LEGAL ASPECTS OF BUSINESS

NEGOTIABLE INSTRUMENTS
ACT, 1881
Unit 3
2
Negotiable Instruments Act, 1881
i Negotiable Instruments – meaning –

characteristics – types – parties – holder and

holder in due course

ii Negotiation and types of endorsements
iii Dishonor of negotiable instruments - noting and

protesting
iv Liability of parties on Negotiable Instruments
 INTRODUCTION TO NEGOTIABLE 3
INSTRUMENTS ACT, 1881

The Negotiable Instruments Act was enacted, in India, in 1881. Prior

to its enactment, the provision of the English Negotiable Instrument Act

were applicable in India, and the present Act is also based on the

English Act with certain modifications.

It extends to the whole of India except the State of Jammu and

Kashmir.
 MEANING OF NEGOTIABLE 4
INSTRUMENT
The word negotiable means ‘transferable ’, and word instrument means ‘a
“written document” by which a right is created in favour of some person. Thus,
the term “negotiable instrument” means “a written document transferable by
document”.

According to Section 13 (1) of the Negotiable Instruments Act, “A negotiable

instrument means a promissory note, bill of exchange, or cheque payable either
to order or to bearer”.

“A negotiable instrument may be made payable to two or more payees jointly,

or it may be made payable in the alternative to one of two, or one or some of
several payees” [Section 13(2)].
FEATURES OF NEGOTIABLE 5
INSTRUMENTS
 Easy Transferability
 Title
 Must be in writing
 Unconditional Order
 Payment
 The payee must be a certain person
 Delivery
 Presumptions
 Procedure for suits
TYPES OF NEGOTIABLE 6
INSTRUMENTS
There are two types of Negotiable Instruments:
1. Instruments Negotiable by Statute:
The Negotiable Instruments Act mentions only three kinds of
negotiable instruments (Section 13). These are:
1. Promissory Notes
2. Bills of Exchange, and
3. Cheques
2. Instruments Negotiable by Custom or Usage:
There are certain other instruments which have acquired
the character of negotiability by the usage or custom of trade.
For example: Exchequer bills, Bank notes, Share warrants,
Circular notes, Bearer debentures, Dividend warrants, Share
certificates with blank transfer deeds, etc.
PROMISSORY NOTES 7

Section 4 of the Act defines, “A promissory note is an

instrument in writing (note being a bank-note or a currency note)

containing an unconditional undertaking, signed by the maker, to

pay a certain sum of money to or to the order of a certain person,

or to the bearer of the instruments.”

CHARACTERISTICS OF A PROMISSORY
NOTE 8
 WRITING
 UNDERTAKING TO PAY
Ex: Bal Mukund v. Munna Lal Ramji:- Absence of the word promise
“I acknowledge to pay on demand Rs.1000/- for value received”
“I promise to pay B Rs.1000/- on demand”
“I owe you Rs.1000/-”

 UNCONDITIONAL
Ex “I promise to pay Rs. 1000/- 7 days after C’s marriage
“I promise to pay B Rs 5000/- on 31st December 2017 at Pune”

 SIGNED
 CERTAIN PERSON
 SPECIFIC SUM
Ex: “ I promise to pay B Rs 1000/-

 PROMISE TO PAY MONEY ONLY

Ex” I promise to pay B Rs 100/- in cash and Rs. 100 worth of cosmetics.”
“I promise to pay B Rs 500/- and to deliver him my black horse”

 STAMPING
PARTIES TO A PROMISSORY NOTE 9

 Maker:
Maker is the person who promises to pay the amount stated in
the note.
 Payee:
Payee is the person to whom the amount of the note is payable.
10
SPECIMEN OF PROMISSORY NOTE 11
Rs. 10,000
Lucknow
April 10, 2013
Three months after date, I promise to pay Shri Ramesh (Payee) or to his order the sum of Rupees
Ten Thousand, for value received.

Stamp

To, Sd/-
Shri Ramesh, Ram
B-20, Green Park,
Mumbai.
(Maker)
BILL OF EXCHANGE 12

According to Section 5 of the act, 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”. It is also called a Draft.

ESSENTIAL ELEMENTS OF BILL OF 13
EXCHANGE
 Writing.
 Order to pay
 Parties
 Unconditional
 Signed
 Person directed, for example the drawee must be certain
 Money
 Payee must be certain
 Stamping
14
15
PARTIES TO A BILL OF EXCHANGE 16

 Drawer:
The maker of a bill of exchange is called the drawer.
 Drawee:
The person directed to pay the money by the drawer is called
the drawee.
 Payee:
The person named in the instrument, to whom or to whose order
the money are directed to be paid by the instruments are called
the payee.
SPECIMEN OF BILL OF EXCHANGE 17

Rs. 10,000

Mumbai
April 10, 2013

Three months after date pay to Ram (Payee) order the sum of Ten Thousand Rupees, for value
received.

To,
Sushil
B-20, Green Park,
Lucknow - 226020.
(Drawer) Stamp
In case of need with Accepted
Canara Bank, Delhi. Sushil Sd/- Ram
(Drawer)
18
CHEQUE 19

According to Section 6 of the act, A cheque is “a bill of

exchange drawn on a specified banker and not expressed to be

payable otherwise than on demand”. A cheque is also, therefore, a

bill of exchange with two additional qualification:

 It is always drawn on a specified banker.

 It is always payable on demand.

ESSENTIAL ELEMENTS OF A CHEQUE 20

 In writing
 Express Order to Pay
 Definite and Unconditional Order
 Signed by the Drawer
 Order to Pay Certain Sum
 Order to Pay Money Only
 Certain Three Parties
 Payable on Demand
PARTIES TO A CHEQUE 21

 Drawer:
Drawer is the person who draws the cheque.
 Drawee:
Drawee is the drawer’s banker on whom the cheque has been
drawn.
 Payee:
Payee is the person who is entitled to receive the payment of a
cheque.
SPECIMEN OF CHEQUE 22

Kapoorthala Bagh,
Mumbai – 400033
IFSCode:MAHB0000316
D D M M Y Y Y Y
Pay ……………………………………………………………………………………………………………......
……………………………………………………………………………………………………. Or Bearer
Rupees ……………………………………………………………………………………………………………
……………………………………………………………………………………………Rs.

A/c No.

SHANKAR GAJARE
Signature
Please sign above

“ΙΙ473792ΙΙ” 000240000 000000 10

 23

CHEQUES

TRUNCATED ELECTRONIC ORDER BEARER CROSSED

NOT
GENERAL SPECIAL NEGIOTABLE
 CLASSIFICATION 24
OF
NEGOTIABLE
INSTRUMENT

ON BASIS ON BASIS ON BASIS ON BASIS

LOCATION PAYEE OF OF VALIDITY
PAYMENT

INLAND FOREIGN ORDER BEARER DEMAND INCHOATE AMBIGUOUS

TIME
 NEGOTIATION
25
BY BY
DELIVERY ENDORSEMENT

ORDER [Link] BE IN
WRITING TYPES OF
INSTRUMENT ENDORSEMENTS
BEARER [Link] BE SIGNED
BY HOLDER
INSTRUMENT

GENERAL
OR BLANK
PARTIAL
SPECIAL OR
FULL
RESTRICTIVE

CONDITIONAL
HOLDER
26
The definition given in section 8 implies that any person (a) who is entitled in his own
name to the possession of the negotiable instrument and (b) has right to receive the
amount from the parties thereto.

 (a) Possession of instrument

 (b) Entitled to receive the amount

 HOLDER is owner ; Barring Theft;

i. Payee ( I promise to pay Rs5000 to X ; X is Holder)
ii. Bearer ( I promise to pay Rs5000 to bearer ; bearer is holder)

NOTE :
a) Actual possession immaterial; de jure possession
b) He has right to sue
FOLLOWING PERSONS ARE CONSIDERED THE HOLDERS OF THE
NEGOTIABLE INSTRUMENTS : 27
 A principal and Agent
 Partner of a firm
 Negotiable is a bearer one
 The endorsee of a cheque is called a holder.
 If a holder of a negotiable instrument is dead, the heirs of the
deceased holder become the holders.
 A principal on whose behalf a pro note is endorsed in blank and is
delivered to his agent, he is a holder of the instrument.

HOWEVER THE FOLLOWING PERSONS ARE NOT CALLED

HOLDERS :
 Thief or a finder of an instrument
 An instrument obtained under forgery is not a holder.
 HOLDER IN DUE COURSE
28
 According to Section 9 of the Negotiable Instrument Act, “a holder
in due course is a person who possesses for some consideration a bill
of exchange, promissory note or cheque payable to bearer or the
payee or the endorsee in good faith, and without any reason to
believe that there is any defective title in the instrument in his
possession”.
 If the following conditions are satisfied the person will become the
holder in due course:
 i) He must be a Holder
 ii) Lawful Consideration
 iii) Receive before maturity date
 iv) Received in Good Faith
He is not considered to be 29

a holder in due course.

 If :
a) He obtains the negotiable instrument after its
maturity, or
b) He obtains it by way or a gift; or
c) He obtains it for any unlawful consideration, or
d) He obtains it by some illegal method, or
e) He does not obtain it bonafide
 DISHONOUR AND DISCHARGE OF
NEGOTIABLE INSTRUMENT 30
 DISHONOR BY NON-ACCEPTANCE

1. If a bill is presented to the drawee for acceptance and he does not accept it
within 48 hours from the time of presentment for acceptance).
2. Where the presentment for acceptance is excused and the bill is not accepted.
3. Where the drawee is incompetent to contract.
4. If the drawee is fictitious person or after reasonable search cannot be found.
5. When a bill is accepted with some consideration the holder may treat the bill of
exchange having been dishonored.

 DISHONOR BY NON-PAYMENT

1. A promissory note, bill of exchange or cheque is said to be dishonoured by non-

payment makes default in payment. (Sec 92)

2. Also, a promissory note or bill of exchange is dishonoured by non-payment when

presentment for payment is excused expressly by the maker.
EFFECT OF DISHONOUR
 As soon as a negotiable instrument is dishonoured (either by non-acceptance or by non-
payment) the holder becomes entitled to sue the parties liable to pay thereon. 31
 The holder MUST, however, give notice of dishonour to all the parties against whom he intends to
proceed.

NOTICE OF DISHONOUR
 Notice of dishonour means formal communication of the fact of dishonour.

NOTICE BY WHOM
 Notice of dishonour must be given by the holder or by some party to the instrument
 Any party receiving the notice of dishonour must also transmit the same to all prior parties
 No suit can be filed against the prior party if he has not transmitted the fact of dishonour of
instrument.
 One person can give the notice only.
NOTICE TO WHOM
 Notice of dishonour must be given to all to whom the holder seeks to make liable or other duly
authorised agents.
 In case of death of a person, notice must be given to his legal representative
 He has been declared insolvent to his Official Assignee.
 In case after dispatch of notice and before it receipt the person dies, it will be treated as if the
notice has been served.
 NOTING
In case a promissory note or bill of exchange has been dishonored by
non-acceptance or non-payment notice, the holder may cause 32
suchdishonor to be noted by Notary Public.
 Noting must be made within reasonable time after dishonor and
must specify
(i) the date of dishonor
(ii) the reason assigned for dishonor and
(iii) the notary’s charges.
PROTESTING (SEC.100)
According to Sec.100, “when the promissory note or bill of exchange
has been dishonored by non- acceptance or non-payment, the
holder may, within a reasonable time, cause such dishonor to be
noted and certified by a notary public. Such certificate is called a
protest.”
 CONTENTS OF PROTEST

33
1. The instrument itself or a literal transcript of the instrument and of
every thing written or printed thereon,
2. The name of the person for whom and against whom the
instrument has been protested.
3. The fact and reason for dishonor
4. The place and time of dishonor
5. The signature of notary public
6. In case of acceptance for honor or payment for honor, the names
of the persons by whom and for whom it is accepted or paid.
 DISHONOUR OF CHEQUE
34

INFORM WITH REASON HOLDER

1 BANK

LEGAL NOTICE WITHIN 30 DAYS

2 HOLDER DRAWER

NEXT 15 DAYS PAYMENT DEMAND

HOLDER DRAWER
3
NO
PAYMENT

AFTER EXPIRY OF 15 DAYS

01 MONTH COURT CASE

4 HOLDER AGAINST DRAWER
 Liability of the Parties: •
 Liability of the Parties: • According to sec. 30 to 32 and 35 to 42 35
1. Drawer:
 The drawer is bound to compensate the holder in case of dishonor of the bill when he
receives the notice of dishonor. (sec. 30) .

 The liability of a drawer in BOE and Cheque is different as the drawer in case of cheque
is drawee himself.

2. Drawee of a cheque:

 When the payee presents the cheque for encashment, he must receive the payment.

 In case of dishonor of the cheque, the damages to the payee must be compensated
by the drawee. (sec. 31)

3. Maker and Acceptor:

 The maker of the Promissory note and the acceptor of the bill of exchange are the
primarily liable for the payment due. ( Sec. 32)
 Even after the maturity in case of BOE, the acceptor is liable to pay the amount on
demand.
 In case of dishonor, the either party has to compensate the damage occurred to the
payee.
Endorser: 36
The person who effects an endorsement is called an ‘endorser’, and the
person to whom negotiable instrument is transferred by endorsement is
called the ‘endorsee

The endorser will be liable to all the subsequent parties in case of dishonor
of the cheque.

He will not be liable if:

• There is a contract to the contrary,
• The endorser has made his liability limited by expressed words.
• Due notice of dishonor is receive or given to the endorser.(Sec. 35)
• If the holder of the instrument, without the consent of the endorser
destroys the instrument or impairs the endorser’s remedy form the prior
party, the endorser’s liability is discharged as if the instrument has been
paid at maturity. (sec. 40)
5. General rules regarding liability:
I. Principle of Suretyship:
Every prior party to the negotiable instrument is liable thereon to HDC 37until the
instrument is duly satisfied. (Sec. 36) the endorser stands as surety for the prior
party.

II. Maker, Drawer and Acceptor as Principals:

Incase of cheque and promissory notes, the maker or drawer will be the
principal debtors and in case of BOE the acceptor is the principal debtor, other
parties are surety as the case may be. (sec. 37)

III. Prior party is principal for the subsequent party: (Sec. 38)

IV. Suretyship: when the acceptor enters into any contract with the holder under
sec. 134/135 of Indian Contract Act, 1872 and the holder stands in the position to
expressly reserve the right to charge, the acceptor is not discharged.

6. Acceptor’s liability on a forged instrument: the Acceptor of the BOE already

endorsed is not relieved from the liability by reason that such endorsement is
forged.