The Negotiable Instruments Act 1881

By: Aparna Mendiratta

Negotiable Instruments

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

• It is a written and signed document entitling a person to a sum of money specified in it and which is transferable from one person to another .

• Thus, the term “negotiable instrument” literally means ‘a written document which creates a right in favour of somebody and is freely transferable by delivery.’

Presumptions

1. Consideration : Every negotiable instrument is deemed to have been drawn and accepted , endorsed, negotiated, or transferred for consideration

2. Date : Every negotiable instrument must bear the date on which it is made or drawn

3. Acceptance : Every Bill of exchange was accepted within a reasonable time after the date mentioned therein and before the date of its maturity

4. Transfer : Every transfer should be made before the expiry

Characteristics

• Written document

• Signature

• Transferable

• Certain sum of money

• Right to sue for recovery of the amount

• Unconditional

Kinds of Negotiable Instruments

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

Eg:

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

Eg:

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 cheque

2. Payee – to whom payment is to be made

3. 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

Promissory Note

1. It contains a promise to pay.

2. It is presented for payment without any previous acceptance by the maker.

3. It cannot be made payable to the maker himself. The maker and the payee cannot be the same person.

4. In the case of a promissory note there are only two parties, the maker and the payee.

5. A promissory note can never be conditional.

6. In case of dishonour no notice of dishonour is required to be given by the Holder

Bill of Exchange

1. It contains an order to pay.

2. It is required to be accepted either by the drawee or by some one else on his behalf, before it can be presented for payment.

3. The drawer and payee or the drawee and the payee may be the same person.

4. There are three parties, drawer, drawee and payee.

5. A bill of exchange cannot be drawn conditionally, but it can be accepted conditionally with the consent of the holder.

6. A notice of dishonour must be given in case of dishonour of a Bills of Exchange.

Cheque

1. Drawee: Cheque can be drawn only on a banker.

2. Time of payment: A cheque is payable on demand.

3. Grace period: Cheque is payable on demand and no grace period is allowed.

4. Notice of dishonour: Notice of dishonour is not necessary.

5. Acceptance: A cheque is not required to be presented for acceptance. It needs to be presented only for payment.

6. Crossing: A cheque may be crossed.

7. Validity period: A cheque is usually valid for a period of six months.

Bill of exchange

1. The drawee may be any person.

2. A bill may be drawn payable on demand or on expiry of certain period after date or sight.

3. While calculating maturity three day’s grace is allowed.

4. A notice of dishonour is required.

5. Bills require presentment for acceptance and it is better to present them for acceptance even when it is not essential to do so.

6. A bill of exchange cannot be crossed.

7. A bill may be drawn for any period.

• One of the essentials feature of a negotiable instrument is its transferability. A negotiable instrument may be transferred from one person to another in either of the followings way-

• 1-By negotiation

• 2-By assignment

Modes of negotiation

• By delivery

• Ex-A the holder of a negotiable instrument payable to bearer , delivers it to B’s agent to keep it for B. The instrument has negotiated.

• By endorsement