Negotiable instrument Act 1881

Priya Abraham
Faculty, Dept of Management Studies
VCMCS
 Introduction
 Definition “Negotiable instrument”
Negotiable means transferable
Instrument means a written document
 A negotiable instrument is a document which
entitles a person to a sum of money and which
is transferable from one person to another by
mere delivery or by indorsement and delivery.
 It is a method of transferring a debt from one
person to another.
 Characteristics
 Freely transferable
 Title of holder free from all defects
A person who is holding negotiated instrument he is free from a defect
in the title of the transferor
Ex: S sells certain goods to B. B gives a promissory note to S for the
price. He refuses to pay the promissory note, claiming that the goods
are not according to order. If S sues B on the note, B’s defence is
good. But if he negotiates the note to H, a holder in due course, B’s
defence will be of no avail.
 Recovery
A holder of the negotiable instrument can sue for recovery of the
amount.
 Presumptions
 Negotiable instrument is for consideration
 Dated
 Reasonable Time of acceptance
 Before the maturity it should transferred
 Stamp when there is a dishonour
Types of negotiable instrument

 Negotiable by statue
- Promissory note
-Bill of exchange
-Cheque
 Negotiable by custom or usage
-Share warrants
-Dividend warrants
-Share certificates
 Promissory note
It is an instrument in writing containing an unconditional undertaking,
signed by the maker,to pay a certain sum of money only to, or to order of, a
certain person, or to the bearer of the instrument.
The person who makes the promissory note and promises to pay is called
maker
The person to whom the payment is to be made is called the payee.
 Essential elements
-Writing
-Promise to pay
-Definite and unconditional
-Signed by the maker
-Point out the Certain parties
-Payment of certain sum of money
-Promise to pay money only
-Formalities like date, number, place, consideration everything should be
there
-it may be payable on demand or after a definite period of time
 Bill of Exchange
It 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.
The person who makes the bill is called drawer
The person who is directed to pay is called drawee
The person to whom the payment is made is called payee
 Essential element
-Must be in writing
-Must contain an order to pay
-The order must be unconditional
-It requires three persons involvement
-The parties must be certain
-Signed by the drawer
-Sum payable must be certain
-It should be an order to pay
-All the formalities like date, time, place etc., should be there
Distinction between a Note and the Bill of
exchange
 Note – two parties involved BOE-Three parties involves
 Note-Unconditional promise to pay BOE-Unconditional order to
pay
 Note-Maker is a debtor BOE-maker is a creditor
 Note-Maker is the acceptor BOE-Maker is not a acceptor
 Note-Liability of the maker is Primary BOE-Liability of the drawee is
secondary
 Note-Requires no acceptance BOE-Requires acceptance of the
drawee
 Note-Cannot drawn as payable to bearer BOE-Drawn as payable to the
bearer
 Note-Dishonor may not informed to all BOE-Dishonour informed to
all
 Cheque
A cheque is a bill of exchange drawn upon a specified
banker and payable on demand.
It is the electronic form means it contains the exact mirror
image of the proper cheque, and is generated, written and
signed in a secure system ensuring the minimum safety
standards with the use of digital signature and asymmetric
crypto system .
 Types
-Open cheque
A cheque which is payable in cash across the counter of a
bank
-Crossed cheque
It is the one on which two parallel transverse lines with or
without the words &Co are drawn.
 Types of crossing
 General crossing

A cheque is said to crossed generally where it bears

across its face an addition of the words “&Co”or any
abbreviation between two parallel transverse lines either with
or without the not negotiable.
 Special crossing
Where a cheque bears across its face an addition of the
name of a banker,either with or without the words not
negotiable the cheque is deemed to be crossed specially.
 Restrictive crossing
A cheque which additionally contains the words ‘A/C
Payee’ in the general or special crossing cheque with or with
out the words not negotiable
Distinction between BOE and cheque
 BOE-Drawn on any person Ch-drawn only on banker

 BOE-Accepted by drawee Ch-No acceptance require

 BOE-Not crossed Ch-Can be crossed

 BOE-Require stamp Ch-Not require stamp

 BOE-Cannot be countermanded Ch-Can be countermanded

Classification of Negotiable instrument
 Bearer and order instruments
 A negotiable instrument is payable to bearer
 A negotiable instrument is payable to order
• Inland and foreign instrument
-Both made and payable in India
-not an inland
• Instrument payable on demand
-a cheque always payable on demand
• Time instrument
-which is payable after a period
• Accommodation bill
-a bill drawn,accepted or indorsed for consideration
• Fictitious bill
-when the name of the drawer or the payee or both is fictitious in a bill,
the bill is called a fictitious bill
• Escrow
-when a negotiable instrument is delivered conditionally or for a special
purpose
• Ambiguous instrument
-faulty draft instrument
• Inchoate instrument
-incomplete instrument
 Bills in sets
 A bill of exchange is sometimes
drawn in parts, especially when it
has to be sent from one country to
another. This is known as drawing a
bill ‘in a set’.
 Each bill must be numbered
 Entire bill is extinguished when the
payment is made
 The drawer must signed in each
part of the bill
 Parties to a negotiable instrument
Capacity of parties
 Minor
 Unsound mind person
 Corporations-upto the limit of MOA
 Agent
 Joint family system
 Partners
 PARTIES
 Parties to a BOE
-Drawer,Drawee,Acceptor,Payee,Holder,
Indorser,Indorsee,Drawee in case of
need, Acceptor for honour
 Parties to Promissory note
-Maker,Payee,Holder,Indorser,Indorsee
 Parties to a cheque
-Maker,Drawee,Payee,Holder,Indorser,
Indorsee
 Maker-The person who makes a Promissory note is
maker.
 Drawer-The person who makes or draws a bill of
exchange or cheque is drawer.
 Drawee-The person on whom the BOE or cheque is
drawn and who is directed to pay is called the drawee.
 Acceptor-In case of a BOE, the drawee becomes the
acceptor.
 Payee-The person named in the Bill, note or cheque, to
whom or to whose order the money is to be paid.
 Indorser-the person who indorses the bill, note or cheque
to another is called the indorser.
 Indorsee-The person to whom the bill, note or cheque is
indorsed is called the indorsee.
 Drawee in case of need-when in the bill or in any
indorement thereon the name of any person is given in
addition to the drawee to be referred to in case of need,
such person is called a drawee in need.
 Acceptor for honour- It a bill is dishonoured by non-
acceptance, the holder may nevertheless allow any other
person to accept it for the honour of the drawer . The
person so accepting the bill is acceptor for honour
Holder and holder in due course
 Holder(sec.8)
any person entitled in his own name to the
possession thereof and receive the amount from the
parties
 Holder in due course(sec.9)
any person who fulfils the following conditions
-he possess the instrument if payable to bearer,
or payable to order
-he hold that instrument before the maturity
-he hold that instrument in good faith.
 Privileges of a holder in due course
 Inchoate(unclear) stamped instrument
It is prohibited from claim as against holder in due course.
 Liability of prior parties
Every prior party is liable in payment.
 Fictitious payee
The acceptor of a bill cannot say as against the holder in due
course, that the other parties to the bill were fictitious
 Conditional delivery
If a bill or note negotiated to a holder in due course, the other
parties to the instrument cannot avoid liability.
 Instrument free from all defects
 Estoppel against denying the original validity
 Estoppel against denying the capacity of payee to indorse
 Liability of parties
 Liability of drawer
Liable in case of dishonour by the drawee
 Liability of drawee
must pay the bill or cheque when required
 Liability of the maker and acceptor
Liable to pay to the holder
 Liability of indorser
Liable to all subsequent holders for
dishonour before the maturity
 Liability of prior parties
Presentment of a negotiable instrument
Presentment means showing the
instrument to the drawee, acceptor or
maker for acceptance.
Three kinds of presentment
-Presentment of BOE for
acceptance
-Presentment of Note for sight
-Presentment of instrument for
payment
 Presentment for acceptance
Essentials of a valid acceptance
 It must be in written on the bill
 It must be signed by the drawee personally or by an
agent
 The accepted bill must be deliver to the holder
Modes of acceptance
 General acceptance
accept the bill without any condition
 Qualified acceptance
Accept with some qualified conditions
-Conditional, Partial, Place, Time, Accepted by some
of the parties
 Presentment for acceptance submitted to the
drawee, drawee in case of need, duly authorised
agents, legal representatives, official receiver
 It should be submitted before the date of maturity
or with in the mention date
 It should be submitted in the specified place.
 Excuses
-when the drawee cannot be found
-where the drawee is dead or insolvent
-when the drawee is a fictitious person
-already the acceptance is refused
 Acceptor for honour(conditions)
-the bill must have been protested for non-
acceptance
-made with the consent of the holder
-written in the bill
-signed by the honour
 Presentment for payment
Rules
 Hours-Business hours
 Presentment of instrument after date or sight-must be
presented for payment at maturity
 Presentment of promissory note payable by
installments-presented for payment on third day after
the date fixed for payment of each installment
 Place of presentment-specified or at the drawee place
 Present of cheque- presented at the bank
 Presented the instrument payable on demand-with in
the reasonable time
 Delay in presentment-accepted when the
circumstances are beyond the control
 Presentment excused
 Liability of banker
Dishonor of Negotiable instrument
 Bill may be dishonored by non-acceptance or by non-payment
but a cheque and Note are dishonored by non-payment only
 Dishonour by non-acceptance(sec.91)
BOE is dishonoured by non-acceptance in any of the
following ways.
-If the drawee does not accept the bill within 48hours from
the time of presentment though it is presented for the
acceptance
-when the presentment is excused and the bill is not
accepted.
-When the drawee incompetent to contract
-When the drawee gives qualified acceptance
-When the drawee is a fictitious person or he can not be
found
 Dishonour by non-payment(sec.92)
when the maker or the drawee makes default in payment
 Notice of dishonour
When the negotiable instrument is dishonoured the holder must give a
notice to all the prior parties whom he wants to make liable on the
instrument
 Object of the notice
inform the party about their liability which accrues as a result of
dishonour.
 Notice by whom
-Notice by holder or any prior party
-chain method of giving notice
-Notice by principal or agent
 Notice to whom
-Notice to all parties whom the holder seeks to make liable
-Notice to party or his agent or legal representative or assignee
 Form of notice
-The notice may be in oral or in written
-It must be given within a reasonable time at the place of business
 Exceptions for notice(sec.98)
-When it is dispensed with by the party entitled thereto
-When the drawer countermanded the payment
-when the party could not suffer by dishonour
-When the party can not be found
-in case of promissory note
-When the entitled to the notice know the fact
Duties of holder upon dishonour
 Notice of dishonor
 Noting and protesting
Noting means the recording of the fact of dishonor by a Notary
public upon the instrument within a reasonable time after
dishonor(sec.99)
The certificate of noting is called protest(sec.100). It is a formal
notarial certificate attesting the dishonor of instrument
 Suit for money
 Contents of Noting
-The fact of dishonour
-The date of dishonour
-The reasons
-The notary charges
 Contents of protest
-The instrument
-The name of the person against whom it is protested
-The reasons of dishoour
-The place and time of dishonour
-The signature of the notary public
 Rules as to compensation(sec.117)
The liable party should compensate all the
charges like noting and protesting etc.,
-Compensation to holder of the instrument
-Re-exchange in case foreign holder of
instrument
-Compensation to indorser(with
18%interest)
-Re-draft
 Penalties for dishonored cheques by
insufficiency of funds(sec.138)
-imprisonment which may extend to 2
years or fine twice the amount or both
Discharge of Negotiable instrument
An instrument is said to be discharged
when all rights of action under it are
completely extinguished and when it
ceases to be negotiable.
 Modes of discharge
 By payment in due course
 By party primarily liable becoming holder
when the maker or the acceptor becomes the
holder of the instrument.
 By express waiver
 By cancellation
 By discharge as a simple contract
 Discharge of party or parties
 By payment
 By cancellation
 By release
 By allowing drawee more than 48 hours
 By non-presentment of cheque
 Cheque payable to order
 Draft drawn by one branch on another
 Parties not consenting discharged by qualified
acceptance
 By operation of law
 By material alteration
 Discharged by the payment of altered
instrument
THANK YOU