LAW OF NEGOTIABLE

INSTRUMENTS

BY: TARUSHI PANCHOLI IMBA/25012/

SHUBHI KIRTI SAKSENA IMBA/25014

INTRODUCTION
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.

Section 31 of the Reserve Bank of India Act provides that

no person in India other than the Bank or as expressly
authorized by this Act, the Central Government shall draw,
accept, make or issue any bill exchange, hundi,
promissory note or engagement for the payment of money
payable to bearer on demand.

This Section further provides that no one except the RBI

or the Central Government can make or issue a
promissory note expressed to be payable or demand or
after a certain time. Section 32 of the Reserve Bank of
India Act makes issue of such bills or notes punishable.

NEGOTIABLE
INSTRUMENTS

Documents of a certain type, used in commercial

transactions and monetary dealings, are called Negotiable
instruments. Negotiable means transferable by delivery
and instrument means a written document by which a
right is created in favour of some person. Thus, negotiable
instrument means a document transferable by delivery.
Definition:
Negotiable Instruments Act , 1881 states that,
A negotiable instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer.
---Sec. 13(1)

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), it
does not exclude the possibility of adding any other
instrument which satisfies the following two conditions
of negotiability:
1. the instrument should be freely transferable (by
delivery or by endorsement. and delivery) by the
custom of the trade; and
2. the person who obtains it in good faith and for value
should get it free from all defects, and be entitled to
recover the money of the instrument in his own name.

TYPES OF NEGOTIABLE
INSTRUMENTS
TYPES OF
NEGOTIABLE
INSTRUMENTS

RECOGNISED
BY STATUE

BILLS OF
EXCHANGE

CHEQUES

PROMISORY
NOTES

RECOGNISED
BY CUSTOM

HUNDIS

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.

PARTIES TO A CHEQUE

Drawer: Drawer is the person who draws the cheque.

Drawee: Drawee is the drawers banker on whom the
cheque has been drawn.
Payee: Payee is the person who is entitled to receive
the payment of a cheque.
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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

SPECIMEN OF CHEQUE

D D M M Y

Essential Features of Cheque

1.
2.
3.

4.

5.

A cheque must fulfill all the essential requirements of a bill

of exchange.
A cheque may be payable to bearer or to order but in either
case it must be payable on demand.
The banker named must pay it when it is presented for
payment to him at his office during the usual office hours,
provided the cheque is validly drawn and the drawer has
sufficient funds to his credit.
Bills and notes may be written entirely by hand. There is no
legal bar to cheques being handwritten. Usually , banks
provide their customers with printed cheque forms which
are filled up and signed by drawer.
The signature must tally with the specimen signature of
the drawer kept in the bank.

A cheque must be dated. A banker is entitled to refuse to pay

a cheque which is not dated. A cheque becomes due for
payment on the date specified on it.

A cheque drawn with a future date is valid but it is payable on

and after the date specified. Such cheques are called postdated cheques.

A cheque may be presented for payment after due date but if

there is too much delay the bank is entitled to consider the
circumstance suspicious and refuse to honor the cheque. The
period after which a cheque is considered too old or stale
varies according to custom from place to place. It is usually 6
months in Indian cities.

In some circumstances the bank is not bound to pay the

cheques

Types of Cheques
Two Types:
1. Open Cheques: An open cheque is one which is
payable in cash across the counter of the bank
2. Crossed Cheques: A crossed cheque is one which
has two short parallel lines marked across its face. It
can be paid only to another banker.
The advantage of crossing is that it reduces the
danger of unauthorized persons getting possession
of a cheque and cashing it.
A crossed cheque can only be cashed through a
bank of which the payee of the cheque is a customer.

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.

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.
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SPECIMEN OF PROMISSORY NOTE

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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

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Essential Elements of a Promissory Note

1.

The instrument must be in writing.

2.

It must be signed by the maker of it. The signature or mark may

be placed anywhere on the instrument, not necessarily at the
bottoms. It may be at the top or at the back of the instrument.

3.

It must contain a promise to pay. It must be expressed not implied

or inferred. E.g. Mr. Sen I.O.U. Rs. 1000. Here I.O.U. stands for I
owe you. This is only an admission of indebtedness and not a
promise to pay. So its not a promissory note.

4.

The promise to pay must be unconditional. If it is coupled with a

condition , it is not a promissory note.E.g. I promise to pay B
Rs.300 on Ds death provided D leaves me enough to pay this
sum.
Promise to pay at a specified time or at a specified place or
after the occurrence of an event which is certain to occur or
payment after calculating interest at a certain rate

5.
6.

The maker of must be certain and definite.

It must be stamped according to the Indian Stamp Act.

7.

The sum of money to be paid must be certain. E.g. I promise to

pay some money on the occasion of his marriage

8.

The payment must be in the legal tender money of India and certain
quantity of goods or foreign money.

9.

The money must be payable to a definite person or according to his

order i.e. payee is indicated by his official designation.

10.

It must be payable on demand or after a certain definite period of

time.

11.

The Reserve Bank Act prohibits the creation of a promissory note

payable on demand to the bearer of the note, except by the Reserve
Bank or the Government of India.

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.

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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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SPECIMEN OF BILL OF EXCHANGE

20

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

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Bill of Exchange

The maker of a bill of exchange is called the

Drawer. The person who is directed to pay is called
the Drawee. The person who will receive the money
is
called
the
Payee.

When the payee has custody of the bill, he is called

the Holder. It is the holders duty to present the bill
to the drawee for acceptance. The drawee becomes
the Acceptor after signing on the bill.

Sometimes the name of another person is

mentioned as the person who will accept the bill if
the original drawee does not accept it. Such a
person is called the Drawee in case of Need.

Essential Elements of a Bill of

Exchange

1.
2.
3.
4.
5.

6.
7.
8.

A Bill of Exchange to be valid must fulfill the following

requirements:
The instrument must be in writing.
It must be signed by the drawer.
It must contain an order to pay, which is express and
unconditional.
The drawer, drawee and the payee must be certain and definite
individuals.
The amount of money to be paid must be certain.
The payment must be in the legal tender money of India.
The money must be payable to a definite person or according
to his order.
It must be properly stamped.

HUNDIS

A Hundi is a negotiable instrument written in an oriental

language. The term hundi includes all indigenous
negotiable instrument whether they be in the form of notes
or bills.

The word hundi is said to be derived from the Sanskrit

word hundi, which means to collect. They are quite
popular among the Indian merchants from very old days.
They are used to finance trade and commerce and
provide a facile and sound medium of currency and credit.

Hundis are governed by the custom and usage of the

locality in which they are intended to be used and not by
the provision of the Negotiable Instruments Act. In case
there is no customary rule known as to a certain point, the
court may apply the provisions of the Negotiable
Instruments Act. It is also open to the parties to expressly
exclude the applicability of any custom relating to hundis
by agreement.

CONCLUSION
A negotiable instrument is a piece of paper which
entitles a person to a sum of money and which is
transferable from one person to another by mere
delivery or by endorsement and delivery. The
characteristics of a negotiable instrument are easy
negotiability, transferee gets good title, transferee
gets a right to sue in his own name and certain
presumptions which apply to all negotiable
instruments.

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