The Negotiable Instruments Act, 1881.

Introduction
The law relating to negotiable instruments
is contained in the Negotiable Instruments Act. 1881 which applies and extends to the whole of India.

Definitions
The word negotiable means transferable by
delivery and instrument means a written document by which a right is created in favor of some person or persons. Thus, the term negotiable instrument literally means a written document which creates a right in favor of somebody and is freely transferable.
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Continued
A negotiable instrument is a piece of paper
which entitles a person to a certain sum of money and which is transferable from one to another person by a delivery or by endorsement and delivery. Eg - Promissory note, Cheque and a Bill of exchange, documents such as Railway or ST Receipts; Dividend, warrants; Railway Bonds payable etc.
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Characteristics of negotiable Instruments

Free transferability or easy negotiability Negotiable instrument is freely transferable. Title of holder is free from all defects A person who takes negotiable instrument bonafide and for value gets the instrument free from all defects in the title. The holder in due course is not affected by defective title of the transferor or of any other party.

Signed & in writing On Demand or after certain days Payable to bearer or Order Unconditional Order Sum payable must be certain Drawee & Payee must be

Basic Conditions of a Negotiable Instrument

Presumptions:
Of consideration : that every negotiable
instrument, was made or drawn for consideration. As to date : that every negotiable instrument bearing a date was made or drawn on such date.

Continued
As to time of acceptance : that every

accepted bill of exchange was accepted within a reasonable time after its date and before its maturity. As to time of endorsements : that the endorsements appearing upto negotiable instrument were made in the order in which they appear thereupon.
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Continued
As to stamps : that a lost promissory-note,
bill of exchange or cheque was duly stamped. As to a holder in due course : that every holder of a negotiable instrument is holder in due course. As to time of transfer : that every transfer of a negotiable instrument was made before its maturity.

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Types of Negotiable Instruments

Negotiable instruments are of two types which are as follows: Negotiable Instruments recognized by status: e.g. Bills of exchange, cheque and promissory notes. Negotiable instruments recognized by usage or customs of trade: e.g. Bank notes, exchequer bills, share warrants, bearer debentures, dividend warrants, share certificate.
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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 certain sum of money only to, or to the order of a certain person or to the bearer of the instrument. Eg - Mr. X purchases goods from Mr. Y for Rs. 1000/Mr. Y buys goods from Mr. S for Rs. 1000/Then Mr. Y may order Mr. X to pay Rs. 1000/- Mr. S which will be nothing but a bill of exchange.
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Features
It must be in writing Order to pay Parties: 1.Drawer-maker of bill of exchange 2.Drawee- the person directed to pay money by the Drawer 3.Payee-The person named in the instrument. To whom the payment is made.

Bill of Exchange

Bill of Exchange

Promissory Note :
A promissory note is an instrument in writing [not being a bank-note or a currency-note} 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 the bearer of the instrument.
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Specimen of a promissory note

Rs. 5000/Pune November 25, 2008 Three months after the date, I promise to pay Mr. X of Mumbai or order a sum of Rupees Fifty Thousand for value received. To Mr. Address.. Mumbai

Stamp Signature of Mr Y
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Parties involved in Promissory Note

The maker: The person who makes or executes the note promising to pay the amount stated therein The payee: One to whom the note is payable

Essential characteristics of a Promissory Note

Promissory note is a negotiable instrument It must be in writing It is a promise to pay money only. It must be definite. The promise to pay must be definite. It must be unconditional. Undertaking to pay must be unconditional. It must be signed by the maker. And in the name of the payee.

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Continued
Maker of the promissory note must be a certain
person and the payee must also be certain. Amount of the promissory note must be certain. Other formalities like number, date, consideration, place etc. are generally found in the promissory notes but they are not essential in law. Promissory note must be properly stamped according to the provisions of the Indian Stamp Act, 1899.
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Cheque
A cheque is a bill of exchange drawn on a specified banker and expressed to be payable otherwise than on demand. The maker of a bill of exchange or Cheque is called the Drawer"; the person thereby directed to pay is called the "Drawee".
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Cheque

Essential characteristics of a Cheque

A cheque is a negotiable instrument. It is a bill of exchange. It is always drawn on a specified banker. It is always payable on demand. A cheque can be bearer, order or crossed

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Continued
A cheque requires no acceptance in the ordinary
course of business as it is intended for immediate payment. In case of a cheque, a drawee is always a specified bank, a drawer is a person who draws a cheque and who has an account in the bank ad payee is a person to whom the amount of cheque is made payable.
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Distinction
Cheque Bill of exchange

It must be drawn only on Banker The amount is always payable on demand The Cheque is not entitled to days of grace Cheque can be

It can be drawn on any person including a Banker The amount may be payable on demand or after a specified time A usance ( time) bill is entitled to 3 days of grace. Crossing of Bill of

Distinction
Promissory Note There are 2 parties Maker (Debtor) and the payee (Creditor) A note contains an unconditional promise by maker to pay the payee Bill of Exchange There are 3 parties The Drawer , the drawee, and the payee It contains an unconditional order to the drawee to pay according to the drawers directors

Negotiation
It is a process of transferring the ownership, right, title, interest of a person in a negotiable instrument to another person so as to give a good title to the transferee and make a transferee a holder of such instrument.
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Continued
Negotiation does not mean a simple transfer. Simple transfer may not necessarily involve the transfer of property in the negotiable instrument but negotiation implies the transfer of property or ownership. Eg -X hands over a cheque to Mr. Y here Mr. X has negotiates the instrument. But if he hands over a cheque to Mr. Y asking him to keep the same in his safe, the cheque is not negotiated to Mr. Y, Mr. Y does not become its holder but only a bailee.
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Essentials of negotiation
There must be transfer of a negotiable
instrument to another person. As a result of such transfer, the transferee must become the holder of the instrument.

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Modes of negotiation:
Negotiation by delivery The negotiable
Instrument is transferred by delivery, actual or constructive. It is physical act of delivering the instrument or handing over the delivery, actual possession of the instrument is not passed. Negotiation by endorsement and delivery The negotiable Instrument payable to order is negotiable by the holder by endorsement and delivery thereof.
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Endorsement
Literal meaning of the term endorsement is writing on an instrument. Endorser - The person who signs on the back or on the face of the instrument or on the slip is an endorser. Endorsee - The person to whom the instrument is endorsed is called the endorsee.
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Types of Endorsement
General or blank endorsement - Endorser
signs his name either on the back or face of the instrument. Full or special endorsement - It specifies the name of the person to whom or to whose order the payment must be made.

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Continued
Partial endorsement Endorsement is
made for remaining balance of payment. Conditional endorsement The liability of the endorser is limited or negative.

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Dishonour of negotiable instrument

Negotiable instruments, Promissory notes and

Cheques may be dishonored by non payment Bills of exchange may be dishonored by non payment or by non-acceptance as they require acceptance from drawees.

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What is DUD Cheque

A dud cheque is a cheque that is written for more than is in the bank e.g. a cheque for $200 when the person only has $150 in the bank will bounce - it's a dud.

DISHONOUR OF NEGOTIABLE INSTRUMENT Promissory notes, cheques and bills of exchange are covered by this Act. Of these negotiable instruments, promissory notes and cheques may be dishonoured by non payment only while bills of exchange may be dishonored by non payment or by non-acceptance as they require acceptance from drawees. Section 93 of the Act states that when a promissory note or a bill of exchange or cheque is dishonoured by non-acceptance or nonpayment the holder thereof, or some party thereto who remains liable thereon, must give notice that the instrument has been so honored to all other parties whom the holder seeks to make severally liable thereon, and to some one of several parties whom he seeks to make jointly liable thereon 36

Dishonour by Non-acceptance:

As mentioned earlier that a bill of exchange is dishonoured by non-acceptance. It stands dishonoured by non-acceptance in the following cases. a). when there are several drawees who are not partners and if all of them refuse to accept. b). If the drawee refuses to accept the bill within forty eight hours from the time of its presentment even though the bill is duly presented for his acceptance. c) where the drawee is incompetent to contract
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e) where the drawee of the bill of exchange gives a qualified acceptance. f) Where the drawee is a fictitious person and even after a reasonable search, he could not be found. It should be noted that where a drawee in case of need is named in a bill of exchange or even in any other instrument, the bill is not considered to be dishonoured unless it has been dishonoured by such drawee [section 115].

Dishonor by non-payment:A

negotiable instrument i.e. a bill, a cheque or a promissory note is said to be Dishonored by non-payment when the maker of the promissory note, acceptor of the bill of exchange or drawee of the cheque makes default in payment upon being duly required to pay the same. [section 2]. A bill or a promissory note is also said to be dishonoured by non-payment when presentment for the payment is excused expressly by the maker of the note or the acceptor of the bill and the note or bill remains unpaid or at after maturity
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If the bill is dishonored either by non-acceptance or non-payment, the drawer and all endorsers of the bill are held liable to the holder provided that a notice of such dishonor is given by the holder. If the bill is dishonored by nonpayment, the drawee is held liable.