Negotiable Instruments
Act, 1881
NEGOTIABLE INSTRUMENTS DEFINED
Whether your business is loaning money to someone or you
are personally loaning money, when you write a binding
promissory note, it is a legal contract between the lender and
the borrower. Promissory notes are commonly written by
banks, lenders and attorneys, but a promissory note written
properly can be just as legal when entered into by two
individuals.
NEGOTIABLE INSTRUMENTS DEFINED
are freely transferable commercial documents and each type of
negotiable instrument has unique functions and features.
are commercial documents which satisfy certain conditions by
the application of law.
can be transferred freely from hand to hand and has a legal life
that can be transferred by more delivery or endorsement.
Most Common Types of Negotiable
Instruments are;
•Promissory notes.
•Bill of exchange.
•Cheque.
•Government promissory notes.
•Delivery orders.
•Customs Receipts.
Most negotiable instruments fall under the following two
categories;
i. Negotiable Instrument by Statute
ii. Negotiable Instruments by Custom or usages.
Negotiable Instrument Act 1881 states three instruments.
i. Cheque
ii. Bill of exchange
iii. Promissory notes
They are therefore called negotiable instruments by statute.
Promissory Notes as Negotiable Instrument
The promissory note is a signed document of written promise to pay a
stated sum to a specified person or the bearer at a specified date or on
demand.
The promissory note is an instrument in writing containing an
unconditional rule signed by one party to pay a certain sum of money
only to, or to the order of a certain person or to the bearer of the
instrument.
Thus a promissory note contains a promise by the debtor to the creditor to
pay a certain sum of money after a certain date. The debtor is the maker
of the instrument.
There are two parties to a promissory note:
Maker or Drawer is the person who makes or draws
the promissory note. He is also called the promisor.
Drawee or Payee is the person in whose favor
the promissory note is drawn. He is called the promisee.
How to Write a Binding Promissory Note
1. Write the date of the writing of the promissory note at the top of the page.
2. Write the amount of the note. Add the amount of the loan, written in numeric value and long
form (written out in words), similar to how you would write a check.
3. Describe the note terms. Write out a description saying how the borrower is to repay the loan,
such as with weekly, monthly or quarterly payments. Give the date the first payment is due by
writing out the month, day and year. State the day and the months that subsequent loan
payments are due as well. Finally, indicate the last day and month of the final payment on the
note.
4. Write the interest rate. Describe the interest rate of the loan in a numeric value with a percent
sign and in long form. State if the interest rate is a fixed or variable rate.
How to Write a Binding Promissory Note
5. State if the note is secured or unsecured. If the borrower is using collateral to secure the loan,
describe this on the promissory note. For example, if the loan is secured by a home or
commercial property, state this in the note by including the property address and a description
of the type of building it is (residential home, warehouse).
6. Include the names of both the lender and the borrower on the note, indicating which person is
which.
7. Write the complete mailing address where each payment is to be mailed.
8. Each borrower should print and sign his name, as well as date the promissory note, to
acknowledge the obligation to repay the loan.
Illustrations
(a) “I promise to pay b or order Rs. 500.”
(b) “I acknowledge myself to be indebted to B in Rs.1,000,
to be paid on demand, for value received.”
(c) “Mr. B, I.O.U. Rs.1,000.”
(d) “I promise to pay B Rs. 500 and to deliver to him my
black horse on 1st January next.”
The instruments marked (a) and (b) are promissory notes. The
instruments marked (c) and (d) are not promissory notes.
Bill of Exchange as Negotiable Instrument
The Bill of Exchange contains an order from the creditor to the
debtor to pay a certain person after a certain period.
The person who draws it is called drawer (creditor) and the person
on whom it is drawn is called drawee (debtor) or acceptor.
The person to whom the amount is payable is called payee.
Bill of Exchange as Negotiable Instrument
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.
Following are Bills of Exchange
(1) A banker’s draft.
(2) A demand draft even if it drawn upon another office of the
same bank.
(3) An order issued by a District Board Engineer on
Government Treasury for payment to or order of a certain
person.
Characteristics/Features of Bill of Exchange:
1. The order to pay a bill must be unconditional one.
2. The order to pay must be made in writing on the bill.
3. The bill must be signed by the drawer of the bill. Without signature of the drawer the
bill will not be genuine one.
4. The order to pay under a bill must be addressed to a certain person which, of course,
includes individuals, firm, company, corporation etc.
5. The amount to be paid under a bill must be certain one.
6. The money under a bill must be paid in legal tender currency.
7. The amount should be payable to or to the order of a specified person or to the bearer
of the instrument.
8. The amount should be payable either on demand or at a fixed determinable future time.
9. The bill must be duly stamped.
10. The other formalities like dating, stating the names of the parties concerned etc.
must be observed.
Parties to a Bill of Exchange
i. The Drawer
The person who draws the bill and puts his signature on it is known as the
drawer of the bill. He is also called the “maker” of the bill.
ii. The Drawee
The person on whom the bill is drawn is called as the drawee of the bill.
iii. The Acceptor
The person who accepts the bill is known as the acceptor of the bill.
Usually, the drawee accepts the bill. But sometimes, a third party may also
accept a bill on behalf of the drawee. The acceptor puts down his
signature across the bill showing his acceptance.
Parties to a Bill of Exchange
iv. The Payee
The person to whom the amount of bill is to be paid is known as payee of
the bill. The drawer may make the bill payable to himself or to any other
person he likes.
v. The Endorsee
The holder of the bill may endorse the bill in favour of someone else
known as endorsee. The person who endorses the bill is called endorser.
vi. The Holder
The person who holds the bill and is entitled to realise the amount of the
bill from the drawee is known as holder of the bill.
Check as Negotiable Instrument
A Check (cheque in royal Britain) is a bill of exchange drawer a specified
banker not expressed to be payable otherwise than on demand.
It is an instrument in writing, containing unconditional order, signed by the
maker (depositor), directing a certain banker to pay a certain sum of
money to the bearer of that instrument.
Some other instruments have acquired the character of negotiability by
customs or usage of trade.
Post dated cheque
A post dated cheque remains a bill of exchange till the date
written on the face of it. On that date it becomes a cheque. One
of the effects is that liability for criminal prosecution under
Section 138 would not be attracted and 6 months period would
be reckoned from the date appearing on the cheque.
Pay Order
A pay order is not a cheque. It is issued by one branch of a bank to another
branch of the same bank or under arrangement, to another bank with a
direction to credit the amount to the account of the party on whose demand
it is issued. Therefore, neither a pay order is equivalent to a cheque no for
its dishonour. Section 138 would be attracted, nor the banker who is
directed to pay make the payment can be a proper complainant because he
is not the payee of the instrument. The decision of the Supreme Court on
this is different.
A “pay order” has been held to b covered by the definition of a cheque in
Section 6 of the Act. A complain under Section 138 for dishonour of a pay
order was held to be maintainable.