2. Amity Business School
Negotiable Instruments Act, 1881
‘Instrument’ means any written document by which a
right is created in favour of some person.
‘Negotiable Instrument’ means a document transferable
from one person to another.
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Characteristics of a Negotiable Instrument:
iii. It must be in writing.
iv. It must be signed by the maker/drawer.
v. It must involve payment of money only.
vi. There must be an unconditional promise or order to
pay.
vii. They are transferable by delivery or by endorsement
and delivery.
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Kinds of Negotiable Instruments:
The Act recognizes the following three types of negotiable
instruments:
i. Promissory notes
ii. Bills of Exchange
iii. Cheques
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Promissory Note (section 4):
Promissory Note is an instrument in writing (not being a
bank 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 parson or to the
bearer of the instrument.
Parties to a promissory note:
v. The Maker
vi. The Payee
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Essentials of a Promissory Note:
ii. Must be in writing.
iii. Must contain an express undertaking to pay a certain
sum of money.
iv. Undertaking to pay must be unconditional.
v. Maker must sign the note.
vi. Payee must be a definite person.
vii. Must be properly stamped according to the
provisions of the Indian Stamp Act.
7. Amity Business School
Bills of Exchange (Section 5):
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 to a Bill of Exchange:
v. The drawer
vi. The drawee (also called the acceptor)
vii.The payee
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Essentials of a Bill of Exchange:
ii. Must be in writing.
iii. Must be dated.
iv. Must contain an unconditional order to the drawee.
v. Must be signed by the drawer.
vi. The sum payable must be certain.
vii. The parties must be certain.
viii. It must be accepted by the drawee.
Types of Bill of Exchange:in detail
• Trade Bill
• Accommodation Bill
9. Amity Business School
Cheques (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 to a cheque:
v. The drawer
vi. The drawee
vii. The payee
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Essentials of a Cheque:
ii. Always drawn on a specified banker.
iii. Always payable on demand.
iv. It does not require acceptance.
v. It may be made payable to drawer himself.
vi. Must be dated.
vii. Valid for 6 months.
viii. No acceptance of cheque is required
ix. Cheque is not required to be stamped.
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Crossing of Cheques:
Crossing is a direction to the paying banker to pay the
money generally to a banker or to a particular banker and
not to pay otherwise.
Modes of Crossing:
–General crossing - In case of general crossing,
the holder or payee cannot get the payment over
the counter of the bank but through a bank only.
•Special crossing - In case of special crossing, the paying
banker will pay only to the banker whose name appears
across the cheque.
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Negotiation of Instruments:
The transfer of an instrument by one party to another so
as to constitute the transferee a holder thereof is called
negotiation.
Negotiation of instruments can be effected in following
ways:
• By mere delivery (in case of instruments payable to
bearer)
• By endorsement and delivery (in case of instruments
payable to order)
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Endorsement :
Endorsement means and involves the writing of
something on the back of an instrument for the
purpose of transferring the right, title and interest
therein to some other person.
Kinds of Endorsements:
• Endorsement in blank
• Endorsement in full
• Restrictive Endorsement
• Conditional Endorsement
• Partial Endorsement
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Dishonour of Instruments:
Instruments are dishonoured either by non-acceptance or
by non-payment.
Notice of Dishonour:
When an instrument is dishonoured, the holder or some
party liable thereon must give notice of dishonour to all
other parties whom he seeks to make liable.
Omission to give notice of dishonour discharges all parties
other than the maker or acceptor.
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Dishonour of Cheque (Sections 138 to 142):
If a cheque is returned by the bank unpaid for the reason
of insufficiency of the amount of money standing to the
credit of the account on which the cheque was drawn, the
drawer of such cheque shall be deemed to have
committed an offence. The Act provides for criminal
penalties in such case:
iv. Imprisonment for term which may extend to 1 year, or
v. Fine which may extend to twice the amount of cheque,
or
vi. Both
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In order to attract the aforementioned penalties
following conditions must be satisfied:
ii. The cheque has been dishonoured due to insufficiency
of funds only.
iii. The cheque should have been presented to the paying
banker within 6 months from the date on which it is drawn.
iv. The payee of the cheque should have given notice in
writing to the drawer demanding payment, within 15 days
of the receipt of information of dishonour of the cheque
from the bank.
v. The drawer is liable only if he fails to make the payment
within 15 days of the receipt of such notice.
vi. The payee of the cheque dishonoured should have
made a complaint within 1 month of the cause of action.
