The Negotiable Instruments
Act ,1881
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05/08/10 The Negotiable Instruments Act,1881
History
A law relating to negotiable instruments
Deals with promissory notes, bills of
exchange & cheques
Act extends to whole of India
The Act came into existence on 1st March,
1882
The latest amendment to the act was
made in 1988
05/08/10 The Negotiable Instruments Act,1881
Object of the Act
The main object of the Negotiable Instruments Act is to
legalise the system by which instruments contemplated by it
could pass from hand to hand by negotiation like any other
goods. The purpose of the Act was to present an orderly and
authoritative statement of leading rules of law relating to the
negotiable instruments.
05/08/10 The Negotiable Instruments Act,1881
Introduction
What is a negotiable Instrument?
A negotiable instrument is the one which
transfers a debt from one person to
another.
Special class of contracts.
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Characteristics
Freely transferable
Title of holder free from all defects
Recovery
Presumptions: Consideration, date, time,
time of acceptance & transfer, order of
indorsements , stamp, holder is a holder in
due course, proof of protest
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Notes Bills & Cheques
Promissory Note : -
A “promissory note” is an instrument in writing (not 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.
Parties Involved: -
Maker
Payee
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Essentials of Promissory note
Must be in writing
Promise to pay
Definite & unconditional
Signed by the maker
Certain parties
Certain sum of money
Promise to pay only money
No bank note or currency note
Other formalities
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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.
Parties Involved: -
Drawer
Drawee
Payee
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Essential elements of BOE
In writing
Order to pay
Unconditional
Requires 3 parties & certain
Signed
Sum to be certain
Order to pay money
Other formalities
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Difference
Bill Of Exchange Promissory Note
Three parties-drawer, Two parties-maker,
drawee, payee payee
Unconditional order Unconditional promise
Drawer-creditor Maker-debtor
Liability is secondary Liability is primary
Can be drawn payable to Cannot be drawn payable
bearer to bearer
Drawer stands in Maker stands in
immediate relation with immediate relation with
acceptor and not payee. the payee
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"Cheque"
A "cheque" is a bill of exchange drawn
on a specified banker (b) payable
otherwise than on demand.
Thus all the cheques are bill of exchange
in the sense that these have all the
essential elements of a bill of exchange.
But all bill of exchange are not Cheques.
Type of Cheque
Open Cheque
Crossed Cheque
Bearer Cheque
Order Cheque
Parties to a Cheque
Drawer :- The Person Who draws the
cheque is called the drawer.
Banker :- The bank on which the cheque
is drawn is called the drawee
Payee :- The person in whose favour the
cheque is drawn is called the payee. The
payee may be a third party or the drawer
himself.
Essential of 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- drawer, drawee & payee
Drawn upon a specified banker
Payable on demand
Difference between Cheque and
BoE
Basis of distinction Cheque Bill of exchange
It can be drawn upon an individual
1 Drawer It is always drawn on a bank as well as a bank
It need not always be payable on
2 Payable on demand It is always payable on demand demand
3 Stamp It does not require a stamp It requires a stamp
4 Crossing It can be Crossed It cannot be crossed
It requires an acceptance of the
5 Acceptance It does not require an acceptance drawee
Crossing of cheques
Meaning – A cheque is said to be
crossed when it bears across its
face two parallel transverse lines
on the left corner of cheque.
Purpose
Capacity Of Partners:
Every person capable of contracting, according to the law to which
he is subject, may bind himself and be bound by the making,
drawing, acceptance, endorsement, delivery and negotiation of a
promissory note, bill of exchange or cheque.
Minors
Corporations
Agency
Legal Representatives
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Parties to Negotiable
Instruments
1) Parties to Bill of Exchange: -
Drawer
Drawee
Acceptor
Payee
Holder
Endorser
Endorsee
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Parties to Negotiable
Instruments
2) Parties to a Promissory Note: -
Maker, Payee, Holder,
3)Parties to a cheque: -
Maker, Drawee, Payee, Holder,
Endorser, Indorsee
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Holder:
The “holder” of a promissory note, bill of exchange 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.
Eg- A is the real holder of promissory note had disappeared but
was civilly alive . On maturity his son B sued for the amount, but
the court dismissed his action on the ground that he was not
entitled “in his own name” to the possession of the instrument
as a thief or finder would have been
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HOLDER IN DUE COURSE:
“Holder in due course” means any person who for
consideration became the possessor of a
promissory note, bill of exchange or cheque if
payable to bearer, or the payee or indorsee
thereof, if payable to order.
A person who takes an instrument “in
good faith and for value “ become the true
owner of the instrument as is known as a
holder in due course.
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Liability Of Parties:
1) Liability of drawer
2) Liability of drawee of cheque
3) Liability of maker of note and acceptor of
bill
4) Liability of endorser
5) Liability of prior parties to a holder in due
course
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Negotiation
When a promissory note, bill of exchange or cheque
is transferred to any person, so as to constitute the
transferee the holder thereof, the instrument is said to
be negotiated.
This Transfer may take place either:
1)By Negotiation
Negotiation by delivery
Negotiation by indorsement & delivery
2)By Assignment
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Endorsement:
When the maker or holder of a negotiable instrument signs the
same for the purpose of negotiation, on the back or face thereof or
on a slip of paper annexed thereto, or so signs for the same
purpose a stamped paper intended to be completed as a negotiable
instrument, he is said to indorse the same, and is called the
Enndorser
Essentials of Valid Endorsement: -
It must be on the instrument itself
It must be signed by the indorser
It must be completed by the delivery of the instrument
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Kinds of Endorsement:
Blank or general Indorsement
Full or special Indorsement
Restrictive Indorsement
Partial Indorsement
Conditional Indorsement
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Instruments obtained by
unlawful means
Stolen instruments
Coercion or Fraud
Unlawful consideration
Forged instruments
Forged indorsement
Without Consideration
Lost negotiable instruments
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Presentment of a negotiable
instrument.
Presentment means showing a negotiable
instrument to the drawee, acceptor or
maker for acceptance, sight or payment.
Types:
Presentment of bill of exchange for
acceptance.
Presentment of promissory note for sight.
Presentment of negotiable instruments for
payment..
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Presentment for acceptance.
It is only bills of exchange of certain type that
require acceptance. A bill is said to be accepted
when the drawee put his signature on it.
Essentials of a valid acceptance-
It must be written on bill.
It must be signed by the drawee personally or
through a authorised agent.
The accepted bill must be delivered to the
holder.
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Modes of acceptance.
General acceptance.
Qualified acceptance.
An acceptance is qualified when it is
Conditional
Partial
Qualified as to place and
Qualified as to time
Acceptance by some of drawees but not all.
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Presentment of acceptance to
whom?
The drawee
All or some of several drawees
Drawee in case of need
All the drawees in case of several
drawees
Duly authorized agent of the drawee
Legal representative in case of death of
the drawee
Official Receiver or Assignee in case of
insolvency of the drawee
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Presentment for acceptance -
when and where
When:
a. If a time for presentment for
acceptance is specified in the bill.
b. If time is not specified in the bill.
c. In case of a bill payable after sight.
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Presentment for acceptance -
when and where
Where
a. If place for presentment is mentioned in
the bill
b. If the place of presentment is not
mentioned in the bill
c. The holder must allow the drawee forty-
eight hours to consider whether to
accept the bill
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Effect of non-presentment
When presentment for acceptance is excused:
a. drawee after reasonable search cannot
be found
b. drawee is dead or insolvent
c. drawee is a fictitious person or one incapable of
contracting
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Acceptance for honour
When the bill is dishonoured by non-
acceptance holder may allow any other
person to accept it for the honour of
drawer or any one of the indorsers.
Conditions for valid acceptance for
honour:
The bill must have been noted or
protested.
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Contd…..
The acceptance for honour must be made with
the consent of the holder.
It must be written on the bill indicating that it is
an acceptance for honour of the party liable on
the bill.
It must be signed by the acceptor who must not
be already liable on the bill .
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Obligations and rights of
acceptance for honour
Obligation of the acceptor for honour is not absolute.
The following conditions has to be fulfilled:
• The bill should once more be presented to the drawee
for payment at maturity.
• If the drawee still refuses to pay, the bill should be
noted or protested for payment.
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Other forms of presentment
Presentment for sight.
Presentment for payment.
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Dishonour of a negotiable
instrument
A bill of exchange may be dishonoured by non-
acceptance or non-payment.
A promissory note and a cheque may be
dishonoured by non-payment only.
Notice of dishonour must be given to all the
prior parties in order to make them liable on the
instrument.
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Contd…..
Notice of dishonour by whom?
Notice of dishonour to whom?
Form of notice.
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Noting
Noting means the recording of the fact of
dishonour by a notary public upon the
instrument or upon a paper attached there to or
partly upon each.
Noting must contain following particulars:
The fact of dishonour.
Date of dishonour.
Reasons, if any assigned.
The notary charges.
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Protest
Fact of dishonour of bill of exchange or promissory note
is noted and certified by Notary Public. Such certificate is
called protest.
Contents of protest:
The instrument or literal transcript of the instrument.
The name of the person for whom and against whom the
instrument has been protested.
The reason for dishonour.
The place and time of dishonour.
The signature of the Notary Public
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Discharge of an Instrument
By payment in due course
Payment of interest (Sec 80)
By express waiver
By cancellation
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Discharge of a Party or Parties
By payment [Sec 82(c)]
By cancellation [Sec 82(a)]
By release [Sec 82(b)]
By operation of law
By material alteration (Sec 87)
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Material Alteration
Instances of material Alteration
The date
Sum Payable
Time of payment
Place of payment & addition of place of
payment
Rate of interest
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ESTOPPEL
When a person by his conduct or words
spoken or written leads another person to
believe that a certain state of affairs
exists, he is estopped from denying the
facts of that statement later.
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Rules of Estoppel
Estoppel against denying original validity
of instrument (sec 120)
Estoppel against denying capacity of
payee to indorse (sec 121)
Indorse not permitted to deny the
capacity of prior parties (sec 122)
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International Law
1. Liability: The liability of the maker or drawer of foreign
promissory note is determined by the law of place
where the instrument has been made .The liability of
the acceptor is determined by the law of place where
the instrument is payable.
2. Dishonour: A promissory note,bill of exchange is made
payable in different place from that in which it is made
or indorsed,the law of place determines what
constitute dishonour
3. Instruments made out of India according to the
provisions of Indian law
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HUNDIS
Unconditional order in writing made by a person
directing another to pay a certain sum of money
to a person named in the order.
Expressed in vernacular language also.
Being a part of the informal system have no
legal status and are not covered under the
Negotiable Instruments Act, 1881.
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Banker & Customer
Banking is defined as an activity of
accepting deposits from the public,
repayable on demand or otherwise and
withdrawal by cheque, draft or otherwise
and such acceptance of money is for the
purpose of lending or investments.
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Rights & Obligations of
Bankers towards Customers
Honour the cheque
Maintain records of all the transactions
Abide by the instructions of the customer
Not to disclose the state of his customer’s account
Set off
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When a Banker MAY Refuse
(Dishonour) Payment
1. When a Cheque is post-dated and presented
for payment before that date
2. Lack of sufficient funds
3. The funds are not available for the purpose
4. Cheque is of doubtful legality
5. When the Cheque is not duly presented
6. Signature doesn't match
7. Cheque presented at a branch where the
customer has no account
8. When the Cheque has become stale
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When a Banker MUST Refuse
(Dishonour) Payment
The customer countermands payment
A customer dies and the bank has notice of
the death
Customer has been adjudged insolvent
Banker receives notice of customer’s insanity
When payment is prohibited by an order of a
court
Customer gives notice to his banker to close
his accounts
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Protection of the Paying Banker:-
Sec 85
1. Paying banker will not be liable if holder of
a bearer Cheque is not actual owner of the
Cheque [Sec 85(2)].
2. If a Cheque is crossed generally
(Sec 126 Para 1)
If a cheque is crossed specially
(Sec 126 Para 2)
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Contd….
Paying banker will not be protected if the
drawer’s signature is forged and the
banker makes the payment on the
cheque
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Thank You
