The document discusses negotiable instruments under Indian law, specifically focusing on promissory notes. It defines a promissory note according to the Negotiable Instruments Act and outlines its essential features, such as containing an unconditional promise to pay a certain sum of money. It discusses key parties to a promissory note like the maker and payee. It also provides examples from case law rulings related to determining what constitutes a promissory note under the Act.
2. What are Negotiable
Instruments?
◦ According to Section 13 (a) of the Act, “Negotiable
instrument 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.”
◦ Thus, the term, negotiable instrument means a written
document which creates a right in favour of some person
and which is freely transferable. Although the Act mentions
only these three instruments (such as a promissory note, a
bill of exchange and cheque)
◦ The Negotiable Instruments Act, 1881. An Act to define and
Law relating to negotiable instruments which are
Promissory Notes, Bills of Exchange and cheques.
5. Characteristic of Negotiable
Instruments
A negotiable instrument has the following characteristics:
1. Transferability: The possessor of the negotiable instrument is
presumed to be the owner of the property contained therein. A
negotiable instrument does not merely give possession of the
instrument but right to property also. The property in a negotiable
instrument can be transferred without any formality. In the case of
bearer instrument, the property passes by mere delivery to the
transferee. In the case of an order instrument, endorsement and
delivery are required for the transfer of property.
2. Title: The transferee of a negotiable instrument is known as
‘holder in due course.’ A bona fide transferee for value is not
affected by any defect of title on the part of the transferor or of
any of the previous holders of the instrument.
6. ◦ 3. Rights: The transferee of the negotiable instrument can sue in his
own name, in case of dishonour. A negotiable instrument can be
transferred any number of times till it is at maturity. The holder of
the instrument need not give notice of transfer to the party liable on
the instrument to pay.
◦ 4. Presumptions: Certain presumptions apply to all negotiable
instruments e.g. It is not necessary to write in a promissory note the
words ‘for value received’ or similar expressions because the
payment of consideration is presumed. The words are usually
included to create additional evidence of consideration.
◦ 5. Prompt payment: A negotiable instrument enables the holder to
expect prompt payment because a dishonour means the ruin of the
credit of all persons who are parties to the instrument.
◦ 6. Certainty: How much the amount is and when it is to be paid
(dated) , no conditions
7. Presumptions As To Negotiable
Instrument
Sections 118 and 119 of the Negotiable Instrument Act lay down certain presumptions which
the court presumes in regard to negotiable instruments. In other words these presumptions
need not be proved as they are presumed to exist in every negotiable instrument. Until the
contrary is proved the following presumptions shall be made in case of all negotiable
instruments:
1. Consideration: It shall be presumed that every negotiable instrument was made drawn,
accepted or endorsed for consideration. It is presumed that, consideration is present in every
negotiable instrument until the contrary is proved. The presumption of consideration,
however may be rebutted by proof that the instrument had been obtained from, its lawful
owner by means of fraud or undue influence.
2. Date: Where a negotiable instrument is dated, the presumption is that it has been made or
drawn on such date, unless the contrary is proved.
3. Time of acceptance: Unless the contrary is proved, every accepted bill of exchange is
presumed to have been accepted within a reasonable time after its issue and before its
maturity. This presumption only applies when the acceptance is not dated; if the acceptance
bears a date, it will prima facie be taken as evidence of the date on which it was made.
8. 4. Time of transfer: Unless the contrary is presumed it shall be presumed that
every transfer of a negotiable instrument was made before its maturity.
5. Order of endorsement: Until the contrary is proved it shall be presumed
that the endorsements appearing upon a negotiable instrument were made
in the order in which they appear thereon.
6. Stamp: Unless the contrary is proved, it shall be presumed that a lost
promissory note, bill of exchange or cheque was duly stamped.
7. Holder in due course: Until the contrary is proved, it shall be presumed that
the holder of a negotiable instrument is the holder in due course. Every
holder of a negotiable instrument is presumed to have paid consideration for
it and to have taken it in good faith. But if the instrument was obtained from
its lawful owner by means of an offence or fraud, the holder has to prove
that he is a holder in due course.
8. Proof of protest: Section 119 lays down that in a suit upon an instrument
which has been dishonoured, the court shall on proof of the protest, presume
the fact of dishonour, unless and until such fact is disproved.
9. What are the types of
Negotiable Instruments
◦ Section 13 of the Negotiable Instruments Act states
that a negotiable instrument is a promissory note, bill
of exchange or a cheque payable either to order or to
bearer.
◦ Negotiable instruments recognised by statute are:
(i) Promissory notes
(ii) Bills of exchange
(iii) Cheques.
◦ Negotiable instruments recognised by usage or
custom are:
(i) Hundis (ii) Share warrants (iii) Dividend warrants
(iv) Bankers draft etc
10. Bills of exchange
◦ “A bill of exchange is a legally binding, written document that orders a
certain party to pay a specific amount of money to a second party. Some
bills of exchange may say that the money is due on a predetermined future
date, or they may state that payment is due on demand.”
◦ It's used in the transaction of goods and services. The bill of exchange is
signed by the party that owes money (the payer) and given to the party
entitled to the money (the seller or payee), who can then use it to fulfil a
contract for payment. However, the seller may also endorse the bill of
exchange and transfer it to someone else, thereby passing the payment on
to another party.
11. Promissory notes
◦ A promissory note is an instrument in writing (not being a bank note or
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.
◦ The terms of a promissory can be tailored to the parties’ needs, as far as the
amount borrowed, whether interest will be charged, the schedule or date by
which the money must be repaid, and any other needed particulars.
◦ There is no requirement that a promissory note be made on a certain type of
paper or document, or that it contain complex language, though it is important
to be as specific as possible. In fact, a promissory written and signed on a
scrap piece of paper, back of a napkin, or even in an email or text message, is
just as valid as a note drawn up by a lawyer.
12. Cheques
◦ Cheque is a kind of bill of exchange, which is always drawn upon a specific
bank and is payable on demand.
◦ Most cheques follow a common pattern. The cheque is delivered by the
drawer to the payee. The payee then deposits the cheque by delivering it to
her or his own bank, called the collecting bank. The collecting bank then
delivers the cheque to the drawer's bank, the bank to which the original order
was addressed.
13. Classification Of Negotiable Instruments
On the Basis of Location
1) Inland Instruments - A promissory note, a bill of exchange or a cheque drawn or made in India,
and made payable for any person who is resident in India shall be deemed to be an inland
instrument. Since a promissory note is not drawn on any person, an inland promissory note is one
which is made payable in India. Subject to this exception, an inland instrument is one which is either:
◦ Drawn and made payable in India, or
◦ Drawn in India upon some persons resident therein, even though it is made payable in a foreign
country.
2) Foreign Instruments- An instrument which is not an inland instrument is defined as a foreign
instrument. To understand it in a broader way, we need to understand its essentials. The essentials
of a foreign instrument include the following:
◦ it must be drawn outside India and should be made payable outside or inside India; or
◦ it must be drawn in India and should be made payable outside India and drawn on a person
resident outside India.
14. On the Basis of payment
1) Demand Instruments-A promissory note or a bill of exchange in which no
time for payment is specified is an instrument payable on demand.
2) Time Instruments- Time instruments are those instruments which are
payable at sometime in the near future. Therefore, a promissory note or a
bill of exchange payable after a fixed period, or after sight, or on a specified
day, or on the happening of an event which is certain to happen, is known as
a time instrument.
15. On the Basis of Payee
1) Bearer Instrument -A promissory note, a bill of exchange or a cheque is
payable to bearer when it is expressed to be so payable, or the last endorsement
on the instrument is an endorsement in blank. A person who is a holder of a
bearer instrument can obtain the payment of the instrument.
2) Order Instrument- A promissory note, a bill of exchange or a cheque is
payable to order in which it is expressed to be so payable; or which is expressed
to be payable to a particular person and it does not contain any words
prohibiting transfer or indicating any intention that it shall not be transferable.
16. On the Basis of Validity
1) Ambiguous bill - Following instruments treated as ambiguous : ambiguous : -
• Where drawer and drawee are same. Where drawer and drawee are same.
• Where drawee is fictitious Where drawee is fictitious • Where drawee is a
person incapable of entering into a Where drawee is a person incapable of
entering into a contract.
2) Inchoate instruments- Incomplete or blank negotiable instruments properly
stamped and signed.
• An inchoate instrument is not a negotiable An inchoate instrument is not a
negotiable instrument until it is completed. instrument until it is completed.
• Principle of estoppel is applicable for this. Principle of estoppel is applicable for
this.
• The signer of this instrument is liable to the The signer of this instrument is liable
to the holder and holder in due course. holder and holder in due course
17. Promissory Note
Parties to a Promissory Note
1. Maker: He is the person who promises to pay the amount stated in the
note. He is the debtor.
2. Payee: He is the person to whom the amount is payable i.e. the
creditor.
3. Holder: He is the payee or the person to whom the note might have
been indorsed.
4. Indorser: When the holder transfers or indorses the instrument to
anyone else, the holder becomes the ‘indorser’.
5. Indorsee: The person to whom the bill is indorsed is called an
‘indorsee’.
18. According to Section 4
“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 only to, or to the order of, a certain
person, or to the bearer of the instrument.
19.
20. Essential Features
An instrument is a promissory note if there are present the following
elements:-
1. Writing : The first essential is that all negotiable instruments must be
in writing. An oral engagement to pay a sum of money is not an instrument,
much less negotiable.
2. Promise to pay : Secondly, it must contain a promise to pay. A mere
acknowledgement of debt is not a promissory note. “Mr. B , I.O.U.(I owe
you), the sum of seventeen dollars for value received.” Has been held not
to be a promissory note. A mere receipt for money does not amount to a
promissory note, even though it might contain the terms of repayment.
21. It must contain an express promise or clear undertaking to pay: A promise to pay cannot be
inferred; it must be expressed. A mere acknowledgement is not enough.
The following are not promissory notes, as there is no promise to pay:
(a) “Mr. A.I.O.U. Rs. 500”.
(b) “I am liable to pay you Rs. 1,000”.
But the following is a promise to pay:
(a) “I promise to pay Ram or order Rs.1,500.”
(b) “Ram, I owe you Rs. 1,500 and promise to pay the same for value received.”
22. CASE:
In Mange Lal Vs. Lal Chand, AIR 1995, Rajasthan High Court has held
that a document which was in the form of a letter acknowledging receipt of
certain sums and affixed with 20 paise revenue stamp was held to be a
receipt and not a promissory note. In the case of Muthu Sastrigal Vs.
Visvanatha AIR 1914 Madras High Court , it has been held that a
document containing the following words “Amount of cash borrowed of you
by me is Rs.350. I shall in two weeks time returning this sum with interest,
get back this letter.” Has been held to be a promissory note because there
is an unconditional undertaking to repay the borrowed money.
23. 3. Unconditional : Thirdly, the promise to pay the money should be
unconditional, or subject only to a condition which according to the ordinary
experience of mankind is bound to happen.
CASE:
In Beardsley Vs. Baldwin (1741), a written undertaking to pay a sum of
money within so many days after the defendant’s marriage was not
recognised as a promissory note because possibly the defendant may never
marry and the sum may never become payable.
4. The sum payable must be in legal tender money of India
The sum payable must be in the monetary form legally accepted by the
Indian Government.
Also a document containing promise to pay a certain amount of foreign
money or to deliver a certain quality of goods is not a promissory note.
24. 5. The amount payable should be certain:
One of the most important characteristics of a promissory note is
certainty—not only regarding the person to whom or by whom payment is
to be made but also regarding the amount.
For a valid promissory note it is also essential that the sum of money
promised to be payable must be certain and definite. The amount must
not be capable of contingent additions or subtractions.
25. However, paragraph 3 of Section 5 provides that the sum does not
become indefinite merely because
(a) there is a promise to pay amount with interest at a specified rate.
(b) the amount is to be paid at an indicated rate of exchange.
(c) the amount is payable by installments with a condition that the
whole balance shall fall due for payment on a default being committed
in the payment of anyone installment.
26. 6. The maker must be certain:
The note self must show clearly who is the person agreeing to undertake the
liability to pay the amount. In case a person signs in an assumed name, he is
liable as a maker because a maker is taken as certain if from his description
sufficient indication follows about his identity. In case two or more persons
promise to pay, they may bind themselves jointly or jointly and severally, but
their liability cannot be in the alternative.
7. The payee must be certain:
The instrument must point out with certainty the person to whom the promise
has been made. The payee may be ascertained by name or by designation. A
note payable to the maker himself is not pronate unless it is indorsed by him.
In case, there is a mistake in the name of the payee or his designation; the
note is valid, if the payee can be ascertained by evidence. Even where the
name of a dead person is entered as payee in ignorance of his death, his
legal representative can enforce payment.
27. CASE:
In Brij Raj Sharan Vs. Saha Raghunandan Sharan AIR 1955,
Rajasthan HC, a letter was addressed to A continuing the
following statement.
● “In your account Rs. 4668 are due from my son Mahesh
Chandra, I shall pay the amount by December 1948. You rest
assured.”
● It was contended that it should not be treated as a
promissory note because the person to whom the amount
was to be paid was not indicated therein.
28. 8. Signed by the maker:
The promissory note should be signed by the maker. Signature may be on
any part of the document. ‘Signature’ means the writing or otherwise
affixing a person’s name or a mark to represent his name, himself or by his
authority with the intention of authenticating a document.
29. Distinction between Bill of Exchange and
Promissory Note
1. Number of parties: In a promissory note there are only two parties – the
maker (debtor) and the payee (creditor). In a bill of exchange, there are
three parties; drawer, drawee and payee; although any two out of the three
may be filled by one and the same person.
2. Payment to the maker: A promissory note cannot be made payable the
maker himself, while in a bill of exchange to the drawer and payee or
drawee and payee may be same person.
30. 4. Prior acceptance: A note is presented for payment without any prior
acceptance by the maker. A bill of exchange is payable after sight must be
accepted by the drawee or someone else on his behalf, before it can be
presented for payment.
5. Primary or absolute liability: The liability of the maker of a promissory note
is primary and absolute, but the liability of the drawer of a bill of exchange is
secondary and conditional.
31. 6. Relation: The maker of the promissory note stands in immediate relation with
the payee, while the maker or drawer of an accepted bill stands in immediate
relations with the acceptor and not the payee.
7. Protest for dishonour: Foreign bill of exchange must be protested for
dishonour when such protest is required to be made by the law of the country
where they are drawn, but no such protest is needed in the case of a
promissory note.
8. Notice of dishonour: When a bill is dishonoured, due notice of dishonour is to
be given by the holder to the drawer and the intermediate indorsers, but no
such notice need be given in the case of a note.
32. CASE I
Judge: R.N. Misra
Court: Orissa High Court
Year: 1971
Case: Loan amounting to Rs. 1,000 with interest
33. CASE II
Parties: Naga Raju vs. Padmawathi
Court: Andhra Pradesh High Court
Year: 2003
Case: Loan amounting to Rs. 1,25,000 with interest