For all the students

1. The Negotiable
Instruments Act, 1881.
By :
Dr. Vilas Kulkarni.
Godwill Management Company.
1

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.
2

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.
 Thus, the term negotiable instrument
literally means a written document which
creates a right in favor of somebody and is
freely transferable.
3

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 and delivery.
 Eg - Promissory note, Cheque and a Bill of
exchange, documents such as Railway or
ST Receipts; Dividend, warrants; Railway
Bonds payable etc.
4

5. Characteristics of negotiable
Instruments
• Free transferability or easy negotiability
Negotiable instrument is freely
transferable.
• Title of holder is free from all defects
A person who takes negotiable instrument
bona-fide and for value gets the instrument
free from all defects in the title. The holder
in due course is not affected by defective
title of the transferor or of any other party.
5

6. 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.
6

7. Continued…
• 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
endorsements appearing upto negotiable
instrument were made in the order in
which they appear thereupon.
7

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.
8

9. Types of Negotiable Instruments
Negotiable instruments are of two types which
areas follows:
• Negotiable Instruments recognized by status:
e.g. Bills of exchange, cheque and promissory
notes.
• Negotiable instruments recognized by usage
or customs of trade:
e.g. Bank notes, exchequer bills, share warrants,
bearer debentures, dividend warrants, share
certificate.
9

10. Bill of Exchange
• 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.
Eg - 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. 10

11. Promissory Note :
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 the bearer of the
instrument.
11

12. Specimen of a promissory note
Rs. 5000/- 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 12

13. Essential characteristics of a
Promissory Note
• Promissory note is a negotiable instrument
• It must be in writing
• It is a promise to pay money only.
• It must be definite. The promise to pay
must be definite.
• It must be unconditional. Undertaking to
pay must be unconditional.
• It must be signed by the maker.
13

14. Continued…
• 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
14
Act, 1899.

15. 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

16. Essential characteristics of a
Cheque
• A cheque is a negotiable instrument.
• It is a bill of exchange.
• It is always drawn on a specified banker.
• It is always payable on demand.
• A cheque can be bearer, order or crossed
16

17. Continued…
• A cheque requires no acceptance in the
ordinary course of business as it is intended for
immediate payment.
• In case of a cheque, a drawee is always a
specified bank, a drawer is a person who draws
a cheque and who has an account in the bank
ad payee is a person to whom the amount of
cheque is made payable.
17

18. 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.”
18

19. Continued…
Negotiation does not mean a simple transfer.
Simple transfer may not necessarily involve the
transfer of property in the negotiable instrument
but negotiation implies the transfer of property
or ownership.
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. 19

20. 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.
20

21. 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. 21

22. 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.
22

23. 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.
23

24. Continued…
• Partial endorsement – Endorsement is made
for remaining balance of payment.
• Conditional endorsement – The liability of
the endorser is limited or negative.
24

25. Dishonour of negotiable instrument
• Negotiable instruments, Promissory notes
and Cheques may be dishonored by non
payment
• Bills of exchange may be dishonored by
non payment or by non-acceptance as they
require acceptance from drawees.
25

26. THANK YOU !!!
26

27. `
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.
27

28. Eligibility to be Holder
Possession of instrument:-
The person must be a de jure (original/real)holder. He
must be entitled to possess the instrument in his own
name. his possession must be under some legal and valid
title. A thief or any person who finds the instrument or an
endorsee under a forged endorsement though in
possession of the negotiable instrument, is not a holder in
the absence of a legal title to it. Even an agent holding a
negotiable instrument for his principal is also not a
holder though he has a right to receive the payment.
28

29. Entitled to receive the amount:-
The person must be entitled to receive the
amount of the instrument and give a valid
discharge to the buyer. A person may be the
bearer of an instrument or payee or endorses of an
instrument but he may not be called a holder of
instrument if he is prohibited by law from
receiving the amount due on the instrument.
29

30. 30

31. The holders of the negotiable instruments:
Eligibility
b. A principal whose name appears on an instrument as the holder though it
executed in the name of his agent for him
c. Where a negotiable instrument is a bearer one, any person who is in the
possession of such instrument is the holder.
d. 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.
e. The endorsee of a cheque is called a holder.
f. If a holder of a negotiable instrument is dead, the heirs of the deceased
holder between the holders.
g. A principal on whose behalf a pronote is endorsed in blank and is
delivered to his agent, he is a holder of the instrument though his name
does not appear on the instrument though is name does not appear on the
instrument 31

32. No eligibility of Holders:
i. I) A thief or a finder of an instrument is not a
holder though he is in possession of an instrument.
ii. 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.
i III) When the endorsement of a bill is ‘for
collection only’ the endorsee cannot be a holder
32

33. 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) .
33

34. a He must be a holder:
A holder to be a holder in due course must be entitled to the
possession of the instrument in his name under a legal title and he
must also be entitled to recover the amount of the instrument from the
parties liable thereto.
He must be a holder for valuable consideration
To be a holder in due course, a person must be a holder for
valuable consideration and the consideration must not be illegal or
void. However, consideration may be past, present adequate or
inadequate.
A donee acquiring title to the instrument by way of a gift is not
a holder in due course because there is no consideration to the contract
and therefore he cannot maintain any suit against the donor in the
court of law. The house hired for illegal purposes and money due on a
promissory note, deposited for the security cannot be recovered by a
34
suit.

35. He must become a holder of the negotiable
instrument before the date of maturity.
If the negotiable instrument is taken after it
becomes due, the person taking it gets the rights of
his immediate transferor against the other parties
and therefore, a person who takes a negotiable
instrument on the day on which it becomes
payable cannot claim rights of a holder in due
course.
35

36. He must become a holder of the negotiable
instrument in good faith:
Here the term ‘good faith’ implies that he should not
accept the instrument after knowing about the defect or
defects in the title to the instrument. A thing is done in
good faith when it is done honestly. It is the duty of a
person [who takes a negotiable instrument] to examine
its contents thoroughly. If the negotiable instrument
contains any material alteration or if it is incomplete, he
will not become a holder in due course. Thus, he must
become a holder and must take the negotiable
instrument complete and regular on its face.
36

37. Distinction between holder and holder in due course
Holder is different from a holder in due course. A holder
in due course enjoys certain rights and privileges.
1. A holder can obtain an instrument without
consideration while a person cannot be a holder in due
course unless he obtains an instrument with consideration
and for value.
2. If an instrument is inchoate, a holder of such
instrument cannot get good title in the instrument. While
holder in due course acquires a good title even if the
instrument is inchoate.
37

38. 3. A holder of an instrument may acquire the
instrument if it becomes payable. But the person is not
treated as a holder in due course if he acquires an
instrument when it becomes payable.
4. A holder need not bother about the defect, if any, in
the title. But no holder is considered a holder in due
course who acquires an instrument knowingly the defect
of the title.
38

39. NEGOTIATION AND TYPES OF
ENDORSEMENT
One of the important characteristics of a
negotiable instrument is its free transferability
from one to another person. Such transfer can
take place either by negotiating the instrument
or by assigning the same. According to section
14 of the act, “When a promissory note, a bill of
exchange or a cheque is transferred to any
person, so as to constitute that person the holder
thereof, the instrument is said to be negotiated.” 39

40. Procedure of transfer or modes of
negotiation:
A negotiable instrument can be transferred to
another person in the following two ways:
c. Negotiation by delivery; and
d. Negotiation by endorsement and delivery
Instruments payable to bearer can be
transferred by mere delivery, while
instruments payable to the order are
transferred by endorsement and delivery:
40

41. Thus delivery of a negotiable instrument is a
voluntary transfer of possession of the
negotiable instrument. When an instrument is
negotiated by delivery it is not necessary for
a transferor to put his or her signature on the
instrument and therefore, there is no privacy
of any contract between the transferor and
any subsequent transferee.
41

42. Negotiation by endorsement and delivery:
Subject to the provision of section 58 [which is stated
earlier] a promissory note, cheque or a bill of exchange
payable to order is negotiable by the holder by
endorsement and delivery thereof [section 48]
Thus the delivery is the common element between the
two modes of negotiation i.e. negotiation by mere
delivery and negotiation by endorsement and delivery.
42

43. Types of Endorsement
The literal meaning of the term endorsement is writing on
an instrument. But In the negotiable instrument or on a
slip of paper attached thereto which is done for the
purpose of negotiation [section 15]. The person who signs
on the back or on the face of the instrument or on the slip
attached thereto is called the endorser and the person to
whom the instrument is endorsed is called the endorsee.
An endorsement can be made by the holder of an
instrument or by the maker who signs it otherwise than a
maker. A payee or an endorsee may also endorse the
instrument if they are holders of the instrument
43

44. Endorsement may be of various types which are a
follows:.
1.General or blank endorsement
2. Full or special endorsement
3. Partial endorsement.
4. Conditional endorsement
5. Restrictive endorsement
44

45. • General or blank endorsement
When a endorser signs his name either on the back or face of the
instrument, the endorsement is said to be blank or general
[section 16(1)]. In a blank endorsement, endorsee is not
specified and therefore the instrument becomes payable to
bearer even though it was made originally payable to order
{section 54]
2, Full or special endorsement:
when an endorser signs the instrument and adds a direction to pay
the amount mentioned therein to or to the order of a specified
person, the endorsement is said to be in full [section 16 (1)].
45

46. a) 3.Partial endorsement:
According to section 56 of the Act, “No writing on a negotiable
instrument is valid for the purpose of negotiation if such writing
purports to transfer only a part of the amount appearing to be due
on the instrument; but where such amount has been partly paid, a
note to that effect may be endorsed on the instrument, which may
then be negotiable for the balance
a) 4. Restrictive endorsement :
Restrictive endorsement restricts the further negotiability of the
negotiable instrument. Such endorsement entitles the holder of the
instrument to receive the amount on the instrument for a specific
purpose. The endorsement is restrictive when it contains express
words to that effect.
46

47. Conditional Endorsement:-
In the conditional endorsement, the liability of the
endorser is limted or negative. A conditional
endorsement is different from a restrictive
endorsement. A conditional endorsement limits or
negatives the liability of the endorser while a
restrictive endorsement places certain restriction
on the negotiability of the instrument.
47

48. DISHONOUR OF NEGOTIABLE INSTRUMENT
Promissory notes, cheques and bills of exchange are
covered by this Act. Of these negotiable instruments,
promissory notes and cheques may be dishonoured by
non payment only while bills of exchange may be
dishonoured by non payment or by non-acceptance as
they require acceptance from drawees. 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 so honored 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 48

49. 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].
49

50. Dishonour by non-payment:
A negotiable instrument i.e. a bill, a cheque or a promissory note is
said to be. Dishonoured by non-payment when the maker of the
promissory note, acceptor of the bill of exchange or drawee of the
cheque makes default in payment upon being duly required to pay
the same. [section 2]. A bill or a promissory note is also said to be
dishonoured by non-payment when presentment for the payment is
excused expressly by the maker of the note or the acceptor of the bill
and the note or bill remains unpaid or at after maturity [section 76]
If the bill is dishonoured either by non-acceptance or non-payment,
the drawer and all endorsers of the bill are held liable to the holder
provided that a notice of such dishonour is given by the holder. If the
bill is dishonoured by non-payment, the drawee is held liable.
50

51. 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,
51

52. 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.
52

53. Protest:
According to section 100 of this Act, when a
promissory note or a bill of exchange has been
dishonoured b 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.
53

54. 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. A statement that payment or acceptance, or better security, as the case may be,
has been demanded of such person by the notary public; the terms of his answer. If
any, or a statement that he gave no answer, or that he could not be found;
4. 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;
5. The subscription of the notary public making the protest;
1. 6 . 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.
2. 7. The signature of the notary public.
54

55. 55