Negotiable Instruments Act 1881

Presented by:

USMS,GGSIPU
 Negotiable means the quality of transferability by delivery
or by endorsement and delivery.

 Instrument means a written document by which a right is

created in favor of some person.

 Negotiable Instrument means a written document, which is

freely transferable and which creates a right in favor of some
person.
 Definition

• According to Wills, “A negotiable instruments is one of the property

which is acquired by anyone who takes it bonafide, and for the value,
notwithstanding any defect of title in the person from whom he took it.
• Right of ownership transferred by mere delivery
• Transferee gets instrument with good faith and consideration is free
from any defect.

• Negotiable instruments means a promissory note, bill of exchange or

cheque, payable either to order or to bearer whether the word order or
bearer appear on the instrument or not.” [sec 13(1) ]
The Act besides above three negotiable instruments recognizes any
other instrument satisfying the characteristics of negotiability, as a
Negotiable Instrument.
Payable to order Payable to bearer
1. Express to be so payable. 1. Express to be so payable
2. Payable to a particular person and it 2. The only or last
must not contain words which endorsement must be
prohibit transfer or indicate an blank. e.g..
intention that it shall not be • Payable to A or bearer.
transferable. e.g. • Pay to the bearer.
• Payable to A.
• Payable to A or order.
• Payable to the order of A
 Characteristics of NI

• Negotiable (Freely transferable).

• Title of holder free from all defects.
A person who is holding negotiated instrument he is free from a
defect in the title of the transferor
Ex: S sells certain goods to B. B gives a promissory note to S for
the price. B refuses to pay the promissory note, claiming that the
goods are not according to order. If S sues B on the note, B’s
defense is good. But if S negotiates the note to H, a holder in due
course, B’s defense will be of no avail.
• Recovery
A holder and holder in due course can sue for recovery .
• Presumption
Negotiable instruments are always subject to the presumptions.
They will be applicable unless contrary is proved.
 Presumptions

 As to consideration

 As to date

 As to acceptance

 As to transfer

 As to the order of endorsements

 As to stamp

 As to holder-in-due course

 As to protest
Parties to Negotiable instrument

 Cheque  Bill of Exchange

• Drawer • Drawer
• Banker • Drawee
• Payee • Payee

 Promissory Note
• Maker
• Payee
 Promissory Note

According to Section 4:
A promissory note is an instrument in writing (not being a
bank note or a currency note) containing unconditional
undertaking, signed by the maker to pay on demand or at
a fixed or determinable future time a certain sum of
money only to or to the order of a certain person, or to
the bearer of the instrument.
This become inoperative because RBI act provides that
only RBI and central government can issue the
promissory note payable to the bearer.

• Promissory not may be payable on demand or after

definite period.
• A bank note or currency note is note promissory not
since they are money itself.
Essentials of a Promissory Note

 In writing
 Expressed promise to pay
 Promise to pay money only
 Unconditional/definite promise Promissory Note should
 Signed by maker Properly stamped under Stamp
Act.
 Maker a certain person Promise to pay for lawful
 Payee is a certain person consideration
 Promise to pay certain sum Date of issue and place of
 Legal tender money to be paid issue to be contained therein.
 Time of payment
 Certain payee
Specimen of promissory note

Promissory Note
Bill of Exchange

 According to section 5 of Negotiable

Instrument 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 sum of money only to or to
the order of a certain person or to the
bearer of the instrument”
• Bill of exchange may be made payable to
bearer on demand or after a definite period
of time.
Essentials of bills of exchange

 Must be in writing
 Must contain an order to pay and not a promise or a request
 Unconditional and definite
 3 parties: Drawer, Drawee and Payee
 Parties must be certain
 Must be duly stamped
 Signed by drawer
 Number, date &
 Sum payable must be certain
place not essential
 Order must be to pay money
Specimen of Bills of exchange

Bills of exchange
Promissory note Vs Bills of exchange
Promissory note Bills of exchange

1. Two parties No. of parties 1. Three parties

2. Promise Nature 2. Order
3. Drawer & payee may Same identity 3. Cant be same
be same person person.
4. Not required Acceptance 4. Required
5. Maker Liability 5. Drawer
6. Not necessary Notice for dishonor 6. To all prior parties.
7. Bearer/not on demand Payable to… 7. Bearer on demand.
8. It doesn’t requires Protest of dishonor 8. It requires.
 Cheque

According to Section 6:
A cheque is a bill of exchange drawn on a specified banker and not expressed to
be payable otherwise than on demand.

Parties of Cheque
Drawer
Banker
Payee.
Specimen of cheque
 Essentials of cheque

 Written instrument
 Express order to pay
 Unconditional order
 Signed by drawer
 On a specified banker only
 A order to pay certain sum of money only
 Three parties and Payee to be certain
 Payable on demand
 Amount of the cheque and Date of cheque
Types of Cheque:
1. Bearer Cheque
2. Order Cheque
3. Crossed Cheque
Cheque Vs Bills of exchange
Cheque Bills of exchange
1. Always bank Drawer 1. Bank or individual
2. Demand Payable on.. 2. Need not on demand
3. On demand Payable to bearer 3. Can’t be on demand
4. Not required Acceptance 4. Required.
5. Doesn’t require Stamp 5. It requires.
6. It can be crossed. Crossing 6. Can’t be crossed
7. It is fix by bank. Form 7. Not fix form.
8. Not necessary Notice for dishonor 8. To all prior parties.
 Crossing of a Cheque

Crossing: (sec 123 to 131A)

cheque is said to be crossed when it bears across its face two
transverse parallel lines which are usual y drawn on the left
hand top corner of the cheque.
Purpose of crossing:
Crossing of cheque is way of making it even more certain that
money is to be paid to correct person. A crossed cheque will
be paid to the banker through which is presented.
Cheque can be crossed by two types:
- General crossing
- Special Crossing
 General Crossing

 Sec 123 & 126

 It has two transverse parallel lines marked across ots face
 It bears an abbreviation “&co.” between the transverse parallel
lines
 It bears the words non- negotiable between two parallel lines.

y
m pan
Co.
co le &
nd ti ab
a o
neg
t
no
Co. an
y
able
p
& om ble
egot i & c
go
ti a
n e
not no
tn
 Special Crossing

Sec 124 Defines Special Crossing:

where a cheque bears across its face, an addition of the name
of a banker, 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

 In this bankers name is written between two lines

 The cheque requires words ‘ not negotiable’
 Two transverse parallel lines are not necessary
 Forms Of Special Crossing

 Cheque crossed with bank name

dia
 Cheque crossed with A/c payee f In
O
a nk
 Cheque crossed with Not negotiable. B
• Only the cheque can be crossed not bills of exchange and notes
payable
• A general crossing can be converted into special crossing but
reverse is not allowed.
• A special crossing can be made once. Except, banker can make
second special crossing to another bank to act as an agent of the
former.
• Where a cheque contain special crossing to than one banker,
then the paying banker shall refuse to make payment of the same
Cheque Crossed after issue(Sec 125)
Following cases are allowed :
 where a cheque is uncrossed, the holder may cross it
generally or specially
 a generally crossed cheque can be crossed specially.
 The holder may add words not negotiable
 A banker may cross specially crossed cheque to another
banker or his agent for collection
 Presentment and payment
of cheque

 According to sec 84 cheque must be presented to bank upon

which it is drawn
 Cheque must be presented within its validity period.
 The drawee (bank) must have sufficient funds of drawer to
make the payment
 An obligation of the banker to honour the payment of cheque.
 Dishonour of Cheque

• Cheque is bounced or dishonoured by non payment when the

drawee of the cheque makes default in payment upon being
duly required to pay the same.
• Drawee (ie paying bank) is liable to compensate for loss for
non payment if:
• Drawee has sufficient fund
• The fund is applicable to such payment.
• The drawee is duly required to pay the cheque.
 Holder(sec 8)

• Holder takes an instrument by negotiation.

• Which gives holder all rights the transferor possessed.
• A person is called a holder of a negotiable instrument if he satisfies the
following conditions:
 He must posses the instrument in his own name. physical possession is
not required
 He must receive /recover the amount due on the instrument from the
parties liable under the instrument.
So, holder is the bearer of the bearer instrument and endorsee or the payee
of the order instrument.
• Only holder can bring a legal action to recover the amount due on the
instrument
Holder in due course(sec 9)

• Holder in due course means any person who for consideration

became the possessor of a promissory note, bill of exchange, or
cheque, before the amount mentioned in it became payable, and
without having sufficient cause to believe that any defect existed in
the person from whom he derived his title.
• A person is a holder in due course when he proves that
i. Get with Consideration
ii. Possesses the instrument
iii. Get before maturity
iv. Get in good faith
v. Received complete and regular on the face of it.
 Holder in due course

Negotiable Negotiable
Maker
Makeroror Payee
Payeeoror Holder
Holderin
in
Instrument Instrument
Drawer
Drawer Bearer
Bearer Due
Duecourse
course
1. Holder
2. Takes a negotiable
Fig: Holder in due course instrument
3. For value
4. In good faith
5. Without notice of defect
6. The instrument bears no
apparent evidence of
forgery, alterations, or
irregularity
 Privileges of holder in due
course

1. Holder in due course can file a suit in his own name

against the parties liable to pay. He is deemed prima
facie to be a holder in due course.
2. Every prior party to the instrument is liable to a holder
in due course until the instrument is duly satisfied.
3. The other parties liable to pay cannot plead that the
delivery of the instrument was conditional or for a
specific purpose only.
 Privileges(contd…)

4. Even if the negotiable instrument is made without

consideration, if it gets into the hands of the holder
in due course, he can recover the means of a forged
endorsement.
5. The person liable cannot plead against the holder in
due course that the instrument had been lost or was
obtained by means of an offence or fraud or for an
considerations.
Difference between holder and holder in due course

Holder Holder in due course

• May become possessor • Become possessor for
without consideration consideration
• Need not to be possessor • Need to be possessor
before maturity. before maturity.
• Need not become the • Need to become
possessor in good faith possessor in good faith.
• Can't have better title • Can have better title than
than transferor. transferor.
• Can't enforce right • Can enforce right against
against all the prior all the prior parties
parties.
 Material Alteration

• An alteration is called a material alteration if it alters or

attempt to alter the character of the instrument and affect or
is likely to affect the contract which the instrument contains
or is evidence of. Thus, it totally alters the business effects of
the instrument. It makes the instrument speak a language
other than that intend. E.g.
• Alteration of date of instrument.
• Alteration of time of payment.
• Alteration of place of payment.
• Alteration of amount payable.
• Conversion of blank instrument into special.
• Addition of new party.
 Endorsement(sec 15)

• It is the process of transferring an instrument

• Defined as:
• A signature on back or face thereof or on a slip of the paper
called allonge.
• For the purpose of negotiating the instrument, restricting
payment of the instrument, or incurring endorser's liability on the
instrument.
• Not an endorsement if circumstances unambiguously indicate
signature was made for a purpose other than endorsement.

• Person who endorses is called endorsee and in whose favor

instrument is endorsed is called endorser.
Essentials of endorsement:

• Must be on the face or back of the instrument

• It must be signed by endorser.
• It must be completed by the delivery of the instrument
• It must be made by the holder of the instrument.
 Kinds of endorsement

• General Endorsement
• Special Endorsement:
• Specifies party to whom instrument is to be paid.
• To whose order it is to be paid.
• Party specified will have to indorse it before it can be
negotiated further.
• Pay to B or order A.
 Kind of endorsement

• Restrictive Endorsement:
• Prohibits any further negotiation of instrument.
• Contains a condition restricting further negotiation.
• Contains words that indicate it is to be deposited or
collected.
• Restrict payment or negotiation may be disregarded by
endorsee, no effect on rights or liabilities of endorsee.
• Restricting instrument to banking channels is a valid
restriction.
• Pay C only
• Pay C for my use.
 Kind of endorsement

• Conditional or Qualified Endorsement:

• Denies contract liability.
• If it limits or negatives the liability of endorser
• Endorser includes such words as “without recourse”
having legal effect of telling later holders that the qualifying
endorser will not repay them if the instrument is
dishonored.
• Pay B order on his marriage.
• Partial Endorsement
• When it purports to transfer only a part of the amount of
the instrument
 Negotiation back

• An instrument is said to be negotiated back to the holder when

an endorser, after he has negotiated an instrument , again
becomes its holder before its maturity.
• Party who cannot be sued: The holder cannot enforce payment
against an intermediate party to whom he was liable
• Party who can be sued: The holder cannot enforce payments
against an intermediate party to whom he was not liable

A B C D E F
Thank You!!!