The Negotiable Instrument Act 1881-2

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Faculty :
Niraj Shah
(CA, CMA, MFC, B.Com.)
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The negotiable instruments

act, 1881
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Sec.13 - What is negotiable instrument?

Negotiable instrument means
A promissory note; or
Bills of Exchange; or
cheque
payable to
either to the order; or
the bearer
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General meaning of N.i

Any instrument
the property in which is acquired by anyone who takes it
Bonafied; and
for a value
the defect in the title of prior party does not affect the validity of
the title of holder in due course.
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General Characteristics of N.i.

Freely transferable
Infinite time transferable
Holder in due course gets title to N.I. even when the title of transferor
is defective
A N.I. may name more than one person jointly and alternatively
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Classification of instruments
Classification of N.I.
Order of the instrument
Payable to particular
person
to the order of the

particular person
Bearer of Instrument
As per RBI Act, 1934, a bill

of exchange or promissory
note can not be made
payable to the bearer.
Instrument payable on
demand
Time instruments
Place of issuance
An instrument in which time

is not specified
An instrument is which time

for payment is specified
Issued in India and

payable in India
An instrument which is
payable on demand
It can be a specific day,

after specified period,
within specified period, on
happening of some certain
event
If not inland instrument

then foreign instrument
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Promissory notes Sec. 4

A promissory note is an instrument
in writing
containing an unconditional undertaking
signed by the maker
to pay a certain sum of money
to certain person or to the order of certain person or to the bearer
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Specimen of promissory note

Essentials
In writing
Express Promise to pay
Definite and
unconditional promise
Signed by maker
Certain sum
for money only
STAMP
Stamped
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Bills of exchange Sec. 5

A bill of exchange is an instrument
in writing
Unconditional order
signed by the maker and acceptor
directing certain person
to pay certain money only to
Studies person or to the bearer of
certain person or to the order of Live
certain
Specimen of Bills of exchange

Essentials
In writing
Express order to pay
Definite and
Signed by maker
Certain sum
for money only
STAMP
Stamped
Can not be made
payable to bearer (RBI)
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Cheque - Sec.6
A cheque is the bills of exchange
drawn on specified banker
not expressed to be payable otherwise than on demand
and includes
electronic form cheque
electronic image of truncated cheque
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Parties involved in cheque

Drawer
Maker
Liability primary and conditional
Drawee
the bank on whom the cheque is
Payee
The person to whom money is to
be paid
He may be drawer himself or any
other person
drawn
he makes payment of cheque
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Specimen of Bills of exchange

Essentials
In writing
Express order to pay
Definite and
15 05 2016
NIRAJ SHAH
One lakh only
100000/-
Signed by maker
Certain sum
for money only
SIGN
to certain person
drawn of specified bank
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Truncated cheque
A simple paper cheque
signed by the ink only
but truncated in electronic format by the clearing house or bank
for transmission
substituting physical movement of the paper cheque
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Electronic cheque
exact mirror image of a paper cheque
generated, written and signed in secure system having security standards
with the use of digital signature
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Difference between cheque and Bills of exchange

Points
Bills of Exchange
Cheque
Drawee
Any person
Only a bank
Liability of
drawer
Primary and conditional until the bill Always primary. Bank is only the
is accepted
custodian of money.
Payable to
bearer on
demand
Can not be made payable to the

bearer
Maturity
At the end of mentioned time frame Payable on demand with in validity

period
Validity
As per the time mentioned in bill

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Can be made payable to bearer
Valid for 3 months from the date

of issue

Points
Bills of Exchange
Cheque
Sets
Can be drawn in sets
Can not be drawn in sets
Acceptance
Acceptance of the bill is required No acceptance is required in case

of cheque
Days of grace
Three days
Discharge on non
presentment
If a bill is not presented for

Even if the cheque is not
payment the drawer is discharged presented for payment, the
from the liability
drawer is not discharged from
the liability.
If the bill is dishonoured, it may A can not be noted or protested
be noted or protested
in case of dishounour
Noting and
Protest
Payable immediately in demand. No

grace is given.
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Points
Bills of Exchange
Cheque
Criminal Liability
No criminal liability in case of

dishounour of bill
There will a criminal liability under

section 138 in case of dishonour
of cheque
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Capacity of the person to be a party to the N.i.

A person shall be liable on the negotiable instrument only if he is capable
of contracting according to the law to which he is subject.
A minor may issue, endorse deliver and negotiate any negotiable
instrument.
All the parties shall be bound on such negotiable instrument.
However, minor shall not be bound by such instrument.
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Maturity of the negotiable instruments

Maturity means a situation or a day on which negotiable instrument falls
due for payment.
A negotiable instrument which is payable otherwise then on demand is
entitled for 3 days of grace.
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How to calculate date of maturity

Case
Date of Maturity
N.I. payable on specified day
Specified day + 3 days
N.I. payable on a stated number of days

after date
Date of which N.I. is drawn + stated number

of days + 3 days

after sight
Date of which N.I. is signed + stated number

of days + 3 days

after happening of certain event
Date on which such event happens + stated

number of days + 3 days
In all above cases days can also be replaced by months and 4 new cases will emerge.
If the date of maturity is public holiday Immediately preceding business day
If the date of maturity is sudden holiday Immediately succeeding business day
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Negotiable instrument made without consideration

A negotiable instrument
made, drawn, accepted, endorse or transferred ,
without consideration,
or for a consideration which fails,
creates no obligation of payment
between the parties to the transaction
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Remember that
holder in due course
to whom the
negotiable
instrument was
endorse for value,
can recover amount
from any prior
parties to the chain
of the transfer of
N.I.
Partial absence or failure of money consideration

When the consideration,
for which a person signed a promissory note, bills of exchange or cheque
consisted of money and
was originally absent in part or has subsequently failed in part,
the sum which a holder standing in immediate relation with such signer is
entitle to receive from him
is proportionately reduced
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Partial absence or failure of money consideration

Example:
Mr. Lalu draws a bill on Mrs. Shalu for 5000 payable to the order of Mr. Lalu.
Mrs. Shalu accepted a bill and subsequently dishonours it by non payment.
Mr. Lalu sues Mrs. Shalu.
Mrs. Shalu proves that the bill was accepted for only 3000 against value received
and the balance of 2000 was only for accommodation.
Here in this case, Mr. Lalu can only recover 3000 form Mrs. Shalu.
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Inchoate instrument
When a person only signs a paper.
The paper must be stamped.
The paper is either wholly or partially blank.
A person signing such paper delivers it to another person.
The holder gets prima facie authority to make or complete upon it a negotiable
instrument.
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Inchoate instrument
When a person only signs a paper.
The paper must be stamped.
The paper is either wholly or partially blank.
A person signing such paper delivers it to another person.
The holder gets prima facie authority to make or complete upon it a negotiable
instrument.
Incase of inchoate instrument, HDC can not recover the amount exceeding the amount
covered by stamp.
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Negotiation method
can be negotiated by way
of delivery to the first
party
By delivery
delivery must be voluntary
Negotiation means
transfer of negotiable
instrument
endorsement
and delivery
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an order instrument can

only be transferred by
endorsement and delivery
If the endorsement is not
baked by delivery than it
does not amount to valid
negotiation
Meaning of endorsement
Endorsement means
in Writing
signing on the face or a back of the N.I or

a slip of paper attached with the N.I.
Valid
Endorsement
by the holder of the N.I.

for the purpose of negotiating such N.I.
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must be
signed
by the
holder only
Kinds of endorsement
Types of Endorsement
General Endorsement in
blank
without
writing the
name of
the
endorsee
order
instrument
is
converted
in to
bearer
instrument
Special Endorsement
signaling in
the name
of specific
person
adding
direction
to pay the
amount to
a specified
person
Restrictive
Endorsemen
t
An
endorsemen
t which
restrict
the right
of further
negotiation
Partial Endorsement
which
purports
to transfer
only the
part of
the amount
covered by
the
instrument
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not valid in
India
Conditional Endorsement
Sans
recourse :
Endorser
relieves
himself
from the
liability of
all
subsequent
endorsees
Facultative:
Endorser
waives any
of his
rights
Contingent:
Endorser
makes his
liability
dependent
on
happening
of some
event
Negotiation Back
If an endorser
Effect:
after endorsing N.I.
The holder can not enforce the payment against
again become its holder,

it is called negotiation back.
the person to whom he was previously liable.

He can enforce payment against all the parties to
whom he was not previously liable.
If holder has done sans recourse endorsement, he
can enforce payment against all the intermediaries
and prior parties.
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Difference between Negotiation and assignment

Points
Negotiation
Assignment
Act
Negotiable Instrument Act, 1881
Transfer of Property Act
Meaning
Transfer of negotiable instrument

to other person to constitute him
the holder of the instrument
Scope
Method
Transfer of only right to receive

the payment of a debt by one
person to other by way of written
document
Negotiation can be done in case of Assignment can be done for any
negotiable instruments only
kind of rights
Bearer instrument can be
Assignment is valid only if it is
negotiated merely by delivery and
written and signed by the assignor
order instrument by endorsement
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and delivery
Difference between Negotiation and assignment

Points
Negotiation
Assignment
Notice
Notice of negotiation is not required

to be given to any party
Consideration It is presumed that every N.I. was
negotiated for consideration
Notice of assignment must be given

by the assignee to the debtor
There is no such presumption in case
of assignment
Burden of
proof
The issuer party has to prove that

the N.I. was issued without any
consideration
The assignee has to prove that the

assignment was done for some
consideration
Title
The transferee of the N.I gets a

title better than that of transferor
The assignee does not acquire a title

better than that of the assignor
Stamp Duty
No need to pay for stamp duty
Stamp duty must be paid
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Holder and holder in due course

Holder:
He must be entitled to the possession the N.I. in his own name.
He must be entitled to receive or recover the amount due on N.I. from the issuer.
Holder in due course:

If bearer N.I. he must be the possessor
If order N.I he must be the payee or endorsee of the N.I.
He must have become holder of N.I. for consideration
He must have obtained possession of N.I. before maturity
He must have obtained possession of N.I. in good faith and without any negligence.
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Privileges of holder in due course

Every prior party to N.I. is liable to HDC..
A holder who derives title from HDC has the same right as that HDC.
No prior party can set defense that the N.I. was drawn, made or endorsed by him
without any consideration.
No prior party can set defense that the N.I. was lost or was obtained from him by
an offence or fraud or for an unlawful consideration.
The HDC gets valid title to the N.I. even though the title of transferor was
defective.
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Privileges of holder in due course

No prior party can allege that the N.I. was delivered conditionally or for a special
purpose only.
HDC can claim full amount of N.I. (not exceeding the amount covered by stamp)
even such amount is in excess of the amount authorized by the person delivering an
inchoate N.I.
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Difference between Holder and HDC
Points
Holder
Holder in due course
Consideration A person become holder even if he

gets N.I without any consideration
Before
A person becomes holder even if he
maturity
obtains N.I. after the maturity of
the N.I.
Right to Sue The holder has no right to sue all
prior parties
A person become HDC if he obtains

N.I. for valid consideration only
A person becomes HDC if he obtains
N.I. before its maturity
Good faith
HDC must obtain negotiable

instrument in good faith
A holder needs not the accept the

N.I. in good faith.
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HDC has a right to sue all the prior

parties
Crossing of cheque
Meaning and purpose of crossing of cheque:
It means an instruction given by the drawer of the cheque to the bank
that the cheque shall not be paid on the counter of the bank
but it will be paid who present it through banker.
Crossing makes cheque safe as it becomes possible to trace the person to whom the payment has been made.
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Types of Crossing
General Crossing
Special Crossing
Not Negotiable
Crossing
Two parallel transverse

line
The cheque must

contain the name of
the banker
It can be made only
once
The cheque should

contain the word Not
Negotiable
The cheque must be
crossd generally or
specially
The cheque must be

paid to the banker only.
Cheque must be paid to

the bank whose name is
mentioned on the
cheque
The cheque can be

transferred but the
transferee will not have
a good title better than
that of transferor.
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A/C payee Crossing

Restrictive
Crossing
The cheque must
contain the word A/c
payee or A/C payee
only
The cheque must be
genrally or specially
crossed
The cheque does not
remain negotiable
anymore.
Protection to the cheque paying banker
Cheque
payable to
order
Payment is made in
due course.
The protection is
available not
withstanding the
fact that any
endorsement was
forgery.
Bearer
Cheque
Payment is made in
due course to the
bearer.
The protection
shall be available
not with standing
the fact that any
endorsement is
written on cheque.
Generally
Crossed
Cheque
Payment is made in
due course.
The protection is
available if the
payment is made
only to the
banker.
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Specially
crossed
cheque
Payment is made in
due course.
Payment is made
to the banker
whose name was
mentioned on the
cheque.
Forged
Signature
If the signature is
proved to be
forged
No Protection to
the paying banker
shall be allowed.
It is duty of
banker to cheque
genuine ness of
signature.
Protection to the collecting banker

A banker who has
in good faith and without any negligence
received payment for a customer of cheque
crossed generally or specially to himself
shall not in case the title of the cheque proves to be defective
incur any liability to the true owner of the cheque
by reason only having received such payment
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Simply speaking a
collecting bank
will not be liable
to repay the
money to the
drawer of cheque
in case he claims
that the title of
the cheque was
defective.
Refusal by banker to honour a customer cheque

Banker must refuse in following cases.
(1) Stop payment
(7) Defect in the title of holder

(8) Loss of cheque
(9) Irregular endorsement
(2) Garnishee Order
(10) Different signatures
(3) Death of customer
(11) Receipt of application of closure
(4) Insolvency of customer
(12) Outdated cheque
(5) Insanity of customer

(6) Assignment of funds by customer
(13) Post dated cheque

(14) Mutilated or Incomplete cheque
(15) Undated cheque
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Refusal by banker to honour a customer cheque

Banker may refuse in following cases.
(1) Insufficient Fund
(2) Funds not applicable
(3) Presentment at different branch
(4) Presentment after banking hours
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Effect on non-presetment of cheque with in reasonable time

Suppose a drawer drew a cheque when he was having sufficient fund for
payment and the holder failed to present the cheque within reasonable time.
Now the bank failed and the drawer of the cheque had to face actual damages
due to failure of bank.
He will not be liable to the holder of the cheque in above circumstances.
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Liability of the drawee (Bank) of the cheque

If the drawer has sufficient fund
such fund are properly applicable to the payment of cheque
the drawee is duly required to pay the cheque
then the drawee must pay the cheque
If it fails to pay the cheque, he will be liable to the damages caused to the
drawer by him.
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Bouncing or dishonor of cheque Section 138

Points
Holder
Debt
Cheque was issued to discharge legally enforceable

debts (Presumption in favour of the holder)
Insufficiency of funds
Reasaon for dishonour
Presentment of cheque by the holder Within 3 months from the date of cheque or
within period of validity
Notice and demand for money by the With in 30 days from the date of information of
holder from the drawer
dishounour received from the bank
Default by the drawer to pay the
Within 15 days from the date of notice given by
money of cheque
the drawee
Complaint by the holder to the court With in 1 month after the failure of drawer to pay
for the amount of cheque
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Punishment for Bouncing or dishonor of cheque

Imprisonment for Maximum period of 2
Fine up to maximum 2
years; or
times amount of cheque; or
Both
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Material alteration to the negotiable instrument

Meaning:
If an alteration done on N.I.

Changes character of that N.I.; or
changes rights
and liabilities of any of the parties of the N.I.
then that kind of alteration is called material alteration

Effect of Material alteration : All the parties not consenting to the alteration
are discharged.
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Essential elements of acceptance of bills of exchange

If a drawar makes a bill and drawee signs it and deliver it back to the drawer, then
that is called valid acceptance of the bill.
So from the above we can list out essential elements
In writing, signed by the acceptor, Delievery
Acceptance can be general or qualified acceptance.
Qualified acceptance means acceptance on the base of some condition or subject to
happening of certain event.
The maker may agree to the qualified acceptance or he may object to it.
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Dishonour by non-acceptance
Meaning: when the bill was presented to the drawee for acceptance and the bill is not acepted.
Cases:
when a bill is not accepted within 48 hours
where the drawee is a fictitious person
when the drawee can not be found after reasonable search
when the drawee is incompetent to the contract
where the drawee gives qualified acceptance and the drawer does not agree to it
Effect:
The holder can sue all prior parties without waiting for the maturity of the bill.
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If a drawer signs the bill in the fictitious name

Even if the drawer signs the bill in the fictitious name,
drawee of the bill has to pay for the liability to HDC
if the sign of the drawer at the time of drawing of bill
and at the time of endorsing the bill in favour of HDC are SAME.
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Drawee in case of a need

The name of any person may be given in a bill as drawee in case of need.
His liability arises on the bill only when the bill is not accepted by the drawee
named in the bill.
The bill is not dishonoured until it has been dishonoured by the drawee in case of
need.
If drawee in case of a need has paid the money to the drawer, he can revocer
that amount from original drawee.
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Acceptance for honour

The person who accepts the bill of any other person for honour is
called as an acceptor for honour.
Conditions for acceptance for honour.
The acceptance is given for the honour of any party liable under
the bill
by any person who is already not liable under the bill
with the consent of the holder of the bill.
The acceptance must be made in writing on the bill.
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The acceptor for

honour has a
right to recover
the amount paid
on bill form the
original drawee
and all prior
parties to the bill.
Payment for honour

A person who pays a bill of any other person for honour is called as
payer for the honour.
Conditions for payer for the honour
The bill must have been noted for non payment.
Payment for honour is made for a person already liable under the bill
by any person whether liable or not liable under the bill
with the consent of the holder of the bill
The payment must be noted by the notary public.
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# The payer for

the honour is
entitled to all the
rights of a holder.
# He can recover
all the sum paid by
him from the
original drawee of
the bill and all
prior parties.
Dishonour of non payment

# When the cheque
is stopped for
payment by the
drawer
# Party entitled to
notice is not found
after due search
# notice of
dishonor is not
required to be
given
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Notice and protesting

Noting means recording the fact of dishonor of negotiable
instrument on the negotiable instrument.
Steps of Noting:
The dishonoured bill is handed over to notary public.
Notary public presents again for its payment.
If the drawee refuses to accept or pay for the bill, the
notary public records the fact of dishonor of the bill.
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# It is not
mandatory to get
the fact of the
dishonor of the
bill noted.
# A certificate
issued by the
notary public
stating the fact
of dishonor is
called protest.
Payment in due
course
Discharge of
Negotiable
Instrument
When the party liable to

N.I. pays amount due on
N.I.
Fact of payment must be

noted on N.I.
Release
Where the holder releases or renounces his right against

the party
Negotiation
Back
When the paty liable to N.I. becomes the holder of it.
Operation of
the law
A N.I is discharged when it becomes time barred
Cancellations
When the holder cancels

the name of the drawee or
other party liable
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With intent to discharge

him
Discharge of party
Payment
When the party liable makes payment, he and all subsequent parties
are discharged.
Cancellations
Where the holder cancels the name of the party liable to N.I.
(other than the party primarily liable), such party and
subsequent parties are discharged.
Release
Where the holder realeses any party, (other than the party
primarily liable), such party and all subsequent parties are
discharged.
Negotiation
back
When a party already liable to N.I. becomes the holder of same

N.I, he and all intermediary parties are discharged.
Qualified
Acceptance
Where the holder agrees to the qualified acceptance, parties not

consenting to it stands discharged.
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The Negotiable Instrument Act 1881-2

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Live Studies for Commerce

LIVE STUDIES FOR COMMERCE

Live Studies for Commerce

A Live Studies for Commerce - Online Presentation

Live Studies for Commerce

LIVE STUDIES FOR COMMERCE

Live Studies for Commerce

The negotiable instruments

LIVE STUDIES FOR COMMERCE

Live Studies for Commerce

Sec.13 - What is negotiable instrument?

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General meaning of N.i

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General Characteristics of N.i.

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Order of the instrument

to the order of the

As per RBI Act, 1934, a bill

An instrument in which time

An instrument is which time

Issued in India and

It can be a specific day,

If not inland instrument

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Promissory notes Sec. 4

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Specimen of promissory note

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Bills of exchange Sec. 5

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Specimen of Bills of exchange

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Parties involved in cheque

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Specimen of Bills of exchange

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Difference between cheque and Bills of exchange

Can not be made payable to the

At the end of mentioned time frame Payable on demand with in validity

As per the time mentioned in bill

Can be made payable to bearer

Valid for 3 months from the date

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Difference between cheque and Bills of exchange

Can be drawn in sets

Can not be drawn in sets

Acceptance of the bill is required No acceptance is required in case

If a bill is not presented for

Payable immediately in demand. No

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Difference between cheque and Bills of exchange

No criminal liability in case of

There will a criminal liability under

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Capacity of the person to be a party to the N.i.

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Maturity of the negotiable instruments

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