Chapter 9: THE NEGOTIABLE INTRUMNETS ACT: HIGHLIGHTS

 A negotiable instrument is a document, guaranteeing the

payment of a specific amount of money, either on
demand, or at a set time.
 The law regulating a negotiable instrument is contained
in The Negotiable Instruments Act, 1881.
 Though the Act was enacted with an object to define and
amend the then existing law relating to promissory notes,
bills of exchange and cheques, yet other instruments
which satisfy the conditions of negotiability by usage or
custom of trade such as, hundi, share warrant, bearer
debentures, etc., also come under its purview.
NATURE AND KINDS
OF NEGOTIABLE
INSTRUMENTS

The notable feature of a negotiable instrument is that it is freely

passable from one person to another wherein the transferee can
get a defect free title. Three primary classes of negotiable
instruments are: promissory notes, bills of exchange, and cheques
(order or bearer ones).
Learning Objectives

Negotiable Instruments: Meaning, Definition, Characteristics

Kinds of Negotiable Instruments: classification, kinds

Promissory Notes, Bills of Exchange, Cheques, Hundi

Crossing of Cheques

Payment-in-due-course

Maturity of Negotiable Instruments

Interest on Negotiable Instruments

 NEGOTIABLE INSTRUMENTS: MEANING AND DEFINITION  

A negotiable instrument is essentially an instrument of credit

readily convertible into money and easily carried from one
hand to another. The word negotiable means ‘passable by
delivery’, and instrument means ‘a written document which,
creates a right in favour of some person.’ Thus, the expression
‘negotiable instrument’ literally implies a written document
transferable by delivery from one person to another. It is
transferable with a simple procedure requiring a signature and
delivery (in case of order instruments) or just delivery (in case
of bearer instruments). The law endorses such a way of
transfer of a negotiable instrument and protects it.
Contd.
….NEGOTIABLE INSTRUMENTS: MEANING AND DEFINITION  

The Negotiable Instruments Act, however, has not

defined the term ‘negotiable instrument’ as such, but
Section 13 gives us an idea about it. Accordingly, a
negotiable instrument means a promissory note, bill
of exchange or cheque payable either to order or to
bearer.
A major drawback of the Section 13 definition is that it
hardly defines a negotiable instrument. It does not
explain any of its salient features; rather it provides an
idea of the types of negotiable instruments. Contd.
….NEGOTIABLE INSTRUMENTS: MEANING AND DEFINITION  

‘A negotiable instrument is one, the property in which is acquired by

any one who takes it bona fide and for the value notwithstanding
any defect of title in the person from whom he took it.’
(Justice K.C. Wills -The Law of Negotiable Securities)
Thus, the real test of a negotiable instrument is that transferee of a
negotiable instrument gets the better title than that of transferor
provided that he (transferee) acquires it in good faith and for
valuable consideration.
X steals a bearer cheque from the drawer of Y and transfers it to Z
who takes it for value and in good faith. In this case title of the
transferee (Z) will be free from defect though the title of the
transferor (i.e., X) is defective as the cheque is a stolen one.
 Salient Features of A Negotiable Instrument 

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 …..Salient Features of A Negotiable Instrument 

1.Freely transferable. Hassle free transferability is the indispensable feature of a negotiable

instrument. Negotiable Instruments are moveable from one person to another without
any legal or documentary procedure. The property in a negotiable instrument passes by
mere delivery if the instrument is payable to bearer and by endorsement and delivery if it
is payable to order.
2.Defect free title to the transferee . The real test of a negotiable instrument is whether the
transferee gets the instrument free of all defects. The general rule is that a person cannot
transfer better title to property that s/he himself/herself does not have. For example, if a
person steals a car and sells the same, the buyer does not get any legal title to the car, as
the transferor himself had no title to the car. The real owner of car can anytime obtain
possession from the buyer, even if the buyer had purchased the car in good faith and even
if he had no idea that the seller had no title to the car. However, if a person acquires a
negotiable instrument in good faith and without knowledge of defect in title of the
transferor, the transferee can enjoy better title to the instrument, even if the title of
transferor was defective. Thus, a negotiable instrument constitutes an exception to the
general rule of the law of transfer of title that ‘nemo dat quad non habet’ – no one can
transfer a better title than that he himself has.
 …..Salient Features of A Negotiable Instrument 
3. Recovery . The holder-in-due-course is presumed to be the owner of the property contained in the negotiable
instrument and is entitled to sue the instrument in his own name (in case of dishonour) for the recovery of the
amount. Also, he need not give notice to the debtor of the fact that he has become holder.
4. No ceiling on number of transfers. There is no definite upper limit on the number of transfers in case of a
negotiable instrument. It can be transferred any number of times till its maturity. But a cheque whether by
order or bearer can be transferred any number of times till it becomes stale i.e., within six months from the
date of its original issue.
5. Payable to order. It should be noted that where the instrument prohibits its transferability or indicates that it
shall not be transferable but remains valid as between the parties thereto, it is not a negotiable instrument, as
it cannot be negotiated further. Thus for an instrument to be negotiable, it should be made payable to order.
The various forms in which an instrument may be made payable to order are as follows.
• Pay Ram
• Pay Ram or Order
• Pay to the Order of A
• Pay Ram and Shyam, and.
• Pay Ram or Shyam etc
A promissory note, bill of exchange, or cheque payable to order, which is expressed to be so payable, or which is
expressed to be payable to a particular person and does not contain words prohibiting transfer or indicating
that it shall not be transferable, are all examples of negotiable instruments.  
But a negotiable instrument may contain any words restricting its transferability, expressly or impliedly, e.g.,
‘pay to Ram only’ or ‘pay to Ram and none else’. If it is made so, it will not be treated as ‘payable to order’ and
thereby shall not be a negotiable one.
 …..Salient Features of A Negotiable Instrument 

6.Payable to bearer.  Bearer refers to the person who is in the possession of an instrument;
therefore ‘payable to bearer’ means payable to any person who possesses it. A promissory
note, bill of exchange, or cheque is payable to bearer which is expressed to be so payable, or on
which the only or last endorsement is an endorsement in blank.  The most common forms of a
bearer instrument are:
• ‘Pay Ram or bearer’
• ‘Pay Ram, Shyam or bearer’
• ‘Pay bearer’
In all the above cases the sum of money contained in a negotiable instrument would be payable
to the bearer. It should also be noted that if an instrument is originally made ‘payable to order’,
it may become ‘payable to bearer’ if it is endorsed in blank by the payee. For example a cheque
is made ‘payable to Kumar’. Kumar endorses it merely by signing on the back (without making it
payable to Verma or Verma’s order) and delivers it to Verma with a view to making it
negotiable. The cheque then becomes a bearer instrument in the hands of Verma.
7.Payment . A negotiable instrument may be made payable to two or more payees jointly or it
may be made payable in the alternative to one or two, or one or several payees. [Section 13 (2)]
 …..Salient Features of A Negotiable Instrument: Presumptions 
 

Sections 118-19 of the Act lay down following presumptions that generally apply to
negotiable instruments unless the contrary is proved:
1. Consideration  It is presumed that every negotiable instrument was made,
drawn, accepted, endorsed, negotiated or transferred for negotiation. [S 118 (a)]
2. Date  Every negotiable instrument bearing a date was made or drawn on the due
date [Section 118 (b)]. An instrument could also be post-dated and even be
booked on a public holiday. But a post-dated instrument can be sued upon only
after the expiry of the due date.
3. Time of Acceptance  It is presumed that every accepted bill of exchange was
accepted within a reasonable time after its date and before its maturity. [S 118 (c)]
4. Time of Transfer  It is presumed that every transfer of a negotiable instrument
was made before its maturity. [S 118 (d)] Contd.
 …..Salient Features of A Negotiable Instrument: Presumptions 
 

1. Order of endorsement  It is presumed that the endorsements appearing upon a

negotiable instrument were made in the order in which they appear thereon. [S
118 (e)]
2. Stamp  It is presumed that a negotiable instrument except a cheque (as no
stamp duty is prescribed for cheques under the Indian Stamp Act) was duly
stamped. This proves helpful in case the instrument is destroyed or lost.
3. Holder-in-due-course  It is presumed that the holder of a negotiable instrument
is also a holder-in-due-course unless it is proved that the holder has obtained the
instrument from its lawful owner or from any person in lawful possession
thereof by committing an offence, fraud, or for unlawful consideration. Thus, a
holder-in-due-course is one who has obtained the instrument in good faith and
for value.
4. Proof of Protest  In the event of dishonour of a negotiable instrument, the
holder can file a suit for recovery of the amount contained in instrument but
before doing so s/he should obtain a certificate from a notary about the fact of
dishonour. This certificate is called protest. The court shall, on proof of protest,
presume that the instrument was presented for payment or acceptance and that
it was dishonoured by non-acceptance or non-payment, as the case may be.
 CLASSIFICATION OF NEGOTIABLE INSTRUMENTS 

The negotiable instruments can broadly be classified under the following eight categories:
1. Bearer instrument
2. Order instrument
3. Inland instrument
4. Foreign instrument
5. Time instrument
6. Demand instrument
7. Ambiguous instrument
8. Inchoate instrument
1. Bearer Instrument . A bearer instrument is a negotiable instrument payable to bearer. It is
one (i) which is expressed to be so payable; or (ii) on which the only best endorsement
 is an endorsement in blank.
A bearer instrument can be negotiated by mere delivery. The holder (anyone possessing it)
of a bearer instrument can obtain the payment of the instrument whether or not his name
appears on the instrument. The bearer however may be required to acknowledge the
receipt of money by putting his signature on the book of the instrument. Contd.
 ….CLASSIFICATION OF NEGOTIABLE INSTRUMENTS

Exception  There is an exception to bearer instruments. In the light of Section 31 of the

RBI Act, a promissory note, or bill of exchange cannot be made payable to bearer.
Similarly, a bearer instrument cannot be made into a promissory note or bill of exchange.  
The various forms in which a negotiable instrument can be made payable to bearer are:
• Pay the bearer
• Pay to Ram or bearer
2. Order Instruments . A negotiable instrument is payable to order when
(i) it is expressed to be so payable; or
(ii) is expressed to be payable to a particular person and does not contain words
prohibiting transfer or indicating an intention that it shall not be transferable.
An instrument payable to order can be negotiated by endorsement and delivery. The
various forms by which an instrument can be made payable to order are as follows:
• Pay Ram
• Pay Ram or order
• Pay to the order of Ram Contd.
 ….CLASSIFICATION OF NEGOTIABLE INSTRUMENTS

3.Inland Instruments.  A promissory note, bill of exchange, or cheque drawn or

made in India, and made payable, or drawn upon any person, residing in India
shall be deemed to be an inland instrument. [Section 11]
Since a promissory note has no drawee i.e. it cannot be drawn on any person,
an inland promissory note is one which is made payable in India. Subject to this
exception, an inland instrument is one, which is either:
Drawn and made payable in India, or
Drawn in India upon some persons resident therein, even though it is made
payable in a foreign country.
Examples: 
i) A bill drawn in Mumbai on a merchant in Kolkata made payable in Kolkata or
in USA;
ii) A bill drawn in Delhi on a merchant in USA made payable or accepted
payable in Mumbai. Contd.
 ….CLASSIFICATION OF NEGOTIABLE INSTRUMENTS

4. Foreign Instruments . According to Section 12 a foreign instrument is one, which

is not an inland instrument.
Examples: 
• A bill drawn outside India and made payable outside or inside India;
• ii) A bill drawn in India and made payable outside India and drawn on a person
resident outside India.
5. Time Instrument . An instrument which is payable at sometime in future is
called a Time Instrument. Therefore, a promissory note or a bill of exchange shall
be known as time instrument, if it is payable:
a) After a fixed period; or
b) After sight; or
c) On a specified day; or     
d) On the happening of an event which is certain to happen. Contd.
 ….CLASSIFICATION OF NEGOTIABLE INSTRUMENTS

The expression ‘after sight’ in a promissory note implies that the payment cannot be
demanded on it unless it has been shown to the maker. But in case of a bill of exchange, the
expression ‘after sight’ denotes after acceptance (if accepted), or after noting for non-
acceptance, or after protest for non-acceptance.
Examples: 
3 months after date
7 days after sight
Payable on 2nd Monday of July 2008
Forty days after Diwali
6. Demand Instrument . A promissory note or bill of exchange in which no time for payment
is specified, and a cheque, are payable on demand. Thus, a cheque is always payable on
demand while a promissory note and a bill of exchange in which no time is specified for
payment are payable on demand. Section 21 further provides that if a note or bill bears the
expression ‘at sight’ and ‘on presentation’, it would mean that these instruments are payable
on demand. But it should be noted that the expressions ‘payable at sight’ and ‘payable on
presentation’ are slightly different from ‘payable on demand’. The former must be presented
before payment is demanded on whereas the latter need not be presented for payment.
 ….CLASSIFICATION OF NEGOTIABLE INSTRUMENTS

7. Ambiguous Instrument. An ambiguous instrument is one whose form or terms are such that
can be treated as a bill of exchange or as a promissory note depending on the holder’s choice,
and it shall be treated accordingly. Section 17 states, ‘where an instrument may be
constructed either as a promissory note or bill of exchange, the holder may, at his election,
treat it as either, and the instrument shall hence forth treated accordingly.’ Thus, an
instrument can be taken as ambiguous in the following cases:
Where drawer and drawee are the same person;
Where drawee is a fictitious person;
Where drawee is a person incompetent to enter into a contract.
8. Inchoate Instrument . The term ‘inchoate instrument’ implies an incomplete instrument. A
negotiable instrument duly signed and stamped but left blank or incomplete in some respect
is called an inchoate instrument. According to Section 20, if a person signs an incomplete
instrument and delivers it to another, it provides the holder thereof with prima facie
authority to complete it and if, in executing that authority, the instrument is completed, the
former i.e. signer will be liable on it to a holder as well as holder in due course.
 KINDS OF NEGOTIABLE INSTRUMENTS 

The Negotiable Instruments Act recognizes only three kinds of

instruments i.e., promissory notes, bills of exchange and cheques. The

Act, however does not exclude any other instrument if it entitles a person

to a sum of money and is transferable by delivery and the transferee can

acquire a better title. Accordingly, shares/dividend warrants, bearer

debentures, government bonds payable to bearer, treasury bills, port

trust debentures and instruments written in local languages i.e. hundis

etc., also included in the category of negotiable instruments.

 Promissory Note
A promissory note is an instrument in writing
(not being a bank note or currency note)
containing an unconditional undertaking, signed
by the maker to pay a certain sum of money only
to, or the order of a certain person, or only to
bearer of the instrument. Section 4]
The person making the promise to pay is called
the ‘maker’ and the person who is to receive the
money stated in the note is called the ‘payee.’
 …..Parties to a Promissory Note 

A promissory note, also called pro-note, may have the following parties:
1. Maker  A person who issues or executes the note promising to pay the
amount stated therein is called the maker.
2. Payee  This is the person who is to receive the money stated in the pro-
note.
3. Holder  This is the person who is entitled in his own name to the
possession of a pro-note, and to receive or recover the amount
thereon. S/He may be either the payee or some other person to whom
he may have endorsed the note.
4. Endorser  This is the maker or payee who may endorse an instrument.
5. Endorsee  The ‘endorsee’ is the transferee or the person in whose
favour the pro-note has been endorsed.
 Essentials of a valid promissory note 

Following are the essential characteristics of a promissory note:

1. Must be in writing
2. Must contain an express undertaking to pay
3. The promise or undertaking to pay must be unconditional
4. The promise must be for paying certain sum of money
5. Must be signed by the maker
6. The maker must be a certain person
7. The payee must be certain
8. Payment must be in legal tender money of India
9. Must be properly stamped
10.Must contain number, place and date of signature
 Specimen of Promissory Notes

Specimen 1
Rs. 5000/
New Delhi
2 November 2010
Sixty days after date I promise to pay Mr. X the sum of rupees five thousand only with interest thereon at
12% per annum for value received.
To, Revenue Stamp
Mr. X Revenue Stamp
New Delhi Mr. X (Sd/- on stamp)
 

 
Specimen 2
Rs. 5000/- New Delhi
2 November 2010 Ninety days after date I
promise to pay Mr. Y or order the sum of rupees Five thousand only. Revenue Stamp
  To, Revenue Stamp
Mr. Y
New Delhi Mr. Y (Sd/- on stamp)
 Specimen of Promissory Notes

Specimen 3
Rs. 5000/
New Delhi
2 November 2010
Forty-five days after date I promise to pay Mr. Z or order the sum of rupees five thousand only.
 
To,
Mr. Z Revenue Stamp
New Delhi Mr. X (Sd/- on stamp)
 

 
Specimen 4
Rs. 5000/- New Delhi
2 November 2010
On demand I promise to pay Mr. A or order the sum of rupees five thousand only with interest thereon at 12% per
annum for value received.

  To, Revenue Stamp

Revenue Stamp
Mr. A
New Delhi Mr. X (Sd/- on stamp)
 Bill of Exchange 
A bill of exchange is an instrument in writing containing an unconditional order, signed by the

maker, directing a certain person to pay a sum of money only to, or to the order of a certain

person, or to the bearer of the instrument. It is known as a draft in the US. If the bill of exchange is

drawn on a bank, it is called a bank draft.

Parties to bills of exchange . A bill of exchange may involve the following parties:

1. Drawer This is the person who writes and signs the bill.

2. Drawee This is the person on whom the bill is drawn

3. Acceptor This is the person who accepts the bill. In practice, the drawee is the acceptor but a third

person may accept a bill on behalf of the drawee .

4. Payee This is the person to whom the money stated in the bill is payable. He may be the drawer or any

other person to whom the bill has been endorsed.

5. Holder This is the person who has the possession of the bill. After being drawn s/he may be the

original payee, endorsee and bearer in case of a bearer bill.

 …..Bill of Exchange

6. Endorser The person, either the drawer or holder, who endorses the bill to any one by signing on the
back of it is called an endorser.

7. Endorsee is the person in whose favour the bill is endorsed.

8. Drawee in case of need This is a person who is introduced at the option of the drawer. Any endorser
may insert the name of such person, and the effect of it is that a resort may be had to him in case the
bill is dishonoured for non-acceptance or non-payment or in any other need .

9. Acceptor for honour The person who may become a party to a bill as acceptor voluntarily in the event
of the refusal by original drawee to accept the bill if demanded by the notary. The acceptor for honour
offers to accept the bill supra protest  with a view to safeguard the honour or prestige of the original
drawer or any other endorser, as the case may be .

Usually there are three parties to a bill of exchange – drawer, drawee and payee. It is also not necessary
that three separate persons should answer to the description of drawer, drawee and payee. Depending
upon the situation one person may fill any two of three positions. When a bill is drawn as ‘pay to me or my
order’, drawer and drawee may be the same person. Similarly, when a principal draws a bill on his agent or
upon himself, drawee and payee may be the same person .
 Specimen of a Bill of Exchange

Rs. 5000/-
New Delhi
1st April 2010
Sixty days after date pay ‘B’ or order the sum of rupees five thousand
only for value received.
To,
C
Stamp
Jamia Nagar,
New Delhi-110025 Accepted Sd/- C Mr. X (Sd/- on stamp)
 Essentials of a Bill of Exchange
The definition of a bill of exchange is very close to that of a promissory note. Therefore bills
of exchange have more or less the same essential characteristics as a promissory note.
Following are the essential elements of a bill of exchange:
1. It must be in writing
2. It must contain an express order directing a certain person to pay
3. The order to pay must be unconditional
4. There are parties to a bill of exchange viz., drawer, drawee, and payee
5. It must be signed by the drawer
6. The drawer must be a certain person
7. The drawee must be certain
8. The payee must be certain
9. The sum payable must be certain
10.The order must be pay money only
11.A bill of exchange can be drawn payable to bearer but cannot originally be drawn payable
to bearer on demand
12.It must be duly stamped according to the Indian Stamp Act
13.Other formalities like, date, place and the words ‘For value received’ etc. are usually found
in a bill of exchange though they are not necessary in law.
 Distinction between a Promissory Note and a Bill of Exchange  

1. Number of Parties  A promissory note is a two-party instrument with a maker and

the payee, both being distinct and different persons. In a bill of exchange there are
three parties- drawer, drawee and payee. It is possible that any two out of three
positions may be filled up by the same person i.e., drawer and drawee may be the
same person, drawee and payee may be the same person and drawer and payee may
be the same person.
2. Promise and Order  A promissory note contains an unconditional undertaking to pay
the drawee  whereas a bill contains an unconditional order to pay.
3. Maker as a Payee  In case of a promissory note the maker cannot be the payee. That
is a pro-note cannot be made payable to the maker. But in a bill of exchange the
drawee and the payee may be one and the same person when a bill is drawn as ‘pay
to me or my order.’
4. Nature of Liability  The liability of the maker of a pro-note is primary and absolute
since the maker himself promises to pay. But the liability of the drawer of a bill is
secondary and conditional. He becomes liable to pay only when the drawee or
acceptor refuses to honour the bill or fails to pay.
5. Acceptance  A pro-note does not require any acceptance before it is presented for
payments as it is payable by a person who makes it. A bill of exchange on the other
hand generally requires acceptance of the drawee before it is presented for payment
since it is payable by the other person directed by the drawer. The acceptance,
however, may be conditional. Contd.
 …Distinction between a Promissory Note and a Bill of Exchange 

6. Maker’s Position  In a pro-note, the maker stands in immediate relationship with the payee,
but the drawer of a bill stands in immediate relation with the acceptor and not the payee.
7. Payable to Bearer  A pro-note cannot be made payable to bearer, even if it is made payable
otherwise than on demand. A bill can be made payable to bearer provided it is not made
payable to bearer on demand.
8. Notice of Dishonour  In case of dishonour of a pro-note, no notice (of dishonour) needs to be
given to maker. But when a bill is dishonoured, due notice must be given by the holder to all
the parties who are liable under the bill, particularly the drawer and the immediate
endorsee. If notice of dishonour is not given, such parties will not be liable to pay.
9. Protest  No protest is necessary in case of a promissory note. But foreign bills must be
protested for dishonour if the law of the land where they are drawn so requires. The term
‘protest’ refers to a formal certificate of dishonour issued by the Notary Public to the holder
of a bill in question.
10. Exemption  The provisions related to presentment for acceptance, acceptance supra
protest , drawing of bills-in-sets, especially foreign bills do not apply in case of promissory
notes. All these provisions are applicable to a bill of exchange.
 Forms of Bills of Exchange 
The various forms of bill of exchange can be classified as follows:
1. Inland bill
2. Foreign bill
3. Trade bill
4. Accommodation bill
5. Documentary bill
6. Clean bill
7. Fictitious bill
8. Bill-in-sets
9. Escrow
10.Bank draft
1. Inland bill  A bill of exchange is an inland bill if it is (i) drawn or made payable in India even though
it has been drawn on a foreign resident or (ii) drawn in India upon any person who is a resident in
India even though it is made payable in a foreign country. Thus, to be an inland instrument, it must
satisfy either of the following two conditions.
• The instrument must have been drawn or made payable in India, or
• The drawee must be in India.
A bill drawn in India and payable in India but drawn upon a person in Canada is an inland bill.
Similarly a bill drawn in India made payable in Canada upon a person in in India is also an inland bill.
2.Foreign bills  Bills, which are not inland bills, are deemed to be foreign bills. Normally foreign bills
are drawn in sets of three copies. Contd.
 …..Forms of Bills of Exchange 
3. Trade bill  When a bill is drawn, accepted or endorsed for a genuine trade transaction, it is a trade
bill. A trader usually makes use of a trade bill when he sells good on credit. A trade bill is invariably
backed by consideration and based on a genuine trade transaction.
A sells goods worth Rs 4,000 to B on credit and gives him 60 days to pay the price. A owes the
same amount of money to C who supplies goods to A. To conclude the transaction, A may draw a
bill on B directing him to pay the money after 60 days of the date of bill to C. A will sign the bill and
present it to B for acceptance If B agrees to obey the order of A he will accept the bill by writing
across its face the word ‘accepted’ and signing his name underneath and then delivering the bill to
the holder. By doing so B, the drawee, now becomes the acceptor of the bill and liable to its
holder. Such a bill is termed as a genuine trade bill.
4. Accommodation bill  An Accommodation bill is one, which is made to provide financial help to
some party. It is a bill in which a person lends or gives his name to oblige a friend or some person
to whom he is known or otherwise. An accommodation bill is drawn, accepted, or endorsed
without consideration. The party lending his name to oblige the other party is known as the
accommodating party and the party so obliged is called the accommodated party.
A, who is need of Rs 10,000, approaches his friend B who instead of lending the money directly,
suggests that A should draw a bill in his favour, which he would accept. Accordingly, A draws the
bill and B accepts it. A in turn gets the bill discounted with his banker at discount. On due date, A
would pay Rs 10,000 to B to enable him to meet the bill. The real creditor in this case is the banker
and not B. B is mere surety and A is the real debtor. Contd.
 …..Forms of Bills of Exchange 

5. Documentary bill  When documents of title to the goods or other documents such as, bill
of lading, invoice, railway receipt, insurance policy, etc., are attached to the bill of
exchange , it is called documentary bill. Such documents are delivered to the buyer only on
acceptance or payment of the bill. Such bills are usually used in connection with foreign
trade.
6.Clean bill  Contrary to documentary bill, a clean bill is one, with which no documents
related to the goods represented by the bill are attached. In inland trade normally clean
bills are used.
7.Fictitious bill  When the name of the drawer or the payee or both is fictitious in a bill, the
bill is termed as fictitious bill. Such type of bill is drawn in a fictitious name and is made
payable to the drawer’s order and as such both the drawer and the payee are said to be
fictitious persons. A fictitious person is one who is non-existing or a pretended one.
8.Bill-in-sets  A bill-in-sets is one, which is drawn in sets of three. A bill is sometimes drawn in
more than one original copy, especially when such copies are required by various parties as
in case of a foreign trade transaction. The three copies (called parts) of a bill in set are sent
by different mail routes in order to avoid delay or inconvenience likely to arise due to loss or
miscarriage of the bill and to ensure safe transmission of at least one part of the bill to the
drawee and his acceptance thereon as early as possible. Contd.
 …..Forms of Bills of Exchange 

9.Escrow  When an instrument is delivered conditionally, or for a special

purpose as a collateral security, or for safe custody only, and not for the
purpose of transferring property absolutely therein i.e., negotiation, it is
termed as escrow. As between the immediate parties, when an instrument
is delivered, conditions agreed upon are fulfilled. Such an instrument does
not create any liability to pay until and unless conditions agreed upon are
fulfilled or the purpose for which the said instrument was delivered is
satisfied.
10. Bank draft   Also known as demand draft, a bank draft is an order to pay
money drawn by one office or branch of a bank upon another office or
branch of the same bank or on a different bank instructing the latter to pay
a certain sum of money to a specified person or his order. When the order
is on another branch of the same bank, it is actually a cheque but the same
is still termed as a draft. When a draft is issued on another bank, it has all
the features of a bill of exchange except that is not stamped and accepted.
 CHEQUES

A cheque is a bill of exchange drawn on a specified banker and not

expressed to be payable otherwise than on demand [Section 6]. Simply
put, a cheque is a kind of bill of exchange drawn on a bank that is
always payable on demand. The definition of cheque is modified by an
amendment to the Negotiable Instruments Act in 2002, according to
which cheque includes electronic image of a truncated cheque and a
cheque in electronic form. This makes provision for electronic
submission and clearance of cheque. 
A cheque being a kind of a bill of exchange satisfies all the requirements
of a bill except that it does not have any acceptance and stamp.
Thus, a cheque must be signed by the drawer (i.e., the maker); it
payable must contain an unconditional order to pay a certain amount of
money to a specified person named therein or his order, or to the
bearer; must specify the banker upon whom it is drawn, and must be
dated.
 Parties to a cheque

A cheque generally involves the following parties :

1. Drawer  The person who makes the cheque
2. Drawee  The bank of the drawer on whom the cheque is drawn
3. Payee   The person who is to receive the money stated in the cheque
4. Holder  A person who is in the possession of a cheque and is entitled
to receive or recover the amount thereon.
5. Endorser  The maker, drawee, payee or endorsee can endorse a
cheque by signing on the back of it. The endorser of a cheque has
the status of a new drawer.
6. Endorsee  The transferee or the person in whose favour the
instrument has been endorsed.
 Essentials of a Cheque

If one takes a close look at the definition of a cheque, as per Section 6, it becomes clear that a
cheque has the following 10 essential elements or characteristics:
1. It must be in writing  A cheque must be in writing. An oral order to pay does not constitute a
cheque.
2. It should be drawn on banker  It is always drawn on a specified banker. A cheque can be
drawn on a bank where the drawer has an account.
3. It contains an unconditional order to pay  A cheque cannot be drawn so as to be payable
conditionally. The drawer’s order to the drawee bank must be unconditional and should not
make the cheque payable dependent on a contingency. A conditional cheque shall be invalid.
4. The check must have an order to pay a certain sum  The cheque should contain an order to
pay a certain sum of money only. If a cheque is drawn to do something in addition to, or other
than to pay money, it cannot be a cheque. For example if a cheque contains ‘Pay Rs 5,000 and
a T.V. worth Rs to A’, It is not a cheque.
5. It should be signed by the drawer and should be dated  A cheque does not carry any validity
unless signed by the original drawer. It should be dated as well.

37
 ……Essentials of a Cheque

6. It is payable on demand  A cheque is always payable on demand.

7. Validity  A cheque is normally valid for six months from the date it bears.
Thereafter it is termed as stale cheque. A post-dated or antedated cheque will not
be invalid. In both cases the validity of the cheque is presumed to commence from
the date mentioned on it.
8. It may be payable to the drawer himself  Cheques may be payable to the drawer
himself. It may be drawn payable to bearer on demand unlike a bill or a pro-note.
9. Banker is liable only to the drawer  The banker on whom the cheque is drawn
shall be liable only to the drawer. A holder or bearer has no remedy against the
banker if a cheque is dishonoured.
10. It does not require acceptance and stamp  Unlike a bill of exchange a cheque
does not require acceptance on part of the drawee. There is, however, a custom
among banks to mark cheques as good for the purpose of clearance. But this
marking is not an acceptance. Similarly, no revenue stamp is required to be affixed
on cheques.
 Difference between a Bill of Exchange and a Cheque 
 

Point of
S.No. Bill of Exchange Cheque
Difference

1. Drawee A bill can be drawn on any person A cheque is always drawn on a

(i.e., upon an individual as well banker.

as a banker)

2. Payable It may be drawn payable on It can only be drawn payable

demand, or on the expiry of a on demand, and within six

certain period or days after sight months of the date mentioned

or date. on the cheque.  Contd.

 ….Difference between a Bill of Exchange and a Cheque 
 
3. Grace A grace of 3 days is allowed No grace is given in case of a

period in the case of payment of cheque for payment for the sole

bill payable after sight or reason that a cheque is payable

date. on demand.

4. Acceptance Acceptance by the drawee is It does not require any acceptance

must before payment can be and is intended for immediate

demanded in respect of a bill. payment.

5. Payable to A bill cannot be made payable A cheque can be made payable to

bearer to bearer on demand the bearer on demand. Contd.

 ….Difference between a Bill of Exchange and a Cheque 
 

6. Estoppel of The drawer cannot stop Banker or the drawee is

payment payment of a bill. In other empowered to stop payment

words a bill of exchange of a cheque if all the related

cannot be countermanded. formalities are not adhered

to. 

7. Presentment The drawer of a bill is The drawer of a cheque is

for payment discharged (i.e., not liable to discharged only if he suffers any

pay), if it is not presented for loss or damage due to delay in its

payment presentment for payment and he

shall be discharged to the extent

of such damage.

Contd.
 ….Difference between a Bill of Exchange and a Cheque 
 

8. Notice of Notice of dishonour of a If a cheque gets dishonoured,

dishonour bill is necessary in order insufficiency of funds in the

to charge its drawer. drawer’s account is

sufficient and appropriate

evidence to charge him.

9. Crossing The Act contains no provision A cheque may be crossed.

for ‘crossing’ of a bill of

exchange.
 Crossing of Cheques 

When two parallel lines are drawn on the left hand top corner of the cheque, it is called
crossing and by doing so a cheque becomes a crossed cheque. A crossing acts as a
direction to the drawee or paying banker to pay the money to a specified banker as
desired by the payee or deposit the amount stated on the cheque in the account of the
payee if he has an account with the drawee bank and not to pay otherwise. The
primary objective of crossing is to secure payment to a holder so that it could be traced
to the person collecting the amount of cheque.
Modes of crossing . The Act recognizes two types of crossing of cheques, namely
• General crossing and
• Special crossing
General crossing Where a cheque bears across its face an addition of the words ‘and
company’ or any abbreviation thereof, between two parallel transverse lines, or of two
parallel transverse lines only, either with or without the words ‘not negotiable’ that
addition shall be deemed to be a crossing and cheque shall be deemed to be crossed
generally. Contd.
 ….Crossing of Cheques 

• Special crossing  When the name of a banker is written across the face of
a cheque with or without the words ‘not negotiable’, it is a special
crossing. The transverse parallel lines may or may not be used in this kind
of crossing. Thus, where the cheque is crossed specially, the paying
banker will pay only to the banker whose name appears across the
cheque, or to his collecting agent. Thus, in case of special crossing, the
paying banker is to honour the cheque only when it is presented through
bank mentioned in the crossing, or an agent of such bank, i.e., another
banker acting as agent.
A cheque crossed specially or generally bearing the words ‘not
negotiable’, lacks negotiability and therefore is not a negotiable
instrument in the true sense. This means in case of transfer, the
transferee will not get a better title than that of a transferor. It does not
restrict transferability but restricts negotiability only.
 HUNDIS 

HUNDIS are negotiable instruments written in various vernacular languages in the country.
The term is derived from the Sanskrit word ‘hundi’ which means ‘to collect’. These are
generally in the form of bills of exchange but may sometimes look like promissory notes in
form and contents. Hundis are quite popular among Indian merchants even today and are
governed by the Negotiable Instrument Act unless there is a local usage to the contrary.
Types of Hundis 
1.  Darshani hundi.   A hundi payable at sight is called darshani hundi. It is negotiable and is
like a ‘demand bill’. It may be sold at par or at premium or at discount. A darshani hundi
should be presented for payment within a reasonable time of its receipt by the holder.
2. Miadi hundi . Also known as ‘muddati hundi’, miadi hundi is one which is payable after a
specified period of time like a ‘time bill’. Banks usually provide loans against the security of
such hundis.
3. Shahjog hundi . This is a hundi made payable only to a Shah (a respectable person of
financial worth and substance in the market). It may be miadi or darshani and can be
transferred freely from one person to another by mere delivery but it is not payable to
bearer. In some respects it is similar to a crossed cheque.
4. Namjog hundi . It is a hundi payable to the party named in the hundi or his order. Such a
hundi is similar to a bill of exchange payable to order. Contd.
 ….HUNDIS : Types Of

5. Dhanijog hundi . Dhani in vernacular means owner. Thus, a dhani jog hundi is one which is made
payable to the owner, or a holder or bearer-owner. It is just like a bearer cheque and the holder
of it becomes holder in due course if he takes it bona fide and for value.
6. Jokhmi hundi . The term ‘Jokhmi’ has been derived from the Hindi work ‘jokhim’ meaning
‘risk’. Such a hundi is usually drawn against goods shipped on a vessel and implies a certain risk
involved in the shipment of goods. Jokhmi hundi in fact is a combination of bill of exchange and
insurance policy and payable only when the goods arrive in safe and sound condition. If the
goods are lost in transit, the consignor cannot claim payment of the hundi from the consignee
i.e., the drawee.
7. Jawabi hundi . A hundi, which is in the form of letter or recommendation to a banker for
payment of a certain sum of money to a specified person, is termed as jawabi hundi.
8. Zikri hundi . This is a hundi accepted for honour in writing on a Zikri chit (letter of protection)
without being protested. It is drawn in the name of a specified person residing in the town or
city where the hundi is payable. In case acceptance is refused by the drawee or when a refusal is
likely to occur, the hundi is furnished to the holder by some prior party to it.
9. Firmanjog hundi . The term ‘Firman’ refers to order in vernacular language and therefore, a
‘Firmanjog’ hundi is made payable to the order of payee. It is just opposite of ‘dhanijog hundi’
which is payable to the bearer only.