Slide 1

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 2

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 3

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 4

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 5

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 6

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 7

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 8

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 9

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 10

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 11

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 12

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 13

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 14

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 15

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 16

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 17

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 18

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 19

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 20

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 21

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 22

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 23

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 24

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 25

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 26

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 27

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 28

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 29

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 30

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 31

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 32

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 33

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 34

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 35

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 36

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 37

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 38

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 39

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 40

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 41

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 42

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 43

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 44

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 45

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 46

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 47

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 48

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 49

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective


Slide 50

NEGOTIABLE INSTRUMENTS
ACT 1881

INTRODUCTION
‘Instrument ‘ means any written document by
which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an
instrument can be transferred by one person to
another


CONTD

Thus, a negotiable instrument is a document by
which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
instruments Act 1881

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.

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.

S 13


A negotiable instrument means a promissory
note, a bill of exchange or a cheque payable
either to order or to the bearer, whether the
words ‘order’ or ’bearer’ appear on the
instrument or not

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
Not negotiable instruments: Share certificate, bill of
lading, postal order

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.

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.

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.
A negotiable instrument can be transferred infinitum, ie, can
be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.
.

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

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.

EXAMPLE
a)
b)

c)
d)

b)

I promise to pay Ram or order Rs.2000{PN}
I acknowledge myself to be indebted to Shiva in
Rs.5000 to be paid on demand, for value
received.{pn}
I am liable to Arnold Rs.3000 {Not PN}
I have taken Rs.10000 from John to whom I am
accountable for the same with interest. {Not PN}
I promise to pay Rs.10000 to George seven days after
his marriage with Julie. {Not PN}

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
Stamp
222, Ashok Vihar
Sd/-Ram
Delhi-110052

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.”

PARTIES
DRAWER: The person who makes the bill of exchange 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 is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:
I
1.
2.
3.
4.
5.

6.

7.

8.

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.

PROMISSORY NOTE & BILL OF EXCHANGE

PN
(i)
(ii)

(iii)

(iv)

BOE
There are two parties
Contains an
unconditional promise
Liability of maker or
drawer is primary and
absolute.
No notice of dishonour is
required

(i) Three parties
(ii) Contains an unconditional
order
(iii) Liability is secondary of
the drawer and conditional.
(iv) Notice must be given.

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.

FORMAT OF CHEQUE

No.……..

Date………..2010

Pay…………………………………………………………or bearer the sum of
Rs…………………………………
Rs…………………
A/c No
LF No
Sd/PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

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.

ESSENTIAL FEATURES OF CHEQUE:
1.
2.
3.
4.

5.

6.

It is always drawn by a bank & not by any other institutions.
It always payable on demand.
A cheque can be bearer, order or crossed.
The drawee, that is, the banker named must honour the cheque by
making payment to the payee when the cheque is presented for
payment to the banker at his office during the usual office hours,
provided the cheque is properly and validly drawn and the drawer has
sufficient funds to his credit.
The signature on the cheque must tally with the specimen signature
of the concerned drawer.
A cheque must be dated.

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].

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.

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.

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.

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 mentioned 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.

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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN
DUE COURSE






A holder can obtain an
instrument without
consideration
If an instrument is inchoate,
a holder of such instrument
cannot get good title in the
instrument
A holder need not bother
about the defect, if any in
the title of the instrument







Obtains an instrument with
consideration and for value.
Holder in due course
acquires a good title even if
the instrument is inchoate.
Holder in due course who
acquires an instrument
knowingly the defect of the
title.

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.
 Negotiation

by delivery
 Negotiation by endorsement and delivery

CONTD

Meaning of endorsement – An endorsement
means signing the negotiable instrument on
the back of, or face thereof or, or on a slip of
paper annexed thereto

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

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.
 Dishonour

by non payment
 Dishonour by non acceptance

BOUNCING OF CHEQUES (S 138- S142)







A cheque is said to be bounced or dishonored by nonpayment 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.

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.

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

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.

DISCHARGE FROM LIABILITY
 By

payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill
of exchange
 By material alteration

BANKER AND CUSTOMER
No statutory definition of banker
 NI Act defines a banker as any person acting as
a banker
 Customer – A person becomes a customer of a
bank when the latter agrees to open an
account with the former. Thus, a customer is a
person who has some sort of account with the
banker. The duration of relationship is
immaterial.


OBLIGATIONS OF A BANKER
To honour cheques.
 To keep a proper record of the transactions.
 To abide by the instructions given by the
customer
 To not disclose the state of his customer’s
account or affairs
 To claim interest on money lent


PROTECTION GRANTED TO BANKER


Protection of paying banker –
 where

a cheque payable to order purports to be
indorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
 Where a cheque is originally expressed to be
payable to a bearer, the drawee is discharged by
payment in due course to the bearer thereof

CONTD

Protection of collecting banker – A banker who
has in good faith received payment for a
customer’s crossed cheque ,does not incur
liability , later if it is found that the title is
defective