LEGAL ASPECTS OF BUSINESS

NEGOTIABLE
INSTRUMENTS ACT, 1881

INTRODUCTION TO
NEGOTIABLE INSTRUMENTS
ACT, 1881

The Negotiable Instruments Act was enacted, in India, in

1881. Prior to its enactment, the provision of the English
Negotiable Instrument Act were applicable in India, and the
present Act is also based on the English Act with certain
modifications. It extends to the whole of India except the State of
Jammu and Kashmir. The Act operates subject to the provisions of
Sections 31 and 32 of the Reserve Bank of India Act, 1934.

MEANING OF NEGOTIABLE
INSTRUMENT

The word negotiable means transferable by delivery, and

word instrument means a written document by which a right
is created in favour of some person. Thus, the term negotiable
instrument means a written document transferable by
delivery.
According to Section 13 (1) of the Negotiable
Instruments Act, A negotiable instrument means a
promissory note, bill of exchange, or cheque payable either to
order or to bearer. A negotiable instrument may be made
payable to two or more payees jointly, or it may be made
payable in the alternative to one of two, or one or some of
several payees [Section 13(2)].

FEATURES OF NEGOTIABLE
INSTRUMENTS

Writing and Signature

Money

Freely Transferable

Title of Holder Free from all Defects

Notice

Presumption

Special Procedure

Popularity

Evidence

TYPES OF NEGOTIABLE
INSTRUMENTS

There are two types of Negotiable Instruments:

1.

Instruments Negotiable by Statute:

The Negotiable Instruments Act mentions only three
kinds of negotiable instruments (Section 13). These are:

2.

1.

Promissory Notes

2.

Bills of Exchange, and

3.

Cheques

Instruments Negotiable by Custom or Usage:

There are certain other instruments which have acquired
the character of negotiability by the usage or custom of
trade. For example: Exchequer bills, Bank notes, Share
warrants, Circular notes, Bearer debentures, Dividend
warrants, Share certificates with blank transfer deeds, etc.

PROMISSORY NOTES

Section 4 of the Act defines, A promissory note is an

instrument in writing (note being a bank-note or a currency note)
containing an unconditional undertaking, signed by the maker, to
pay a certain sum of money to or to the order of a certain person,
or to the bearer of the instruments.
The person who makes the promissory note and promises
to pay is called the maker. The person to whom the payment is to
be made is called the payee.

CHARACTERISTICS OF A
PROMISSORY NOTE

It is an Instrument in Writing

It is a Promise to Pay

Signed by the Maker

Other Formalities

Definite and Unconditional Promise

Promise to Pay Money Only

Maker must be a Certain Person

Payee must be Certain

Sum Payable must be Certain

It may be Payable on Demand or After a Definite Period of Time

It cannot be Made Payable to Bearer on Demand

PARTIES TO A PROMISSORY
NOTE

Maker:
Maker is the person who promises to pay the amount stated in
the note.

Payee:
Payee is the person to whom the amount of the note is
payable.

Holder:
He is either the payee or the person to whom the note may
have been endorsed.

SPECIMEN OF PROMISSORY
NOTE
Rs. 10,000
Lucknow
April 10, 2013
Three months after date, I promise to pay Shri Ramesh (Payee) or to his order the sum of
Rupees Ten Thousand, for value received.
Stamp
To,
Shri Ramesh,
B-20, Green
Park,
Mumbai.
(Maker)

Sd/Ram

BILL OF EXCHANGE

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0

According to Section 5 of the act, 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. It is also called a Draft.
Special Benefits of Bill of Exchange:

A bill of exchange is a double secured instrument.

In case of immediate requirement, a Bill may be discounted

with a bank.

ESSENTIAL ELEMENTS OF
BILL OF EXCHANGE

It must be in Writing.

Order to pay

Drawee

Signature of the Drawer

Unconditional Order

Parties

Certainty of Amount

Payment in Kind is not Valid

Stamping

Cannot be made Payable to Bearer on Demand

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1

PARTIES TO A BILL OF
EXCHANGE

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2

Drawer:
The maker of a bill of exchange is called the drawer.

Drawee:
The person directed to pay the money by the drawer is called
the drawee.

Payee:
The person named in the instrument, to whom or to whose
order the money are directed to be paid by the instruments
are called the payee.

SPECIMEN OF BILL OF
EXCHANGE

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Rs. 10,000
Mumbai
April 10, 2013
Three months after date pay to Ram (Payee) order the sum of Ten Thousand Rupees, for
value received.
To,
Sushil
B-20, Green Park,
Lucknow 226020.
In case of need
with Canara Bank,
Delhi.
(Drawer)

(Drawer)
Accepted
Sushil

Stamp
Sd/- Ram

CLASSIFICATION OF BILL OF
EXCHANGE

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4

Inland and Foreign Bills [Section 11 and 12]

Inland Bill:

It is drawn in India on a person residing in India whether payable in or

outside India; or

It is drawn in India on a person residing outside India but payable in India.

Foreign Bill:

A bill drawn in India on a person residing outside India and made payable
outside India.

Drawn upon a person who is the resident of a foreign country.

CLASSIFICATION OF BILL OF
EXCHANGE (Cont.)

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Time and Demand Bills:

Time Bill: A bill payable after a fixed time is termed as a time bill.
A bill payable after date is a time bill.

Demand Bill: A bill payable at sight or on demand is termed as a

demand bill.

Trade and Accommodation Bills:

Trade Bill: A bill drawn and accepted for a genuine trade

transaction is termed as trade bill.

Accommodation Bill: A bill drawn and accepted not for a genuine

trade transaction but only to provide financial help to some party is
termed as an accommodation bill.

CHEQUE

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6

According to Section 6 of the act, A cheque is a bill of

exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand. A cheque is also, therefore, a
bill of exchange with two additional qualification:

It is always drawn on a specified banker.

It is always payable on demand.

Special Benefits of Bill of Exchange:

A bill of exchange is a double secured instrument.

In case of immediate requirement, a Bill may be discounted

with a bank.

ESSENTIAL ELEMENTS OF A
CHEQUE

In writing

Express Order to Pay

Definite and Unconditional Order

Signed by the Drawer

Order to Pay Certain Sum

Order to Pay Money Only

Certain Three Parties

Drawn upon a Specified Banker

Payable on Demand

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7

PARTIES TO A CHEQUE

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Drawer:
Drawer is the person who draws the cheque.

Drawee:
Drawee is the drawers banker on whom the cheque has been
drawn.

Payee:
Payee is the person who is entitled to receive the payment of
a cheque.

SPECIMEN OF CHEQUE

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9

Kapoorthala Bagh,
Mumbai 400033
IFSCode:MAHB000031
6

D D M M Y Y Y Y
Pay ......

. Or Bearer
Rupees
Rs.
A/c No.

SHANKAR GAJARE
Signature
Please sign above

473792
10

000240000 000000

TYPES OF A CHEQUE

Bearer Cheque

Cross Cheque

d
an

&

Co
No

e
tN

go

b
tia

le

. le
Co iab
d t
an ego
N
ot

Cheque Crossed Specially

S
A/C

ny
pa
m
Co

2
0

BI

ia
Ind
f
o
nk
Ba

ia
Ind le
f
o
b
tia
nk
Ba Nego
t
No

Restrictive Crossing (A/c Payee Only)

LY
ON
E
E
ia
PAY f Ind
C
A/ nk o
Ba

E
AYE
P
A/C

E
AYE able
P
A/C egoti
tN
No

NEGOTIATION

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1

According to section 14 of the Act, 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. The main purpose and essence of negotiation is
to make the transferee of a promissory note, a bill of exchange or
a cheque the holder there of.
Negotiation thus requires two conditions to be fulfilled, namely:

There must be a transfer of the instrument to another person;

and

The transfer must be made in such a manner as to constitute

the transferee the holder of the instrument.

MODES OF NEGOTIATION

Negotiation by delivery (Sec. 47):

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2

Where a promissory note or a bill of exchange or a

cheque is payable to a bearer, it may be negotiated by delivery
thereof. Example: A the holder of a negotiable instrument
payable to bearer, delivers it to Bs agent to keep it for B. The
instrument has been negotiated.

Negotiation by endorsement and delivery (Sec. 48):

A promissory note, a cheque or a bill of exchange
payable to order can be negotiated only be endorsement and
delivery. Unless the holder signs his endorsement on the
instrument and delivers it, the transferee does not become a
holder. If there are more payees than one, all must endorse it.

ENDORSEMENT [SECTION 15]

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3

The word endorsement in its literal sense means, writing

on the back of an instrument. But under the Negotiable
Instruments Act it means, the writing of ones name on the back of
the instrument or any paper attached to it with the intention of
transferring the rights therein. Thus, endorsement is signing a
negotiable instrument for the purpose of negotiation. The person
who effects an endorsement is called an endorser, and the person
to whom negotiable instrument is transferred by endorsement is
called the endorsee.
Who may Endorse / Negotiate [Section 51]:
Every Sole maker, drawer, payee or endorsee, or all of
several joint makers, drawers, payees or endorsees of a negotiable
instrument may endorse and negotiate the same if the
negotiability of such instrument has not been restricted or
excluded as mentioned in Section 50.

ENDORSEMENT

(Cont.)

Essentials of a Valid Endorsement:

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It must be on the back or face of instrument or on a slip of paper

annexed thereto.

It must be signed by the endorser.

It must be completed by the delivery of the instrument.

It must be made by the holder of the instrument.

Kinds of Endorsement:

Blank or General Endorsement

Full or Special Endorsement

Partial Endorsement

Restrictive Endorsement

Conditional Endorsement

THANK YOU