NEGOTIABLE INSTRUMENT ACT 1881

Priyanka Jagtap

Features of a Negotiable InstrumentIt is a written document by which certain rights

are created and or/ transferred to a certain person.

It must be signed by the maker or the drawer as the case may be.

There must exist the unconditional order or promise to pay.

There must be a time mentioned for such payment.

In particular cases, the drawee’s name should be specifically mentioned.

Elements of NegotiabilitySection 13 defines a negotiable instrument.The definition does not bar the inclusion of

other documents which have the element of negotiability.

Freely transferable.Can be transferred infinitum.

Negotiable Instruments According to sec. 13(a) of the Act, “ negotiable

Instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer, whether the word “order” or “bearer” appear on the instrument or not.

Thus, the term, negotiable instrument means a written document which creates a right in favour of some person and which is freely transferable. Although the Act mentions these three instruments( such as a promissory note, a bill of exchange and cheque).

Characterstics Of A Negotiable Instrument1. Transferability:It is easily transferable from person to person by mere

delivery or by endorsement and delivery. But all the transferable instruments are not negotiable instruments, but all negotiable instruments are transferable.

2.Title:The transferee of a negotiable instrument is known as”

holder in due course’.3.Rights:The transferee of the negotiable instrument can sue in his

own name, in case of dishonour. A negotiable instrument can be transferred any number of times till its maturity.

Cont:4. Presumptions:Certain presumptions apply to all negotiable

instruments e.g., a presumption that consideration has been paid under it. It is not necessary to write in a promissory note the words ‘for value received’ or similar expressions because the payment of consideration is presumed.

5.Prompt Payment:A negotiable instrument enables the holder to expect

prompt payment because a dishonour means the ruin of the credit of all the persons who are parties to the instrument.

Types Of Negotiable Instrument As per sec. 13 othersThe Negotiable Instruments

Act states that a negotiable instrument is a promissory note, bill of exchange or cheque payable either to order or to bearer. Negotiable Instruments recognized by Statute are:

I. Promissory noteII. Bills of exchangeIII. Cheques

Negotiable instruments recognized by usage or custom are:

I. HundisII. Share warrantsIII. Dividend warrantsIV. Bankers draftV. Circular notesVI. Railway receipts

Promissory noteSec. 4 of the Act defines, “A promissory note

is an instrument is an instrument in writing( not being a currency note or bank note) containing an unconditional undertaking, signed by the maker, to pay a certain person, or to the bearer of the instruments.”

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Promissory Note Amount: _________________________________

Place: _________________________________________

I Mr. ABC, make commitment to pay XYZ Company, the Sum of $ ________________________. Repayment is to be made in the form of 200 equal payments at the interest rate of 7.2% of $ _____________ payable on the 1oth of each month, beginning 10/01/2011 until the total amount of debt is paid.

IN WITNESS WHEREOF, I set my hand under seal this ____ [the day] of __________________ [month], 20___ and I acknowledge receipt of a completed copy of this instrument.

_____________________ Sign: [Signature of borrower] ________________________________ Name & Address: [Party name]

Notary Public - SEAL My Commission Expire _ _____ /___ ___ /___ __ _

Date: _________________________

Promissory Note Template

Promissory Note Amount: _________________________________

Place: _________________________________________

I Mr. ABC, make commitment to pay XYZ Company, the Sum of $ ________________________. Repayment is to be made in the form of 200 equal payments at the interest rate of 7.2% of $ _____________ payable on the 1oth of each month, beginning 10/01/2011 until the total amount of debt is paid.

IN WITNESS WHEREOF, I set my hand under seal this ____ [the day] of __________________ [month], 20___ and I acknowledge receipt of a completed copy of this instrument.

_____________________ Sign: [Signature of borrower] ________________________________ Name & Address: [Party name]

Notary Public - SEAL My Commission Expire _ _____ /___ ___ /___ __ _

Date: _________________________

Promissory Note Template

Essentials of Promissory note 1. It must be in writing: A mere verbal promise to pay is not a promissory note. The method of writing( either

ink or pencil or printing, etc.) is unimportant, but it must be in any form that cannot be altered easily.

2.It must certainly an express promise or clear understanding to pay: There must be an express undertaking to pay. A mere acknowledgement is not

enough.

3. promise to pay must be unconditional:

A conditional undertaking destroys the negotiable character of an otherwise negotiable instrument. Therefore, the promise to pay must not depend upon the happening of some outside contingency or event. It must be payable absolutely.

4. it should be singed by the maker The person who promise to pay must sign the instrument even though it might have

been written by the promisor himself.

5.The maker must be certain: The note self must show clearly who is the person agreeing to undertake the

liability to pay the amount

Cont: 6. The payee must be certain: The instrument must point out with certainty the person to whom the

promise has been made. 7. The promise should be to pay money and money only: Money means the legal tender money and not old and rare coins 8. The amount should be certain: One of the most important characteristics of a promissory note is

certainly-not only regarding the person to whom or by whom payment is to be made but also regarding the amount.

There is a promise to pay certain amount with interest at a specified rate. the amount is to be paid at an indicated rate of exchange 9. Other Formalities: The other formalities regarding number, place, date, consideration etc.

though usually found given in the promissory notes but are not essential in law

Types of Promissory NotePersonal Promissory Notes:  These are used to document a personal loan from a friend or

family member. Although many people tend to avoid legal writings when dealing with trusted acquaintances, the use of a promissory note actually demonstrates good faith and effort on behalf of the borrower.

Commercial:  Promissory notes are almost always a requirement when

dealing with commercial lenders such as a bank. Most commercial promissory notes are similar to personal notes, although they can be stricter. If the borrower defaults, the commercial lender is usually entitled to immediate repayment on the balance. Further default can result in a lien being placed on the borrower’s property in order to obtain payments

Cont:Real Estate:  These are similar to commercial notes with respects to the

default consequences. In this case, the lien would be placed on the home; if a mortgage is involved, the information will become public record and can affect the borrowers credit and/or purchasing abilities in future transactions

Investments:  In a business setting, promissory notes are sometimes

exchanged in order to raise capital. The note functions much like currency, as it has legal value and can be traded. Promissory notes for investments often involve statements dealing with returns of investment for a certain time period

Bills of exchangeSection 5 of the Act defines, “ A bills of

exchange is an instrument in writing 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.”

A bill of exchange, therefore, is a written acknowledgement of the debt, written by the creditor and accepted by the debtor. There are usually three parties to a bill of exchange drawer, acceptor or drawee and payee. Drawer himself may be the payee.

Mechanics of bill financing

sale of goods drawing of bill & acceptance

submitting release of bill of bill Finalization Of accounts Making payment

of bills

Seller/ drawer

Buyer/ drwaee

Banker

Essential conditions of a bills of exchange

It must be in writing.It must be signed by the drawer.The drawer, drwaee & payee must be certain.The sum payable must also be certain.It should be properly stamped.It must contain an express order to pay

money and money only.Number , date , place are not essential.

Types of bills of exchange

Inland billsForeign bills

Inland & Foreign bills Inland bill: It is drawn in India on a person residing in India,

whether payable in or outside India, or It is drawn in India on person residing outside India

but payable in India.The following are the inland bills:A bill is drawn by a merchant in Delhi on a merchant

in Chennai. It is payable in Mumbai the bill is an inland bill.

A bill is drawn by a Delhi merchant on a person in London but is made payable in India. This is an inland bill.

Foreign bill

A bill drawn outside India & made payable in India.

A bill drawn outside India on any person residing outside India.

A bill drawn in India on a person residing outside India and made payable outside India.

Distinction between promissory note & Bill of Exchange

Basis of difference Promissory note Bill of exchange

Number of parties There are two parties-The maker(debtor),& the payee( creditor).

There are three parties-Drawer, drawee & payee:Although any two out of the three may be filled by one and the same person.

Payment to the maker A promissory note cannot be made payable the maker himself.

Bill of exchange to the drawer and payee or drawee and payee may be the same person.

Conditional instrument it cannot be made conditionally.

A bill also cannot be drawn conditionally.

Nature of liability The liability of maker is primary & absolute.

The liability of a maker of a bill of exchange is secondary and conditional.

Maker The maker of a promissory note is in a position of a debtor who promises to pay the sum specified in it.

The maker of a bill of exchange is in a position of a creditor who orders to pay the sum specified in it.

Cheques Section 6 of the Act defines, “ A cheque is a bills of exchange

drawn on a specified banker and not expressed to be payable otherwise than on demand.” A cheque is bill of exchange with two more qualifications ,namely,

it is always drawn on a specified banker, and It is always payable on demand. Consequently all cheque are bill of exchange, but all bills are

not cheque. A cheque must satisfy all the requirements of a bill of exchange; i.e; must be signed by the drawer, and must contain an unconditional order on a specified banker to pay certain sum of money to or to the order of a certain person or to the bearer of the cheque. It does not require acceptance.

Basis of difference

Bills of exchange

cheques

Person / firm A bill of exchange usually drawn on some person or firm.

A cheque is always drawn on bank.

Acceptance It is essential that a bill of exchange must be accepted before its payment can be claimed.

A cheque does not require any such acceptance.

Payable on demand The B.O.E may be drawn payable on demand.

A cheque can only be drawn payable on demand.

Grace of days Three days are allowed in case of B.O.E.

In case cheque no grace of days are allowed.

Notice of dishonour It is necessary in B.O.E. No such notice is required.

Crossing No crossing of bills of exchange

A cheque may be crossed.

Stamp It must be properly stamped.

No stamp is required.

Crossing of cheques

It is a direction given by the customer to the banker that payment should not be made across the counter.

Crossing is effected by drawing two parallel transverse lines with or without particular abbreviations.

A cheque that is not crossed is an open cheque.

It serves as a measure of safety against theft or loss of cheques in transit.

Types of crossing

Types of crossing

SpecialGeneral

Types of crossing General Special Addition of two parallel drawing of two

parallel transverse lines. Is not

always

necessary.Between the lines, the words addition of

the “Not Negotiable”, “A/c Payee” specific

name of the , “& Co.” may or may not be Banker on

the face of Written. Cheque.

Negotiation , EndorsementThe transfer of a negotiable instrument by

one party to another so as to make the transferee the holder thereof, is called negotiation.

Endorse: if you endorse someone or something, you say publicly that you support or approve of them.

Holder According to sec. 8, Holder of a negotiable

instrument is the person:Who is entitled in his own name to the

possession of the instrument, andWho has the right to receive, or recover the

amount due thereon from the parties thereto.In case the instrument( note, bill or cheque) is

lost or destroyed, the person who has entitled in his own name to the possession of it or to receive or recover the amount due on it from the parties thereto is the holder of the instrument. [sec.8].

Who can be a Holder?Payee- the payee is usually the original holder of an instrument.

He remains holder till he endorses the instrument.Endorsee –the person to whom an instrument is endorsed becomes

holder of in place of the endorser. An instrument, when endorsed and delivered, the endorsee becomes the holder.

Bearer – in the case of a bearer instrument, the person to whom the instrument is delivered becomes the holder. But every bearer of an instrument cannot become the holder.

a thief or a finder of a bearer instrument or a servant possessing an instrument on behalf of his employer cannot become holder.

Legal representative or heir- a legal representative or heir of a deceased person can become holder by operation of law even though he is not the payee or the bearer or the endorsee of the instrument.

Holder In due courseHolder in due course is a person who came into possession

of the instrument on payment of consideration and without knowledge of the fact that the erstwhile owner had a defective title.

The holder in due course has a better title than the holder. There fore, according to sec. 9 of the Negotiable Instrument Act, holder in due course mans any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof, if payable to order before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.[sec. 9].

Privileges of a Holder in Due course

He can sue every prior party to the negotiable instrument if the instrument is not duly satisfied.

When the holder endorses such instrument further, the new owner has a good title unless he is party to fraud.

The burden of proving his title does not lie upon the holder in due course.

How Endorsement is done?The maker or holder signs either on the

back or the face of the instrument for the purpose of the negotiation.

Endorsement can also be done on a slip of paper annexed( attached) to the negotiable instrument.

Kinds of endorsementBlankFullRestrictivepartial

Instruments obtain by unlawful meansLost instruments:The holder of a lost instrument should give notice of the

loss to all the parties through public advertisement.The finder of the lost instrument is not entitled to sue

thereon in his own name.The true owner can recover the instrument from the

finder if it is with him but he has parted with the instrument and has received payment thereon and cannot return the instrument to the owner, he must compensate the owner.

An acceptor, maker or drawee who makes payment in due course of a lost instrument gets a valid discharge for it.

Stolen instrumentThe thief does not get any title to the instrument,

but if the instrument is payable to the bearer and it is negotiated to a holder in due course; he will get a good title to it not only against the thief but also against any party prior to him.

good title :ownership of real property which is totally free of claims against it and therefore can be sold, transferred, or put up as security (placing a mortgage or deed of trust on the property). Copyright © 1981-2005 by Gerald N. Hill and Kathleen T. Hill. All Right reserved.

Instruments obtain by fraudValid contracts must be brought about by the

free consent of the parties competent to contract. Therefore, the person guilty of fraud not only gets no valid title to the thing obtained but also liable to damages.

Forged instruments:Forged instruments in the eyes of law have

no existence whatsoever. There is a complete absence of title from the very beginning and a forged signature is altogether inoperative.

Dishonor & discharge of negotiable instrumentDishonor can be done by two ways-By non- acceptanceBy non- paymentNotice of dishonor is mandatoryNoting of dishonor is also necessary

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