Module 1
Negotiable instruments
A negotiable instrument is a document guaranteeing
the payment of a specific amount of money, either
on demand, or at a set time.According to Sec 13 of
Negotiable instrument Act 1881, a negotiable
instrument means a promissory note, bill of
exchange and cheque payable either to order or
bearer.
A negotiable instrument is a promise of a payment
of money.
PRESIDENCY COLLEGE
Features of negotiable instruments
•A
negotiable instrument is freely transferable. Usually,
when we transfer any property to somebody, we are
required to make a transfer deed, get it registered, pay
stamp duty, etc. But, such formalities are not required
while transferring a negotiable instrument. The ownership
is changed by mere delivery or by valid endorsement and
delivery.
• Negotiability confers absolute and good title on the
transferee. It means that a person who receives a
negotiable instrument has a clear title to the instrument.
PRESIDENCY COLLEGE
•A negotiable instrument must bear the signature of its
maker. Without the signature of the drawer or the maker,
the instrument shall not be a valid one.
•Delivery of the instrument is essential. Any negotiable
instrument like a cheque or a promissory note is not
complete till it is delivered to its payee. For example, you
may issue a cheque in your brother’s name but it is not a
negotiable instrument till it is given to your brother.
•Stamping of Bills of Exchange and Promissory Notes is
mandatory. This is required as per the Indian Stamp Act,
1899. The value of stamp depends upon the value of the
bill.
PRESIDENCY COLLEGE
Kinds Of Negotiable Instruments
'Promissory Notes
A promissory note is a legal instrument, in which
one party(the maker or the issuer) promises in
writing to pay a determine sum of money to the
other(the payee) either at a fixed or terminable future
time or on demand of the payee under specific terms
PRESIDENCY COLLEGE
Definition
According to sec 4 of NI Act defines Promissory Note as, “A
Promissory note 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”.
PRESIDENCY COLLEGE
PARTIES TO A PROMISSORY NOTE
Maker : it is a person who makes the promissory note and
promises to pay the money stated therein.
PAYEE : it is a person to whom the amount of promissory note is
payable i.e., to whom the promise to pay it made.
PRESIDENCY COLLEGE
ESSENTIAL ELEMENTS OF A PROMISSORY NOTE
1. It must be in writing
2. It must contain an express promise or clear undertaking to pay
3. The maker must sign the promissory note
4. The maker must be a certain person
5. The payee must be certain
6. The sum payable must be certain
7. Payment must be in legal money of the country
8. A bank note or currency note is not a promissory note
9. The promise to pay must be unconditional
10. Other formalities
PRESIDENCY COLLEGE
BILLS OF EXCHANGE
The bills of exchange is also termed as money draft.
It can be used in foreign trade and can also be
discounted with an acceptance house, bank etc., A
cheque is also a bill of exchange payable on
demand and drawn on a banker.
It is a written order signed by one person (drawer)
requiring a second person (drawee) to pay on
demand or at a stated date an amount of money to,
or to the order of, a specified person or the bearer
(payee).
PRESIDENCY COLLEGE
DEFINITION
According to sec 5 of NI 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 or the instrument”.
PRESIDENCY COLLEGE
PARITIES TO BILLS OF EXCHANGE
Drawer: the maker of a bill of exchange is responsible for the
contents written in the bill.
Drawee: the person who is directed to pay.
Payee: the person to who the payment is made by the drawee
as per the direction of drawer.
Holder: the drawer or the payee who is in possession of the
bill is called as holder.
Acceptor: the person who accepts the bill is termed
as ACCEPTOR. He is none other than the
Drawee.
PRESIDENCY COLLEGE
BASIS
BILL OF EXCHANGE
PROMISSORY NOTE
parties
There are three parties to a bill of
exchange namely, the drawer the
drawee and the payee.
But in promissory note, there are
only two parties maker and payee.
Nature of
payment
In a bill of exchange, there is an
unconditional order to pay.
While in promissory note there is
an unconditional promise to pay.
Acceptance A BOE requires an acceptance of
the drawee before it is presented
for the payment.
While a promissory note does not
require any acceptance since it is
signed by the person who is liable
to pay.
liability
But the liabilty of the maker of a
PN is primary and absolute.
The liability of the maker of BOE
is secondary and conditional. It is
only when the drawee fails to pay
that the drawer would be liable as
a surety.
PRESIDENCY COLLEGE
BASIS
BILL OF EXCHANGE
PROMISSORY NOTE
Notice of
dishonor
In case of dishonor of bill of
exchange either due to non
payment of non acceptance ,
notice must be given to all
persons liable to pay.
But in case of a promissory note ,
notice of dishonor to the maker is
not necessary.
Maker’s
position
The drawer of a bill of exchange
stands in immediate relationship
with he acceptor and not the
payee.
While in case of a promissory
note , the maker stands in
immediate relationship with
payee.
Nature of
acceptance
A bill of exchange can be accepted While a promissory note can never
conditionally.
be conditional.
Copies
A bill of exchange can be drawn in But a promissory note cannot be
set.
drawn in set.
PRESIDENCY COLLEGE
Cheques
A cheque is a negotiable instrument instructing a financial
institution to pay a specific amount of a specific currency from a
specified transactional account held in the drawer's name with that
institution. Both the drawer and payee may be natural persons or
legal entities. Specifically, cheques are order instruments, and are
not in general payable simply to the bearer (as bearer instruments
are) but must be paid to the payee when demanded.
Definition
According to sec 6 of NI Act 1881 “a cheque is a bill of exchange
drawn on a specified banker, and not expressed to be payable
otherwise than on demand”.
PRESIDENCY COLLEGE
A cheque is a bill of exchange drawn on a bank payable on demand.
A cheque is a BOE with two additional qualification,
1. It is always drawn on a bank
2. It is always payable on demand
Special features of a cheque
1. It must be signed by the drawer
2. It must contain an unconditional order on a specified banker to
pay a certain sum of money to require acceptance.
3. A cheque is a payment, unless dishonoured the payment
becomes effective from the delivery of the cheque and does not
wait till it is honoured and money paid.
PRESIDENCY COLLEGE
Parties to a cheque
1. The drawer
2. The drawee
3. The payee
4. The holder
Under English Law
i. Holder
ii. Holder for value
iii. Holder in due course
Under Indian Law
i. Holder
PRESIDENCY COLLEGE
Bearer cheque
Stale Cheque
Types of
cheque
Order cheque
Uncrossed/Crossed
c
Post Dated
Cheque
Antidated
Cheque
Crossed Cheque
PRESIDENCY COLLEGE
1. BEARER CHEQUE
When a particular cheque includes
bearer on the face of the cheque and
which is not cancelled, the cheque is called
a bearer cheque. This type of cheque are
payable to the person specified therein or
to any other else who presents it to the
bank for payment. Cheques are associated
with risk, this is because if such cheques
are lost, the finder of the cheque can
collect payment from the bank.
PRESIDENCY COLLEGE
2. Order cheque
when a particular cheque in which the word
“bearer” appearing on the face is cancelled and
when in its place the word “or order” is written
on the face of the cheque, the cheque is called
an order cheque. Such a cheque is payable to
the person specified therein as the payee, or to
any one else to whom it is endorsed
(transferred).
PRESIDENCY COLLEGE
3. Uncrossed/open cheque
When a particular cheque is not crossed, it is
known as an “open cheque” or an “uncrossed
cheque”. The payment of such a cheque can
be obtained at the counter of the bank. An open
cheque may be a bearer cheque or an order
one.
PRESIDENCY COLLEGE
4. Crossed
cheque
When a particular cheque in which two parallel
lines are drawn on the face of the cheque with
or without additional words like “& Co”. Or
“Account payee” or “not negotiable”. A
crossed cheque cannot be encashed at the cash
counter of a bank but it can only be credited to
the payee’s account.
PRESIDENCY COLLEGE
5. Anti-Dated cheque
When a particular cheque which bears
a date earlier than the date on which it is
presented to the bank, it is called as
“anti-dated cheque. Such a cheque is
valid up to six months from the date of
the cheque.
PRESIDENCY COLLEGE
6. post-dated cheque
If a cheque bears a date which is yet to
come(future date) then it is known as
post-dated cheque. A post dated cheque
cannot be honoured earlier than the date
on the cheque.
PRESIDENCY COLLEGE
7. Stale cheque
If a cheque is presented for payment
after six months from the date of the
cheque it is called stale cheque. A state
cheque is not honoured by the bank.
PRESIDENCY COLLEGE
Difference between cheque and bills of exchange
BASIS
CHEQUE
BILL OF EXCHANGE
Banker
Cheque is always drawn on a
banker
While a bill may be drawn on
any one, including a banker
Payment
The cheque can only be drawn
and payable on demand.
A bill may be drawn payable on
demand, or on the expiry of a
certain period after or sight
Acceptance
A cheque does not require
acceptance and is intended for
immediate payment
A bill must be accepted before
payment can be demanded
.
Grace period
No grace period is allowed in
case of cheque payment
A grace of 3 days is allowed in
the case of time bills.
Dischargement
of drawer
Drawer of a cheque is
discharged only if he suffers
any damage by delay in
presentment for payment.
The drawer of a bill is
discharged, if it is not
presented for payment.
PRESIDENCY COLLEGE
BASIS
CHEQUE
BILL OF EXCHANGE
Notice of
dishonour
No notice of dishonour of
cheque
But notice of dishonour of a
bill is necessary.
Revocable
A cheque being a revocable
mandate, the authority may be
revoked by countermanding
payment and is determined by
notice of the customer’s death
or insolvency.
But this is not so in the case of
a bill
Crossing
The cheque may be crossed
But the bill cannot be crossed.
PRESIDENCY COLLEGE
Difference between cheque and promissory note
BASIS
CHEQUE
PROMISSORY NOTE
Order and promise It contains an order to pay
A promissory note contains
promise to pay
Number of parties
In case of cheque may be
three parties, the drawer,
drawee and payee
In case of promissory note are
only two parties, the maker
and the payee.
Object
Cheque is used because it is It is used for receiving and
a simple and easy medium of giving credit
exchange and serving of
metallic money
Crossing
A cheque may be crossed
A pro-note cannot be crossed
Payable to bearer
A cheque is often drawn as
payable to bearer
A pro-note cannot be drawn
payable to bearer
Stop payment
Its payment can be stopped
by giving the notice to the
bank
A pro-note payment cannot be
stopped if once issued
PRESIDENCY COLLEGE
BASIS
CHEQUE
BILL OF EXCHANGE
Liability nature
In case of cheque when it is
dishonoured, the drawer is
liable
In case of promissory not
liability is primary
Use of form
It is drawn on a printed form Promissory note may be drawn
issued by a particular bank
on any paper and there is no
need of any particular form
Drawee
A cheque is always drawn to
a particular bank were
account is available
A promissory note can be
drawn on any person
Drawer and payee
In case of cheque drawee
and payee can be the same
person
In case of pre-note there are
two parties and maker cannot
be the payee.
PRESIDENCY COLLEGE
Crossing of cheques
A crossed cheque is a cheque which is payable only through a
collecting banker and not directly at the counter of the bank.
Crossing ensures security to the holder of the cheque as only
the collecting banker credits the proceeds to the account of the
payee of the cheque.
When two parallel transverse lines, with or without any words,
are drawn generally, on the left hand top corner of the cheque. A
crossed cheque does not affect the negotiability of the
instrument.
PRESIDENCY COLLEGE
Types of crossing:
1.General Crossing
2.Special crossing
3.Account-payee or restrictive crossing
4.Not-negotiable crossing
PRESIDENCY COLLEGE
1.General Crossing
A cheque is said to contain a general crossing when
two parallel lines are drawn across the face of the
cheque.
According to sec 123 of NI Act 1881 as where a
cheque bear’s across its face an addition of
a. The words “and company”, or any abbreviation
thereof between two parallel transverse lines, or
b. The parallel transverse lines simply, either with or
without the words “not negotiable”,
PRESIDENCY COLLEGE
2. Special Crossing
In the case of special crossing the paying banker is to
honour the cheque only when it is presented
through the bank mentioned in the crossing in the
crossing or an agent of such bank.
According to sec 124 of NI Act 1881 as, “where a
cheque bears across its face an addition of the
name of a banker, either with or without the words
“not negotiable” addition constitutes a crossing and
the cheque is crossed special and to that banker.
PRESIDENCY COLLEGE
3. Double crossing
According to sec 127 of NI Act 1881 states that if a
paying banker receives a cheque crossed specially
to two bankers he must not pay it, however, if one
of the bankers named is acting as an agent for
collection for the other, the cheque may be paid to
the agent bank.
PRESIDENCY COLLEGE
4. Restrictive crossing
Some additional forms of crossing have been adopted to
commercial and other banks in order to avoid the risk of a
thief obtaining payment. These forms consist in adding to
the general or special crossing, the words “account payee”,
“account payee only” or “account Govinda only”.
Crossing of cheque directs the collecting banker that the
proceeds are to be credited only to the account of the
payee, or the party named, or his agent. If the collecting
bankers allows the proceeds of a cheque so crossed to be
credited to any other account, then he may be held guilty of
negligence in the event of an action for wrongful conversion
of the funds.
PRESIDENCY COLLEGE
Who may cross a cheque?
According to 125 of NI Act 1881 following authorities ad
persons can cross a cheque.
1. A cheque may be crossed generally or specially by the
drawer.
2. Where a cheque is uncrossed, the holder may cross it
specially.
3. Where a cheque is crossed generally or specially, the
holder may add the words “not negotiable”.
4. Where a cheque is crossed generally or specially, the
holder may add the words “not negotiable”
5. Where a cheque is crossed specially, the banker to who it is
crossed may again cross it especially to another banker for
collection.
6. Where an uncrossed cheque or a cheque crossed
generally is sent to a banker for collection, he may
cross it specially to himself.
PRESIDENCY COLLEGE
Endorsement:
A legal term that refers to the signing of a document which
allows for the legal transfer of a negotiable from one party
to another.
An endorsement consists of the signature of the holder
usually made on the back of the negotiable with the object
of transferring the instrument. The person making the
endorsement is called as an “endorser” and the person to
whom the instrument is endorsed is called as “endorsee”.
PRESIDENCY COLLEGE
Definition
According to sec 15 of NI Act 1881, “where the maker or
holder of a negotiable instrument signs the same,
otherwise than as such maker, for the purpose of
negotiable, 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 indorse the same
and is called the “endorser”.
PRESIDENCY COLLEGE
•Endorsement:
A legal term that refers to the signing of a document which allows
for the legal transfer of a negotiable from one party to another.
The word ‘endorsement’ in its literal sense means, a 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 endorsements is called an ‘endorser’ and the
person to whom negotiable instrument is transferred by
endorsement are called the ‘endorsee’.
Allonge (from French allonger, "to draw out"), a slip of paper
affixed to a negotiable instrument, as a bill of exchange, for
the purpose of receiving additional endorsements for
which there may not be sufficient space on the bill itself.
PRESIDENCY COLLEGE
Essentials of a valid Endorsement
1. It must be on the instrument. The endorsement may
be on the back or face of the instrument and if no space is
left on the instrument, it may be made on a separate
paper attached to it called allonge. It should usually be in
ink.
2. It must be made by the maker or holder of the
instrument. A stranger cannot endorse it.
3. It must be signed by the endorser. Full name is not
essential. Initials may suffice. Thumb-impression should be
attested. Signature may be made on any part of the
instrument.
PRESIDENCY COLLEGE
4. It may be made either by the endorser merely signing his name on the
instrument No specific form of words is prescribed for an endorsement.
But intention to transfer must be present.
5. It must be completed by delivery of the instrument. The delivery must be
made by the endorser himself or by somebody on his behalf with the
intention of passing property therein. Thus where a person endorses an
instrument to another and keeps it in his papers where it is found after his
death and then delivered to the endorsee, the latter gets no right on the
instrument.
If delivery is conditional endorsement is not complete until the condition is
fulfilled.
6. It must be an endorsement of the entire bill. A partial endorsement i.e.
which purports to transfer to the endorsee a part only of the amount
payable does not operate as a valid endorsement.
PRESIDENCY COLLEGE
Types of endorsements
Blank or
general
endorsement
Full or
special
endorsement
Sans
recource
endorsement
Partial
endorsement
Faculative
endorsement
Restrictive
endorsement
Liability
dependent
upon a
contingency
Conditional
or qualified
endorsement
Sans freis
endorsement
PRESIDENCY COLLEGE
1. Blank or General Endorsement
According to sec 16(1) and 54 when the endorser signs his
name only on the face or back of the instrument, it is known
as blank or general endorsement. A blank endorsement
specifies no endorsee and the instrument in consequence
becomes payable to bearer even though originally it was
payable to order.
PRESIDENCY COLLEGE
2. Full or special endorsement (sec 16(1))
If the endorser, in addition to his signature,
also adds a direction to pay the amount
mentioned in the instrument to, or to the
order of a specified person, the
endorsement is said to be in full
PRESIDENCY COLLEGE
2. Full or special endorsement (sec 16(1))
If the endorser, in addition to his signature,
also adds a direction to pay the amount
mentioned in the instrument to, or to the
order of a specified person, the
endorsement is said to be in full
PRESIDENCY COLLEGE
3. Partial endorsement (sec 56)
It purports to transfer to the endorsee only a
part of the amount payable on the
instrument, such an endorsement does not
operate as a negotiation of the instrument
and is valid.
PRESIDENCY COLLEGE
4. Restriction endorsement (sec 50)
an endorsement is said to be restrictive
when the endorser, by express words,
restricts the right of further negotiation of
the instrument or merely entitle the
endorsee of the instrument to receive the
contents of the instrument for a specific
purpose.
PRESIDENCY COLLEGE
5. Conditional or qualified endorsement
An endorsement is conditional or qualified
which limits or negatives the liability of the
endorser. The endorser limits or excludes
his tow liabilities by putting some condition
in the instrument.
It differs from restrictive endorsement. The
restrictive endorsement prohibits further
negotiability of the instrument.
PRESIDENCY COLLEGE
5. Conditional or qualified endorsement
An endorsement is conditional or qualified
which limits or negatives the liability of the
endorser. The endorser limits or excludes
his tow liabilities by putting some condition
in the instrument.
It differs from restrictive endorsement. The
restrictive endorsement prohibits further
negotiability of the instrument.
PRESIDENCY COLLEGE
a) Sans recourse endorsement
This endorsement is done in such a way
that the endorser does not incur any liability
to the endorsee. It is done by adding the
words “sans recourse”. Eg., pay to X or
order sans recourse.
PRESIDENCY COLLEGE
b) Facultative endorsement
When the endorser increases to his liability
or abandons some rights against the
instrument, it is called as facultative
endorsement. Eg., pay to A or order. Notice
of dishonour waived.
PRESIDENCY COLLEGE
c) Liability dependent upon a contingency
An endorser endorses an instrument in
such a way that his liability becomes
dependent upon the happening of some
specified event, which may or may not
happen. Eg., pay to A or order on his
marriage with B.
PRESIDENCY COLLEGE
d) Sans Frais Endorsement
Where the endorser does not want the
endorsee of any subsequent holder of the
instrument to incur any expenses on his
account, the endorsement is known as san
frais.
PRESIDENCY COLLEGE
Cancellation of endorsement
According to sec 40, “where the holder of a
negotiable instrument, without the consent
of the endorser, destroys or impairs the
endorser’s remedy against a prior party, the
endorser is discharged from liability to the
holder to the same extent as if the
instrument had been paid at maturity”.
PRESIDENCY COLLEGE