Negotiable Instruments Act, 1881

Definition:
The word negotiable means ‘transferable by delivery,’ and the word instrument means
‘a written document by which a right is created in favour of some person.’

Or

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.

Types of Negotiable Instruments:

1. 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.”

Parties:

a) Maker: Person who makes the PN and promise to pay.

b) Payee: Person to whom payment is to be made ‫۔‬
c) Holder: holder may be the payee or someone to whom PN is endorsed.
d) Endorser: the person who endorse the PN to another person.
e) Endorsee: the person to whose favor the note is endorsed.

2. Bill of Exchange:
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.”

Parties: Same as Promissory Note

Classification of BOE:

a. Time Bill: Bill payable after fixed time

b. Demand Bill: Bill payable at sight or on demand
 c. Inland Bill: bill drawn in country on person residing within country whether payable in
or outside country.
d. Foreign Bill: Bill drawn in country on a person residing outside country and made
payable outside country.

3. Cheque
A cheque is a bill of exchange drawn on a specified banker and expressed to be payable otherwise than
on demand.

Parties:

a) Drawer: Person who makes the Cheque.

b) Drawee: Person who directed to pay.
c) Payee: Person to whom the payment is to be made.

Types of cheque:

a) Bearer Cheques: if a drawer orders the bank to pay a stated sum of money to the bearer
called bearer cheque.
b) Order cheques: if a cheque is to the order of a person in whose favour the cheque is
drawn called order cheque.
c) Crossed Cheque: if a cheque is crossed by drawing two parallel lines across the face of
the cheque, with or without the words and Co or A/C payee only called crossed cheque.
 The drawing up of two simple parallel lines on the face of the cheque at the top
left corner with or without words called General crossing.
 A cheque is deemed to be crossed especially when it bears across its face the
name of the banker either with or without words called Special Crossing.

Negotiation:
An instrument is said to be negotiated, When a promissory note, BOE and cheque is transferred to any
person so as to constitute that person the holder of the instrument.

Dishonor:
A negotiable instrument is said to be dishonoured by non-payment when the maker, accepter or
drawee, as the case may be makes default in payment upon being duly required to pay the same.