Negotiable Instruments

Definition

• According to the section 13(1) of the Negotiable Instruments act of 1881-

A Negotiable instrument means a promissory note, Bill of exchange or

cheque payable either to order or to the bearer.

• Typically Negotiable instruments are written orders or unconditional promises to pay a fixed sum of money on demand or at a certain point of time. .

Types of Negotiable Instruments

Promissory Note:

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 a certain

person or the bearer of the instrument.

Bill of Exchange:

A bill of exchange is an instrument in writing containing an unconditional order,

signed by the maker, directing a certain person to pay another person a certain

sum of money.

Cheque:

A cheque is a bill of exchange on a specified banker and not expressed to be payable

otherwise than on demand.

Hundi

• Hundies are the negotiable instrument written in vernacular language ,some

times these are even like promissory notes.

• It covers all indigenous negotiable instruments whether they be in the form of

notes or bills.

• The word hundi is derived from the Sanskrit word ‘hund’ which means to

collect.

Basically Hundis refer to financial instruments evolved on the Indian sub-continent used in trade and credit transactions.

They were used -• as remittance instruments (to transfer

funds from one place to another), • as credit instruments (to borrow money

[IOUs]), • for trade transactions (as bills of exchange).

Though normally regarded as bills of exchange, they were more often used as equivalents of cheques issued by indigenous bankers.

Parties to Negotiable Instruments Promissory Note• Maker• Payee• Holder• Endorser• Endorsee

Bill of Exchange• Drawer• Drawee• Acceptor• Payee• Holder• Endorser• Endorsee• Acceptor of Honour

Cheque• Drawer• Drawee• Payee• Holder• Endorser/Endorsee

Distinction - I

Promissory Note Bill of Exchange

NaturePromise Order

PayeeMaker & Payee Drawer & Payee

Not Required Required

LiableMaker Drawer

NoticeNot Necessary Given to all Prior Parties

Payable to…Bearer Bearer on Demand

Distinction - II

10

Bill of Exchange Cheque

DraweeAnyone Only Banker

AcceptanceNeeds Not Required

PaymentDemand - Time Demand

CrossingNever Crossed May be Crossed

StampProperly Stamp

Noting - ProtestingNeeded Not Needed

CountermandateNot Possible Possible

Notice of DishonourNecessary Necessary

Grace Days3 Days 0 Days

Types of Cheques

There are two types of cheques

1). Open cheques-

A cheque is payable in cash across the counter of a bank is called an open cheque.

2). Crossed cheques-

A crossed cheque is one on which has two parallel lines or without the words ‘& co.

1). General crossing

• Two transverse parallel lines are marked across its face

• It bears the words “not negotiable” between these parallel lines

2). Special crossing.

• Cheques crossed by two parallel lines with the Banker’s name written in

between.

• The banker to whom it is drawn shall pay only to the banker to whom it is

crossed or his agent.

3). Crossed “A/c Payee”

• It is also called restrictive crossing

• When the words “a/c payee” are written between the transverse parallel

lines , it means that the proceeds of the cheque are to be credited to the

account of the payee only.

Types of crossing