KAMAL K JINDAL

Managing Director
Global Management Services
New Delhi
Email kamaljindal@hotmail.com
Negotiable Instruments
All promissory notes, bills of exchange, cheques or other instruments
in writing

unconditional order

signed by any person

who promises to pay money, or

acknowledges money to be due,

shall be negotiable by delivery/endorsement and delivery thereon,

so as to vest the property thereof in each endorsee successively

Negotiable Instruments Act - MBIC 2

What is a Negotiable Instrument:
 Negotiable means the quality of transferability
by delivery or by endorsement and delivery.
 Instrument means a written document by which
a right is created in favor of some person.
 In general terms, Negotiable Instrument means
a written document, which is freely transferable
and which creates a right in favor of some
person to receive specific sum of money.

Negotiable Instruments Act - MBIC 3

What is a Negotiable Instrument:
 The Act besides three negotiable instruments
recognizes any other instrument satisfying the
characteristics of negotiability, as Negotiable
Instrument.

 For Example
I. Dividend Warrants
II. Share Warrants
III. Bearer Debentures
IV. Government Promissory Notes etc.

Negotiable Instruments Act - MBIC 4

Features Of Negotiable
Instruments
1. A negotiable instrument is freely transferable
2. Negotiability confers absolute and good title
on the transferee
3. A negotiable instrument must be in writing
4. In every negotiable instrument there must be
an unconditional order or promise for payment
5. The instrument must involve payment of a
certain sum of money only and nothing else

Negotiable Instruments Act - MBIC 5

Features Of Negotiable
Instruments
6. The time of payment must be certain
7. The payee must be a certain person
8. A negotiable instrument must bear the
signature of its maker
9. Delivery of the instrument is essential
10. Stamping of Bills of Exchange and
Promissory Notes is mandatory

Negotiable Instruments Act - MBIC 6

Law of Negotiable Instrument
 The object and purpose of this Act is to legalize the system
under which claim on certain mercantile instruments are
treated like ordinary goods passing from hand to hand.
 This Act regulates the issue and negotiations of Bills of
exchange, Promissory Note and Cheque.
 In the absence of any express provisions in this Act, the
general rules contained in the contract Act are applicable to
such instruments, as to obligations of parties to the
negotiable instruments are contractual in nature.
 The Act does not declare what consideration is sufficient
and valid for a Bill of Exchange, Promissory Note and
therefore, any consideration which will support a simple
contract will support a bill of exchange or promissory note.

Negotiable Instruments Act - MBIC 7

Negotiable Instruments Act - MBIC 8
Drawer – Drawee
 “Drawer“: The maker of a bill of exchange or
Cheque
 “Drawee”: The person thereby directed to pay
 "Drawee in case of need ": When the bill or in any
endorsement thereon the name of any person is
given in addition to the drawee to be resorted to in
case of need such person is called a "drawee in
case of need".

Negotiable Instruments Act - MBIC 9

Acceptor – Payee
 "Acceptor": After the drawee of a bill has signed
his assent upon the bill, or given notice of such
signing to the holder or to some person on his
behalf, he is called the "acceptor"

 "Payee": The person named in the instrument, to

whom or to whose order the money by the
instrument is directed to be paid, is called the
"payee"

Negotiable Instruments Act - MBIC 10

Holder
 The "holder" of a promissory note, bill of exchange
or cheque means any person entitled in his own
name to the possession thereof and to receive or
recover the amount due thereon from the parties
thereto.

Negotiable Instruments Act - MBIC 11

Holder in Due Course
Better title to Holder in Due Course.

Holder in Due Course becomes holder of negotiable

Instrument if he becomes Holder thereof :

a. For consideration
b. Before the maturity of the instrument
c. In good faith
A holder in due course gets the instrument free
from all defects of title.

Negotiable Instruments Act - MBIC 12

Capacity to make Negotiable
Instruments
 Every person capable of contracting, according to
the law to which he is subject, may bind himself
and be bound by the making, drawing,
acceptance, endorsement, delivery and
negotiation of a promissory note, bill of exchange
or cheque.
 Minor
 A minor may draw, indorse, deliver and negotiate such
instruments to as to bind all parties except himself.

Negotiable Instruments Act - MBIC 13

Liability of drawer
 The drawer of a bill of exchange or cheque
is bound in case of dishonour by the
drawee or acceptor, to compensate the
holder, provided due notice of dishonour
has been give to, or received by, the
drawer as herein after provided.

Negotiable Instruments Act - MBIC 14

Liability of drawee of cheque
 The drawee of a cheque having sufficient
funds of the drawer in his hands properly
applicable to the payment of such cheque
must pay the cheque when duly required
so to do, and, in default of such payment,
must compensate the drawer for any loss
or damage caused by such default.

Negotiable Instruments Act - MBIC 15

Delivery
 The making, acceptance or endorsement of a
promissory note, bill of exchange or cheque is
completed by delivery, actual or constructive.
 For delivery to be effectual, it must be made by the
party making, accepting or indorsing the
instrument, or by a person authorised by him.
 A cheque payable to bearer is negotiable by the
delivery thereof.

Negotiable Instruments Act - MBIC 16

Negotiable Instruments Act - MBIC 17
Definition
 A “promissory note” is an instrument in
writing (not being a bank-note or  a
currency-note) containing an unconditional
under­taking, signed by the maker, to pay a
certain sum of money only to, or to the
order of, a certain person, or to the bearer
of the instrument. [Section 4].

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Features

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Illustrations: Promissory Notes

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Illustration: Not Promissory Notes

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Parties to a Promissory Note

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Components

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Specimen of a Promissory Note
PAYEE

MAKER/DRAWER
Negotiable Instruments Act - MBIC 24
Specimen of a PN

Negotiable Instruments Act - MBIC 25

Negotiable Instruments Act - MBIC 26
What is a Cheque?
 A ''cheque" is a bill of exchange drawn on a
specified banker and not expressed to be payable
otherwise than on demand and it includes the
electronic image of a truncated cheque and a
cheque in the electronic form.

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Specimen of a cheque

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Parties to a Cheque
 Drawer

 Drawee

 Holder

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Negotiable Instruments Act - MBIC 30
Presentment
 Cheques must be presented for payment to the
drawee, by the holder himself or on behalf or the
holder as hereinafter provided.
 If this is not so, the other parties are then not liable
thereon to such holder.
 Presentment for payment must be made during
the usual hours of business and, if at a banker’s,
within banking hours.
 A cheque must, in order to charge the drawer, be
presented at the bank upon which it is drawn

Negotiable Instruments Act - MBIC 31

Presentment of instrument payable
on demand
 A negotiable instrument payable on demand must
be presented for payment within a reasonable time
after it is received by the holder
 Delay is excused if it is caused by
 Circumstances beyond the control of the holder
 Actions not imputable to his default, misconduct or
negligence
 When the cause of the delay ceases to operate,
presentment must be made within a reasonable
time.

Negotiable Instruments Act - MBIC 32

To whom payment should be made
 Subject to the provisions of section82,
clause (c),
 payment of the amount due
 must be made to the holder of the
instrument
 in order to discharge the drawer

Negotiable Instruments Act - MBIC 33

Delivery of instrument on payment
or indemnity in case of loss
 Any person liable to pay, and called upon by
the holder thereof to pay, the amount due is
before payment entitled to have it shown
 On payment entitled to have it delivered up to
him
 If the instrument is lost or cannot be produced
he is entitled to be indemnified against any
further claim against him

Negotiable Instruments Act - MBIC 34

Discharge from Liability
 By cancellation – to a holder who cancels with
intent to discharge the indorser and all parties
claiming under the holder

 By release – to a holder who otherwise discharges

such maker, acceptor or indorser, and to all parties
deriving title under such holder

 By payment- to all parties in due course of the due

amount

Negotiable Instruments Act - MBIC 35

Affect of material alteration
 Any material alteration of a negotiable instrument
renders it void

 Alteration by endorsee:- And any such alteration, if

made by an endorsee, discharges his endorser
from all liability to him in respect of the
consideration thereof.

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Negotiable Instruments Act - MBIC 38
Dishonours by non-payment
 Dishonour by non-payment is when the
drawee of the cheque makes default in
payment upon being duly required to do so

Negotiable Instruments Act - MBIC 39

By and to whom notice should be
given
 When a cheque is dishonoured by non-
payment, the holder, or some party who
remains liable, must give notice that the
instrument has been so dishonoured to all
other parties whom the holder seeks to make
liable
 It is not necessary to give notice to the maker
of the dishonoured cheque

Negotiable Instruments Act - MBIC 40

Mode in which notice may be
given
 Notice of dishonour may be given to a duly
authorized agent of the person to whom it is
required to be given, or , where he has died, to his
legal representative, or, where he has been
declared an insolvent, to his assignee

 It maybe oral or written

 It may, if written, be sent by post, and in any form

Negotiable Instruments Act - MBIC 41

Contd…
 It must inform the party, either in clear terms that
the instrument has been dishonoured, and in what
way, and that he will be held liable

 It must be given within a reasonable time after

dishonour, at the place of business or at the
residence of the party

 If the notice is duly directed and sent by post and

miscarries, it does not render the notice invalid

Negotiable Instruments Act - MBIC 42

Penalty in case of Dishonour
 If a cheque is returned by the bank unpaid,
either because

The amount of money standing to the credit of

that account is insufficient to honour the cheque

It exceeds the amount arranged to be paid from

that account by an agreement made with that
bank

Negotiable Instruments Act - MBIC 45

 The person shall be deemed to have
committed an offence and shall be

punished with imprisonment for a term which

may extend to two years

fined as much as twice the amount of the

cheque, or with both

Negotiable Instruments Act - MBIC 46

Conditions
 The cheque has been presented to the bank within a
period of six months from the date on which it is drawn
or within the period of its validity, whichever is earlier.
 The payee makes a demand for the payment of the
said amount of money by giving a notice, in writing, to
the drawer, of the cheque, “within thirty days” of the
receipt of information by him from the bank regarding
the return of the cheques as unpaid, and
 The drawer of cheque fails to make the payment of the
amount of money to the payee or holder in due course
of the cheque, within fifteen days of the receipt of the
notice

Negotiable Instruments Act - MBIC 47

Cheque crossed generally
 Where a cheque bears across its face an addition
of the words "and company" or any abbreviation
between two parallel transverse lines, or of two
parallel transverse lines simply, either with or
without the words "not negotiable“, it is deemed a
crossing, and the cheque shall be deemed to be
crossed generally

Negotiable Instruments Act - MBIC 48

Cheque crossed specially
 Where a cheque bears across its face an addition
of the name of a banker, either with or without the
words "not negotiable", that addition shall be
deemed a crossing, and the cheque shall be
deemed to be crossed specially, and to be crossed
to that banker.

Negotiable Instruments Act - MBIC 49

 Payment of cheque crossed generally
Where a cheque is crossed generally, the
banker on whom it is drawn shall not pay it
otherwise than to a banker.
 Payment of cheque crossed specially
Where a cheque is crossed specially, the banker
on whom it is drawn shall not pay it otherwise
than to the banker to whom it is crossed, or his
agent for collection.

Negotiable Instruments Act - MBIC 50

 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.
Characteristics of Bill of
Exchange
 Bill of Exchange must contain an Order - It must in
imperative terms direct the drawee to "pay to A" the sum
specified. A request to pay, or an authority to collect
money due, is not an order, though it is often hard to tell
from the language used just what is meant.

 A Bill Of Exchange "Must Be Payable On Demand Or At

A Fixed Or Determinable Future Time.“
An instrument is payable on demand (1) where it is
expressed to be payable on demand, or at sight, or on
presentation; or (2) where no time of payment is stated.
 The amount to be paid must be certain -
If the bill reads "$500 and accrued
taxes," then it would not be negotiable,
for the amount payable at maturity is
uncertain.
The order to pay must be to pay money.
The money must be that of the country
where the order is payable.
Important Terms
 DRAWER, DRAWEE AND PAYEE - The
maker of a bill of exchange or cheque is called
the “drawer”;
 the person thereby directed to pay is called the
“drawee”
 The person named in the instrument, to whom,
or to whose order the money is by the
instrument directed to be paid, is called the
“payee”
 However, a drawer and payee can be one
person as he can order to pay the amount to
himself.
 A bill of exchange is payable on demand
when it is expressed to be payable on
demand, or at sight, or on presentation or
when notice for payment is expressed. In
calculating the maturity of bills payable at
a future time, three days, called days of
grace, must be added to the nominal due
date of the bill
 By the acceptance of a bill the drawee
becomes the principal debtor on the
instrument and the party primarily liable to
pay it. The acceptor of a bill "by accepting it
engages that he will pay it according to the
tenor of his acceptance," and is precluded
from denying the drawer's right to draw or the
genuineness of his signature