Business Law

MBA Semester I
 SYLLABUS

UNIT IV: Negotiable Instruments Act, 1881

Meaning, Characteristics and Types of Negotiable Instrument, Parties
to Negotiable Instrument and Types of Endorsement.

CO4: Apply: Apply the various provisions of Negotiable Instrument

Act for business transaction.
 Learning Objectives
 To know about Negotiable Instrument

 To classify different types of Negotiable Instrument

 To know the Parties to Negotiable Instrument

 To know the Types of Endorsement

Negotiable Transferrable

Written
Instrument
Document
DEFINITION OF A NEGOTIABLE INSTRUMENT [SECTION 13]

The word 'negotiable' means transferable from one person to another, and the
term 'instrument' means 'any written document by which a right is created in
favor of some person.' Thus, the negotiable instrument is a document by which
rights vested in a person can be transferred to another person in accordance
with the provisions of the Negotiable Instruments Act, 1881.

The term 'negotiable instrument' has been defined as - A 'negotiable

instrument' means a promissory note, bill of exchange or cheque payable either
to order or to bearer."
 Types of Negotiable Instrument
Types of
Negotiable
Instrument

Promissory Bill of
Cheque
Notes Exchange
 PROMISSORY NOTE [Section 4]

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 to, or to the order of, a certain person or to the
bearer of the instrument.

Examples of Promissory Notes “A” signs instruments in the following terms:

I acknowledge myself to be indebted to 'B' in Rs. 1000, to be paid on demand,
for value received.“

Followings are Not Promissory Notes.

(i) "Mr. B, I.O.U. (I owe you) Rs “
(ii) "I promise to pay B Rs on D's death, provided he leaves me enough to
pay that sum,“
(iii) "I promise to pay B Rs. 500 seven days after my marriage with C."
 Essentials or Characteristics of a Promissory Note

In writing
Express Promise to pay
Unconditional
Signed by the Maker
Certain sum of money
Promise to pay money only
Stamped
 Parties of a Promissory Note

The Maker: The person who makes the promissory note is called the maker.

The Payee: The person to whom or to whose order the payment is to be

made,, is called the payee.
Specimen of a Promissory Note
 Bill of Exchange[Section 5]

A 'bill of exchange' is defined by as 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
 Essentials or Characteristics of a Bill of Exchange

It must be in writing.

It must contain an order to pay and not a promise or request.
The order must be unconditional.
There must be three parties, viz., drawer, drawee and payee.
The parties must be certain.
It must be signed by the drawer.
The sum payable must be certain or capable of being made certain.
The order must be to pay money and money alone.
It must be duly stamped as per the Indian Stamp Act.
 Parties of a Bill of Exchange

Drawer: The person who draws a bill of exchange is called the drawer.

Drawee: The person on whom the bill of exchange is drawn is called the
drawee. He is also called as an acceptor of the bill.

Payee: The person to whom or to whose order the money is directed to be

paid by the instrument,, is called the payee.
 Types of Bills of Exchange

•Trade Bill
•Accomodation Bill
•Inland Bill
•Foreign Bill
•After Date Bill
•After sight Bill
•On Demand or At Sight Bill
 Specimen of a Bill of Exchange

In the above-mentioned bill of exchange format, Kunal Singh is the drawer as well as the payee of
the bill.
 Cheques (Section 6)
Definition –
“A cheque is a bill of exchange drawn upon a specified banker and payable on demand and it
includes the electronic image of a truncated cheque and a cheque in the electronic form”.
Note –
A cheque is a species of a bill of exchange; but it has the following two additional qualifications:
1. It is always drawn on a specified banker, and
2. It is always payable on demand.

Essentials of a Cheque –
• A cheque must be an order in writing.
• It must contain an unconditional order
• A cheque must be signed by the maker
• The amount must be specifically mentioned in figures and words
• A cheque may be drawn payable to order or bearer. There are two kinds of cheques prevailing
now a days. They are: a) it may be a bearer or order cheque; and b) it may be a self cheque.
• The cheque must contain the date.
• Payee to be certain
 Parties to a Cheque

• Drawer– The party issuing the cheque and holding an account with
the bank;

• Drawee– The party which is directed to make the payment ie. bank;

• Payee– The party which receives the payment made by the drawee.
If the drawer has drawn the cheque in favor of self then the drawer
becomes the payee.
 Types of Cheques
• Bearer Cheque: It is somewhat comparable to an open cheque in that any
person carrying or bearing the bearer cheque may be paid the amount
specified in the cheque.
• Crossed Cheque: A crossed cheque, which would only be credited into the
payee’s bank account, can be used to reduce the risk associated with open
cheques, which are often risky to write and issue. The top left corner of a
cheque can be crossed by drawing two parallel lines across it, with or
without writing “Account Payee” or “Not Negotiable.”
• Order Cheque: It is a cheque that can have the word “word bearer” cut or
cancelled and is made out to a specific person;
• Post Dated Cheque: If a drawer wants the payee to apply for withdrawal or
transfer of money after the present date, then he/she can fill a post dated
cheque.
• Electronic Cheque: It is a cheque that is generated in a secure system,
ensuring safety requirements through the use of digital signatures, and it
contains an exact mirror image of the original cheque.
 Types of Cheque Crossing
• General Crossing (Sec 123) – cheque bears across its face an addition of
two parallel transverse lines.

• Special Crossing (Sec 124) – cheque bears across its face an addition of
the banker’s name.

• Non-Negotiable Crossing (Sec 130) – It is when the words ‘Not Negotiable’

are written between the two parallel transverse lines.

• Restrictive Crossing Account Payee’s Crossing - It directs the collecting

banker that he needs to credit the amount of cheque only to the account of
the payee.
 Dishonor of Cheque
1) Sections 138 to 142 deals with dishonor of cheques and provides for criminal penalties in
the event of dishonor of cheques for insufficiency of funds.

2) Penalty for dishonour of cheque – The drawer, under Section 138, may be punished with
imprisonment up to 2 years or with a fine up to twice the amount of the cheque or with both.

However, in order to attract the aforesaid penalties, following conditions must be

satisfied:

 The cheque should have been dishonored due to insufficiency of funds in the account
maintained by him with a banker for payment of any amount of money to another person
from out of that account.

 The payment for which the cheque was issued should have been in discharge of a legally
enforceable debt or liability in whole or part of it.

 The cheque should have been presented within 3 months from the date on which it is
drawn.
Specimen of Cheque
 Endorsement
• Section 15 of the Negotiable Instruments Act 1881 defines an “Endorsement” as when the
maker or the holder of a negotiable instrument signs the same, otherwise than as such
maker, for the purpose of negotiation on the back or face thereof or on a slip of paper
annexed thereto, or so signs for the same purpose a stamped paper intended to be
completed as a negotiable instrument he is said to endorse the same and is called the
“endorser”.

• Endorsement means transferring of any document or instrument to another person by

signing on its back, face, or on a slip of paper attached to it.

• An endorsement is a mode of negotiating a negotiable instrument.

• A negotiable instrument payable otherwise than to a bearer can be negotiated only by

endorsement and delivery.

• The person to whom the instrument is endorsed is called the endorsee.

• Thus, usually, the endorsement is on the back of the instrument though it might also be
on the face of it.
 Endorsement of Negotiable Instruments
• Blank endorsement– where the endorser becomes payable to the bearer
that means where the and doses sign his name only.

• Special endorsement– when the endorser puts his sign and writes the
name of the person who will receive the payment then it is a special
endorsement.

• Restrictive endorsement- restrictive endorsement is the type where it

restricts further negotiations.

• Partial endorsement – partial endorsement allows transferring to the

endorsee a part only of the amount payable on the instrument.

• Conditional endorsement – conditional endorsement is the type where the

fulfillment of some conditions is required.
 Holder & Holder in Due Course
Parameters Holder Holder in Due Course (HDC)
HDC is a person who acquires negotiable instrument
A holder is a person who has legally
in a good faith for consideration before it becomes
obtained a negotiable instrument, with
Meaning due for payment and without any knowledge of the
name entitled on it, for receiving the
defective title of a party who transfers the instrument
payment from the parties liable.
to him.
Consideration Not Required Required

A holder is not allowed to sue any prior A holder in due course is allowed to sue every prior
Right to Sue
parties. party.

The instrument may or may not be obtained

Good Faith The instrument must be obtained in good faith.
in good faith.
Privileges Comparatively less. More.
A person can become a holder, before or A person is eligible to become a holder in due course,
Maturity after the maturity of the negotiable only prior to the maturity of the negotiable
instrument. instrument.
Holder does not acquire a good title in case Holder in due course gains a good title even though
Title the title of any of the prior parties is there was a defect in the title of any prior parties to
defective. the instrument.
REVISION
1) The Negotiable Instruments Act is applicable
to ______
A) Whole of the country
B) Whole of the country except J & K state
C) Whole of the country except union territories
D) Whole of the country except newly carved out
states after 2000.
2) The grace period for payment of a negotiable
instrument other than payable on demand is
_____ days/months.
A) 7 days
B) 3 days
C) 30 days
D) 15 days
3) How many parties involved in a bill of
exchange.
A) 2
B) 3
C) 4
D) 1
4) If the day on which a promissory note or bill of
exchange is at maturity is a public holiday, the
instrument shall be deemed to be due on the
___________
A) Preceding Day
B) Next preceding business day
C) Same day of next week
D) 3rd day following the date holiday
5) A bearer instrument is negotiated by _______
A) Delivery Only
B) Delivery & endorsement
C) Endorsement
D) Registration & Attestation
1. A) Whole of the country
2. B) 3 days
3. B) 3
4. B) Next preceding business day
5. A) Delivery Only