The Negotiable Instruments Act 1881

Submitted by:Dipak Kumar sah

BBA, 3RD SEM

Negotiable Instrument

• According to Section 13(i) “ a negotiable instrument means a promissory note, bill of exchange or cheque payable either on order or to bearer”.

• An instrument may be negotiable either by1. Statute : Promissory Notes , bills of exchange and cheques

are negotiable instruments under Negotiable Instruments Act 1881 .

2. By Usage : Bank Notes , Bank Drafts , scripts, treasury Bills etc

Characteristics

• It is freely transferable• Better title• Right to sue• A negotiable instrument can be transferred any number of

times till its maturity• A negotiable instrument is subject to certain presumptions • Presumptions – certain presumptions as to consideration,

reasonable time etc., apply to all negotiable instruments.

Meaning of Endorsement

• When a maker or holder writes the person’s name on the face or back of the instrument & puts his signatures thereto for the purpose of negotiation, it is called ‘endorsement’.

• Person who signs – endorser• To whom it is endorsed – endorsee.• A legal term that refers to the signing of a document which

allows for the legal transfer of a negotiable from one party to another.

• When an employer signs a check, they are endorsing the transfer of money from the business accounts to the account of the employee.

1. Blank or general endorsement – where endorsee simply puts his signature on the back of the instrument without writing name of the person in whose favor the instrument is endorsed.

2. Special or full endorsement – An endorsement with the direction to pay amount mentioned in the instrument to a specified person or his order & the endorser writes his signature under it.

3. Partial endorsement – When an endorser is willing to transfer to an endorsee only a part of the amount of the instrument. Such an endorsement does not operate as a negotiation of the instrument.

Kinds of endorsement

• The instrument is therefore payable to the bearer

• Restrictive endorsement – An endorsement is said to be restrictive if it prohibits or restricts the further negotiability of the instrument. The holder of such an instrument can only receive the payment but he cannot negotiate it further. An instrument can be made restrictive only by expressed words.

• Conditional endorsement – It limit the liability of the endorser. E.G. – “ Pay A or order on his marrying B”.

Types of negotiable instrument1. Promissory notes2. Bill of exchange3. cheques

Promissory Notes• Section 4 defines it as, “ 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”.

• The person who makes the promissory note is called the maker.

• The person to whom payment is to be made is called the payee. e.g. –

• I promise to pay B or order rs. 500• I promise to pay B Rs.500 on D’ death, provided D leaves me

enough to pay that sum

Essentials of Promissory Note• It must be in writing• It must contain express promise to pay :- ‘I am liable to pay’• The promise to pay must be unconditional• It must be signed by maker• The maker must be certain- It must describe the name &

designation of the maker, sum of money• There are 2 parties involved i.e. maker and the payee • The payee must be certain- It is essential that it must contain a

promise to pay some person ascertained by name or designation.• The sum payable must be certain• The payment must be in legal money• A currency note is not a promissory note

Bill of Exchange• Section 5, is defined 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 bill of exchange :• Drawer – The person who makes/orders to pay bill of exchange.• Drawee – The person who is directed to pay on bill. On acceptance

he becomes acceptor.• Payee – The person to whom the payment is to be made.• Drawer & Payee can be the same person. • X sells goods worth Rs. 2000 to Y & allow him 3 months time to pay

the price. X then draws a bill on Y “ Three months after date, pay to my order the sum of Rs. 2000 for value received”. X is drawer . Y is Drawee.

Essential of Bills of Exchange

• It must be in writing• It must contain an order to pay and a promise or request• The order must be unconditional• There must be 3 parties i.e. : drawer, drawee, and payee • The parties must be certain• It must be signed by the drawer • Number, date and place are not essential

Cheques

• Section 6, defines it as “ A cheque is a bill of exchange drawn on a specified banker & not expressed to be payable otherwise than on demand”.

• It is always drawn on a bank• It is payable to bearer on demand

• Parties To Cheque:1. Drawer – who makes the cheque2. Payee – to whom payment is to be made3. Drawee – Bank .

Meaning of Crossing of Cheque

• Crossing of a cheque is a unique feature associated with a cheque affecting to a certain level the responsibility of the paying Banker and also its negotiable Character.

• Crossing of a Cheque is a direction to a particular Banker by the Drawer that Payment should not be made across the Counter. The payment on the crossed Cheque can be collected only through a Banker.

• Crossing of the Cheque is affected by drawing two parallel Transverse lines .

• The Cheque that is not crossed is an open Cheque.

Types of cheque

• There are two types of cheque:1. Open cheque – those which can be en cashed across the

counter of the bank. Liable to great risk if stolen or lost. Finder can get payment from bank.

2. Crossed cheque – which bears two transverse lines with or without the words “ & co.”

Various kinds of Crossing

1. General Crossing:- which bears across its face the words “ & co.” or the words “not negotiable”. For general crossing two transverse lines on the face of cheque are essential. The paying banker shall pay only to a banker. There are two sloping parallel lines, marked across its face

• The cheque bears an short form "& Co. "between the two parallel lines

• The cheque bears the words "A/c. Payee" between the two parallel lines.

• The cheque bears the words "Not Negotiable" between the two parallel lines.

Specimen of General Crossing

2. Special or Restrictive Crossing :- When a particular bank's name is written in between the two parallel lines the cheque is said to be specially crossed. Where a cheque bears across its face an addition the name of banker either with or without the words “ not negotiable”. It contains:

• The name of the banker across the face of cheque.• With the words “ not negotiable”• In addition to the word bank, the words "A/c. Payee Only", "Not

Negotiable" may also be written. The payment of such cheque is not made unless the bank named in crossing is presenting the cheque. The effect of special crossing is that the bank makes payment only to the banker whose name is written in the crossing. Specially crossed cheques are more safe than a generally crossed cheques.

Specimen of Special or Restrictive Crossing

Why Crossing of Cheque is being used• The important usefulness of a crossing cheque is that it cannot be

covered at the counter but can be collected only by a bank from the drawee bank.

• Crossing provides a protection and safeguard to the owner of the cheque as by securing payment through a banker it can be easily detected to whose use the money is received. Where the cheque is crossed the paying banker shall not pay it except to a banker.

• In case of not negotiable crossing the person holding such a cheque gets no better title than that of his transfer and cannot suggest a better title to his own transferee. In case of 'account payee' only crossing, a direction is given to the collecting banker to collect cheque and to place the amount to the credit of the payee only.

• A special crossing makes the cheque more safe than a general crossing because the payee or holder cannot receive payment except through the banker named on the cheque.

Who can cross a Cheque

1. The drawer of a Cheque2. Holder of the Cheque3. The Banker in whose favor the cheque has been crossed

specially

Dishonor of cheque• Liability of drawee on dishonour Conditions (Sec.31) • If – • the drawer has sufficient funds in the account; and • such funds are properly applicable to payment of the cheque • Then – • the drawee is duly required to pay the cheque. • In case of default by drawee (i.e. Banker), the drawee shall compensate the drawer

for loss caused to him.

• Liability of drawer on dishonour (Sec.138) • Nature of liability • Imprisonment – 2 years (Maximum); or • Fine - 2 times the amount of cheque (Maximum); or • Both • Conditions • Debt - Cheque was issued to discharge a legally enforceable debt. • Reason for dishonour – insufficiency of funds

Meaning of ‘holder’ (Sec.8)

(a) He must be entitled to the possession of negotiable instrument in his own name.

(b) He must be entitled to receive or recover the amount due on negotiable instrument from the parties liable on negotiable instrument.

Meaning of ‘holder in due course’ (Sec.9)

(a) He must be a holder. (b) He must have become the holder for consideration. (c) He must have obtained the possession of negotiable instrument before maturity (d) He must have obtained the negotiable instrument in good faith.

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