INSTITUTE : University School of

Business
DEPARTMENT : Commerce
Bachelor of Commerce
Legal Aspects of Business and CMT-218

THE NEGOTIABLE INSTRUMENT ACT, DISCOVER . LEARN . EMPOWER

1881
 Negotiable
Instrument Act 1881
Course Outcome
CO Title Level
Number

CO-1 The student will be able to demonstrate the acquaintance Understanding

of himself/ herself with Legal Process and negotiable
instruments
CO-2 The student will be able to explain the new and Understanding
contemporary developments in Indian Corporate Law
CO-3 The student will be able to analyse the Understanding
differencebetween the negotiable instruments and also
about the responsibility of the business towards the
society.

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 Kinds of Negotiable Instruments

Promissory Note Bill of Exchange Cheque

(Sec 4) (Sec 5) (Sec 6)

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Bill of Exchange (Sec 5)
• Section 5 of the Act defines Bill of Exchange as, “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 the order of, a
certain person, or the bearer of the instrument.”

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• A Bill of exchange is used when
i. When a creditor sells goods on credit to his debtor or there exists a debt
between them;
ii. The debtor agrees to make payment for goods on future date after the
expiry of the credit period;
iii. The creditor to ensure that the debtor shall pay for the goods;
iv. Draws a bill, which is called as bill of exchange;
v. The creditor draws the bill, so he is called as drawer;
vi. The debtor is known as drawee;
vii. When the bill is drawn, the drawer takes the bill to the drawee and gets his
signature on it;
viii. When the drawee signs the bill, the bill is said to have been accepted;
ix. Once the bill is accepted, the due date is calculated from the date of
acceptance.

Due Date = Date of Acceptance + Time Allowed + 3 Days of Grace 5

x. On the due date (or maturity date), the drawer takes the bill to the drawee and
demands payment, this is called as bill presented for payment.
xi. If the drawee pays on the due date, the bill is cancelled.
xii. If the drawee does not pay on due date, the bill gets dishonoured.

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Essentials of Bill of Exchange
1) Bill of Exchange is a Negotiable Instrument
2) In writing
3) Is an order
• Unlike a promissory note, a bill of exchange is not a promise to
pay but an order whereby the drawer orders the drawee to pay.
4) Is an Unconditional Undertaking
5) Must be signed by the drawer
6) Must be accepted by the drawee
• Unless the bill is accepted by the drawee, it is not a legal
document in the eyes of law.
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7) To pay certain sum
8) To pay money only
9) Payable to order or bearer
10) Parties of a Bill of exchange
• Drawer: the one who draws the bill
• Drawee: The one on whom the bill is drawn. When drawee
accepts the bill, he is called as acceptor.
• Payee: he is the one who is entitled to receive the payment on
due date
i. Generally, the drawer is the payee.
ii. But if the bill has been endorsed, then the party who has the
custody of the bill i.e. endorsee is the payee.

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11) Payable on Demand
12) Payable otherwise than on demand
13) Maturity of a Bill of Exchange

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Cheque (Sec 6)
• According to Sec 6 of Negotiable Instrument Act, 1881, “A Cheque is a bill of
exchange drawn on a specified banker and not expressed to be payable otherwise
than on demand and it includes electronic image of a truncated cheque and a
cheque in the eletronic form.

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Essentials of a Cheque
1. Negotiable Instrument
2. In writing
3. An order
4. Unconditional order
5. To pay a certain sum
6. To pay money only
7. Payable to order or to bearer
8. Parties of a cheque
9. Payable on demand
10. Drawn on a specified bank
11. Maturity of cheque

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 Kinds of Cheque

Uncrossed
Anti- Post-
Bearer Order Cheque Crossed Stale
Dated Dated
Cheque Cheque (Open Cheque Cheque
Cheque Cheque
Cheque)

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1. Bearer Cheque
• When the words "or bearer" appearing on the face of the cheque are not cancelled, the
cheque is called a bearer cheque.
• The bearer cheque is payable to the person specified therein or to any other else who
presents it to the bank for payment.
• However, such cheques are risky, this is because if such cheques are lost, the finder of
the cheque can collect payment from the bank.

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2. Order Cheque
• When the word "bearer" appearing on the face of a cheque is cancelled and when in
its place the word "or order" is written on the face of the cheque, the cheque is called
an order cheque.
• Such a cheque is payable to the person specified therein as the payee, or to any one
else to whom it is endorsed (transferred).

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3. Crossed Cheque
• Crossing of cheque means drawing two parallel lines on the face of the cheque with
or without additional words like "& CO." or "Account Payee" or "Not Negotiable".
• A crossed cheque cannot be encashed at the cash counter of a bank but it can only be
credited to the payee's account.

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4. Uncrossed or Open Cheque
• When a cheque is not crossed, it is known as an "Open Cheque" or an "Uncrossed
Cheque".
• The payment of such a cheque can be obtained at the counter of the bank.
• An open cheque may be a bearer cheque or an order one.

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5. Anti-dated Cheque
• If a cheque bears a date earlier than the date on which it is presented to the bank, it is
called as "anti-dated cheque".
• Such a cheque is valid upto three months from the date of the cheque.

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6. Post-dated Cheque
• If a cheque bears a date which is yet to come (future date) then it is known as post-
dated cheque.
• A post dated cheque cannot be honoured earlier than the date on the cheque.

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7. Stale Cheque
• If a cheque is presented for payment after three months from the date of the cheque it
is called stale cheque.
• A stale cheque is not honoured by the bank.

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THANK YOU