NEGOTIABLE INSTRUMENTS:

TYPES & PARTIES

Negotiable Instruments
• The Negotiable Instruments Act, 1881
• Amended in 2002
• What is a ‘Negotiable Instrument’?
• In Scope
– Promissory Note, Bills of Exchange, Cheques
– Local Usage: If not contrary to the Act
• Out of Scope
– Bills of Lading, Dividend Warrants, Drafts

Characteristics of a Negotiable Instrument

• ‘Holder in due course’ gets the instrument free from all defects
• Payable to order
• Payable to bearer
• Can be made payable to two or more persons jointly
• Consideration is presumed
• All prior parties are liable to holder who has the complete ‘Right to
Ownership’

Promissory Notes

• Definition:
It is an instrument in writing 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:
• Maker: promises to pay
• Payee: is promised the payment

Essential Elements:
1. Writing: In ink/pencil/printed/cyclostyled
2. Undertaking to pay: Not necessary to use word ‘promise’. Intentions must be
clearly shown
3. Signed: Sign with free consent
4. Specific Sum: Sum should be certain.
Interest rate may not be specific.
Can be made in installments
5. Unconditional: No conditions should be attached.
Following are not conditions:
i) Particular place or specific time
ii) Event which is certain to happen
6. Promise to pay money only: Anything else, in full or part, is not a note
7. Certain Persons: Maker and payee must be certain and definite.
8. Stamping: Chargeable with stamp duty.
Examples
• I owe you Rs.1000
• I promise to pay B Rs.1,000 7 days after C’s marriage
• I promise to pay B Rs.300 in cash and Rs.100 worth of cosmetics.

(None of the above is a valid promissory note)

BILL OF EXCHANGE

• Definition:
An instrument in writing containing an unconditional order, signed by the
marker, 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:
• Drawer/ Maker: draws the bill
• Drawee/Acceptor: on whom the bill is drawn
• Payee: to whom the money is paid
• Drawee/ Payee & Drawer/ Payee

Essential Elements:
1. Writing: in any language, any form
2. Order to pay: imperative, no request; it’s an ORDER
3. Unconditional: conditional bill is invalid
4. Signed: must be signed by the drawer
5. Person directed: the drawee must be certain
6. Money: payment of money only
7. Payee must be certain: payee must be definite
8. Certain sum: sum payable must be certain
9. Stamping: is chargeable with stamp duty

Specimen of Bill of Exchange

Mumbai
Rs.5,000.00 Date: 2nd Dec, 2006

Sixty days after date pay to ABC or Order, the sum of five thousand rupees
only for value received.

To Signed
PQR, Mumbai XYZ

Here, XYZ – Drawer PQR – Drawee ABC – Payee

Classification of Negotiable Instruments

1. Accommodation Bill
2. Fictitious Bill
3. Escrow
4. Instruments payable on demand
 5. Bearer and order instruments
6. Inchoate stamped instruments
7. Ambiguous instruments
8. Inland and foreign instrument
9. Forged instrument

Accommodation Bill

• Illustration:
– A is in need of Rs.5000, approaches friend B to borrow money.
– B suggests A to draw bill on him which he would accept
– A gets the bill discounted with the banker
– Meets his requirement
– On due date, A pays Rs.5000 to B
– B would honor the bill
– Thus, B has accommodated A

Cheques

Definition: A bill of exchange drawn on a specified banker and not expressed to be

payable otherwise than on demand.

It includes the electronic image of a truncated cheque and a cheque in the electronic
form.

A cheque in the electronic form means a cheque which contains the exact mirror
image of a paper cheque, and is generated, written and signed in a secure system
ensuring the minimum safety standards with the use of digital signature (with or
without biometric signatures) and asymmetric crypto systems.

A truncated cheque means a cheque which is truncated during the course of a clearing
cycle, either by the clearing house or by the bank whether paying or receiving
payment immediately on generation of an electronic image for transmission
substituting the further physical movements of the cheque in writing.

Aspects Cheques Other Bills of Exchange

• Drawee • Only banker • Anyone including banker
• Acceptance • Not required • Drawee liable only after
acceptance
• Payment • No grace • 3 days grace after maturity
• Crossing • May be crossed • Can never be crossed
• Stamp • Not required • Must be properly stamped
• Noting and • Not required for • A bill may be noted or
protesting dishonor protested for dishonor
• Payable to bearer • Can be drawn so • It cannot be drawn so
on demand
Types of Crossing

Cheques:
1. Bearer Cheques
2. Crossed Cheques:
i) Crossed generally
ii) Crossed Specifically
iii) Crossed A/C Payee

Parties and crossing rules

Parties: Drawer, drawee, payee

Crossing after issue: When a cheque is:

(i) Uncrossed, holder may cross generally or specially
(ii) Generally, holder may cross specially
(iii) Generally or specially, holder may add “not negotiable”
(iv) Specially, banker may re-cross to another banker or agent for collection

Parties to a Negotiable Instrument

Four parties:
1. Drawer: maker of an instrument
2. Drawee: person directed to pay
3. Payee: person to whom or to whose order the money is to be paid.
4. Endorser: person who endorses an instrument