Negotiable Instruments Act 1881

Came into force on 1st March, 1881

the said act was enacted to define and to provide the law relating to PROMISSORY NOTES, BILLS OF EXCHANGE AND CHEQUES !

Meaning of Negotiable Instrument

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

Payable to order
A promissory note, bill of exchange or cheque is payable to order if either of the following two conditions is fulfilled:
 

It must be expressed to be so payable It must be expressed to be payable to a particular person and it must not contain words which prohibit transfer or indicate an intention that it shall not be transferable.

Payable to bearer
A promissory note, bill of exchange or cheque is payable to order if either of the following two conditions is fulfilled:
 

It must be expressed to be so payable The only or last endorsement must be an endorsement in blank.

Essential characteristic Features of a Negotiable Instrument

Payable to order or bearer Freely transferable Presumption as to holder Title of holder in due course free from all defects. Presumption as to consideration.

Presumption as to Negotiable Instruments (section 118)

Of consideration As to date As to time of acceptance As to time of transfer As to time of endorsement As to stamp As to holder in due course As to protest

Promissory Note: Section 4 of the Act defines:

A Promissory Note is an instrument in writing 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.

Essential Characteristics of a Promissory Note

In writing


Example: A promise to pay B a sum of Rs 500 on telephone. This promise will not make a promissory note since it is not an instrument. Example: Mr B said that I owe you Rs 500.this is not a promissory note. Example : A promise to pay b Rs 500 seven after his marriage with C or D is not called a promissory note.

Express promise to pay



Definite and unconditional promise



Signed by the maker

Promise to pay certain sum



Example: A promise to pay B Rs 500 and all other sums which shall be due to him is not a promissory note. Example: I promise to deliver to B 100 Kg of sugar. (this instrument is not a promissory note as the payment ois not in mpney and money only. Certain payee

Promise to pay money only



Parties to a Promissory Note

The maker
 

The person who makes the promissory note is called the maker The person to whom or to whose order the payment is to be made is called the payee.

The payee In course of transfer of a promissory note by payee and others, the parties involved may be 

a. The Endorser the person who endorses the note in favour of another person. In the above specimen if Ramesh endorses it in favour of Ranjan and Ranjan also endorses it in favour of Puneet, then Ramesh and Ranjan both are endorsers. b. The Endorsee the person in whose favour the note is negotiated by endorsement. In the above, it is Ranjan and then Puneet. Endorsement means transfer of any document or instrument to another person by signing on its back or face or on a slip of paper attached to it

Example
Suppose you take a loan of Rupeess Five Thousand from your friend Ramesh. You can make a document stating that you will pay the money to Ramesh or the bearer on demand. Or you can mention in the document that you would like to pay the amount after three months. This document, once signed by you, duly stamped and handed over to Ramesh, becomes a negotiable instrument. Now Ramesh can personally present it before you for payment or give this document to some other person to collect money on his behalf. He can endorse it in somebody elses name who in turn can endorse it further till the final payment is made by you to whosoever presents it before you. This type of a document is called a Promissory

Specimen of a promissory Note

New Delhi Oct 12,2010

Rs 10000/- only On demand, I promise to pay Ramesh, s/o RamLal of Meerut or order a Rahul sum of Rs 10,000/- (Rupees Ten Thousand only), for value received... To , Ramesh Address.. Sanjeev Stamp

Bill of Exchange

Section 5 of the Act defines:

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 or to the bearer of the instrument

Essential Characteristics of Bill of Exchange

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

Example
Suppose Rajiv has given a loan of Rupees Ten Thousand to Sameer, which Sameer has to return. Now, Rajiv also has to give some money to Tarun. In this case, Rajiv can make a document directing Sameer to make payment up to Rupees Ten thousand to Tarun on demand or after expiry of a specified period. This document is called a Bill of Exchange, which can be transferred to some other persons name by Tarun.

Specimen of a Bill of Exchange

Rs. 10,000/New Delhi Oct 12, 2010 Five months after date pay Tarun or (to his) order the sum of Rupees Ten Thousand only for value received. To Sameer Address Accepted Sameer Stamp Rajiv

Parties to a Bill of Exchange

The Drawer The person who makes the order for making payment. In the above specimen, Rajiv is the drawer. 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. The Payee The person to whom the payment is to be made. In this case it is Tarun.

Distinction between Bill of Exchange and Promissory Note

No. of parties Promise/order Nature of liability Acceptance Same identity of payer and payee Payable to bearer Notice of dishonor

Cheques
A cheque is a bill of exchange which is
 

Drawn upon a specified banker And payable on demand

Essential characteristics of Cheque

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

Parties to a Cheque
Drawer Banker Payee

Types of Cheque
Open cheque


A cheque is called Open when it is possible to get cash over the counter at the bank. The holder of an open cheque can do the following:
Receive its payment over the counter at the bank, Deposit the cheque in his own account Pass it to some one else by signing on the back of a cheque.

Crossed cheque. Bearer cheque Order cheque

Specimen of a Cheque
Oct 14, 2010. Pay.............................................................................................................. ....................................................................................................... or Bearer Rupees Rs.. _ __________________ STATE BANK OF INDIA Jawaharlal Nehru University, New Delhi 110067 MSBL/97 653003 110002056 10

Distinction between a Cheque and a Bill of Exchange

Drawer Payable of demand Payable to bearer on demand Acceptance Stamp Three days of grace Crossing Form Notice of dishonour

Crossing of cheque

Crossing of a Cheque
Meaning
 

The crossing of a cheque is an instance of an alterataion which is authorised by the act. A cheque is said to be crossed when it bears across its face two parallel transvese lines which are usually drawn on the left hand top corner of the cheque. The purpose of crossing is to direct the drawee to pay the amount of cheque only to a banker so that the party who receives the payment of the cheque can be easily traced.

Types of Crossing
General Crossing It is a cheque which bears across its face two parallel transverse lines without any words as (and company or & Co.) written in between these two lines. Special Crossing It is a cheque in which the name of the bank is written between the two parallel lines and hence it can be paid to that specific banker only.

A cheque is said to be crossed generally where it bears across its face an addition of
     

Two parallel transverse lines The words and company between two parallel transverse lines The words & company between two parallel transverse lines The words Not Negotiablebetween two parallel transverse lines The words & company and Not Negotiablebetween two parallel transverse lines The words and company and Not Negotiable between two parallel transverse lines

Special Crossing
A cheque is said to be crossed specially where it bears across its face in addition of :


The name of a banker

Without lines Between two paralalel transverse lines

The name of the bank with the words,not negotiable

Without lines Between two paralalel transverse lines

The name of the banker with the words,and company

Without lines Between two paralalel transverse lines

The name of the banker with the words,& company

Without lines Between two paralalel transverse lines

The name of the banker with the words,and company and Not Negotiable
Without lines Between two paralalel transverse lines

The name of the banker with the wordsand Not Negotiable ,& company
Without lines Between two paralalel transverse lines

Dishonour of Cheques
A cheque is said to be dishonoured by nonpayment when the drawee of the cheque makes default in payment upon being duly required by the same.

When banker may dishonour a customers cheque

Insufficient funds Post dated cheque Doubtful legality No account Presented after banking hours Stale cheque

Liability of Drawee on Dishonour of a Cheque

The drawee of a cheque must compensate the drawer for any loss or damage caused by non-payment if the following three conditions are fulfilled:
  

If the drawee has sufficient funds of the drawer in his hands If the funds are properly applicable to such payment If the drawee is duly required to pay the cheque.

The drawee is liable to the drawer not any other person.