THE NEGOTIABLE

INSTRUMENT ACT,
1881
Objectives
• Negotiable instruments like promissory note, bill of exchange and cheque
• Types of negotiable instrument
• Crossing of cheque
 Introduction to Negotiable Instruments
◦ In the world of business and finance,
negotiable instruments are a very important
tool.
◦ They provide the parties with an ease of doing
business.
◦ And they can also be a source of financé when
in need of funds.
 Negotiable Instruments Meaning

◦ Whenever one thinks of negotiable instruments meaning (or NIs) the

thoughts of cheques and bills of exchange come to mind.

◦ These instruments are nothing but documents which have monetary

value and are exchangeable.
◦ Hence, the two main characteristics of Negotiable Instruments are
financial worth and transferability.
Negotiable instruments are transferable documents that
guarantee cash payments either on demand or at a future time.
◦ Most Common types of negotiable instruments are;
◦ Promissory notes.
◦ Bill of exchange.
◦ Cheque.
◦ Government promissory notes.
◦ Delivery orders.
◦ Customs Receipts.
Section 14 – Negotiation

◦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.
 Features of Negotiable Instruments
◦ Negotiable means ‘transferable by delivery,’ and the word instrument means ‘a written
document by which a right is created in favour of some person.’

◦ Easily Transferable
◦ Must be Written
◦ Time of Payment must be Certain: Here the time period has to be certain even if it is
not a specific date.

◦ For example, it is acceptable if the time of payment is linked with the death of a specific individual. As death
is a certain event.
◦ Payee also must be certain:

◦ The person to whom the payment is to be made must be a specific person or

persons. Also, there can be more than one payee for a negotiable instrument.
◦ And “person” includes artificial persons as well, like body corporates, trade
unions, chairman, secretary etc.
 What are Negotiable Instruments?

◦ A negotiable instrument is actually a written document.

◦ This document specifies payment to a specific person or the bearer of the instrument at a specific date.

◦“a document signifying an unconditional promise signed by the

person giving promise, requiring the person to whom it is addressed
to pay on demand, or at a fixed date or time, a certain sum to or to
the order of a specified person, or to bearer.”
 Most negotiable instruments fall under the
following two categories…
◦the Negotiable instrument by statute and
◦Negotiable instruments by custom or usages
◦ Negotiable instrument acts state three instruments.
◦ check,
◦ bill of exchange and
◦ promissory notes are negotiable instruments.

◦They are therefore called negotiable instruments by statute.

 Promissory Notes as Negotiable
Instrument

The promissory note is a signed document of written promise to pay a stated sum to a
specified person or the bearer at a specified date or on demand.

The promissory note is an instrument in writing containing an unconditional rule

signed by one party to pay a certain sum of money only to, or to the order of a certain
person or to the bearer of the instrument.

Thus a promissory note contains a promise by the debtor to the creditor to pay a
certain sum of money after a certain date. The debtor is the maker of the instrument.
◦For instance, A has to pay ₹ 10000 to B.
◦A makes a promissory note in which he promises to pay ₹
10000 to B on 25th September 2018.
◦Therefore, A is the maker, payer or the drawer of the
promissory note whereas B is the receiver or the payee of the
promissory note.
Bank notes are frequently referred to as promissory notes, a promissory note made
by a bank and payable to bearer on demand.
Features of a Promissory Note

◦ It must be in writing.
◦ It contains an unconditional promise to pay.
◦ The sum payable is a certain amount.
◦ The maker should sign it.
◦ The sum should be payable to a certain person.
◦ There are only two parties to a Promissory Note, one is the maker or the payer and another one is the payee.
◦ It is not transferable and thus, the amount is not payable to the bearer.
◦ The liability of the maker is primary and absolute.
◦ Notice is not required if it is dishonored.
◦ It needs to be properly stamped.
 Illustrations
A signs instruments in the following terms:
a) I promise to pay B or order Rs. 500.
b) I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on demand, for value received.
c) Mr. B, I O U Rs. 1,000.
d) I promise to pay B Rs. 500 and all other sums which shall be due to him.
e) I promise to pay B Rs. 500, first deducting thereout any money which he may owe me.
f) I promise to pay B Rs. 500 seven days after my marriage with C.
g) I promise to pay B Rs. 500 on D’s death, provided D leaves me enough to pay that sum.
h) I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next.

The instruments respectively marked ( a ) and ( b ) are promissory notes.

The instruments respectively marked ( c ), ( d ), ( e ), ( f ), ( g ) and ( h ) are not promissory notes.
Bill of Exchange as Negotiable Instrument
◦ The Bill of Exchange contains an order from the creditor to the debtor to pay a certain person after a certain
period.

◦ The person who draws it is called drawer (creditor) and the person on whom it is drawn is called drawee
(debtor) or acceptor.

◦ The person to whom the amount is payable is called payee.

A bill of exchange or "draft" is a written order by the drawer to the

drawee to pay money to the payee. A common type of bill of
exchange is the cheque (check in American English), defined as a
bill of exchange drawn on a banker and payable on demand.
Types of a Bill of Exchange

◦ If a bill of exchange is issued by a bank, they can be

referred to as bank drafts.
◦ If they are issued by individuals, they can be referred to as
trade drafts.
◦ If the funds are to be paid immediately or on demand, the
bill of exchange is known as a sight bill, and
◦ if they are to be paid at a set date in the future, it is known
as a term bill.
 Example of a Bill of Exchange

◦ Company ABC purchases auto parts from Car Supply XYZ for $25,000.
◦ Car Supply XYZ draws a bill of exchange, becoming the drawer and payee in this
case, for $25,000 payable in 90 days.
◦ Car Supply XYZ becomes the drawee and accepts the bill of exchange and the
goods are shipped.
◦ In 90 days, Car Supply XYZ will present the bill of exchange to Company ABC for
payment.
◦ The bill of exchange was an acknowledgment created by Car Supply XYZ, which
was also the creditor in this case, to show the indebtedness of Company ABC, the
debtor.
Requirements for a Bill of Exchange

◦A bill of exchange must clearly lay out the amount of money,

the date, and the parties involved (including the drawer and
drawee).
Check as Negotiable Instrument

◦ A Check (cheque in royal Britain) is a bill of exchange drawer a

specified banker not expressed to be payable otherwise than on
demand.

◦ It is an instrument in writing, containing unconditional order, signed

by the maker (depositor), directing a certain banker to pay a certain
sum of money to the bearer of that instrument.
◦ What is meant by crossing of Cheque?
◦ A crossed check is any check that is crossed with two parallel lines, either across the whole check or through
the top left-hand corner of the check. This symbol means that the check can only be deposited directly into
a bank account and cannot be immediately cashed by a bank or any other credit institution.
◦ Is it necessary to cross Cheque?
◦ So the amount of a crossed cheque cannot be paid across the counter. It will be paid through a bank
account. Thus it affords protection to the true owner of the cheque. Crossing helps to trace the payee who
has received the payment of the cheque.
What is a Crossed Check

◦A crossed check is any check that is crossed with two

parallel lines, either across the whole check or through
the top left-hand corner of the check.
◦This symbol means that the check can only be
deposited directly into a bank account and cannot be
immediately cashed by a bank or any other credit
institution.
◦ By using crossed checks, check writers can simply but effectively
protect the checks they write.
◦ Crossed checks are predominantly used in countries across Europe
and Asia, as well as in Mexico and Australia.

◦ Crossed checks are rarely used in the United States; any individual
attempting to deposit a crossed check in the U.S. may encounter
problems.
◦ Crossing a check provides specific instructions to a financial
institution regarding how the funds can be handled.

◦ Most commonly, it is used to ensure a bank only deposits the funds

into an actual bank account and does not immediately cash it upon
initial receipt.

◦ This provides a level of security to the payer, as it requires the funds

be handled through a collecting banker.
 Marking a Crossed Check

◦ While the precise formatting and wording may vary between nations, the most
common symbolic market involves two parallel lines being drawn.
◦ These lines may be located across the center of the check or noted in the top left
corner, and
◦ may or may not also contain the words "& Co." or "not negotiable," noting the
change in status.

◦ Otherwise, the phrase "Account Payee" may also be written on the check, and
performs the same function as crossing it.
 Uncrossing a Check
◦ If a check is crossed, there is no way for the payee to uncross the check.
Additionally, the check is considered non-transferable; it cannot be transferred
to a third party.
◦ The only action permitted is for the payee to deposit the check in an account
that he holds in his own name.
◦ The payer can uncross the check by writing "Crossing Canceled" across the
front of the check.
◦ However, this is generally not recommended; it eliminates the protection the
payer originally had in place.
Open Checks

◦An open check, also referred to as a bearer

check, is any check that is not crossed.

◦Open checks may be cashed at the counter, with

the funds being provided directly to the payee.
Key takeaways

◦Make sure you have sufficient funds in your account for the
cheque amount.
◦Cross your cheques to ensure that only the payee can deposit
it.
◦Record and track all your cheque transactions and tell the
bank if there are discrepancies.
Some other instruments have acquired the
character of negotiability by customs or usage
of trade.

◦ Negotiable instruments by custom or usages are

mainly, the government promissory notes, delivery
orders, and railway receipts have been held to be
negotiable by usage or custom of the trade.
◦ In India, the Negotiable Instruments Act, 1881 is responsible for governing NIs.

◦ This law defines these instruments and also deals with each type of them individually.

◦ It governs the use of cheques, promissory notes, and bills of exchange.

◦ There are other customary payment methods similar to NIs in India (like Hundis) but this
law does not cover them.

◦ Section 13(1) says NIs include promissory notes, bills of exchange or cheques payable either
to order or to bearer.

◦ Hence, the Act only includes these three types of NIs within its ambit.
The Negotiable Instruments (Amendment) Bill, 2017
◦ The Negotiable Instruments (Amendment) Bill, 2017 has been introduced in the Lok
Sabha last year on Jan 2nd, 2018.
◦ The bill seeks for amending the existing Act. The bill defines the promissory note, bill of
exchange, and cheques.
◦ The bill also specifies the penalties for dishonor of cheques and various other violations
related to negotiable instruments.
◦ As per a recent circular, up to INR 10,000 along with interest at the rate of 6%-9% would
have to be paid by an individual for cheques being dishonored.
◦ The Bill also inserts a provision for allowing the court to order for an interim
compensation to people whose cheques have bounced due to a dishonouring party
(individuals/entities at fault).
◦ Such interim compensation won’t exceed 20 percent of the total cheque value.