NEGOTIABLE INSTRUMENT ACT

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• GLOBALIZATIO
N.
Negotiable Instrument Act
 Negotiable – Transferable by delivery
 Instrument - A written document by which a right is
created in favor of some person

 Thus Negotiable Instrument means a written

promise or order to pay a money whose
ownership can be freely transferred by one person
to another.
NEGOTIABLE INSTRUMENT ACT
 The law in India relating to negotiable instruments is
contained in the Negotiable Instruments Act, 1881.

 It is mainly based on the English Common Law.

 The Act came into force on 1st March, 1882.

 The latest amendment to the Act was made in the year

2002.

 The Act extends to the whole of India.

 MEANING OF NEGOTIABLE INSTRUMENT ACT

 A negotiable instrument is an instrument which

entitles a person holding it to a sum of money and
which is transferable from person to person by mere
delivery. The transferee becomes entitled to the money
and also to the right to further transfer it.
Characteristics of a Negotiable Instrument

 It’s a written document. It can never be oral.

 It should be duly signed.

 A negotiable instrument may be payable either to

order or to bearer.

 The transferee who received instrument in good faith

and for consideration is called holder in due course.
Contd……
 Negotiable instrument can be freely transferred or
endorsed.

 The negotiable instrument is valid only when it is for a

certain sum of money and should be payable in legal
tender money of India.

 The holder of the Negotiable Instrument is presumed to

the owner of the property contained in it.

 Every negotiable instrument is freely transferable from one

person to another
Contd…….
A negotiable instrument should always be
unconditional.

 eg – Mr. A promise to pay Rs. 10,000/- to Mr. B

provided Mr. B delivers goods as per his order.
Freely Transferable Payee must be a certain
Person
Absolute Title Signature a must.

In Writing Certain Time

Unconditional Delivery Essential

Certain Sum Stamping is Mandatory.

 Presumptions as to Negotiable Instruments

 Every negotiable instrument was made or drawn, accepted,

endorsed and negotiated or transferred for consideration.

 It bears the date on which it was made or drawn.

 Every accepted Bill of Exchange was accepted and

transferred within a reasonable time after its date and
before its maturity.

 Every transfer of a Negotiable Instrument was made before

its maturity.
Contd……
 A lost promissory note or bill was duly stamped and
signed.

 That the holder of the instrument is a holder in due

course`.

 That the endorsements appearing on it were made in

the order in which they appear thereon.
Classification of Negotiable Instruments

 Inland Instruments
 Foreign Instruments
 Bearer Instruments
 Order Instrument
 Demand Instruments
 Time Instruments
Contd……
 Inland Instruments: When the negotiable instrument
drawn or made in India and made payable in India, or
drawn upon any person resident in India, shall be deemed
to be an inland instrument.
 Foreign Instruments: When the negotiable instrument
drawn or made in India and payable outside India, or
drawn outside India but payable in India.
 Bearer Instruments: When a negotiable instrument is
payable to bearer or in case of endorsed instrument the last
endorsement is `Blank endorsement` it is considered as
Bearer instrument.
Contd……
 Order Instrument: When the negotiable instrument
is payable to specific person, whose name is
mentioned expressly on the instrument.
 Demand Instruments: Promissory Note and Bill of
Exchange is payable `on demand` or at sight or on
being presented, a cheque is always payable on
demand.
 Time Instruments: An instrument payable after a
fixed time e.g. after one month, or specific date is
termed as Time Instrument.
Kinds of Negotiable Instruments
 According to section 13 of the negotiable Instruments
Act, ` a negotiable instrument means a
promissory note, bill of exchange or cheque
payable either to order or to bearer.
Kinds of Negotiable Instrument
 Thus it deals with three kinds of negotiable
instruments i.e.

• Promissory Notes,
• Bills of Exchange
• Cheque.
 Promissory Note
 According to section 4, `A promissory note is an
instrument in writing containing an
unconditional undertaking signed by the maker,
to pay a certain person, or to the bearer of the
instrument’.
Promissory Note
 In writing, signed, stamped
 Unconditional promise to pay
 Money only
 Certain party
 On demand or certain date
 Certain sum
 Parties – Drawer, Payee
SPECIMEN OF PROMISSORY NOTE

 Rs. 20,000/-
 Dayalbagh, Agra
 July 9, 2011

 Three months after date, I promise to pay Mr. Ramesh or order the sum
of rupees twenty thousand for value received.


 To,
 Ramesh Stamp
 Dayalbagh, Sd\-
 Agra – 282 005 Rahul

Essentials of a Promissory Note
Thus Promissory note must be in
 writing,
 Definite and unconditional,
 express promise to pay
 chargeable with stamp duty under the Indian
Stamp Act.
 Maker and payee must be certain
 Signed by the Maker
 Promise to Pay a Certain Sum
Cases……
 I promise to pay Balwant Rs 2500 and all other sums which
shall be due to him.
 I promise to pay Balwant Rs. 1200 and to deliver to him my
rabbit on 1 March 2011’.
 I owe B Rs 500.
 I have borrowed Rs 2000 from Y.
 I promise to pay B Rs 1000 after I receive money from Y.
 I promise to pay Rs 500 but after deducting moneys owed
by him.
 I promise to pay B Rs 1000 and other charges.
 Bills of Exchange
 According to Section 5 of the Negotiable Instruments
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 –

 A certain person
 the order of a certain person
 the bearer of the instrument.
Cases……
 ‘A’ wrote and signed an instrument ordering ‘B’ to pay
Rs. 500 for value received.

 ‘On demand pay to ‘A’ or order the sum of Rs. 500 for
value received’.
SPECIMEN OF BILL OF EXCHANGE

 Rs. 15,000/-
Dayalbagh, Agra
 August 28, 2008

 Three months after date, pay to Ramesh or bearer the sum of rupees
fifteen thousand for value received.


 To,
 Ramesh ACCEPTED Stamp
 Dayalbagh, Sd\- Sd\-
 Agra – 282 005 Ramesh Rahul

Bill of Exchange  Writing, signed,
accepted, stamped
 Unconditional order to
pay
 Money only
 Certain party
 Certain sum
 Parties – Drawer, Drawee
& Payee
Essentials of Bill of Exchange
Following are essentials of bills of exchange.

 It must be in writing.

 It must contain an express an order to pay.

 The order to pay must be definite and

unconditional.

 It must be signed by the drawer.

Contd…..
 The sum contained in the order must be certain.

 The order must be to pay money only.

 Drawer , drawee and payee must be certain. The

drawer and payee may be same person.

 It must be stamped.
Contd…..
 It must contain an order to pay certain money only

 The maker must sign it

 The drawee and payee must be certain

 Bills of exchange must be order or bearer

Parties of a Bill of Exchange
 Drawer: The maker of the bill of exchange is called the
drawer.
 Drawee: The person who is directed to pay the bill of
exchange is called the drawee.
 Acceptor: When a Drawee accepts the bill by signing
on it, he becomes the acceptor.
 Payee: The person named in the instrument to whom
the amount of the bill is to be paid.
 Holder: The person who has custody of the bill is
known as holder.
 Comparison between Promissory Note & Bills of
Exchange

Promissory Note Bill of Exchange

 Two Parties – Maker & Payee  Three Parties – Drawer, Drawee
& Payee

 Unconditional promise to Pay  Unconditional order to pay

 Maker of a note is Debtor and  Drawer of a bill is the creditor
he himself undertakes to pay. who directs the drawee (his
debtor) to pay.

 A note cannot be made  Whereas in a bill, the drawer

payable to the maker himself and the payee may be one and
 the same person.
 Acceptance is required by the
 Acceptance is not required by drawee.
the maker.
 Cheque
 A cheque is a written instrument signed by the drawer
containing an unconditional order to a specified bank to
pay on demand a certain sum of money only to or order of a
certain person or to the bearer of the instrument.

 According to the amendment in the Act in 2002, section 6,

cheque includes the following:

 Electronic image of a truncated cheque

 A cheque in the electronic form
 SPECIMEN OF CHEQUE

 Dated_____________

 Pay__________________________________________________ or bearer
Rupees__________________________________________________
 ___________________________________________________ only

 Rs_____________

 A/c No.________________ L.F_______________

 THE RADHASOAMI URBAN CO-OP. BANK LTD. Sd\ - of A/c holder
 DAYALBAGH, AGRA

 Cheque No.892702 282007251


SPECIMEN OF CHEQUE
CHEQUES
 Writing, signed
 Unconditional order
 Issued by specified
banker, certain payee
 On demand
 Certain amount
 Must bear a date
Cheque
 A cheque is a species of bill of exchange; a cheque
therefore, has the following two additional essential
features in addition to a bill of exchange:

It must be drawn upon a specified bank

It must be payable on demand

Essential Elements of Cheque
 Cheque must be in writing.

 It may be written on paper or it may be in electronic

form.

 The drawer must sign it.

 It must be drawn on a specific Bank.

Contd……
 It must contain an order to pay a certain sum of money.

 It must be always payable on demand only.

 A cheque must be always payable either to a certain

person or order of that person or to the bearer of it.

 It must have certain drawer, drawee and the payee.

 Types of Cheque
 Crossed Cheque

 Order Cheque

 Bearer Cheque
Contd……
 Bearer Cheque: A cheque which is payable in cash
across the counter of the bank is called as Bearer or
open cheque. Bank makes payment to the person who
presents the cheque at its counter without any proper
verification.
Contd……
 Order Cheque: When the drawer in the cheque
cancels the word `on Bearer’, it becomes order cheque.
Before payment of this cheque, Bank confirms that the
recipient of payment is the same person whose name
is mention on the cheque.
Contd……
 Crossed Cheque: A crossed cheque is one on which
two parallel transverse lines with or without any word
is drawn. The payment of such a cheque can be
obtained only through the banker. It is considered as
safe cheque.
Marking of Cheque or Certification of Cheque

 When paying bank verifies the customer’s account and

certifies on the cheque regarding sufficient availability
of funds in his account for payment of the cheque.
Such a cheque is called the `marked cheque’

 Thus, the marking of cheque protects the person who

receives a marked cheque. He is certain to get the
payment of the cheque. Although, bank is not liable
even if it has marked a cheque as good for payment.
Dishonour of Cheque
A cheque is said to be dishonoured when the
banker refused to pay to the holder of the
cheque.

Reason for the Dishonour of the cheque:

 When the banker may dishonour cheque or refuse

payment

 When banker is bound to Dishonour cheque

When the banker may dishonour cheque or
refuse payment:
 Not duly presented

 Cheque is presented at a branch other than one where the

drawer has his account.

 Cheque is undated

 Cheque is post dated

 Cheque is presented after validity time period for payment

Contd…….
 Funds of the customer in banker’s hands are not
properly applicable to the payment of such cheque

 Cheque is doubtful

 Drawer signature mismatch

 Conditional cheque endorsement

 Material alteration.
When banker is bound to Dishonour cheque

(1) When the drawer countermands(cancel) payment.

 This right vested in its drawer

 The stop payment order may be given in writing or verbally

 Order to stop payment must be signed by the drawer of the

cheque

 The drawer must inform the banker the full and correct
detail of the cheque payment of which is intended to be
stopped
Contd…..
(2)Death of Drawer
(3) Lunacy or Unsound mind state of their customer
(4)Insolvency of the Drawer
(5)Banker is prevented by any government order
(6)Banker receive a notice of loss of the cheque form
customer or a holder
(7)When notice to close the account received from
banker or cutomer
Crossing of Cheque
 Drawer give direction to the paying banker through
certain words marked on cheque itself, which
constitute ‘ crossing’.

 Thus crossing is an instruction given to the paying

banker to pay the amount of the cheque through a
banker only and not directly to the person presenting
it at the counter. A cheque bearing such an instruction
is called Crossed Cheque.
Contd……
 Thus a crossed cheque is one on which two parallel
transverse lines with or without any word is drawn.

 The payment of such a cheque can be obtained only

through the banker

 It is considered as safe cheque

Types of Crossing
 General Crossing

 Special Crossing

 Non – Negotiable Crossing

 Restrictive Crossing
1.) General crossing

According to Section123 - where a cheque bears across

its face an addition of the words “and company” or any
abbreviation thereof, between two parallel transverse
lines, or of two parallel transverse lines simply , either
with or without the words “not negotiable” , that
addition shall be deemed a crossing , and the cheque
shall be deemed to be crossed generally.
GENERAL CROSSING
2.) SPECIAL CROSSING

 Under section 124 of the Act, 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 to be crossed specially.
SPECIAL OR RESTRICTIVE CROSSING
3.) NON- NEGOTIABLE CROSSING
 The words 'Not Negotiable' can be added to
General as well as Special crossing and a
crossing with these words is known as Not
Negotiable crossing.
4.) RESTRICTIVE CROSSING
 This crossing can be made in both general and special
crossing by adding the words Account Payee.
 In this type of crossing the collecting banker is
supposed to credit the amount of the cheque to the
account of the payee only.
Bank Draft or Demand Draft
 Bank draft or demand draft is a negotiable instrument
drawn by one bank upon the same bank or some other
bank. It contains an unconditional order.
Characteristics of Bank Draft
 It is issued by one branch of a bank upon another
branch of the bank.

 It is payable on demand.

 Bank draft is always payable on demand.

 The buyer can return the draft and can get it cancelled
by the drawer bank branch.
Hundi
 Hundi derived from `Sanskrit’ word `hund’

 Means `to collect’.

 Thus, `hundi’ written in vernacular language is an

instrument used to collect the money stated in it.
HUNDIS

 Drawn in any local

language in accordance
with the custom of the
place
 For transfer of money
without its actual
physical movement
Classification of Hundies
 Darshani Hundi: The word `darshan’ means at sight.
A hundi payable at sight or on darshan or on demand
is known as darshani hundi.

 Muddati or Miadi Hundi: Muddat or miad means a

specific time period. A hundi payable after a specified
time period is known as muddati or miadi hundi
 Kinds of Hundies
 Shah Jog Hundi: When hundi payable only to a shah i.e.
the person of repute is called shah jog hundi.

 Nam Jog Hundi: When hundi is payable to the person

named in it or to his order is called nam hog hundi.

 Dekhandar or Dhani Jog Hundi: Dhani means the owner

or holder who purchases a hundi. Thus, a dhani jog hundi
is one payable to its owner or to the person who becomes
holder or bearer by purchasing it.
Contd…..
 Firman Jog Hundi: A hundi payable to order is a
firman jog hundi. It can be negotiated by endorsement
and delivery.

 Insan Jog Hundi: An Insan Jog hundi is one which is

paid only to the person who presents it.
Contd…….
 Jawabee Hundi: Jawabi hundi is in the form of a letter
from the person who desires to remit money from one
place to another. In this letter i.e. hundi the drawer advises
the payee to collect money from a banker and send an
answer. On receipt of the money, the payee sends his
receipt in the form of an answer to the remitter of the
money.

 Jokhami Hundi: A jokhami hundi is drawn by the seller of

the goods on the buyer. It is a conditional hundi which is
payable by the drawee on the safe arrival of the goods
against which the hundi is drawn. The drawee is not
required to pay the hundi unless the goods reach their
destination safely.
Certain Important Terms
 Khoka- A paid up and cancelled hundi

 Peth – hundi issued when the original hundi is lost

 Perpeth – Triplicate Copy of Hundi issued in case of loss

of peth

 Zickri Chit – letter of protection given to the holder of a

hundi by some prior party to the hundi
Maturity of Negotiable Instrument
 Acc to section 22 rules regarding maturity are as follow:

 Payable on Demand

 Payable on Order

 Payable on Demand falls due for payment immediately

after its issue.

 Payment of cheque is due on or after its date mentioned on

its face but upto its validity period (Six Month)
Contd…..
 A promissory note or bills of exchange are payable
after sight or on specified day or on the happening of
an event which is certain to happen.

 Bill of Exchange – Date of bill + Period of Bill +3 Days

(Grace Days)
Cases
 A negotiable instrument dated 29 January 2011 is made
payable at one month after date.
 Maturity -?????

 A promissory note, dated 30 august 2010 is made

payable three months after date.
 Maturity - ?????
Payment in due Course
 Means payment is made as required in the act
 The payment should be made in accordance with the
apparent tenor of the instrument
 Payment must be made in money only
 The person to whom payment is made should also be
entitled to receive payment
 The payment should be made in good faith, without
negligence and under bonafide circumstances
Holder & Holder in Due Course
A person is a holder of a negotiable instrument who is
entitled in his own name:

 To the possession of negotiable instrument in his own

name.

 To recover the amount due on a negotiable from the

parties liable on negotiable instrument.
Holder in Due Course
 He must be a holder

 He must have become holder for consideration

 He must have obtained the possession of negotiable

instrument before maturity

 He must have obtained the negotiable instrument in

good faith
Privileges of a Holder in Due
Course
 Every prior party to a negotiable instrument is liable
to a holder in due course.

 A holder who derives the title from a holder in due

course, has the same right as that of a holder in due
course