Kalinga University

Faculty of Law

Course- LLB Sem-VI

Subject- Banking and Insurance Law

Subject Code: LLB 6.6

UNIT 3

Negotiable instrument

A negotiable instrument is a piece of paper which entitles a person to a sum of money and
which is transferable from person to person by mere delivery or by endorsement and
delivery. The person to whom it is so transferred becomes entitled to the money also to the
right to further transfer it. Thus, negotiable instruments play a major role in the trade world.

The maxim of law nemo dat quod non-habet (no one can transfer a better title than he
himself has). This is the general principle relating to transfer of property is that no one can
become the owner of any property unless he purchases it from the true owner or with his
authority.

According to professor Goode, instrument is described as a document of title of money

Therefore an instrument is a document which physically expresses the payment obligation.
An instrument will be in deliverable state only if it is signed by the possessor or it should
be with the authority of that person. The instrument clearly states the contractual right to
payment and the right will be transferred only after the complete delivery. The person who
has that entitlement and posses the instrument is consider as the true owner.

Purpose

Main purpose of negotiable instruments is to avoid the carriage of higher amount of money
and to reducing the risk of theft; robbery etc.
To give legal effect to negotiable instruments there is legislation and the name of that
legislation is The 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.

What are Negotiable Instruments?

Documents of a certain type, used in commercial transactions and monetary dealings, are
called Negotiable instruments. The word 'negotiable' means transferable from one person to
another and the term 'instrument' means 'any written doc. by which a right is created in favor
of some person.' Thus, the negotiable instrument is a doc. by which rights vested in a person
can be transferred to another person in accordance with the provisions of the Negotiable
Instruments Act, 1881.

According to section 13 of Negotiable Instruments Act, 1881- A 'negotiable instrument'

means a promissory note, bill of exchange or cheque payable either to order or to bearer.

Main Features of A Negotiable Instrument

An instrument may be negotiable either by
# Statute - Promissory notes, bills of exchange and cheques are negotiable instruments
under the Negotiable Instruments Act, 1881; or

# By usage - Bank notes, bank drafts, share warrants, bearer debentures, dividend warrants,
scripts and treasury bills.

# An instrument is to be called 'negotiable' if it possesses the following characteristic

features:

# Freely transferable - Transferability may be by

1. delivery, or

2. By endorsement and delivery.

a. Holder's title free from defects: The holder (of the negotiable instrument) in due course
acquires a good title not withstanding any defect in a previous holder's title.

b. The Holder can sue in his own Name - Another characteristic feature of a negotiable
instrument, is that its holder in due course, can sue on the instrument in his own name.
 c. A negotiable instrument can be transferred infinitum, i.e., can be transferred any number
of times till its maturity.

d. A negotiable instrument is subject to certain presumptions.

Presumptions

1. Consideration: Every negotiable instrument is deemed to have been drawn and accepted,
endorsed, negotiated, or transferred for consideration.
2. Date: Every negotiable instrument must bear the date on which it is made or drawn.

3. Acceptance: Every bill of exchange was accepted within a reasonable time after the date
mentioned therein and before the date of its maturity.
4. Transfer: Every transfer should be made before the expiry.

Meaning of Endorsement:

# When a maker or holder writes the person’s name on the face or back of the instrument &
puts his signatures thereto for the purpose of negotiation, it is called ‘endorsement’.
# Person who signs – endorser
# To whom it is endorsed – endorsee.

Essentials of valid endorsement:

1, On the back or face of the instrument.

2, Must be made by maker or holder.
3, Must be properly signed by the endorser
4, It must be for the entire negotiation instrument.
5. No specific form of words is necessary for endorsement.

Effects of Endorsement:

• The property in instrument is transferred from endorser to endorsee.

• The endorsee gets right to negotiate the instrument further.

• The endorsee gets the right to sue in his own name to all other parties.[2]
Promissory Note [Section 4]:
Definition According to section 13 of Negotiable Instruments Act, 1881- 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 to, or to the
order of, a certain person or to the bearer of the instrument.

A promissory note is a promise in writing by a person to pay a sum of money to a specified

person or to his order.

Maker: The person who makes the promissory note and promises to pay is called the maker.
Payee: The person to whom the payment is to be made is called the payee.

Essentials or Characteristics of a Promissory Note:

From the definition, it is clear that a promissory note must have the following essential
elements.

1. In writing - A promissory note must be in writing. Writing includes print and typewriting.

2. Promise to pay - It must contain an undertaking or promise to pay. Thus, a mere

acknowledgement of indebtedness is not sufficient. Notice that the use of the word
‘promise’ is not essential to constitute an instrument as promissory note.
Unconditional - The promise to pay must not be conditional. Thus, instruments payable on
performance or non- performance of a particular act or on the happening or non-happening of
an event are not promissory notes.
3. Signed by the Maker – The promissory note must be signed by the maker, otherwise it is
of no effect.
4. Certain Parties - The instrument must point out with certainty the maker and the payee of
the promissory note.
5. Certain sum of money - The sum payable must be certain or capable of being made
certain.
6. Promise to pay money only - If the instrument contains a promise to pay something in
addition money, it cannot be a promissory note.

7. Number, place, date etc. - These are usually found in a promissory note but are not
essential in law. If a promissory note does not bear a date, it is deemed to have been made
when it was delivered.
8. Installments - It may be payable in installments.
9. It may be payable on demand or after a definite period - Payable 'on demand' means
payable immediately or any time till it becomes time-barred. A demand promissory note
becomes time barred on expiry of 3 years from the date it bears.
10. It cannot be made payable to bearer on demand or even payable to bearer after a certain
period
11. It must be duly stamped under the Indian Stamp Act - It means that the stamps of the
requisite amount must have been affixed on the instrument and duly cancelled either before
or at the time of its execution. A promissory note, which is not so stamped, is a nullity.

BILL OF EXCHANGE [SECTION 5]:

According to section 5 of Negotiable Instruments Act, 1881- 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.

Characteristic Features of a bill of exchange:

1. It must be in writing.

2. It must contain an order to pay and not a promise or request.

3. The order must be unconditional.

4. There must be three parties, viz., drawer, drawee and payee.

5. The parties must be certain.

6. It must be signed by the drawer.

7. The sum payable must be certain or capable of being made certain.

8. The order must be to pay money and money alone.

9. It must be duly stamped as per the Indian Stamp Act.

10. Number, date and place are not essential.

Parties To A Bill Of Exchange:

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.

CHEQUE [SECTION 6]

According to section 6 of Negotiable Instruments Act, 1881- A cheque is defined as 'a bill
of exchange drawn on a specified banker and not expressed to be payable otherwise than on
demand’.
Thus, a cheque is a bill of exchange with two added features, viz.:
# it is always drawn on a specified banker; and

# It is always payable on demand and not otherwise.

Essentials Of Cheque:
1. In Writing: The cheque must be in writing. It cannot be oral.

2. Unconditional: The language used in a cheque should be such as to convey an

unconditional order.
3. Signature of the Drawer: It must be signed by the maker.

4. Certain Sum of Money: The amount in the cheque must be certain.

5. Payees Must be certain: It must be payable to specified person.

6. Only Money: The payment should be of money only.

7. Payable on Demand: It must be payable on demand.

8. Upon a Bank: It is an order of a depositor on a bank.

Parties To A Cheque

# Drawer: Drawer is the person who draws the cheque.

# Drawee: Drawee is the drawer‟s banker on whom the cheque has been drawn. #
Payee: Payee is the person who is entitled to receive the payment of a cheque.

Penalty for Bouncing of Cheque

As per the Section 138 of the Negotiable Instrument Act, 1881, dishonour of cheque due to
insufficient fund in drawer’s account is a criminal offence. Drawer can be punished with
imprisonment for up to two years, and/or a fine up to twice the amount of cheque bounced.

Apart from NI act , A civil suit can also be filed against the drawer for the recovery of
 cheque bounced amount. Banks can also charge some amount as a penalty for themselves in
case of bouncing of the cheque.

ESSENTIAL FOR AN ACTION UNDER SECTION 138

There should be dishonour of cheque

Section 138 makes dishonour of cheque in certain cases an offence. Cheque is the most
common mode of making the payment. In order to duly protect the interest of its payee,
holder in due course, there is an attempt to discourage dishonour of a cheque by making it
an offence. These provisions do not cover the dishonour of other negotiable instruments.

 Payment in discharge of debtor liability

 The cheque should have been drawn by a person on an account with a banker for
payment of money to another person for the discharge, in whole or part, of any debt
or other liability.

 The debt or other liability in such a case means a legally enforceable debt or other
liability.

If the payment by way of cheque is made as gift or charity, it is not the payment for legally
enforceable debt or liability. The dishonour of such cheque does not attract the provisions of
Section 138 of the Negotiable Instrument Act.
Presentment of the cheque within the period of its validity
It is further necessary that the cheque has been presented before it became stale and invalid.
It means that the cheque has been presented within a period of 6 months from the date on
which it is drawn or within the period of validity, whichever is earlier.
Dishonour due to insufficient fund

It is also necessary that the cheque should be returned by the bank unpaid.
Dishonour may be because of 2 reasons:
Either the amount of money present in the account is insufficient
Or the amount to be paid has exceeded the amount to be paid from that account as in the
agreement made with that bank.

It has been generally held in various cases that dishonour due to the insufficiency of funds has
to be interpreted liberally. Dishonour due to the remarks like “Account closed”, “Refer to the
drawer” or “Stop payment” of the cheque may be deemed to be covered by the provision
contained in Section 138 of the Act.

Notice and demand from the drawer and drawer’s failure to pay

Within 15 days of receipt of information from the bank about the dishonour of the
cheque, the payee or holder in due course of the negotiable instrument, as the case may
be, must make a demand of the said amount from the drawer by giving a notice in
writing.

Inspite of such a notice the drawer of the cheque should fail to make the payment of the said
amount of money to the payee or the holder in due course of the cheque, within 15 days of the
receipt of the said notice.

In the case of TomyJacob Kattikaran v. Thomas Manjaly A.I.R 1998 S.C. 366
The Supreme Court has held that if it was established that the appellant did not serve a
notice on the drawer within the period prescribed under Section 138 of the Act, the acquittal
of the drawer is justified.