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Negotiable Instruments Act,

1881 and other documents

used in financial transactions

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What do you mean by

Negotiable instruments Documents freely used in commercial

transactions and monetary dealings

Negotiable Means transferable Instruments Written documents by which

right is created in faour of some !erson

NI Document which entitles a !erson to asum of money and which is transferable

from on !erson to another by mere

deliery or by endorsement and deliery

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Definition of Negotiable

Instruments

A negotiable instrument is a method of

transferring a debt from one !erson toanother

"erm NI not defined in the Act

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What is #Negotiable Instrument$%

&ec A 1' #negotiable instrument$ means a

!romissory note, bill of e(change orche)ue !ayable either to order or to

bearer*

A NI is used to transfer money or as a

mode of !ayment in a secured way

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+haracteristics of negotiable instrument

1. Freely transferable- Property in NI passes from one person to another by

delivery.

2. Title of the holder free from all defects

(! & sells some goods to -* - gies a !romissory note

for the !rice*

- refuses to !ay the !romissory note claiming that the

goods are not according to order* If & sues - on the

note, -.s defense is good*

-ut if & negotiates note to / a holder in due course -

cannot aoid the !ayment*

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Types of Negotiable

Instruments

1* Negotiable by &tatute NI Act mentions

romissory note , bills of e(change and

che)ues

2*Negotiable by custom or usage

5 (am!les 6ot romissory notes, -an7

drafts, ay orders, railway recei!t for

goods hae been held as Negotiable by

usage

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+a!acity to draw a NI

"o hae ca!acity as !er the aw of

+ontract

Minor

An only be a beneficiary

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HOLDER (Ss. 8)

#/older$ defined 9&* 8:

"he #holder$ of a !romissory note, bill of e(change* or che)uemeans any !erson entitled his own name, to the !ossession thereof,

and to receie or recoer the amount due thereon from the !arties

thereto* Where the note, bill or che)ue is lost or destroyed, its holder

is the !erson so entitled at the time loss or destruction*

Holer in ue !ourse (S. ")

#/older in due course$ means any !erson who for consideration,

became the !ossessor of a !romissory note, bill of e(change, or

che)ue, if !ayable to bearer, or the !ayee or endorsee thereof, if

!ayble to order, before the amount mentioned if it became !ayable,

and without haing sufficient cause to beliee that any defect e(isted

in the title of the !erson from whom he deried his title*

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resum!tions as to NI

ery NI was made, acce!ted and endorsed for

+onsideration

ery NI bearing a date was made or drawn on

such date ery acce!ted bill was acce!ted within

reasonable time after its date and before

maturity

ery transfer of NI was made before its

maturity

"he /older of NI is a /D+

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What is !romissory note %

#$romissory note%. Se!. &* A #!romissory note$ is an instrument in

writing 9not being a ban75note or a currency5

note: containing an un!onitional uner'

taing, signed by the ma7er, to !ay a certainsum of money only to, or to the order of, a

certain !erson, or to the bearer of the

instrument*

arties Inoled; 5

Ma7er erson who ma7es romissory Note

ayee erson to whom the !ayment is to be

made

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Illustrations of =!romissory notes. Illustrations

A signs instruments in the following terms;> 9a: #I !romise to !ay - or order 0s* ?@@*$ 9b: #I ac7nowledge myself to be indebted to - in 0s* 1,@@@,

to be !aid on demand, for alue receied*$ 9c: #Mr* -, I*4** 0s* 1,@@@*$ 9d: #I !romise to !ay - 0s* ?@@ and all other sums which

shall be due to him*$ 9e: #I !romise to !ay - 0s* ?@@ first deducting thereout

any money which he may owe me*$ 9f: #I !romise to !ay - 0s* ?@@ seen days after my

marriage with +*$

9g: #I !romise to !ay - 0s* ?@@ on D.s death, !roided Dleaes me enough to !ay that sum*$ 9h: #I !romise to !ay - 0s* ?@@ and to delier to him my

blac7 horse on 1st Banuary ne(t*$

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Illustrations of =!romissory notes. Illustrations

A signs instruments in the following terms;> 9a: #I !romise to !ay - or order 0s* ?@@*$ 9b: #I ac7nowledge myself to be indebted to - in 0s* 1,@@@,

to be !aid on demand, for alue receied*$ 9c: #Mr* -, I*4** 0s* 1,@@@*$ 9d: #I !romise to !ay - 0s* ?@@ and all other sums which

shall be due to him*$ 9e: #I !romise to !ay - 0s* ?@@ first deducting thereout

any money which he may owe me*$ 9f: #I !romise to !ay - 0s* ?@@ seen days after my

marriage with +*$

9g: #I !romise to !ay - 0s* ?@@ on D.s death, !roided Dleaes me enough to !ay that sum*$ 9h: #I !romise to !ay - 0s* ?@@ and to delier to him my

blac7 horse on 1st Banuary ne(t*$ "he instruments res!ectiely mar7ed 9a: and 9b: are !romissory

notes* "he instruments res!ectiely mar7ed 9c:, 9d:, 9e:, 9f:, 9g: and

9h: are not !romissory notes*

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S$EI*ENS O+ $RO*ISSOR, NOTES

-ombay, 1@thBanuary, 1CC8

0s* ?,@@@5

4N DMAND I romiseto !ay WIIMB4N& "/ &M 4<

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#-ill of e!/ange%

Se!. 0.A #bill of e(change$ is an instrument in writingcontaining an un!onitional orer, signed by the ma7er,

directing a certain !erson to !ay a certain sum of money

only to, or to the order of, a certain !erson or to the

bearer of the instrument*

arties Inoled; 5 Drawer "he !erson who gies order or who ma7es

bill

Drawee "he !erson who is directed to !ay is calleddrawee* When he acce!ts he becomes acce!tor*

ayee 5 "he !erson to whom the !ayment is to bemade

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-ILLS O+ E1H2N3E

(S. 0 4 Ss. 567'566)

2 #-ill of E!/ange% is 91: an instrument in writing,

92: containing an unconditional order,

9': signed by the ma7er,

93: directing a certain !erson,

9?: to !ay a certain sum of money only5*

9i: to a certain !erson, or

9ii: to the order of a certain !erson, or

9iii: to the bearer of the instrument*

"he ma7er of a -ill of (change is called the #drawer,$ and the

!erson thereby directed to !ay. is called #the drawee$* 9&* J: A bill of

e(change is also sometimes called a draft* When it is drawn by a ban7 on

its own branch, it is called a ban7 draft*

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-ILL O+ E1H2N3E ESSENTI2L RE9:ISITIES

T/e follo;ing are t/e eig/t essential re

1* It must be in writing*

2* It must contain an order to !ay*'* "he order contained in the bill should be unconditional*

3* It must be signed by the drawer,*

?* "he drawee must be certain*

K* "he !ayee must be certain*

J* "he sum !ayable must be certain*

8* It must contain an order to !ay money, and money

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-ombay, 1@thBanuary, 1CC8

0s* ?@@@5

&i(ty Days after date, !ay to William &mith, the sum of

fie thousand ru!ees only for alue receied*

"o

aul Bacobson,

3@, Mahatma 6andhi 0oad,

-ombay 3@@ @2'*

S$EI*ENS O+ -ILL O+ E1H2N3E

-ombay, 2@thBanuary, 1CC8

0s* ?@@@5

&i(ty Days after date !ay to Bohn &mith, or order, thesum of 0u!ees

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+he)ue

Se!. ?. A che!ue" is a bill of e#change

dra$n on a specified ban%er and not

e#pressed to be payable other$ise than

on demand and it includes the electronic

image of a truncated che!ue and a

che!ue in the electronic form. It isaddressed to the -an7 and !ayable on

demand* It cannot be !ay after the e(!iry

date*

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We come across two ty!es of che)ues in actual

!ractice namely, o!en che)ues and crossed

che)ues*

4!en che)ues are those which can be directly

!resented to the ban7 for !ayment oer the ban7.s

counter*

"hey do not bear any crossing oer their face*

+04&&IN6 4< +/&

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"hus, !ayment in the case of crossed

che)ues can be obtained only by or

through a !erson who has an account in

one ban7 or another*

&ince the amount is credited to the account

of a !erson, the !erson who receied the

amount can be traced*

"hus, crossing hel!s in the detection of

fraud*

+04&&IN6 4< +/&

S O 9

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S$2E*ENS O+ ROSSED HE9:E

-ANL 4< INDIA A+ No* 1@@1 -4M-AF 2@ th

Banuary, 1CC8

No* &- J@@J@@J

ay to William &mith or -earer 0u!ees

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Distinction between bill of e(change and

romissory Note

1 romissory note there are 2 !arties Ma7er and !ayee*

In -ill of e(change ' !arties Ma7er , drawee and !ayee

2* Note contain unconditional !romise -ill unconditional

order to !ay

'* "he ma7er of the note is debtor 9customer: himself

under ta7es to !ay* "he drawer of bill is creditor who

directs the draweedebtor to !ay*

3* iability of ma7er of bill is !rimary and absolute where

as the liability of drawer is secondary and conditional*

?* Note can.t be made !ayable to himself* Whereas in bill

drawer and the !ayee may be one and the same*

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Distinction between bill of e(change and

!romissory note

K* N re)uires no acce!tance as it is signed bythe !erson who is liable to !ay* Whereas bill

re)uires acce!tance by drawee before

!resented for !ayment*

J*A note can.t be drawn !ayable to bearer* A billcan be drawn so*

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Im!ortant terms

Se!. @. #Dra;er%A #Dra;ee%.

"he ma7er of a bill of e(change or che)ue

is called the #drawer$ the !erson thereby

directed to !ay is called the #drawee$*

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Se!. @. #$ayee%.

"he !erson named in the instrument, to

whom or to whose order the money is by

the instrument directed to be !aid, is

called the #!ayee$*

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#$ayment in ue !ourse%

#ayment in due course$ means !ayment in

accordance with the a!!arent tenor

of the instrument in good faith and

without negligence*

ayment in good faith

to any !erson in !ossession thereof under

circumstances which do not afford a reasonableground for belieing that he is not entitled to

receie !ayment of the amount therein

mentioned* i*e* to the holder

And made in money only

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Negotiation.

Se!. 5&. When a !romissory note, bill of e(change

or che)ue is transferred to any !erson,

so as to constitute that !erson the holder thereof,

the instrument is said to be negotiated*

A negotiable instrument can be transferred in two

ways*

1: -y Negotiation

Negotiation by deliery Negotiation by indorsement deliery

2: -y Assignment under the transfer of !ro!erty act

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InorsementBEnorsement

Se!. 50* When the ma7er or holder of anegotiable instrument signsthe same,

for the !ur!oseof negotiation,

on the bac7 or face thereof or on a sli! of !a!er anne(ed thereto,

he is said to indorse the same,

and is called the #indorser$*

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Modes of Negotiation

5. Negotiation by eli=ery ; A negotiable instrument!ayable to the bearer can be transferred by meredeliery and the transferee becomes the holder ofthe instrument* "he transferor need not sign his

name on such instrument* *g* A, a holder of anegotiable instrument !ayable to bearer, deliers itto -.s agent to 7ee! for -* "he instrument hasbeen negotiated*

7. Negotiation by enorsement an eli=ery ; Aninstrument !ayable to order is negotiable by theholder by endorsement and deliery thereof

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$arties to Negotiable

Instruments 2: arties to a romissory Note; 5

Ma7er, ayee, /older, Indorser,

Indorsee

':arties to a che)ue; 5

Ma7er, Drawee, ayee, /older,Indorser, Indorsee

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ffect of ndorsement

"he endorsement followed by deliery

transfers to the endorsee

the !ro!erty therein

with the right of further negotiation*

-ut the endorsement may by e(!ress words, restrict or

e(clude such right*&o the ssentials of Ealid Indorsement; 5

It must be on the instrument itself

It must be signed by the indorsor

It must be com!leted by the deliery of the instrument

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Linds of ndorsement1* -lan7 or general endorsement Bust indorsor

signs his name on the bac7 or on the face ofthe instrument*

2*

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resentment of a negotiable

instrument* resentment means showing a negotiable

instrument to the drawee, acce!tor orma7er for acce!tance, sight or !ayment*

"y!es; resentment of bill of e(change foracce!tance*

resentment of !romissory note for sight*

resentment of negotiable instruments for!ayment**

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Dis/onour of a negotiable

instrument A bill of e(change may be dishonored by non5

acce!tance or non5!ayment*

A !romissory note and a che)ue may bedishonored by non5!ayment only*

Notice of dishonor must be gien to all the !rior!arties in order to ma7e them liable on the

instrument*

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iability of drawee ban7er

-an7er and customer 0elationshi! is li7e

Debtor and customer

-an7er underta7es to honor customer che)ue

as long as there are sufficient funds +ustomer underta7es to draw che)ue in !ro!er

manner as to enable the ban7er to honor the

same

Where customer has 2 ac ban7er can.t transfer

funds between ac without customer !ermission*

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When can ban7er refuse to

honor customer che)ue ost dated che)ue

In sufficient funds

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Noting

Noting means the recording of the fact ofdishonor by a notary !ublic u!on the instrumentor u!on a !a!er attached there to or !artly u!oneach*

Noting must contain following !articulars;

"he fact of dishonor*

Date of dishonor* 0easons, if any assigned*

"he notary charges*

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rotest

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Dis!/arge of an Instrument

-y !ayment in due course

ayment of interest 9&ec 8@: -y e(!ress waier

-y cancellation

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Dis!/arge of a $arty or $arties

-y !ayment P&ec 829c:Q

-y cancellation P&ec 829a:Q

-y release P&ec 829b:Q

-y o!eration of law

-y material alteration 9&ec 8J:

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*aterial2lteration

Instances of material Alteration

"he date

&um ayable

"ime of !ayment

lace of !ayment addition of !lace of

!ayment 0ate of interest

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-aner 4 ustomer

-an7ing is defined as an actiity of

acce!ting de!osits from the !ublic,

re!ayable on demand or otherwise and

withdrawal by che)ue, draft or otherwiseand such acce!tance of money is for the

!ur!ose of lending or inestments*

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Rig/ts 4 Obligations of

-aners to;ars ustomers

Honour t/e !/e

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/en a -aner *2, Refuse

(Dis/onour) $ayment

1* When a +he)ue is !ost5dated and !resentedfor !ayment before that date

2* ac7 of sufficient funds'* "he funds are not aailable for the !ur!ose

3* +he)ue is of doubtful legality

?* When the +he)ue is not duly !resented

K* &ignature doesnRt matchJ* +he)ue !resented at a branch where the

customer has no account

8* When the +he)ue has become stale

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