Negotiable instruments act, 1881 1 march 1882 classification Types Examples

1. NEGOTIABLE
INSTRUMENTS ACT, 1881
LEGAL ASPECTS OF BUSINESS
Presented To
Ms Kavita (A. Prof. )
Presented By
Name
Shubham Tyagi
MBA EVENING
SEC -B

2. INTRODUCTION TO NEGOTIABLE
INSTRUMENTS ACT, 1881
The Negotiable Instruments Act was
enacted, in India, in 1881. Prior to its
enactment, the provision of the English
Negotiable Instrument Act were applicable in
India, and the present Act is also based on the
English Act with certain modifications. It extends
to the whole of India except the State of Jammu
and Kashmir. The Act operates subject to the
provisions of Sections 31 and 32 of the Reserve
Bank of India Act, 1934.
2

3. Negotiable Instruments
What is negotiable?
• Negotiable means transferable.
• The negotiation that goes on refers to the
transfer of the instrument between two people, or
from one bank to another, or even from one
country to another.
What is an instrument?
• In the broadest sense, almost any agreed-upon
medium of exchange could be considered a
negotiable instrument.
• In day-to-day banking, a negotiable instrument
usually refers to checks, drafts, bills of exchange,
and some types of promissory notes.

4.  According to Section 13 (1) of the
Negotiable Instruments Act, “A negotiable
instrument means a promissory note, bill of
exchange, or cheque payable either to
order or to bearer”. “A negotiable instrument
may be made payable to two or more
payees jointly, or it may be made payable in
the alternative to one of two, or one or
some of several payees” [Section 13(2)].

5. Forms of Negotiable Instruments
 A negotiable instrument is a written,
order promising to pay a sum of money.
 A document becomes negotiable when it
contains an unconditional promise to pay
money and is payable to a bearer or
payable on demand.

6. Features of a Negotiable
Instrument
 It is a written document by which certain rights
are created and or/ transferred to a certain
person.
 It must be signed by the maker or the drawer as
the case may be.
 There must exist the unconditional order or
promise to pay.
 There must be a time mentioned for such
payment.
 In particular cases, the drawee’s name should be
specifically mentioned.

7. Types of negotiable instrument
Cheque
Bill of
exchange
Promissory
note

8. PROMISSORY NOTES
Section 4 of the Act defines, “A promissory note is an
instrument in writing (note being a bank-note 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 person, or to the bearer
of the instruments.”
The person who makes the promissory note and
promises to pay is called the maker. The person to whom the payment is to
be made is called the payee.
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 Illustrations :
A signs instruments in the following terms
(a) " I promise to pay B or order Rs. 500."
(b) I promise to pay B Rs. 500 which shall be due to him.“
(c) " I promise to pay B Rs. 500 seven days after my marriage with C."

9. CHARACTERISTICS OF A
PROMISSORY NOTE
 It is an Instrument in Writing
 It is a Promise to Pay
 Signed by the Maker
 Other Formalities
 Definite and Unconditional Promise
 Promise to Pay Money Only
 Maker must be a Certain Person
 Payee must be Certain
 Sum Payable must be Certain
 It may be Payable on Demand or After a Definite Period of
Time
 It cannot be Made Payable to Bearer on Demand
9

10. PARTIES TO A PROMISSORY NOTE
 Maker:
Maker is the person who promises to pay the amount stated in the
note.
 Payee:
Payee is the person to whom the amount of the note is payable.
 Holder:
He is either the payee or the person to whom the note may have been
endorsed.
10

11. SPECIMEN OF PROMISSORY NOTE
Rs. 10,000 Delhi
Aug 10, 2017
Three months after date, I promise to pay Shri Akrit (Payee) or to his order the sum of
Rupees
Ten Thousand for value received.
To,
Shri Akrit,
C-20, Janak
Puri,
Delhi.
(Maker)
Stamp
Sd/-
Shivam
11

12. www.aftemplates.com
Promissory Note
Amount: _________________________________
Place: _________________________________________
I Mr. ABC, make commitment to pay XYZ Company, the Sum of $ ________________________.
Repayment is to be made in the form of 200 equal payments at the interest rate of 7.2% of $
_____________ payable on the 1oth of each month, beginning 10/01/2011 until the total
amount of debt is paid.
IN WITNESS WHEREOF, I set my hand under seal this ____ [the day] of __________________
[month], 20___ and I acknowledge receipt of a completed copy of this instrument.
_____________________
Sign: [Signature of borrower]
________________________________
Name & Address: [Party name]
Notary Public - SEAL
My Commission Expire
______/______/______
Date: _________________________
Promissory Note Template
Promissory Note
Amount: _________________________________
Place: _________________________________________
I Mr. ABC, make commitment to pay XYZ Company, the Sum of $ ________________________.
Repayment is to be made in the form of 200 equal payments at the interest rate of 7.2% of $
_____________ payable on the 1oth of each month, beginning 10/01/2011 until the total
amount of debt is paid.
IN WITNESS WHEREOF, I set my hand under seal this ____ [the day] of __________________
[month], 20___ and I acknowledge receipt of a completed copy of this instrument.
_____________________
Sign: [Signature of borrower]
________________________________
Name & Address: [Party name]
Notary Public - SEAL
My Commission Expire
______/______/______
Date: _________________________
Promissory Note Template

13. CHEQUE
According to Section 6 of the act, A cheque is “a bill of
exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand”. A cheque is also, therefore, a
bill of exchange with two additional qualification:
◦ It is always drawn on a specified banker.
◦ It is always payable on demand.
Special Benefits of Bill of Exchange:
 A bill of exchange is a double secured instrument.
 In case of immediate requirement, a Bill may be discounted with
a bank.
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14. ESSENTIAL ELEMENTS OF A CHEQUE
 In writing
 Express Order to Pay
 Definite and Unconditional Order
 Signed by the Drawer
 Order to Pay Certain Sum
 Order to Pay Money Only
 Certain Three Parties
 Drawn upon a Specified Banker
 Payable on Demand
14

15. PARTIES TO A CHEQUE
 Drawer:
Drawer is the person who draws the cheque.
 Drawee/Banker:
Drawee is the drawer’s banker on whom the cheque
has been drawn.
 Payee:
Payee is the person who is entitled to receive the
payment of a cheque.
15

16. SPECIMEN OF CHEQUE
Pay ……………………………………………………………………………………………………………......
……………………………………………………………………………………………………. Or Bearer
Rupees ……………………………………………………………………………………………………………
……………………………………………………………………………………………
Rs.
Kapoorthala Bagh,
Mumbai – 400033
IFSCode:MAHB00003
16
A/c No.
“ΙΙ473792ΙΙ” 000240000 000000 10
Shubham Tyagi
Signature
Please sign above
16
D D M M Y Y Y Y

17. Types of crossing
Types of
crossing
SpecialGeneral

18. Crossing of cheques
 It is a direction given by the customer to the
banker that payment should not be made across
the counter.
 Crossing is effected by drawing two parallel
transverse lines with or without particular
abbreviations.
 A cheque that is not crossed is an open cheque.
 It serves as a measure of safety against theft or
loss of cheques in transit.

19. Types of crossing
 General Special
Addition of two parallel drawing of two
parallel
transverse lines. Is not always
necessary.
Between the lines, the words addition of the
“Not Negotiable”, “A/c Payee” specific name of
the
, “& Co.” may or may not be Banker on the
face of
Written. Cheque.

20. BILL OF EXCHANGE
According to Section 5 of the 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 certain sum of money only
to, or to the order of, a certain person or to the bearer
of the instrument”. It is also called a Draft.
Special Benefits of Bill of Exchange:
 A bill of exchange is a double secured instrument.
 In case of immediate requirement, a Bill may be
discounted with a bank.
20

21. Mechanics of bill financing
sale of goods
drawing of bill & acceptance
submitting release
of bill of bill
Finalization
Of accounts
Making
payment of
bills
Seller/
drawer
Buyer/
drwaee
Banker

22. ESSENTIAL ELEMENTS OF BILL OF
EXCHANGE
 It must be in Writing.
 Order to pay
 Drawee
 Signature of the Drawer
 Unconditional Order
 Parties
 Certainty of Amount
 Payment in Kind is not Valid
 Stamping
 Cannot be made Payable to Bearer on Demand
22

23. PARTIES TO A BILL OF EXCHANGE
 Drawer:
The maker of a bill of exchange is called the drawer.
 Drawee:
The person directed to pay the money by the drawer is called the
drawee.
 Payee:
The person named in the instrument, to whom or to whose order the
money are directed to be paid by the instruments are called the payee.
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24. Types of bills of exchange
Inland
bills Foreign
bills

25. Inland & Foreign bills
 Inland bill:
 It is drawn in India on a person residing in
India, whether payable in or outside India,
or
 It is drawn in India on person residing
outside India but payable in India.
 The following are the inland bills:
 A bill is drawn by a merchant in Delhi on a
merchant in Chennai. It is payable in
Mumbai the bill is an inland bill.
 A bill is drawn by a Delhi merchant on a
person in London but is made payable in

26. Foreign bill
 A bill drawn outside India & made payable
in India.
 A bill drawn outside India on any person
residing outside India.
 A bill drawn in India on a person residing
outside India and made payable outside
India.

27. SPECIMEN OF BILL OF
EXCHANGE

28. SPECIMEN OF BILL OF EXCHANGE
Rs. 10,000
Delhi
April 10, 2017
Three months after date pay to Shivam (Payee) order the sum of Ten Thousand Rupees, for value
received.
To,
Vivek
BC-20, Green Park,
Delhi-110023
Stamp
Sd/- Shivam
In case of need with
Canara Bank, Delhi.
(Drawer)
(Drawer)
Accepted
ViVek
28

29. CLASSIFICATION OF BILL OF
EXCHANGE
 Inland and Foreign Bills [Section 11 and 12]
◦ Inland Bill:
 It is drawn in India on a person residing in India whether payable in
or outside India; or
 It is drawn in India on a person residing outside India but payable in
India.
◦ Foreign Bill:
 A bill drawn in India on a person residing outside India and made
payable outside India.
 Drawn upon a person who is the resident of a foreign country.
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30. CLASSIFICATION OF BILL OF
EXCHANGE
 Time and Demand Bills:
◦ Time Bill: A bill payable after a fixed time is termed as a time bill. A
bill payable “after date” is a time bill.
◦ Demand Bill: A bill payable at sight or on demand is termed as a
demand bill.
 Trade and Accommodation Bills:
◦ Trade Bill: A bill drawn and accepted for a genuine trade transaction
is termed as “trade bill”.
◦ Accommodation Bill: A bill drawn and accepted not for a genuine
trade transaction but only to provide financial help to some party is
termed as an “accommodation bill”.
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31. Basis of
difference
Bills of
exchange
cheques
Person / firm A bill of exchange usually
drawn on some person or
firm.
A cheque is always drawn
on bank.
Acceptance It is essential that a bill of
exchange must be accepted
before its payment can be
claimed.
A cheque does not require
any such acceptance.
Payable on demand The B.O.E may be drawn
payable on demand.
A cheque can only be
drawn payable on demand.
Grace of days Three days are allowed in
case of B.O.E.
In case cheque no grace of
days are allowed.
Notice of dishonour It is necessary in B.O.E. No such notice is required.
Crossing No crossing of bills of
exchange
A cheque may be crossed.
Stamp It must be properly
stamped.
No stamp is required.

32. NEGOTIATION
According to section 14 of the Act, ‘when a
promissory note, bill of exchange or cheque is transferred to any
person so as to constitute that person the holder thereof, the
instrument is said to be negotiated.’ The main purpose and essence
of negotiation is to make the transferee of a promissory note, a bill of
exchange or a cheque the holder there of.
Negotiation thus requires two conditions to be fulfilled, namely:
 There must be a transfer of the instrument to another person; and
 The transfer must be made in such a manner as to constitute the
transferee the holder of the instrument.
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33. MODES OF NEGOTIATION
 Negotiation by delivery (Sec. 47):
Where a promissory note or a bill of exchange or a
cheque is payable to a bearer, it may be negotiated by delivery
thereof. Example: A the holder of a negotiable instrument
payable to bearer, delivers it to B’s agent to keep it for B. The
instrument has been negotiated.
 Negotiation by endorsement and delivery (Sec. 48):
A promissory note, a cheque or a bill of exchange
payable to order can be negotiated only be endorsement and
delivery. Unless the holder signs his endorsement on the
instrument and delivers it, the transferee does not become a
holder. If there are more payees than one, all must endorse it.
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34. ENDORSEMENT [SECTION 15]
The word ‘endorsement’ in its literal sense means,
writing on the back of an instrument. But under the Negotiable
Instruments Act it means, the writing of one’s name on the back of
the instrument or any paper attached to it with the intention of
transferring the rights therein. Thus, endorsement is signing a
negotiable instrument for the purpose of negotiation. The person who
effects an endorsement is called an ‘endorser’, and the person to
whom negotiable instrument is transferred by endorsement is called
the ‘endorsee’.
Who may Endorse / Negotiate [Section 51]:
Every Sole maker, drawer, payee or endorsee, or all
of several joint makers, drawers, payees or endorsees of a
negotiable instrument may endorse and negotiate the same if the
negotiability of such instrument has not been restricted or excluded
as mentioned in Section 50.
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35. ENDORSEMENT
Essentials of a Valid Endorsement:
 It must be on the back or face of instrument or on a slip of paper
annexed thereto.
 It must be signed by the endorser.
 It must be completed by the delivery of the instrument.
 It must be made by the holder of the instrument.
Kinds of Endorsement:
 Blank or General Endorsement
 Full or Special Endorsement
 Partial Endorsement
 Restrictive Endorsement
 Conditional Endorsement
35

36. Holder
 According to sec. 8, Holder of a negotiable
instrument is the person:
 Who is entitled in his own name to the
possession of the instrument, and
 Who has the right to receive, or recover the
amount due thereon from the parties
thereto.
 In case the instrument( note, bill or cheque)
is lost or destroyed, the person who has
entitled in his own name to the possession
of it or to receive or recover the amount due
on it from the parties thereto is the holder of

37. Who can be a Holder?
 Payee- the payee is usually the original holder of an
instrument. He remains holder till he endorses the instrument.
 Endorsee –the person to whom an instrument is endorsed
becomes holder of in place of the endorser. An instrument,
when endorsed and delivered, the endorsee becomes the
holder.
 Bearer – in the case of a bearer instrument, the person to
whom the instrument is delivered becomes the holder. But
every bearer of an instrument cannot become the holder.
 a thief or a finder of a bearer instrument or a
servant possessing an instrument on behalf of his employer
cannot become holder.
 Legal representative or heir- a legal representative or heir of
a deceased person can become holder by operation of law
even though he is not the payee or the bearer or the
endorsee of the instrument.

38. Holder In due course
 Holder in due course is a person who came into
possession of the instrument on payment of
consideration and without knowledge of the fact
that the erstwhile owner had a defective title.
 The holder in due course has a better title than
the holder. There fore, according to sec. 9 of the
Negotiable Instrument Act, holder in due course
mans any person who for consideration became
the possessor of a promissory note, bill of
exchange or cheque if payable to bearer, or the
payee or endorsee thereof, if payable to order
before the amount mentioned in it became
payable, and without having sufficient cause to
believe that any defect existed in the title of the
person from whom he derived his title.[sec. 9].

39. Privileges of a Holder in Due course
 He can sue every prior party to the
negotiable instrument if the instrument
is not duly satisfied.
 When the holder endorses such
instrument further, the new owner has
a good title unless he is party to fraud.
 The burden of proving his title does
not lie upon the holder in due course.

40. Instruments obtain by unlawful
means
 Lost instruments:
 The holder of a lost instrument should give notice
of the loss to all the parties through public
advertisement.
 The finder of the lost instrument is not entitled to
sue thereon in his own name.
 The true owner can recover the instrument from
the finder if it is with him but he has parted with
the instrument and has received payment
thereon and cannot return the instrument to the
owner, he must compensate the owner.
 An acceptor, maker or drawee who makes
payment in due course of a lost instrument gets a
valid discharge for it.

41. Stolen instrument
 The thief does not get any title to the
instrument, but if the instrument is payable to
the bearer and it is negotiated to a holder in
due course; he will get a good title to it not
only against the thief but also against any
party prior to him.
 good title :ownership of real property which
is totally free of claims against it and
therefore can be sold, transferred, or put up
as security (placing a mortgage or deed of
trust on the property). Copyright © 1981-2005
by Gerald N. Hill and Kathleen T. Hill. All
Right reserved.

42. Instruments obtain by fraud
 Valid contracts must be brought about by
the free consent of the parties competent
to contract. Therefore, the person guilty
of fraud not only gets no valid title to the
thing obtained but also liable to
damages.
 Forged instruments:
 Forged instruments in the eyes of law
have no existence whatsoever. There is
a complete absence of title from the very
beginning and a forged signature is
altogether inoperative.

43. Dishonor & discharge of
negotiable instrument
 Dishonor can be done by two ways-
 By non- acceptance
 By non- payment
 Notice of dishonor is mandatory
 Noting of dishonor is also necessary

44. Thank You