The negotiable-instruments-act-1881

1. 1
The Negotiable
Instruments Act, 1881.

2. 2
Introduction
• The law relating to negotiable instruments
is contained in the Negotiable Instruments
Act. 1881 which applies and extends to the
whole of India.

3. 3
Definitions
 The word negotiable’ means “transferable
by delivery” and instrument means “a
written document by which a right is
created in favor of some person or persons.

4. 4
Continued…
• A negotiable instrument is a piece of paper
which entitles a person to a certain sum of
money and which is transferable from one
to another person by a delivery or by
endorsement.
 Eg - Promissory note, Cheque and a Bill of
exchange, documents such as Railway or
ST Receipts; Dividend, warrants; Railway
Bonds payable etc.

5. 5
Characteristics of negotiable
Instruments
• It is a written document
• It is the simplest and most convenient mode of
assignment of a debt
• The transferor does not need to give notice to
any person at the time of transferring the
instrument.
• Free transferability or easy negotiability
• Title of holder is free from all defects

6. Types of Negotiable Instruments
6
Negotiable Not Negotiable Semi Negotiable
Instrument Instruments Instruments
1. Promissory Note 1. Money Order 1. Bill of Lading
2. Bill of Exchange 2. Postal Order 2. Dock Warrant
3. Cheque 3. Deposit Receipt 3. Carriers
Receipt
4. Exchequer Bill 4. Share Certificate 4. Letters of Credit
5. Circular Note 5. Railway Receipt
6. Dividend Warrant
7. Share Warrant
8. Bearer Debenture
9. Bank Note
10. Bank Draft

7. 7
Presumptions:
• Of consideration : that every negotiable instrument, was
made or drawn for consideration.
• As to date : that every negotiable instrument bearing a
date was made or drawn on such date.
• As to time of acceptance : that every accepted bill of
exchange was accepted within a reasonable time after its
date and before its maturity.
• As to time of endorsements : that the endorsement
appearing upto negotiable instrument were made in the
order in which they appear thereupon.

8. 8
Continued…
• As to stamps : that a last promissory-note,
bill of exchange or cheque was duly
stamped.
• As to a holder in due course : that every
holder of a negotiable instrument is holder
in due course.
• As to time of transfer : that every transfer
of a negotiable instrument was made
before its maturity.

9. 9
Promissory Note :
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.”

10. 10
Specimen of a promissory note
Rs. 50000/- Pune November 25, 2008
Three moths after the date, I promise to pay Mr. X of
Mumbai or order a sum of Rupees Fifty Thousand for
value received.
To
Mr.
Address………..
…………… Stamp
Mumbai Signature of Mr Y

11. 11
Essential characteristics of a
Promissory Note
• Promissory note is a negotiable instrument and It must be in writing
• It is a promise to pay money only.
• It must be unconditional. Undertaking to pay must be unconditional.
• It must be signed by the maker.
• Maker of the promissory note must be a certain person and the payee
must also be certain.
• Amount of the promissory note must be certain.
• Other formalities like number, date, consideration, place etc. are
generally found in the promissory notes but they are not essential in
law.
• Promissory note must be properly stamped according to the
provisions of the Indian Stamp Act, 1899.

12. 12
Bill of Exchange
 Definition:
Section 5 of the Negotiable Instruments Act defines a Bill of
Exchange as follows:
“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.”
Illustration:
Mr. X purchases goods from Mr. Y for Rs. 1000/-
Mr. Y buys goods from Mr. S for Rs. 1000/-
Then Mr. Y may order Mr. X to pay Rs. 1000/- Mr. S which will
be nothing but a bill of exchange.
.

13. Kinds of bills of Exchange
 Inland Bill
 Foreign Bill
 Inchoate
 Accomodation Bill
 Ambiguous Bill
 Fictitious Bill
 Documentary Bill
 Banker’s Draft
13

14. 14
Cheque
“A cheque is a bill of exchange drawn on a
specified banker and expressed to be
payable otherwise than on demand.”
The maker of a bill of exchange or Cheque
is called the “Drawer"; the person thereby
directed to pay is called the "Drawee".

15. 15
Essential characteristics of a
Cheque
• A cheque is a negotiable instrument.
• It is always drawn on a specified banker.
• It is always payable on demand.
• A cheque must be signed by the drawer
• A cheque must be an unconditional order to
pay a certain amount of money

16. 16
Negotiation
“It is a process of transferring the ownership, right, title,
interest of a person in a negotiable instrument to another
person so as to give a good title to the transferee and make
a transferee a holder of such instrument.”
Eg -X hands over a cheque to Mr. Y here Mr. X has
negotiates the instrument.
But if he hands over a cheque to Mr. Y asking him to keep
the same in his safe, the cheque is not negotiated to Mr. Y,
Mr. Y does not become its holder but only a bailee.

17. 17
Essentials of negotiation
• There must be transfer of a negotiable
instrument to another person.
• As a result of such transfer, the transferee
must become the holder of the instrument.

18. 18
Modes of negotiation:
• Negotiation by delivery – The negotiable Instrument
is transferred by delivery, actual or constructive.” It
is physical act of delivering the instrument or
handing over the delivery, actual possession of the
instrument is not passed.
• Negotiation by endorsement and delivery – The
negotiable Instrument payable to order is negotiable
by the holder by endorsement and delivery thereof.

19. 19
Endorsement
“Literal meaning of the term endorsement is
writing on an instrument.”
Endorser - The person who signs on the back
or on the face of the instrument or on the
slip is an endorser.
Endorsee - The person to whom the
instrument is endorsed is called the
endorsee.

20. 20
Types of Endorsement
• General or blank endorsement - Endorser signs his name
either on the back or face of the instrument.
• Full or special endorsement - It specifies the name of the
person to whom or to whose order the payment must be
made.
• Partial endorsement – Endorsement is made for
remaining balance of payment.
• Conditional endorsement – The liability of the endorser
is limited .

21. 21
Dishonour of negotiable instrument
Section 93 of the Act states that when a promissory note or a
bill of exchange or cheque is dishonoured by non-
acceptance or non-payment the holder thereof, or some
party thereto who remains liable thereon, must give notice
that the instrument has been dishonoured to all other
parties whom the holder seeks to make severally liable
thereon, and to some one of several parties whom he seeks
to make jointly liable thereon

22. 22
HOLDER AND HOLDER IN DUE COURSE
Holder :- According to section 8 of the Act
holder of a negotiable instrument means any
person
(a) who is entitled in his own name to the
possession of the negotiable instrument and
(b) who has also the right to receive or recover
the amount due thereon from the parties thereto.
`

23. 23
The holders of the negotiable instruments:
Eligibility
a. A principal whose name appears on an instrument as the holder though it
executed in the name of his agent for him
b. Where a negotiable instrument is a bearer one, any person who is in the
possession of such instrument is the holder.
c. Where a negotiable instrument is in the name of a partner of a firm, it
naturally becomes a holder as it is not a separate entity from the partner.
d. The endorsee of a cheque is called a holder.
e. If a holder of a negotiable instrument is dead, the heirs of the deceased
holder between the holders.

24. 24
No eligibility of Holders:
I) A thief or a finder of an instrument is not a holder
though he is in possession of an instrument.
II) The word ‘entitled’ used in the definition of a holder
shows that the title of the person who claims to be the
holder must be acquired in a lawful manner. A person
obtaining the instrument under forgery is not a holder.

25. 25
Holder in due Course
Holder in due course’ means any person who for the
consideration becomes the possessor of a promissory note, a bill
of exchange or a cheque if payable to bearer, or the payee or
endorsee thereof, if payable to order, before the amount
mentioned in it becomes payable and without having sufficient
cause to believe that any defect existed in the title of the person
from whom he derived his title (section 9) .
In order to be a holder in due course, a person will have to
prove following:
•He must be a holder:
•He must be a holder for valuable consideration
•He must be careful in checking the title of transferor.

26. Distinction between Holder and Holder in due course
HOLDER
 He may becomes possessor of
instrument even without
consideration.
 He need not become the possessor
before the maturity of the
instrument.
 He need not become the possessor
in good faith.
 He cannot have a better title than
that of transferor.
 He cannot enforce his rights
against all the prior parties.
 He does not enjoy all the
privileges available to holder in
due cource.
HOLDER IN DUE COURSE
 Acquires possession for
consideration.
 He must become the possessor
before the maturity of the
instrument.
 He must become the possessor in
good faith.
 He can have a better title than
that of transferor.
 He can enforce his rights against
all the prior parties.
 He enjoys some privileges under
the Act, for e.g. 20, 36, 42, 43,46,
58, 120, 121. 26

27. 27
Dishonour by Non-acceptance:
As mentioned earlier that a bill of exchange is dishonoured by non-acceptance. It stands
dishonoured by non-acceptance in the following cases.
a). when there are several drawees who are not partners and if all of them refuse to
accept.
b). If the drawee refuses to accept the bill within forty eight hours from the time of its
presentment even though the bill is duly presented for his acceptance.
c) where the drawee is not competent to enter into contract.
d) When the presentment of a bill of exchange for acceptance is excused and it remains
unaccepted.
e) where the drawee of the bill of exchange gives a qualified acceptance.
f) Where the drawee is a fictitious person and even after a reasonable search, he could
not be found.
It should be noted that where a drawee in case of need is named in a bill of exchange or
even in any other instrument, the bill is not considered to be dishonoured unless it has
been dishonoured by such drawee [section 115].

28. 28
NOTING AND PROTEST
Noting:
As mentioned above, when a negotiable instrument within the
meaning of this Act is dishonoured, the holder of the instrument,
after giving notice of the same, can sue any or all the prior parties
liable thereon. But before he does so, he can get the fact of the
dishonour of the instrument authenticated by noting by a notary
public. Noting is the authentic and official proof of presentment
and dishonour of the instrument.
Noting means nothing but the recording of the fact of
dishonor of the instrument by a notary public within a
reasonable time after dishonour. Of course, nothing is not
compulsory neither it affects the rights of the holder thereon,

29. 29
Noting contains the following particulars.
a) The fact and the date of dishonour of the instrument
b)The reason or reasons if any, assigned for such
dishonour.
c) The rotary charges incurred.
d) If the instrument has not been expressly dishonoured,
the reason as to why the holder wants to treat the same
as dishonoured.

30. 30
Protest:
According to section 100 of this Act, when a
promissory note or a bill of exchange has been
dishonoured by non-acceptance or non-payment, the
holder may, within a reasonable time, cause such
dishonour to be noted and certified by a notary public.
Such certificate is called a protest.
Thus protest is a formal certificate of dishonour of an
instrument issued by the notary public. Of Course, it is
issued to the holder of the instrument on his demand
only.

31. 31
Contents of protest:
1.Either the instrument itself, or a literal transcript of the instrument and of every
thing written or printed thereupon;
2.The name of the person for whom and against whom the instrument has been
protested;
3. When the note or bill has been dishonoured, the place and time of dishonour, and
when better security has been refused, the place and time of refusal;
4. The subscription of the notary public making the protest;
5 . In the event of an acceptance for honour or of a payment for honour, the name
of the person by whom, of the person for whom, and the manner in which, such
acceptance or payment was offered and effected.
6. The signature of the notary public.