AMITY GLOBAL

BUSINESS SCHOOL

Chandigarh

Negotiable instruments
Definition---a negotiable instrument
means a promissory note, bill of exchange
or cheque payable either to order or to
bearer.
3 kinds of negotiable instruments:1.Promissory note
2.Bills of exchange
3.cheques

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Characteristics of a negotiable
instrument
1.Property-the processor of the negotiable
instrument is presumed to be the owner of the
property contained therein .a N.I does not
merely gives possession of the instrument but
right to property also.
2.Negotiablility property in a N.I is freely
transferable by from one person to another.
3.Good title-a holder in due course for value ,gets
a good title even if the transferor had the
defective title.

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Right to sue in own name where the N.I.

is dishonored ,the transferee of that
negotiable instrument has right to sue in
his own name for the recovery of the
amount.
5.Presumptions there are certain
presumptions which are applicable to all
negotiable instrument.

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Presumptions
1.Consideration it shall be presumed that every negotiable
instrument was made ,drawn, accepted , endorsed or
consideration
2.Date where a negotiable instrument is dated ,the
presumption is that it has been made or drawn on such
date, unless the contrary is proved
3.Time of acceptance-unless the contrary is proved ,every
accepted bill of exchange is presumed to have been
accepted within a reasonable time after its issue and
before its maturity

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4.Time of transfer-unless the contrary is

presumed it shall be presumed that every
transfer of a negotiable instrument was
made before its maturity.
5.Order of endorsement- until the contrary is
proved it shall be presumed that the
endorsements appearing upon a
negotiable were made in the order in
which they appear thereon

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6.stamp- until the contrary is proved it shall

be presumed that a lost P.N.,B.O.E,
cheque was duly stamped
7.Holder in due course- until the contrary is
proved it shall be presumed that holder of
a N.A .is the holder in due course.

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Promissory note
"Promissory note".- A "promissory note"
is an instrument in writing (not being a
bank-note or a currency-note) 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

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Essentials of a promissory note

-it must be in writing
-the promise to pay must be express
-the promise to pay must be unconditional
-it must be signed by the maker
-the maker must be ceratin
-promise must be to pay a certain sum
-the promise should be to pay money and money
only.
-other formalities

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Bill of exchange
"Bill of exchange".- 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

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Essentials of a bill of exchange

1)It must be in writing
2)It must contain an unconditional order to pay
3)It must be signed by the drawer
4)There must be three parties to the instrument and the
parties must be certain
5)The order must be to pay a certain sum of money
6)The instrument must contain an order to pay money and
money only
7)
it must comply with the formalities as regards to
date,consideration,stamp,etc.

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Difference
1)Parties there re 3 parties to a bill of exchange, namely
the ,the drawer, the drawee and the payee: while in a
promissory note there are only 2 parties-maker and
payee
2)Nature of payment-in a B.O.E there is an unconditional
order to pay ,while in a P.N there is an unconditional
promise to pay
3)Acceptance a B.O.E requires an acceptance before it is
presented for payment whereas a promisory note does
not require any acceptance since it is signed by the
person who is liable to pay.

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4)Liablity liability of a maker of P/N is primary an

absolute whereas liability of a drawer of B.O.E is
secondary and conditional
5)Notice of dishonor-in B.O.E notice is given to all
the persons who are liable whereas in P/N
notice of dishonor to the maker is not necessary
6)Nature of acceptance-a P/N can never be
conditional but a B.O.E can be accepted
conditionally

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Cheque
A cheque is the means by which a person who
has funds in the hand of a bank withdraws the
same or some part of it.
A cheque must be addressed by one person to
another. So ,a bank draft is not a cheque
Crossing of cheques
Cheques are of 2 types-open and crossed
cheques

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Open cheques-are those which are paid over the

counter of the bank.
Open cheques are liable to great risks in the
course of circulation. they may be either lost or
stolen and the finder or thief can get it encashed
at the bank unless the drawer has in the
meantime countermanded the payment
With a view to avoiding such risks, and protect
owner of cheque, a system of crossing was
introduced. crossing is a direction to the banker
not to pay the cheque across the counter but to
pay a bank only.

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CHEQUE CROSSED GENERALLY - Where a cheque

bears across its face an addition of the words and
company or any abbreviation thereof, between two
parallel transverse lines, or of two parallel transverse
lines simply, either with or without the words not
negotiable, that addition shall be deemed a crossing,
and the cheque shall be deemed to be crossed
generally. [section 123]
CHEQUE CROSSED SPECIALLY - Where a cheque
bears across its face an addition of the name of a
banker, either with or without the words not negotiable,
that addition shall be deemed a crossing, and the
cheque shall be deemed to be crossed specially, and to
be crossed to that banker. [section 124].

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Different types of negotiable

instruments
1)Inland instruments(sec11)-is one which is both drawn and
payable in India or drawn in India on some person
resident therein. thus, a bill drawn in Delhi upon a
merchant resident in new York and payable in Calcutta is
an inland instrument .
2)Foreign instrument- any instrument which is not an inland
instrument is a foreign instrument. thus, a bill drawn
outside India on any person resident outside India or a
bill drawn in India on a person resident outside India is a
foreign bill .eg. a bill drawn in India and payable in
Tehran.
A bill drawn in London and made payable in India

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Ambiguous instrument-an instrument

which in form is such that it may either be
treated as bill of exchange or a promissory
note is an ambiguous instrument.
Accommodation bills-it is a bill which is
drawn by one person and accepted by the
other ,without consideration merely to
enable the drawer to raise money on the
bill by discounting it.

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Fictitious bills (sec 42)when the name of

the drawer or payee or both are fictitious
the bill is called a fictitious bill.
Bearer instrument-a negotiable instrument
is payable to bearer which is expressed to
be so payable or on which the only or last
endorsement is an endorsement in blank.
Eg.pay A or bearer

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Order instrument-expressed to be payable

to a particular person and doesnot contain
words prohibiting transfer
Eg. pay to B or order
Pay to B

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Parties to a Bill of Exchange

There are three parties involved in a bill of exchange. They
arei. The Drawer The person who makes the order for
making payment
ii. The Drawee The person to whom the order to pay is
made. He is generally a debtor of the drawer..
iii. The Payee The person to whom the payment is to be
made. The drawer can also draw a bill in his own name
thereby he himself becomes the payee. Here the words in
the bill would be Pay to us or order. In a bill where a time
period is mentioned, just like the above specimen, is called
a Time Bill. But a bill may be made payable on demand
also. This is called a Demand Bill.

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Parties to a Promissory Note

There are primarily two parties involved in a
promissory note. They arei. The Maker or Drawer the person who makes
the note and promises to pay the amount stated
therein.
ii. The Payee the person to whom the amount
is payable. others, the parties involved may be
a. The Endorser the person who endorses the
note in favour of another person.
b. The Endorsee the person in whose favour
the note is negotiated by endorsement.

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Parties to a cheque
1.The drawer: he is the person who draws
the cheque
2.The drawee: the banker on whom the
cheque is drawn
3.Payee