Transcript Negotiable Instruments Act 1881 Negotiable Instruments Act 1881 Negotiable instruments ORIGIN : In the year 1881. SCOPE : Applicable in entire India except the.

Negotiable Instruments
Act 1881
Negotiable Instruments Act 1881
1
Negotiable instruments
ORIGIN : In the year 1881.
SCOPE : Applicable in entire India except the State
of Jammu & Kashmir.
Applicability: Deals with law relating to three
specific instruments, viz. Promissory note, Bill
of exchange and cheque.
The Act does not apply to Indian
Paper Currency Act, 1871
Negotiable Instruments Act 1881
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MEANING

There are certain documents which are freely used
in commercial transactions and monetary dealings.
These documents, if they satisfy certain conditions
are known as “Negotiable Instruments.”

A Negotiable instrument is a method of transferring
a debt from one person to another.

The word negotiable means “transferable from one
person to another in return for consideration ” and
instrument means “a written document by which a
right is created in favour of some person.”
Negotiable Instruments Act 1881
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Characteristics Of a Negotiable
Instrument
1) Freely
transferable: The property in a negotiable,
instrument passes from one person to another by a
simple process, i.e., by mere delivery if it is payable
to bearer, and by indorsement and delivery if it is
payable to order.
2) Holder’s
title free from all defects: The holder in
due course (one who acquires the instrument in
good faith and for consideration) gets it free from
all defects.
Negotiable Instruments Act 1881
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Contd Example S sells certain goods to B.
B gives a promissory note to S for
the price. He refuses to pay the
promissory note, claiming that the
goods are not according to order. If
S sues B on the note , B’s defence
is good. But if he negotiates the
note to H, a holder in due course,
B’s defence will be of no avail.
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Contd Recovery: He can sue upon the instrument
in his own name.
The transferee of the instrument need not
give notice of transfer to the party
liable to pay.
Negotiable Instruments Act 1881
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Pre- sumption as to Negotiable
Instrument



Until the contrary is proved, the following
presumptions shall be made. (sec 118 & 119).
N.I was made, drawn, accepted, indorsed or transferred
for consideration.
NI Bearing a date was made or drawn on that
particular date only.
B.O.E was accepted within a reasonable time after its
date & before its maturity.
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Contd 


Transfer of a N.I were made in order in which they
appear.
It is presumed that a lost negotiable instrument is
duly stamped.
Holder of a negotiable instrument is a holder in due
course except the case where the instrument has
been obtained by fraud
Negotiable Instruments Act 1881
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Kinds of negotiable instrument
Negotiable instrument
By STATUTE .
1) Promissory note.
2) Bill of exchange.
3) Cheque.
Negotiable instrument
By custom or usage
1) Bank draft.
2) Pay orders.
3) Hundies.
4) Delivery order
Negotiable Instruments Act 1881
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Promissory Note
Sec.4
“ 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”.
.
Negotiable Instruments Act 1881
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Parties
MAKER : The person who makes the promissory note and
promises to pay is called the Maker.
PAYEE : The person to whom the payment is to be made is
called the Payee.
HOLDER: The holder is either the payee or someone to whom
he may have indorsed (transfer) the note is known as Holder.
ENDORSER: The person who indorses the note to another is
called the Endorser .
ENDORSEE: The person to whose favour the note is endorsed
is called the Endorsee
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Essentials Of The Promissory Notes
1. It must be in writing .
2. It must contain a promise or undertaking to pay a definite sum of money.
3. The promise to pay must be unconditional.
4. It must be signed by the maker.
5. The payee must be identified & must be certain.
6. The sum payable must be certain.
7. The amount payable must be in legal tender in money of India.
8. Other formalities – like date, place ,& stamp must be mentioned.
Negotiable Instruments Act 1881
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FORMAT OF PROMISSORY NOTE
Rs. 1,000
Delhi,February10,2009
Three months after date I promise to pay Shyam or
order the sum of one thousand rupees, for value received.
To,
Shyam
222, Ashok Vihar
Delhi-110052
Stamp
Sd/-Ram
Negotiable Instruments Act 1881
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Bill Of Exchange
Sec.5 :
“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.”
Negotiable Instruments Act 1881
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Parties
Negotiable Instruments Act 1881
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Essentials Features Of Bill Of Exchange:
It must be in writing.
It must contain an order to pay a definite sum of money.
The order to pay must be unconditional.
It must be signed by the drawer (who draw money).
The drawer, the drawee &the payee must be identified & must be certain.
The sum payable must be certain.
The bill must contain an order to pay the money in legal tender in India.
It must contain the formalities like date, place & stamp etc.
Negotiable Instruments Act 1881
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FORMAT OF BILL OF EXCHANGE
Rs. 500
Greater Noida,21 Feb.2009
Three months after the date pay to Ram or order the sum of Five
Hundred rupees , for value received.
To,
Shyam
235,Subhash marg
delhi-110006.
In case of need with
Canara Bank, Delhi
Accepted
Shyam
Stamp
Sd/-
Krishna
Negotiable Instruments Act 1881
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Bill of exchange
Promissory Note
There are three parties –
drawer, drawee and
payee.
 It contains an
unconditional order given
by a creditor to a debtor.
 The liability of the drawer
is secondary and
conditional
 It requires acceptance to
become a valuable
instrument





There are two parties –
maker and payee
It contains an
unconditional promise
given by a debtor to a
creditor
The liability of the maker
is primary and absolute
The liability of the maker
is primary and absolute
Negotiable Instruments Act 1881
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CHEQUE
Sec.6 :
“ A cheque is a bill of exchange drawn on a specified
banker & not expense to be payable on a specified
banker & not expense to be payable otherwise
than on demand & it includes the electronic image
Of a truncated cheque & a cheque in the electronic
form.
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Parties
DRAWER: The person who
makes a cheque is called Drawer.
DRAWEE: The person who is
directed to pay is called Drawee.
PAYEE: The person to whom the
payment is to be made.
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Essential Features Of Cheque:
1.
2.
3.
4.
5.
It is always drawn by a bank & not by any other
institutions.
It always payable on demand.
It does not require an acceptance.
It does not require a stamp.
It can be crossed.
Negotiable Instruments Act 1881
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FORMAT OF CHEQUE
NO……..
Date………..2009
PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
Pay…………………………………………………………or
bearer the sum of Rs…………………………………
Rs…………………
A/c No
Sd/-
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Crossing of cheques

CHEQUE CROSSED GENERALLY - Where a
cheque bears across its face an addition of the
words “and company” or any abbreviation thereof,
between two parallel transverse lines, or of two
parallel transverse lines simply, either with or
without the words “not negotiable”, that addition
shall be deemed a crossing, and the cheque shall
be deemed to be crossed generally. [section 123]

CHEQUE CROSSED SPECIALLY - Where a
cheque bears across its face an addition of the
name of a banker,either with or without the words
“not negotiable”, that addition shall be deemed a
crossing, and the cheque shall be deemed to be
crossed specially, and to be crossed to that banker.
[section 124].
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Contd 
PAYMENT OF CHEQUE CROSSED GENERALLY OR
SPECIALLY - Where a cheque is crossed generally, the
banker on whom it is drawn shall not pay it otherwise than to
a banker. 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, or his agent for collection.
[section 126].

CHEQUE BEARING “NOT NEGOTIABLE” - A person taking
a cheque crossed generally or specially, bearing in either
case the words “not negotiable”, shall not have, and shall not
be capable of giving, a better title to the cheque than the
person from whom he took it had. [section 130].

Thus, mere writing words ‘Not negotiable’ does not mean that
the cheque is not transferable. It is still transferable, but the
transferee cannot get title better than what transferor had.
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HOLDER
Sec.8
The Holder of a Promissory note, B.O.E or
CHEQUE means any person entitled in his
own name to the possession thereof, and to
receive or recover the amount due thereon
from the parties thereto. Where the note, bill
or cheque is lost or destroyed, its holder is
the person so entitled at the time of such
loss or destruction.
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Holder
1) The person must be entitled to receive payment or
receive the amount by filling a suit in his own name
against other parties to negotiate the instrument giving
a valid discharge.
2) In case instrument is lost from the person who was
entitled to receive the payment, the subsequent finder
does not become it’s owner. Only the person who was
entitled to receive the payment initially is the real owner.
3) The person must have a legal right to possess the
instrument in his own name.
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HOLDER IN DUE COURSE
Sec.9
Any person who for consideration becomes the
possessor of the promissory note, B.O.E or
Cheque before the amount mention in it becomes
payable & without having sufficient cause to
believe that any defect existed in the title of the
person from whom he derives his title.
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When does a person becomes a
Holder in due course
Before the amount mentioned in the instrument becomes
payable.
1) Without having sufficient cause to believe that any defect
exists in the title of the person from whom, he derives his title
2) He becomes a possessor of a promissory note, b.o.e or
cheque .
3) If it is payable to the bearer.
4) Consideration has passed from him.
Illustration:- A is a payee for a valuable consideration of a bill
payable to order. He gets this instrument from B without
knowledge of any defect in B’s title & its maturity.
In this e g. A is a holder in due course.
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Contd A holder of a negotiable instrument will not be a
holder in due course if:a) he has obtained the instrument by gift or by
illegal method.
b) he has obtained the instrument after its maturity.
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Privileges of Holder in due course
1)Inchoate stamped instrument: A person,
who has signed & delivered to another a
stamped but otherwise inchoate instrument
, is precluded from asserting, as against a
holder in due course, that the instrument
has not been filled in accordance with the
authority given by him, the stamp being
sufficient to cover the amount(sec.20).
2) Liability of prior parties: Every prior party
to a negotiable instrument is liable thereon
to a holder in due course until the
instrument is duly satisfied (sec.36).
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Contd 3) Fictitious payee: Where a bill is drawn payable to
the drawer’s order in fictitious name & is indorsed in
the same hand as the drawer’s signature, the
acceptor is not relieved from liability to any other
holder in due course, on the plea that the drawer is
fictitious(sec.42).
4) Conditional delivery: If a bill or not is negotiated to
a holder in due course, the other parties to the
instrument cannot avoid liability on the ground that
the delivery of the instrument was conditional or for a
special purpose only.
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Contd 5) Instrument cleansed of all defects: Once a negotiable
instrument passes through the hands of a holder in due course, it
gets cleansed of its defects provided the holder was himself not a
party to the fraud or illegality which affected the instrument in
some stage of its journey. Thus any defect in the title of the
transferor will not affect the rights of the holder in due course even
if he had knowledge of the prior defect provided he himself is not
a party to the fraud.
Example: A, by fraud, induces B to make a promissory note in his
favour. He indorses the note to C, who take it as a holder in due
course. C subsequently indorses the note to A, for value. A cannot
sue B on the note as he himself is a party to the fraud .
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Negotiation
Method of transfer
 An instrument is said to be negotiated
when a promissory note,BOE,cheque
is transferred to any person so as to
constitute that person the holder of the
instrument
 Transfer with an intention to transfer
the title of the instrument.

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Presentment
Presentment for Acceptance (required
only in case of BOE)
 Presentment for payment
 Presentment made to the drawee.
 Must be made before the date of
maturity

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Dishonour (s 92)

A negotiable instrument is said to be
dishonoured by non-payment when
the maker, acceptor or drawee, as the
case maybe makes default in payment
upon being duly required to pay the
same.
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Bouncing of cheques (s 138- s142)
A cheque is said to be bounced or dishonored by
non-payment when the drawer of the cheque
makes default in the payment upon being duly
required by the same.
 If a cheque is dishonoured even when presented
before expiry of 6 months, the payee or holder in
due course is required to give notice to drawer of
cheque within 30 days from receiving information
from bank..
 The drawer should make payment within 15 days
of receipt of notice.
 If he does not pay within 15 days, the payee has to
lodge a complaint with Metropolitan Magistrate or
Judicial Magistrate of First Class, against drawer
within one month from the last day on which
drawer should have paid the amount.

Negotiable Instruments Act 1881
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Contd 

The penalty can be upto two years imprisonment or
fine upto twice the amount of cheque or both. The
offence can be tried summarily. Notice can be sent
to drawer by speed post or courier. Offence is
compoundable.
It must be noted that even if penalty is imposed on
drawer, he is still liable to make payment of the
cheque which was dishonoured. Thus, the
fine/imprisonment is in addition to his liability to
make payment of the cheque.
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Noting
When a cheque is dishonoured
generally the bank who refuses
payment returns back the cheque
gives reasons in writing for the
dishonour of the cheque.
 Noting

◦ The holder cause such dishonour to be
noted by a notary public upon the
instrument or upon a paper attached
thereto or partly upon each
◦ Noting consists in recording the fact of
dishonour by notary public
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Protest
Protest is a formal certificate issued by
the notary public certifying the
dishonour of the bill or note.
 It has to be done within a reasonable
period of time.

Negotiable Instruments Act 1881
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Discharge from liability
By payment
 By cancellation
 By release
 By non-presentment for acceptance of
a bill of exchange
 By material alteration

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Presumptions as to negotiable
instruments




Until the contrary is proved, the following presumptions
shall be made :—
(a) of consideration - that every negotiable instrument
was made or drawn for consideration, and that every
such instrument, when it has been accepted,
negotiated or transferred, was accepted, negotiated or
transferred for consideration;
(b) as to date - that every negotiable instrument
bearing a date was drawn on such date;
(c) as to time of acceptance - that every accepted bill
of exchange was accepted within a reasonable time
after its date and before its maturity;
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Contd
(d) as to time of transfer - - that every
transfer of a negotiable instrument was
made before its maturity;
 (e) as to order of indorsements - that the
indorsements appearing upon a negotiable
instrument were made in the order in which
they appear thereon;
 (f) as to stamps - that a lost promissory
note, bill of exchange or cheque was duly
stamped

Negotiable Instruments Act 1881
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Contd 
(g) that holder is a holder in due course that the holder of a negotiable instrument is
a holder in due course: provided that,
where the instrument has been obtained
from its lawful owner, or from any person in
lawful custody thereof, by means of an
offence or fraud, or has been obtained from
the maker or acceptor thereof by means of
an offence or fraud, or for unlawful
consideration, the burden of proving that
the holder in due course lies upon him.
[section 118]
Negotiable Instruments Act 1881
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Assignment

An instrument is said to be assigned
when a negotiable instrument is
transferred by means of a written and
registered document under the
provisions of the Transfer of Property
Act 1882.
Negotiable Instruments Act 1881
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Endorsement
The process of transferring of an
instrument is called an endorsement.
 An endorsement means signing the
negotiable instrument on the back or
face thereof or on slip of paper
annexed therto by the holder of
negotiable instrument for the purpose
of negotiation.

Negotiable Instruments Act 1881
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