NEGOTIABLE

INSTRUMENT ACT, 1881

• NEGOTIABLE INSTRUMENT ACT, 1881
• This act extends to whole of India. Various amendments
have been made from time to time, but important
amendment was made in 1988 by inserting Sec, 138-142,
which relates to ‘Dishhonour of Cheque’.
• This act applies to 3 kinds of Negotiable instruments –
i.e. Promissory Notes, Bills of Exchange & Cheques. This
act is also applicable to ‘Hindis’ and documents like
dividend warrants, share warrangts, bearers debentures,
railway receipts etc.
• Negotiable Instrument means ‘a written document
transferable by delivery, it also means a written document
by which a right in created in favour of some person’.
• Sec. 13 of N.I. Act defines ‘a negotiable instrument
means a promissory note, bill of exchange or cheque
payable either to order or to bearer.
• Payable to order means payable to particular person.
• Payable to bearer means payable to any person
whosoever bears it.
• Payable on demand – related to time (whenever it is
demanded say within 6 months).
• No person in India other than the RBI or central Govt.
can make or issue a promissory note which in ‘payable
to bearer’.
• PROMISSORY NOTE
A Pro-note is an instrument in writing containing an
unconditional undertaking signed by the maker, to pay a
certain sum of money only to, the order of a certain
person, or to the bearer of the instrument?
The person who makes the promise to pay is called the
‘Maker’ he is the debtor and must sign the document.
The person to whom payment is to be made is called the
‘Payee’.
Rs. 10,000 Dehradun 1st Jan 08
Sixty days after date I promise to pay to Mr. J.N. Sharma or order the
sum of Rs. 10,000 only with interest thereon @12% p..a. for value
received.
Rev. Stamp
Sig.
• PRONOTE (Specimen)
Essentials of a Promissory Note :
1. It must be in writing, which must be on a paper or book. The
word ‘Promise’ must always be used in the writing of a Pro-
note.
Ex : A person signs the instrument in the following terms
I promise to pay B or order Rs. 10,000
I acknowledge my self to be indebted to B in Rs. 10,000 to
be paid on demand for value received.
2. It must contain a promise or undertaking to pay. A mere
acknowledgement of indebtness is not a Pro-note although it
is a valid agreement between the parties.
Ex: a) ‘I am liable to pay to B Rs. 5,000.
b) ‘I have taken from B Rs. 5000 and I am accountable
to him for the same with interest.
These instrument are not Pro-notes as there is no promise
to pay, only acknowledgement of indebtness is made.
3. The promise to pay must be unconditional - The
promise to pay must not depend upon the happening of
some uncertain event.
Ex: a) I promise to pay B Rs. 5,000 as soon as I can’
b) ‘I promise to pay B Rs. 5000 provided I get the
same from C.
c) ‘I promise to pay, B Rs. 5000 7 days after
C’s death.’
4. It must be signed by the maker – If there person is
illiterate then his thumb impression must be there at
the place of signature.
5. The maker must be a certain person – The instrument
must indicate with certainty as who is the person or are
the persons engaging himself or themselves to pay.
Ex : No alternatives like A or B promises to pay in valid
because law say ‘where liability lies no ambiguity must
lie.’
6. The payee must be certain – It can be a single person or
more than one person alternative payee are permissible
in law. But it must be payable to order originally.

Pro-note in favour of fictitious person is illegal and

invalid, for it is treated as payable to bearer.
Ex : a) ‘I promise to pay to B Rs. 5000 and all other sums
which shall be due to him.
b) ‘I promise to pay Rs. 5000 and all fines
according to rule.
8. The amount payable must be in legal tender money of
India – A document containing a promise to pay a certain
amount of foreign money.

9. Date of place is usually put in Pro-notes, but if not, then

it shall not make the Pro-Note invalid.
• Bill of Exchange
• Sec. 5, defines BOE as ‘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’
• Parties to a BOE – There are 3 parties to a BOE i.e.
DRAWER, DRAWEE & PAYEE.
• The person who makes the bill is called the ‘DRAWER’
• The person who is directed to pay is called the
‘DRAWEE’
• The person to whom payment is to be made is called the
‘PAYEE’
• The bill is endorsed to the payee, the endorsee who is in
possession of the bill is called the ‘HOLDER’
• The holder must present the bill to be drawee for his
acceptance, when the drawee accepts the bill, by writing
the word ‘Accepted’ and then signing it, he is called the
‘Acceptor’.
• A person may be become both i.e. Drawer and Payee – it
means pay to me.

Rs. 10,000 D.Dun 1st Jan 2008

Three month after date pay to C or order the sum of the rupees ten
thousand only for value received.
Accepted (Sign of A)
To
C, Rev. Stamp
35, Rajpur Road Sig. of B
Dehradun.
Specimen of BOE
Essentials of BOE
1) It must be in writing.
2) It must contain an order to pay
3) The order to pay must be unconditional.
4) It must be signed by the maker (drawer)
5) The drawer, Drawee and payee must be certain.
6) The sum payable must be certain
7) Bill must contain an order to pay money only.
8) It must comply with the formalities as regards date, consideration
stamps etc.
CHEQUE
Sec. 6 Defines – ‘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 a cheque in the electronic form.
A cheque is a BOE with two distinctive features :
it is always drawn on a bank.
It is always payable on demand.
•
• Parties to Negotiable Instrument
A person competent to contract, can become a party to
Negotiable Instrument.
Following are the parties which are incompetent to
contract –
1) Minor – Minor is not competent to contract. However,
N.I. Act allows a minor to draw, endorse, deliver and
negotiate a N.I. so as to bind all parties except himself,
so a minor is not personally liable, but the adult parties
are.
2) Persons of Unsound Mind – An agreement with a
person of unsound mind is void, so these persons
cannot execute deliver, negotiate. N.I.
3) Insolvent – An insolvent is not competent to enter into a
valid contract unless he is discharged by the court. An
insolvent person is not competent to draw, make accept
or endorse a N.I.
4) Corporation – A registered company cannot draw,
accept, make or endorse a BE, Pronote or cheque
unless the company is empowered by its Memorandum of
Association.
5) Agent – An agent cannot draw, accept, endorse a N.I.
unless he is authorized to do so by the principal.
6) Partners and Firm – Each partners has authority to bind
his other partners for drawing, accepting negotiating a
N.I. in the name of the firm.
 A partner signing an instrument on behalf of the firm should
do so in the name of the firm.
7) Legal Representative – who signs his name to a pro-note,
BE or cheque is liable personally unless he expressly limits
his liability by adding the words to his signature as ‘without
personal liability’.
Parties to N.I.
I) Parties to Pro-Note
1) Maker – The person who makes the note promising
to pay the amount stated therein is called maker.
2) Payee – The person to whom the amount of Pro-
note is payable.
3) Holder – A person who is either the payee or the
endorse of the Pro-note. Holder is a person, who is entitled
to the possession of the instrument in his own and name
and is also entitled to receive the money due on it.
4) Endorser – The person who endorses the note to
another persons – is called the Endorser.
5) Endorsee – The person to whom the note is endorsed is
called the Endorsee.
Parties to Bill and Exchange -
1) Drawer – the maker of a BOE is the drawer.
2) Drawee – The person who is directed to pay the BOE by
the drawer is called Drawee.
3) Acceptor – Drawee accepts the bill and on acceptance
the drawee becomes the acceptor.
4) Payee – The person named in the instrument, to whose
order the drawee is directed to be pay is called the
Payee.
5) Holder, Indorser, Indorsee are the same as in case of
Pro-note
Parties to Cheque –
1) Drawer – the person who draws the cheque.
2) Drawee – The person who is directed by the cheque
to pay, here drawee must be a Banker.
3) Payee, Holder, Indorser, Indorsee are the same as in
case of Pro-note.

• Negotiation
• Sec 14 “Where a promissory note, bill of exchange or
cheque is transferred to any persons, so as to a make
that person the holder there of, a instrument is said to
be negotiated.”
• Methods of Negotiation – There are two ways;
• Negotiation by delivery.
• Negotiation by endorsement and delivery.
1) Negotiation by Delivery (Sec. 47) – A Promissory
note, bill of exchange or cheque payagle to bearer is
negotiable by delivery there of.
A negotiable instrument payable to bearer can be
transferred by mere delivery and the transferee becomes
t he holder of the instrument.
Ex. A) A, the holder of a N.I. payable to bearer,
deliver it to B’s agent to keep for B. The instrument has
been negotiated.
2) Negotiation by Endorsement & Delivery (Sec. 48) -
A P.N., BOE, or cheque payable to order is negotiable
by the holder by endorsement and delivery thereof.
• This mode of negotiation requires the following two
formalities –
• The holder (Transferor ) must indorse the N.I. i.e. he
must sign his name on the instrument.
• The duly signed instrument must be delivered to the
transferee.

Delivery of N.I. may be :

Actual delivery – when the instrument is physically
handed over by the transferor to the transferee.
Constructive Delivery - When the instrument is delivered
to an agent, clark or servant of the transferee who holds
the instrument on behalf of the transfree.
Conditional Delivery – When the instrument is delivered with
some condition attached, it is called conditional delivery. In
such case the negotiation is not valid.

Endorsement
Sec. 15 Where the maker or holder of a N.I. signs the same,
for the purpose of negotiation, on the back or face thereof
or on a slip of paper annexure thereto or so signs for the
same purpose a stamped paper intended to be completed
as a N.I., he is said to have endorsed the same and is
called the ‘ENDORSER’

Essentials of a Valid Endorsement –

1) It should be on the instrument, if there is no space on it, it
may be on a separate slip of paper annexed to the
instrument called ‘allonge’.
2) The endorser should sign in the same style and
spelling.
3) Signatures should be in ink and not by pencil or rubber
stamp.
4) It should be made by the holder or the maker.
5) The delivery of the instrument should be with the
intention of passing the property in it to the endorsee is
important.
6) More signature of the holder without any words also
constitutes endorsement.
An Endorsement becomes complete only when –
a) The holder signs on the face or back of the instrument.
b) The instrument is delivered to the enrdosee.
c) It is signed and delivered with the intention of vesting
the right to the holder.
• Negotiation by Unauthorised Parties (Sec. 58)
• Lost Negotiable Instrument – A lost N.I. is one, which
has been lost by its holder before it becomes over due.
• When a BOE has been lost before it is overdue,
the holder of it may apply to the drawer to give him
another bill of the same amount, by giving security to
the drawee in case the lost bill is found again.
• Following rule apply –
• a) When the N.I. is lost, the holder should inform all
parties liable on it and should also give public notice.
• b) The finder of the instrument gets no title to it, the
rightful holder is entitled to get back the instrument from
him.
• c) When a bill has been lost before it is overdue the
holder may apply to drawer to give him another bill of the
same amount by giving security to the drawer.
• d) Acceptor maker who makes payment in due
course on lost bill or note to a finder is discharged from
all liabilities to the rightful owner. But the true owner can
recover the money from the finder.
• e) If a N.I. payable to order is endorsed by the finder
with forged signature, the endorsee gets no title even
though be might have taken it in good faith. Forgery can
confer no title.
Crossing of Cheques
• Cheques are of two types –
i) Open or uncrossed cheques.
ii) Crossed Cheques.
• A open cheque is payable at the counter of the drawee
bank on the presentation of cheque, but such a cheque
runs great risk in the course of circulation because once
a wrong person takes away the payment of an open
cheque it is difficult to trace him.
• A crossed cheque is payable only through a collecting
banker and not directly at the counter of the bank.
• The collecting banker credits the proceeds to the
accounts of the payee of the cheque.
• A cheque is said to be crossed when two parallel line
with or without any words are drawn on the left hand top
corner of the cheque.
• Where the holder of a crossed cheque has no account
in any bank then either;
1) He may open an account with same banker and deposit
the cheque in that account to enable the banker to
collect the payment and credit the same into his account
2) He may obtain payment by endorsing the cheque in
favour of some person who has got an account in any
bank.
Types of Crossing :-
There are 2 types of Crossing :
1) General 2) special
1) General Crossing - Where a cheque bears across its
face, usually on the left hand top corner , two parallel
lives without any words, or with words as and company’
or ‘ & co.’ or ‘not negotiable’ written in between these two
parallel lines.
 (1) (2) (3)
• Where a cheque is crossed generally, the banker on
whom it is drawn shall not pay it otherwise than to a
banker. Collecting bank in case of general crossing may
be any bank of the holder/s choice.
2. Special Crossing – Where the cheque bears, across its
face parallel lines with the addition of the name of the
banker, the cheque shall be deemed to be crossed
specially.
 (1) (2) (3)
• 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.
3. A/c Payee or Restrictive Crossing -
• To give more protection to the payee of a cheque
instructive crossing is practiced in the business
community.
• Such crossing is done by writing the words
• A/c Payee only or Account Ramesh Sharma only.
 The effect of A/c Payee crossing is that the collecting banker is supposed to
credit the amount of the cheque to the account of the payee only and
nobody else.

(1) (2)

Obligation of a Banker

• The relation between a Banker and customer is primarily that of a Debtor ad

a creditor. It is the duty of a Banker to honour his customer’s chequer unless
there are valid reasons for refusing the payment.
• In case the dishonor a chequ without justification he is liable to compensate
the customer for any loss or any damage caused by such default (towards
Drawer).
* (The payee has no right of action against the banker refusing to honour,
because there is no privities of contract – between him and the banker.)
Rule of Awarding Damages –
• In case of wrongful dishonor of cheque, a non-trade
customer is entitled to general damages for such
monetary loss which he might have suffered.
• For a Trader or businessman customer is entitled to
claim not only the general damages but special damages
also for loss of reputation in the market.
Bouncing of the cheque
A cheque is said to be bounced or dishonor by non-
payment when the drawee of the cheque makes default
in payment upon being duly required to pay the same.
A drawer of a dishonored cheque shall be deemed to
have committed on offence and shall be punishable with
imprisonment for a term which may extent to 2 years and
a five twice the amount of cheques or both.
Before the penal provision can be invoked against the
drawer of a cheque which has bounced the following
requirements should be satisfied
1) The cheque should have been dishonored due to
insufficient of funds to the credit of the account on which
the cheque was drawn.
• 2) The cheque should have been issued by the
drawer in favour of another person for the discharge of
some debt or liability. If a cheque issued for social
obligation, like marriage, gifts etc. then it may not be
considered.