The

Negotiab
le
Instrume

Introduction
The

law relating to negotiable

instruments is contained in the
Negotiable Instruments Act,
1881 which applies and extends
to the whole of India.

The

Act came into force

on 1st

March 1882

 Definition:
The word Negotiable "meansTransferable from one person to another
in return for consideration
Instrument meansA written document by which a right is
created in favour of some person
A negotiable instrument is a piece of
paper which entitles a person to a certain
sum of money and which is transferable
from one to another person by a delivery
or by endorsement and delivery.

Indorsement/EndorsementThe term Indorsement means writing

on an instrument. In its technical
sense in the Negotiable Instruments
Act it means the writing of a persons
name (otherwise than as maker) on
the face or back of a negotiable
instrument or on a slip of paper.
The person who so signs the
instrument is called the indorser.
The person to whom the instrument
is indorsed is called the indorsee

 Sec.

13, However, says that A

negotiable instrument means A
PROMISSORY NOTE, BILL OF
EXCHANGE OR CHEQUE payable
either to order or to bearer.

1. Payable to Order: A note bill or

cheque is payable to order which is

expresses to be payable to a particular
person or his order Example:- i) Pay A,
ii) Pay A or order , iii)Pay to the order of
A iv) Pay A and B, v) Pay A or B,
But it should not contain any words
prohibiting transfer, e.g., Pay to A, only
or pay to A and none else

2. Payable to Bearer: Payable to

bearer means payable to any
person whosoever bear it.

CHARACTERIST
ICS OF
NEGOTIABLE
INSTRUMENTS

1.Free transferability or easy

negotiability
2. Title of holder is free from
all defects
3.Recovery

4. Presumptions:
Certain presumptions apply to all negotiable
instruments.
Section 118 and 119 lay down the following
presumptions:
(a)Consideration : that every negotiable
instrument, was made, drawn, accepted,
endorsed or transferred for consideration.
(b)Date : that every negotiable instrument bearing
a date was made or drawn on such date.
(c) Time of acceptance : that every bill of
exchange was accepted within a reasonable
time after its date and before its maturity.
(d) Time of transfer: that every transfer of a
negotiable instrument was made before its
maturity

(e) Order of endorsements : That the

endorsements appearing upon a negotiable
instrument were made in the order in which
they appear thereon.
(f) Stamps : When n instrument has been
lost, it is presumed that it was duly
stamped. that a lost promissory-note, bill of
exchange or cheque was duly stamped.
(g) Holder presumed to be a Holder in
due corse: that every holder of a
negotiable instrument is holder in due
course.
(h) Proof of protest: In a suit upon an
instrument which has been dishonored, the
court, on proof of the protest, presumes the
fact of dishonour, until such fact is
disproved.

Types of Negotiable
Instruments
Negotiable instruments are of two types
which are as follows:

1. Negotiable Instruments
recognized by Statute: The

Negotiable instruments Act

mentions only three kinds of
negotiable instrument.
These are Bills of exchange, cheque
and promissory notes.

2. Negotiable instruments
recognized by usage or customs of
trade:
e.g. Bank notes, exchequer bills,
share warrants, bearer debentures,
dividend warrants, share certificate.
Etc
The court of India follow the practice of
English courts Promissory Note,
Bankers drafts and pay orders,
Hundies, Delivery orders and Railway
receipts for goods .

Hundies:

Hundis refer to financial instruments evolved on

the Indian sub-continent used in trade and credit
transactions. They were used as
as credit instruments
remittance instruments (to transfer funds from one
place to another),
for trade transactions (as bills of exchange).
Technically, a Hundi is an unconditional order in
writing made by a person directing another to pay
a certain sum of money to a person named in the
order. Though normally regarded as bills of
exchange, they were more often used as
equivalents of cheques issued by indigenous
bankers.

Indigenous bankers constitute the ancient banking

system of India. They have been carrying on their ageold banking operations in different parts of the country
under different names.

In Chennai these bankers are calledChettys; in

Northern IndiaSahukars, Mahajans and Khatnesin
Mumbai,
According to the Indian Central Banking Enquiry
Committee, an indigenous banker or bank is defined as
an individual or private firm which receives deposits,
deals in hundies or engages itself in lending money.

PROMISSORY NOTE

Definition:
According to (Sec 4), A promissory

note is an instrument in writing (not

being a bank-note or a currencynote) 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.

Parties to a Promissory Note

There are primarily two parties involved
in a promissory note. They are:
(i) The Maker or Drawer: The person
who makes the note and promises to
pay the amount stated therein. In the
above specimen, Sanjeev is the maker
or drawer.
(ii) The Payee: The person to whom
the amount is payable. In the above
specimen it is Ramesh.

Specimen of a Promissory Note

Essentials of Promissory Note

1. It must be in writing
2. It must contain a promise or
undertaking to pay
3. The promise to pay must be Definite
and unconditional
4. It must be signed by the maker
5. Certain Parties
6. Certain sum of money
7. Promise to pay money only
8. The Bank note or currency note is not a
promissory note: Because a bank note
or currency note is money or a
currency. note is money itself

9. The formalities like number ,

date , place, consideration , etc .
10. It may be payable on demand
or after a definite period of time.
11. It cannot be made payable to
bearer on demand: The Reserve
bank of India act, 1934 prohibits
issue of such promissory notes
except by the Reserve Bank of
India itself or the central
Government.

BILL OF EXCHANGE

Definition:

According to (Sec 5),

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.

Specimen of Bill of Exchange

Parties to a Bill of Exchange

There are three parties involved in a bill of exchange
(i) The Drawer The person who makes the order
for making payment. In the above specimen, Rajiv
is the drawer.
(ii) The Drawee The person to whom the order to
pay is made. He is generally a debtor of the drawer.
It is Sameer in this case.
(iii) The Payee The person to whom the payment is
to be made. In this case it is Tarun.
The drawer can also draw a bill in his own name
thereby he himself becomes the payee. Here the
words in the bill would be Pay to us or order.
In a bill where a time period is mentioned, just like
the above specimen, is called a Time Bill.
But a bill may be made payable on demand also. This
is called a Demand Bill.

Essentials of a Bill of Exchange

1.
2.
3.
4.
5.
6.
7.
8.
9.

It must be in writing
It must contain an order to pay.
The order to pay must be unconditional
It must be signed by the drawer
It requires three parties, i.e. The
drawer, drawee, and the payee.
The drawer, drawee and payee must be
certain.
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

CHEQUE
A cheque is a bill of exchange drawn
upon a specified banker and payable
on demand and it includes the
electronic image of a truncated
cheque and a cheque in the
electronic form.
A cheque is a series of a bill of
exchange 1- it is always drawn on a specified
banker and
2-it is always payable on demand.

CHEQUE TRUNCATION
SYSTEM(CTS)

Cheque Truncation System (CTS) or Image-based Clearing System

(ICS), in India, is a project undertaken by the Reserve Bank of India
RBI, for faster clearing of cheques.CTS is basically an online imagebased cheque clearing system where cheque images and
Magnetic Ink Character Recognition (MICR) data are captured at the
collecting bank branch and transmitted electronically.
Truncation means, stopping the flow of the physical cheques issued by
a drawer to the drawee branch. The physical instrument is truncated at
some point en route to the drawee branch and an electronic image of
the cheque is sent to the drawee branch along with the relevant
information like theMICRfields, date of presentation, presenting banks
etc.
Cheque truncation , would eliminate the need to move the physical
instruments across branches, except in exceptional circumstances. This
would result in effective reduction in the time required for payment of
cheques, the associated cost of transit and delays in processing, etc.,
thus speeding up the process of collection or realization of cheques.

TYPES OF CROSSING

Cheques for CTS 2010

All types of cheques can be presented for clearing through CTS. But
toachieve standardisation of cheques issued by banks across the
country and to reduce cheque frauds set of benchmarks called as CTS2010 standard are introduced . These include provision of mandatory
minimum security features on cheque forms like quality of paper,
watermark, banks logo in invisible ink, void pantograph, etc., and
standardisation of field placements on cheques.

Sample old and new(CTS 2010compliant) cheques issued by State

Bank of India (SBI) are shown below

Holder & Holder in due

course
Holder(Sec-8)

means any person

entitled in his own name to the
possession a promissory note bill of
exchange or cheque and to recover or
receive the amount due thereon from
the parties thereon. A holder must
therefore have the possession of the
instrument and also the right to
recover the money in his own name.

 Holder

in due course(Sec 9) means

any person
1. That, for consideration he became
the possessor of a promissory note,
bill of exchange or cheque, if payable
to the bearer
The payee or indrosee there of ,if
payable to the order
2. That he became the holder of the
instrument before its maturity.

3. That he became the holder of the

instrument in good faith , i.e. without
sufficient cause to believe that any
infirmity in the instrument or defect
existed in the title of the person from
whom he derived his title.

A Holder of a Negotiable
instrument will not be a Holder in
due course if

He has obtained the instrument by

gift or for an unlawful consideration
or by some illegal method.
2. He has obtained the instrument
after its maturity.
1.

Difference between holder and

holder in due course
Meaning-holder

means any person

entitled in his own name possession
of the instrument in other hand
holder in due course a holder who
takes the instrument in good faith for
consideration before it is overdue and
without any notice of defect in the
title of the who transferred it to him.

One of the essentials feature of a

negotiable instrument is its
transferability. A negotiable
instrument may be transferred
from one person to another in
either of the followings way-

1-By Negotiation
2-By Assignment

NEGOTIATION
The

transfer of an instrument by one

party to another so as to constitute
the transferee a holder is called
Negotiation.
Negotiation means as the process by
which a third party is constituted the
holder of the instrument so as to
entitle him to the possession of the
same and to receive the amount due
thereon in his own name.

Modes of negotiation
1.

Negotiation By delivery

An instrument payable to bearer is

negotiable by delivery thereof (Sec.47)

2. Negotiation By indorsement and

Delivery
An instrument Payable to order is
negotiable by the holder by Indorsement
and delivery thereof (Sec.48)

ASSIGNMENT
When a person transfers his right to
receive the payment of a debt,
Assignment of the debt takes
place .Thus where a holder of a bill
note or cheque transfer the same to
another, he in fact gives his right to
receive the payment of the
instrument to the transferee.

Difference between
Assignment & Negotiation

Mode of transfer- The transfer by

negotiation requires only delivery with or
without endorsement of a bearer or order
instrument. Whereas the transfer by
assignment requires a separate written
document such as transfer deed signed by
the transferor.

Notice of transfer-Not require in negotiation

Consideration-consideration must be
proved in assignee.

Indorsement/EndorsementThe term Indorsement means writing

on an instrument. In its technical
sense in the Negotiable Instruments
Act it means the writing of a persons
name (otherwise than as maker) on
the face or back of a negotiable
instrument or on a slip of paper.
The person who so signs the
instrument is called the indorser.
The person to whom the instrument
is indorsed is called the indorsee

TYPES/KINDS OF
INDORSEMENT
1.Blank or general Indorsement
2. Full or special Indorsement
3. Restrictive Indorsement
4.Partial Indorsement
5.Conditional Indorsement

1. Blank or general endorsement:

If the endorser signs his name only
and does not specify the name of the
endorsee, the endorsement is said to
be in blank Sec. 16(1). The effect of a
blank endorsement is to convert the
order instrument into bearer
instrument (Sec. 54), which may be
transferred merely by delivery.

2. Endorsement in full or special endorsement:

If the endorser, in addition to his signature, also adds a
direction to pay the amount mentioned in the
instrument to, or to the order of, a specified person the
endorsement is said to be in full [Sec. 16(1)].
If, for example, A, the holder of a bill of exchange,
wants to make an endorsement in full to B, he would
write thus: Pay to B or order, . After such an
endorsement it is only the endorsee, i.e., B, who is
entitled to receive the payment of the instrument and
to further negotiate the instrument by his endorsement.
A blank endorsement can easily be converted into an
endorsement in full.

3. Restrictive endorsement:
Stating the effect of endorsement, Section 50 provides that the
endorsement of negotiable instrument followed by delivery transfers to the
endorsee the property herein with the right of further negotiation.
However, Section 50 permits restrictive endorsement.
An endorsement which, by express words, prohibits the endorsee from
further negotiating the instrument or restricts the endorsee to deal with his
instrument as directed by the endorser is called restrictive endorsement.
Illustrations:
(a) B, the holder of the bill, makes an endorsement on the bill saying Pay C
only. It is a restrictive endorsement as C cannot negotiate the bill further.

4. Partial Endorsement:
Section 56 provides that a negotiable instrument cannot
be endorsed for a part of the amount appearing to be due
on the instrument. In other words, a partial endorsement
which transfers the rights to receive only a part payment
of the amount due on the instrument is invalid.
Such an endorsement has been declared invalid because
it would subject the prior parties to plurality of actions
(one action by holder for part value and another action by
endorsee for part value) and will thus cause
inconvenience to them.
Thus, where A holds a bill for Rs 2,000 and endorses it in
favour of B for Rs 1,000 and in favour of C for the
remaining Rs 1,000, the endorsement is partial and
invalid.

5. Conditional endorsement:
If the endorser of a negotiable instrument, by express
words in the endorsement, makes his liability,
dependent on the happening of a specified event,
although such event may never happen, such
endorsement is called a conditional endorsement
(Sec. 52).
The law permits a conditional endorsement and
therefore it does not in any way affect the negotiability
of the instrument. Thus, endorsements can validly be
made in the following terms:
(i) Pay B or order on his marriage;
(ii) Pay B on the arrival of Pearless ship at Bombay.

DISCHARGE
Discharge means release from
obligation.
By Payment
By cancellation
By material alteration or lapse of
time.

DISHONOR
It may be by non acceptance or non payment
A. DISHONOUR BY NON-ACCEPTANCE (Sec-91)
A bill of exchange can be dishonored by non
acceptance in the following ways 1-Does not accept 48 hours from the time of
presentment.
Means showing an instrument to the drawee,
acceptor, or maker for acceptance, sight or
payment.

 2-Drawee

is fictitious person
3-Drawee has become insolvent or
dead
4-Drawee is incompetent

Drawee(The person to whom the

order to pay is made)

B. DISHONOUR BY NON-PAYMENT
A promissory note, Bill of exchange
and cheque is said to be dishonoured
by non-payment when the make of
the note, acceptor of the bill or
drawee of the cheque makes default
in payment upon being duly requires
to pay the same

NOTING

When a promissory note or bill of exchange has

been dishonoured by non- acceptance or nonpayment, the holder may cause such dishonour to
be noted by a notary public upon the instrument,
or upon a paper attached thereto, or partly upon
each. Such note must be made within a reasonable
time after dishonour, and must specify the date of
dishonour, the reason, if any, assigned for such
dishonour, or, if the instrument has not been
expressly dishonoured, the reason why the holder
treats it as dishonoured, and the notary' s charges.

PROTESTING

When a promissory note or bill of exchange has been

dishonoured by non- acceptance or non- payment, the
holder may, within a reasonable time, cause such
dishonour to be noted and certified by a notary public.
Such certificate is called a protest. Protest for better
security. When the acceptor of a bill of exchange has
become insolvent, or his credit has been publicly
impeached, before the maturity of the bill, the holder
may, within a reasonable time, cause a notary public
to demand better security of the acceptor, and on its
being refused may, within a reasonable time, cause
such facts to be noted and certified as aforesaid. Such
certificate is called a protest for better security.

LIABILITY OF PARTIES ON
NEGOTIABLE INSTRUMENT
Liability of DrawerThe drawer of a bill of exchange or
cheque is bound, in case of
dishonour by the drawee or
acceptor thereof, to compensate the
holder, provided due notice of
dishonour has been given to, or
received by drawer.
1.

2.Liability of drawee of chequeThe drawee of a cheque(who is always

banker) having sufficient funds of a
drawer in his hands, properly
applicable to the payment of such
cheque, must pay the cheque when
duly required to do so . In default of
such payment, the drawee, i.e. , the
banker , must compensate the
drawer for any loss or damage
caused by such default.

3. Liability of maker of note and acceptor of billIn the absence of a contract to the contrary, the maker of
a promissory note, by making it, the acceptor before
maturity of a bill of exchange by accepting it, engages
that he will pay it according to the tenor of the note or
his acceptance respectively, andin default of such
payment, suchmaker or acceptor is bound to
compensateany party to the note or bill for anyloss
or damagesustained by him and caused by such
default. . The acceptor of a bill of exchange at or
aftermaturity, by accepting it,engages to paythe
amount thereof to theholder on demand.

4. Liability of endorser In the absence of a contract to the contrary,

the.endorserof anegotiable instrument, by
indorsing it, engagesthat ondue presentmentit
shall beaccepted and paidaccording to its tenor
and thatif it be dishonouredhe willcompensate
the holderor subsequent endorser who is
compelled to pay it for any loss or damage
caused to him by such dishonour.

 5.

Liability of prior parties to a holder

in due courseEvery prior party to a negotiable
instrument is liable thereon to a
holder in due course until the
instrument is duly satisfied.

6. General rules regarding Liability1. Maker, drawer and acceptor

principals
2. Prior party a principal debtor in
respect of each subsequent party.
3. Discharge of endorsers liability
4. Suretyship

7. Acceptors liability on a forged

indorsementAn acceptor of a bill of exchange
already indorsed is not relieved from
liability by reason that such
endorsement is forged, if he knew or
had reason to believe the indorsement
to be forged when he accepted the
bill.

8. Acceptors Liability for a bill in a fictitious

name
An acceptor of a bill of exchange drawn in
fictitious name and payable to the
drawers order is not, reason that such
name is fictitious, relieved from liability to
any holder in due course claiming under
an indorsement by the same hand as the
drawers signature, and purporting to be
made by the drawer.