Negotiable instrument

act,1881
Unit 3rd
Definition of negotiable
instrument
The word negotiable means transferable
by delivery
Instrument means a written document by
which a right is created in favour of some
person.
Negotiable instrument means a written
document transferable by delivery
Acc. To sec. 13 of NI Act, a NI means a
promissory note, bill of exchange or
cheque payable either to order or to
bearer.
Characteristics of NI
1. Easy negotiability
2. Transferee can sue in his own name without
giving notice to the debtor
3. A bona fide transferee for value (called holder
in due course) gets the instrument free from
all defects
4. Presumptions:
That every NI was made, drawn, accepted
for consideration
That every NI bearing a date was made or
drawn on such date
That every transfer of a NI was made
before its maturity
That the holder of a NI is a holder in due
course
Specimen of Promissory note
Rs.1,000 Mathura, 25 March, 2009



Sixty days after date I promise to pay to Mr.B or order the
Sum of rs. One thousand for value received.





Revenue stamp
A
PROMISSORY NOTE(SEC.4)
It must be in writing
it must contain a promise or undertaking to pay
The promise to pay must be unconditional
It must be signed by the maker
The maker must be a certain person
The payee must be certain
The sum payable must be certain
The amount payable must be in legal tender
money of India
No person in India except the reserve bank can
make a P.N payable to bearer
BILL OF EXCHANGE(SEC.5)
It must be in writing
It must contain an order to pay
Must be unconditional
Must be signed by the drawer
The drawer, drawee and payee must be certain
The sum payable must be certain
The bill must contain an order to pay money only
It must comply with the formalities as regards
date, consideration ,stamps.
A bill of exchange may be originally drawn
payable to bearer but it must be payable
otherwise than on demand ( i.e in future)
CHEQUE (SEC.6)
A cheque is a bill of exchange
drawn on a specified banker and not
payable otherwise than on demand
and it includes the electronic image
of a truncated cheque and a cheque
in the electronic form
A cheque is a bill of exchange with
2 features :
1. it is always drawn on a bank
2. it is always payable on demand
HOLDER (SEC. 8)
Holder is a person :
1. who is entitled to the
possession of the instrument in his
name
2. he must be entitled to receive
or recover the amount from the
parties liable thereto.
HOLDER IN DUE COURSE (S.9)
He must be a holder
He must be a holder for valuable
consideration
He must have become the holder of
the NI before its maturity
He must take the NI complete and
regular on the face of it
He must have become holder in
good faith without having sufficient
cause to believe that any defect
existed
Privileges of holder in due
course
He gets a better title than that of
the transferor
Privilege in case of inchoate
stamped instruments
Liability of prior parties
Privilege when an insrument
delivered conditionally is
negotiated
Estoppel against denying original
validity of instrument
NEGOTIATION (SEC.14)
When a promissory note, bill of
exchange or cheque is transferred
to any person, so as to constitute
that person the holder thereof, the
instrument is said to be negotiated.
MODES OF NEGOTIATION
Negotiation by mere delivery-- a
bearer instrument may be
negotiated by delivery only. It does
not require signature of the
transferor ( indorsement )
Negotiation by indorsement and
delivery NI payable to order is
negotiable by the holder by
indorsement and delivery.
Importance of delivery in
negotiation
Delivery made voluntarily with the
intention of transferring the
ownership of the instrument to the
transferee is essential.
If a person delivers a NI to his
servant for safe custody, the
delivery does not amount to
negotiation.
Indorsement (sec.15)
when the maker or holder of a NI signs the
same, for the purpose of negotiation, on the
back or face of it or on a slip of paper
annexed thereto, or so signs for the same
purpose a stamped paper, he is said to
indorse the same, and is called the indorser
The slip attached to it is called ALLONGE
and becomes part of the instrument.
An instrument to be valid it should be made
in ink. And indorsement in pencil or by
rubber stamp is not valid.
Kinds of indorsement
Blank or general indorsement
Indorsement in full or special
indorsement
Partial indorsement
Restrictive indorsement
Conditional indorsement
Sans recourse indorsement
Facultative indorsement
Negotiation back

Negotiation by unauthorised
parties
In case of lost instruments
In case of stolen instruments
Instruments obtained by fraud
Instruments obtained for unlawful
consideration
Forged instruments

LOST INSTRUMENTS
A finder does not acquire any title and he
cannot recover any payment from any party to
the instrument
If the instrument is payable to bearer and the
finder indorses it to a holder in due course, the
holder will get a good title to it.
In case the person liable on the instrument i.e.
the maker or acceptor makes payment of the
lost instrument to the finder he is discharged.
However the true owner can recover the
amount of the instrument from the finder of the
instrument
Holders right to get
duplicate copy of lost bill
where a bill of exchange has been
lost, before maturity, the person who
was the holder of it may apply to the
drawer to give him another bill of
same tenor.
The drawer may require the holder to
give security to indemnify him against
all persons in case the bill lost shall
be found again
Stolen instruments
The position is almost same as that
of lost instrument with the
difference that on being traced the
thief is open to criminal prosecution
while a finder is not

Dishonour of NI
Dishonour by non- acceptance
Dishonour by non-payment
Dishonour by non-
acceptance
When the bill is duly presented and the
drawee does not accept the bill within 48 hrs.
of presentment
Where there are several drawees who are
not partners, and any of them does not
accept the bill within 48 hrs. of presentment
When the drawee is incompetent to contract
When the acceptance is qualified
when the drawee is a fictitious person
When drawee after reasonable search
cannot be found

Dishonour by non-payment
A promissory note, bill of exchange or
cheque is said to be dishonoured by
non-payment when the maker of the
note, acceptor of the bill, does not pay
the amount upon being duly required
to pay the same
NOTING
NOTING : It is the authentic and official
proof of presentment and dishonour of a NI.
In case of dishonour of a cheque there is
no noting as bank while returning the
cheque give reasons in writing for the
dishonour.
In case of dishonour of promissory note or a
bill of exchange, the holder may cause such
dishonour to be noted by a notary public
upon the instrument, or upon a paper
attached thereto
protest
Protest is a formal certificate of
dishonour issued by the notary public to
the holder of the bill or note.
Contents of protest ----
1. the name of the person against whom
the instrument has been protested
2. the fact and reasons for dishonour
3. time and place for dishonour
4. signature of notary public
Discharge of NI
Discharge of the instrument
Discharge of one or more parties
Discharge of instrument
1. By payment in due course:
a) should be made by the party
primary liable
b) payment should be made at or
after maturity
2. Discharge by cancellation
3. By acceptor of a bill becoming its
holder
4. by release
Discharge of one or more parties
to an instrument
Discharge by cancellation
Discharge by release
Discharge by payment
Discharge by delay in presenting
cheques
Discharge by qualified acceptance
Discharge by material alteration
Discharge by payment of instrument
on which alteration is not apparent

CROSSING OF CHEQUES
Uncrossed cheques or open
cheques
Crossed cheques
CROSSING OF CHEQUES
1. General crossing
2. Special crossing
3. Restrictive crossing
4. Not negotiable crossing
Who may cross a cheque
Where a cheque is uncrossed, the
holder may cross it generally or
specially
Where a cheque is crossed
generally, the holder may cross it
specially
Where a cheque is crossed
generally or specially, the holder
may add the words not negotiable