SAI VIDYA FIRST GRADE COLLEGE RAJANUKUNTE

Module: 03

Negotiable Instruments
Introduction • Meaning and Definition of Negotiable Instruments • Characteristics of
Negotiable Instruments • Kinds of Negotiable Instruments – Promissory Note, Bills of
Exchange and Cheques (Meaning, Characteristics and types) • Parties to Negotiable
Instruments • Dishonour of Negotiable Instruments • Notice of dishonour • Noting and
Protesting

Meaning of Negotiable Instrument

According to Section 13 (a) of the Act, “Negotiable instrument means a promissory

note, bill of exchange or cheque payable either to order or to bearer, whether the
word “order” or “ bearer” appears on the instrument or not.”

Characteristics of a negotiable instrument:

1. Freely Transferable: Negotiable instruments are freely transferable from one person
to another by mere delivery

2. No legal formalities: transfer of a negotiable instrument can happen without any

legal formalities

3. Title free from defects: it gives absolute and good title to the transferee. It gives a
better title to the transferee than the transferor.

4. Rights to sue: The transferee of the negotiable instrument can sue in his own
name, in case of dishonour. A negotiable instrument can be transferred any number of
times till it is at maturity. The transferee of a negotiable instrument is known as ‘holder
in due course.

5. No notice of transfer: The holder of the instrument need not give notice of transfer
to the party liable for the instrument to pay.

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6. Presumptions: Certain presumptions apply to all negotiable instruments

Presumptions as to negotiable instrument. These presumptions need not be proved as
they are presumed to exist in every negotiable instrument.

• Consideration: It shall be presumed that every negotiable instrument was made

drawn, accepted or endorsed for consideration .

• Date: Where a negotiable instrument is dated, the presumption is that it has been
made or drawn on such date, unless the contrary is proved.

• Time of acceptance: every accepted bill of exchange is presumed to have been

accepted within a reasonable time after its issue and before its maturity.

• Time of transfer: is presumed it shall be presumed that every transfer of a

negotiable instrument was made before its maturity.

• Order of endorsement: it shall be presumed that the endorsements appearing upon a

negotiable instrument were made in the order in which they appear thereon.

• Stamp: it shall be presumed that a lost promissory note, bill of exchange or cheque
was duly stamped.

• Holder in due course: Until the contrary is proved, it shall be presumed that the
holder of a negotiable instrument is the holder in due course.

Kinds/ Types of Negotiable Instruments

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1. Promissory Note
According to the negotiable instruments Act 1881, section 4. “A promissory note is
an instrument in writing containing an unconditional undertaking, signed by the
maker, to pay a certain sum of money only or to the order of a certain person, or to
the bearer of the instrument.” A promissory note is drawn and signed by the debtor,
who promises to pay the creditor a certain sum of money.
Parties to a Promissory Note
1. The Maker or Drawer: The person who makes the draft and promise to pay the
amount stated therein.
2. The Drawee: The person who receive the draft from a drawer.
3. The Payee: The Person to whom the amount is payable.

Specimen of Promissory Note

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2. Bill of Exchange:
According to Negotiable Instruments Act 1881, “A bill of exchange is an instrument
in writing containing an unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to, or to the order of, a certain
person or to the bearer of the instrument.”
Parties of Bill of Exchange:
1. The Drawer: The person who maker of the bill and who gives the order.
2. The Drawee: The person who is directed to pay the bill and who on affixing his
signature becomes the acceptor.
3. The Payee: The person to whom the amount of the instrument is payable.

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Specimen of Bill of Exchange

Essential Elements of Bill of Exchange

• It must be in writing
• It must contain an order to pay
• The order to pay must be unconditional
• It must be signed by drawer
• The drawer, drawee and payee must be certain 6
• . The sum payable must be certain
• The bill must contain an order to pay money only
• It must comply with the formalities as regards date, Consideration, stamps, etc.

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It is an important document for any transaction in the business world. Thus, a cheque
is a bill of exchange with two distinctive features namely1) It is always drawn on a bank
2) It is always payable on demand.

According to the negotiable instruments act 1881, section 6, “ a cheque is a bill of

exchange drawn on a specified banker and not expressed to be payable otherwise than
on demand.”

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Parties of Cheque

1. The maker of the cheque is Drawer.

2. The person thereby directed to pay is called Drawee.
3. The person named in the instruments to whom or to whose order the money directed
to be paid.

Essentials of Cheque

1) A cheque is printed paper

2) On the printed paper it specifies the bank and branch address

3) It must be in writing : The cheque may be written in hand by using ink or ballpoint
pen, typed or even it may be printed. But the customer should not use pencil to fill up
the cheque form. Even though other columns may be permitted to be written in hand or
printed or typed, the signatures should be made by ink pen or ballpoint pen by the
maker.

4) A cheque is always drawn on a banker : For the validity of a Cheque it must be

drawn on a specified banker. If there is not mentioned in the cheque about the banker it
would not be a valid cheque. In addition to it, it must contain all the three parties i.e.
Drawer, Drawee and Payee.

5) A cheque can only be drawn payable on demand : The parties of the Cheque must
be certain. There are three parties of the cheque i.e. Drawer, Drawer and Payee. In a
valid Cheque the name of the must contain in other words they must be certain. It must
contain an order, which must be unconditional. If any condition were imposed then it
would not be a valid cheque.

6) It must have a date: In a valid cheque it must be signed by the drawer with date
otherwise it would not be a valid cheque. It must be written in hand by using ink or ball
point pen, typed or even it may be printed as it becomes conclusive proof i.e.
presumption under Section 118(b) unless contrary is proved.
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7) Cheque no is also exist

8) It must contain an order to pay

9) It includes an account no of owner of the account holder

10) The order to pay must be unconditional: The order to pay the amount must be
unconditional. If there is any condition imposed to pay the amount to the holder of the
cheque then it will not be considered as a cheque. A cheque made payable on the
happening of a contingent event is void ab-initio.

11) The sum payable must be certain : It is one of the essential requirement of the
Cheque that it must be payable in money and money only. If is not in term of money
then it will be a valid one. The sum mentioned in it must be certain.

12) A cheque must contain an order to pay money only

Types of Cheque

1. Open Cheque: It is a cheque which is payable at the counter of the drawee bank on
presentation of the cheque.
2. Crossed Cheque: A crossed cheque is a cheque which is payable only through a
collecting banker and not directly at the counter of the bank. Crossing ensures
security to the holder of the cheque as only the collecting banker credits the proceeds
to the account of the payee of the cheque.

1. Open Cheque:
a. Order Cheque: It is one which is payable to a particular person. In such a cheque
the word ‘bearer’ may be cancelled and the word ‘order’ may be written.
b. Bearer Cheque: A cheque which is payable to any person who presents it for
payment at the bank counter.

2. Crossed Cheque:
a. General Crossing: A cheque bears across its face an addition of the words or any
abbreviation thereof between two parallel transverse lines.
b. Special Crossing: Where a cheque bears across its face an addition of the name of
a banker, either word or without words.

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Meaning of Dishonour of Cheque

“Dishonour” means the non payment of a cheque across the counter or through the
account.

Circumstances in which the cheque must be dishonoured:

1. When cheque is countermanded by the customer.

2. When banker receives the notice of death of the customer.
3. When the banker comes to know of the lunatic condition of the customer through
notice.

A Negotiable Instruments may be dishonoured by:

a. Non- Acceptance (Sec91)
b. Non- Payment (Sec 92)

Non- Acceptance (Sec91)

1. Drawee is the Fictitious Person (Not real)
2. Drawee is In competent
3. Accepted with qualified acceptance
4. Drawee is Insolvent or Death
5. Where one or several drawee has not been partners

Non- Payment (Sec 92)

1. A bill after accepted has to be presented for payment after date of its maturity
2. If the acceptor fails to make the payments when its due
3. In case of Promissory note the maker fails to make payment.

Notice of Dishonour (Sec 93)

1. Formal communication of the fact of dishonour.

2. Must be given in reasonable time.
3. By party to the instrument who remains liable on it.
4. The agent of any such party may also give notice of dishonour.
5. No notice needs to give a maker, acceptor, or drawee who are the principal debtor.
6. Death of such person to the legal representatives.

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Meaning of Noting and Protesting

Noting:

Sec 99 of the NI Act 1986, defines recording of the fact of dishonour by a notary public
upon the instruments.

Protesting:

Sec 100 of the NI Act 1986, defines Protest is a formal certificate issued by Notary Public
about the dishonour of bill or note by non- acceptance or non- payment.

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