LEGAL ASPECTS OFBUSINESS

NEGOTIABLE INSTRUMENTS
ACT, 1881

Name Roll No.

Kumar Gaurav R600216079
Nanda Gopal R600216066
Paul Mathew R600216080
Umang Vashistha R600216078
Sagar Dwivedi R600216047
INTRODUCTION TO NEGOTIABLE 2
INSTRUMENTSACT, 1881
• The Negotiable Instruments Act was enacted, in India, in 1881.

• It extends to the whole of India except the State of Jammu and

Kashmir.

• The Act operates subject to the provisions of Sections 31 and 32 of

the Reserve Bank of India Act, 1934.
 MEANING OF NEGOTIABLE 3
INSTRUMENT
The word negotiable means "transferable by delivery‟, and word instrument
means "a written document by which a right is created in favour of some
person". Thus, the term “negotiable instrument” means “a written document
transferable by delivery”.

According to Section 13 (1) of the Negotiable Instruments Act, “A

negotiable instrument means a promissory note, bill of exchange, or cheque payable
either to order or to bearer”. “A negotiable instrument may be made payable to two
or more payees jointly, or it may be made payable in the alternative to one of two, or
one or some ofseveral payees” [Section 13(2)].
FEATURESOF NEGOTIABLE 4
INSTRUMENTS
Writing and Signature
Money
Freely Transferable
Title of Holder Free from all Defects
Notice
Presumption
Special Procedure
Popularity
Evidence
TYPESOF NEGOTIABLE 5
INSTRUMENTS
There are two types of Negotiable Instruments:
1. Instruments Negotiable by Statute:
The Negotiable Instruments Act mentions only three kinds of
negotiable instruments (Section 13). These are:
1. Promissory Notes
2. Bills of Exchange, and
3. Cheques
2. Instruments Negotiable by Custom or Usage:
There are certain other instruments which have acquired the
character of negotiability by the usage or custom of trade. For example:
Exchequer bills, Bank notes, Share warrants, Circular notes, Bearer
debentures, Dividend warrants, Share certificates with blank transfer
deeds, etc.
PROMISSORY NOTES 6

Section 4 of the Act defines, “A promissory note is an instrument in

writing (note being a bank-note or a currency note) containing an
unconditional undertaking, signed by the maker, to pay a certain sum of
money to or to the order of a certain person, or to the bearer of the
instruments.”
The person who makes the promissory note and promises to pay is
called the maker. The person to whom the payment is to be made is called
the payee.
CHARACTERISTICS OF A 7
PROMISSORY NOTE
It is an Instrument in Writing
It is a Promise to Pay
Signed by the Maker
Other Formalities
Definite and Unconditional Promise
Promise to Pay Money Only
Maker must be a Certain Person
Payee must be Certain
Sum Payable must be Certain
It may be Payable on Demand or After a Definite Period of Time
It cannot be Made Payable to Bearer on Demand
PARTIESTO A PROMISSORY NOTE 8

Maker:
Maker is the person who promises to pay the amount statedin the
note.
Payee:
Payee is the person to whom the amount of the note ispayable.
Holder:
He is either the payee or the person to whom the note may
have been endorsed.
SPECIMEN OF PROMISSORY NOTE 9

Rs. 10,000
Lucknow April
10, 2013

Three months after date, I promise to pay Shri Ramesh (Payee) or to his order the sum of Rupees Ten
Thousand, for value received.

Stamp

To, Sd/-
Shri Ramesh, Ram
B-20, Green Park,
Mumbai.
(Maker)
BILLOF EXCHANGE 10

According to Section 5 of the act, 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”. It isalso called a Draft.

Special Benefits of Bill ofExchange:

A bill of exchange is a double secured instrument.
In case of immediate requirement, a Bill may be discounted with a bank.
ESSENTIALELEMENTSOF BILLOF 11
EXCHANGE
It must be in Writing.
Order to pay
Drawee
Signature of the Drawer
Unconditional Order
Parties
Certainty of Amount
Payment in Kind is not Valid
Stamping
Cannot be made Payable to Bearer on Demand
PARTIESTO A BILLOFEXCHANGE 12

Drawer:
The maker of a bill of exchange is calledthe drawer.
Drawee:
The person directed to pay the money by the drawer is called the
drawee.
Payee:
The person named in the instrument, to whom or to whose order the
money are directed to be paid by the instruments are called the payee.
SPECIMEN OF BILLOF EXCHANGE 13

Rs. 10,000

Mumbai
April 10, 2013

Three months after date pay to Ram (Payee) order the sum of Ten Thousand Rupees, for value received.

To,
Sushil
B-20, Green Park,
Lucknow - 226020.

(Drawer) Stamp
In case of need with Accepted
Canara Bank, Delhi. Sushil Sd/- Ram
(Drawer)
CLASSIFICATION OF BILLOF 14
EXCHANGE
Inland and Foreign Bills [Section 11and12]
Inland Bill:
It is drawn in India on a person residing in India outside whether payable in or
India; or
It is drawn in India on a person residing outside India but payable in India.

Foreign Bill:
A bill drawn in India on a person residing outside India and made payable outside
India.
Drawn upon a person who is the resident of a foreign country.
CLASSIFICATION OF BILLOF 15
EXCHANGE (Cont.…)
Time and Demand Bills:
Time Bill: A bill payable after a fixed time is termed as a time bill. A bill payable
“after date” isa timebill.
Demand Bill: A bill payable at sight or on demand istermed as a demand bill.
Trade and Accommodation Bills:
Trade Bill: A bill drawn and accepted for a genuine trade transaction is termed as
“trade bill”.
Accommodation Bill: A bill drawn and accepted not for a genuine trade
transaction but only to provide financial help to some party is termed as an
“accommodation bill”.
CHEQUE 16

According to Section 6 of the act, A cheque is “a bill of

exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand”. A cheque is also, therefore, a bill of exchange
with two additional qualification:
It is always drawn on a specifiedbanker.
It is always payable on demand.

Special Benefits of Bill ofExchange:

A bill of exchange is a double secured instrument.
In case of immediate requirement, a Bill may be discounted with a bank.
ESSENTIALELEMENTSOF A CHEQUE 17

In writing
Express Order to Pay
Definite and Unconditional Order
Signed by the Drawer
Order to Pay CertainSum
Order to Pay Money Only
Certain Three Parties
Drawn upon a SpecifiedBanker
Payable on Demand
PARTIESTO ACHEQUE 18

Drawer:
Drawer is the person who draws the cheque.
Drawee:
Drawee is the drawer‟s banker on whom the cheque has been drawn.
Payee:
Payee is the person who is entitled to receive the payment of a
cheque.
SPECIMEN OF CHEQUE 19

Kapoorthala Bagh,
Mumbai – 400033
IFSCode:MAHB0000316
D D M M Y Y Y Y

Pay ……………………………………………………………………………………………………………......
……………………………………………………………………………………………………. Or Bearer
Rupees ……………………………………………………………………………………………………………
………………………………………………………………………………………… …Rs.

A/c No.

SHANKAR GAJARE
Signature
Please signabove

“ΙΙ473792ΙΙ” 000240000 000000 10

TYPESOF A CHEQUE 20

Bearer Cheque
Cross Cheque

Cheque Crossed Specially

Restrictive Crossing (A/c Payee Only)

NEGOTIATION 21

According to section 14 of the Act, „when a promissory note, bill of

exchange or cheque is transferred to any person so as to constitute that person
the holder thereof, the instrument is said to be negotiated.‟ The main purpose
and essence of negotiation is to make the transferee of a promissory note, a
bill of exchange or a cheque the holder there of.
Negotiation thus requires two conditions to be fulfilled,namely:
There must be a transfer of the instrument to another person;and
The transfer must be made in such a manner as to constitute the transferee
the holder of the instrument.
MODES OF NEGOTIATION 22
Negotiation by delivery (Sec. 47):
Where a promissory note or a bill of exchange or a cheque is
payable to a bearer, it may be negotiated by delivery thereof.
Example: A the holder of a negotiable instrument payable to bearer,
delivers it to B‟sagent to keep it for B. The instrument has been negotiated.
Negotiation by endorsement and delivery (Sec. 48):
A promissory note, a cheque or a bill of exchange payable to
order can be negotiated only be endorsement and delivery. Unless the
holder signs his endorsement on the instrument and delivers it, the
transferee does not become a holder. If there are more payees than
one, all must endorse it.
ENDORSEMENT [SECTION15] 23

The word „endorsement‟ in its literal sense means, writing on the back of
an instrument. But under the Negotiable Instruments Act it means, the writing of
one‟s name on the back of the instrument or any paper attached to it with the
intention of transferring the rights therein. Thus, endorsement is signing a
negotiable instrument for the purpose of negotiation. The person who effects an
endorsement is called an „endorser‟, and the person to whom negotiable
instrument istransferred by endorsement iscalled the „endorsee‟.

Who may Endorse /Negotiate [Section 51]:

Every Sole maker, drawer, payee or endorsee, or all of several joint
makers, drawers, payees or endorsees of a negotiable instrument may endorse
and negotiate the same if the negotiability of such instrument has not been
restricted or excluded as mentioned in Section 50.
ENDORSEMENT (Cont….) 24

Essentials of a Valid Endorsement:

It must be on the back or face of instrument or on a slip of paper annexed
thereto.
It must be signed by the endorser.
It must be completed by the delivery of theinstrument.
It must be made by the holder of the instrument.

Kinds of Endorsement:
Blank or General Endorsement
Full or Special Endorsement
Partial Endorsement
Restrictive Endorsement
Conditional Endorsement