UNIT-3

Negotiable Instruments Act,1881

Negotiable instrument : It is basically a document which contains some monetary value
and is freely transferable. These instruments include examples like cheques, bills of
exchange, etc.
The main characteristics of negotiable instruments are their financial worth and
transferability. As long as an instrument contains these features, it can be a negotiable
instrument.
CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT:

1. Property: The prossessor of the negotiable instrument is presumed to be the

owner of the property contained therein. A negotiable instrument does not
merely give possession of the instrument but right to property also. The
property in a negotiable instrument can be transferred without any formality.

2. Title: The transferee of a negotiable instrument is known as ‘holder in due

course.’ A bonafide transferee for value is not affected by any defect of title
on the part of the transferor or of any of the previous holders of the
instrument

3. Rights: The transferee of the negotiable instrument can sue in his own
name, in case of dishonour. A negotiable instrument can be transferred any
number of times till it is at maturity. The holder of the instrument need not
give notice of transfer to the party liable on the instrument to pay.
 4. Presumptions: Certain presumptions apply to all negotiable instruments e.g., a
presumption that consideration has been paid under it. It is not necessary to write in a
promissory note the words ‘for value received’ or similar expressions because the payment of
consideration is presumed. The words are usually included to create additional evidence of
consideration.

5. Prompt payment: A negotiable instrument enables the holder to expect prompt payment
because a dishonour means the ruin of the credit of all persons who are parties to the
instrument.

Types of negotiable instrument:

Promissory Note [Section 4]

A promissory note is a written instrument that includes promise signed by a person to pay a
certain sum of money to a certain person or to the bearer of that instrument. The one who
makes the promissory note and promises to pay a certain sum of money is called the maker.
And the person to whom the payment is to be paid is called the payee.
For example:
Raj Kumar promises to pay Rs.30,000 to Inderpal Singh. Here Raj Kumar is the drawer or maker and
Inderpal Singh is the drawee or payee to whom payment is to make.

Bill of exchange [Section 5]

A form was written by one person and accepted by another person on which a certain amount of
money is ordered. It is called the bill of exchange.

For example
Jatin sold goods to Rahul on credit for Rs. 20,000 for 2 months. To ensure payment on due date
Jatin draws a bill of exchange upon Rahul for
Rs. 20,000 payable after 2 months. After Rahul writes the word “accepted” on it and append his
signature thereto communicate his acceptance, it becomes a bill of exchange.
Here Jatin is the drawer of the bill and Rahul is the drawee of the bill.
Cheque [Section 6]
It is an exchange bill that is drawn on a specified bank and which is not declared payable in
any manner other than due on demand. It is also called a money order. There are different
types of checks such as Bearer Cheque, Order Cheque, Crossed Cheque, Account payee
Cheque, Stale Cheque, Post-dated Cheque.
For example
Priya has a savings account in the State Bank of India. She wanted to make payment of
Rs.200,000 to Kajal. Priya gave a cheque to Kajal, writing her name on the cheque. Kajal will
present the cheque to HDFC bank and she will get the cash.

Inland Instruments:
Section 11 of The Negotiable Instruments Act, deals with inland instruments. It says that
promissory note, a bill of exchange or a cheque is called inland instrument if any of the
following two conditions are satisfied

a) That are drawn and made payable in India, or

b) That they are drawn on any person resident in India
 Foreign Instrument:
Section 12 of The Negotiable Instruments Act, deals with inland instruments. It says
that any instrument which is not an inland instrument is a foreign instrument. Thus a
bill drawn outside India or on any person who is not a resident of India and resident of
outside India is a foreign bill.
For eg. A bill is drawn in India and made payable in Tehran.

Ambiguous Instruments
Section 17 of The Negotiable Instruments Act, deals with inland instruments. It states
that those negotiable instruments which possess the characteristics of promissory note
under section 4 and bill of exchange under section 5, such instruments are called
ambiguous instruments.

For example:
If in a bill the drawer and the drawee are the same person or the drawee is a fictitious
person or a person having no capacity to contract, the instrument is ambiguous and
the holder may treat it either as a bill or a note.
WHO ARE THE PARTIES TO A NEGOTIABLE INSTRUMENT?

Maker/drawer: the person who makes or executes the note promising to pay the
amount stated therein.

Drawee: The person directed to pay the money by the drawer. The drawee is the
paying bank in case of cheque.

Payee: Payee is the person whose name is written on the promissory note or bill
of exchange or cheque. The payee is entitled to receive amount mentioned in the
note or bill or cheque.

Holder: Holder is either the payee or some other person to whom he may have
endorsed the promissory note or bill of exchange or cheque. A person cannot be a
holder unless he is the payee or indorsee (endorsee) thereof.
Holder in due course: Holder in due course means any person who for
consideration became the possessor of a promissory note, bill of exchange or
cheque, if payable to bearer, or the payee or indorsee thereof, if payable to order,
before the amount mentioned in it became payable, and without having sufficient
cause to believe that any defect existed in the title of the person from whom he
derived his title.”

Endorser: A signature of the owner (the holder of the instrument) would serve
the legal rights to transfer an instrument to another party. The holder of the
instrument who transfers his right to another party by endorsement is called
endorser

Endorsee: If the endorser adds a direction to pay the amount mentioned in the
instrument to, or to the order of, a specified person, the person so specified is
called the “endorsee” of the instrument
Endorsement: If the endorser signs his name only, it is called endorsement in blank. If
the endorsement contains the instructions of endorser to pay the amount mentioned in
the instrument to, or to the order of, a specified person, the endorsement is called
endorsement in full.

Drawee in the case of need: In addition to drawee’s name, the name of a person is
given in the bill or endorsement, to have resorted in case of need. Such person is called
drawee in case of need.

Acceptor for honour: In the event of refusal of acceptance of bill by the original
drawer or in cases of providing better security when demanded by notary public, with
the consent of the holder some other person who is originally not liable for payment of
bill, may accept it for honor of any party liable on the bill . Such acceptor is called
‘Acceptor for honour”.
Who is a Holder?

A person who has obtained the negotiable instrument legally through a third party
by delivery or endorsement is known as a holder. He is usually the payee of a
negotiable instrument. He is entitled to claim the amount due on the negotiable
instruments through the parties liable. The party that is transferring this negotiable
instrument should be capable of doing it in the eyes of law.

Who is a Holder in Due Course?

Holder in due course refers to the person who is in possession of the value before it
becomes overdue when it is payable to the bearer. When it is payable to order, the
holder in due course is the person who is the endorsee or payee of the instrument
before it matures
 HOLDER IN DUE COURSE
COMPARISON HOLDER
(HDC)

Meaning A holder is a person who A holder in due course (HDC)

legally obtains the negotiable is a person who acquires the
instrument, with his name negotiable instrument
entitled on it, to receive the bonafide for some
payment from the parties consideration, whose
liable. payment is still due.

Consideration Not necessary Necessary

Right to sue A holder cannot sue all prior A holder in due course can
parties. sue all prior parties.
Good faith The instrument may or The instrument must be
may not be obtained in obtained in good faith.
good faith.

Privileges Comparatively less More

Maturity A person can become A person can become holder

holder, before or after the in due course, only before the
maturity of the negotiable maturity of negotiable
instrument. instrument.
Negotiation and types of endorsement:

Negotiation :

Negotiation in Negotiable Instrument Act relates to the concept of

transferring the ownership from one person to the other.

When a Negotiable Instrument is transferred from one person to

another in a motive to make him as a holder then it is called as
negotiable. To complete the negotiation it is essential that the
negotiable instrument has to be delivered.

Sec 46 states that the negotiation ends with delivery.

There are two types of negotiation:

Negotiation by delivery: when the instrument passes along with ownership from
one person to another it is called negotiation by delivery here the bearer of the
instrument becomes the owner of the instrument.

Negotiation by endorsement and delivery: when the transferor transfer the

instrument along with the name to whom it is assigned in the face or back of the
instrument it is called endorsement and delivery.

Kinds of negotiation:
. Actual:- Negotiable Instrument change hand physically
• Constructive:- Negotiable Instrument has been given to agent.
• Conditional or special:- Negotiable Instrument can be delivered on condition for
happening or non-happening of such event. The property in this case will not transfer
even after delivery.
What is Endorsement?

Endorsement 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“. –
Negotiable Instruments Act

Thus, an endorsement is signing a negotiable instrument for the purpose of

negotiation.
Person who effects an endorsement is called an “endorser”
Person to whom the negotiable instrument is transferred by endorsement is called
the “endorsed”
Endorsement Meaning:
Signing
on the face or back of negotiable instrument; or
on a slip of paper annexed to the negotiable instrument
By
the holder of negotiable instrument
For the purpose of
negotiating such negotiable instrument
Blank or General Endorsement:

It is a type of endorsement when the endorser just signs on the instrument without
mentioning the name of the person in whose favour the endorsement is made.
Endorsement in blank specifies no endorsee. It simply consists of the signature of the
endorser on the endorsement.

Example: A bill is payable to X. X endorses the bill by simply affixing his signature. This
is an endorsement in blank by X. In this case the bill becomes payable to bearer.
There is no difference between a bill or note endorsed in blank and one payable to
bearer. They can both be negotiated by delivery.

Special or Full Endorsement:

In this type of endorsement contains not only the signature of the endorser but also
the name of the person in whose favour the endorsement is made, then it is an
endorsement in full.
In Special or Full Endorsement an endorsement, it is only the endorsee who can transfer
the instrument
Example: A is the holder of a bill endorsed by B in the blank. A writes over B’s
signature the words “Pay to C or order.” A is not liable as an endorser but the writing
operates as an endorsement in full from B to C.

Partial Endorsement
A partial endorsement is a type of endorsement in which purports to transfer to the
endorsee a part only of the amount payable on the instrument. Such an endorsement
does not operate as a negotiation of the instrument.

Example: A is the holder of a bill for Rs.1000. He endorses it “pay to B or order

Rs.500.” This is a partial endorsement and invalid for the purpose of negotiation.
Restrictive Endorsement
A restrictive endorsement is one which either by express words restricts or prohibits
the further negotiation of a bill or which expresses that it is not a complete and
unconditional transfer of the instrument but is a mere authority to the endorsee to
deal with bill as directed by such endorsement.
Example: “Pay C,“ “Pay C for my use,“ “Pay C for the account of B“ are instances of
restrictive endorsement. The endorsee under a restrictive endorsement acquires all the
rights of the endorser except the right of negotiation.

Conditional or Qualified Endorsement

A type of endorsement where the endorsee limits or negatives his liability by putting
some condition in the instrument is called a conditional endorsement.
A conditional endorsement, unlike the restrictive endorsement, does not affect the
negotiability of the instrument. It is also sometimes called a qualified endorsement.
Dishonour of negotiable instrument:

Dishonour of negotiable instrument means loss of honour or respect for the

instrument in question on the part of the maker, drawee, or acceptor, as the case may
be, which eventually results in non-realization of payment due on the instrument.
Dishonour by non-acceptance:

Any type of negotiable instruments, i.e., bill of exchange, promissory note, or cheque may be
dishonoured by non-payment by the drawee/acceptor thereof. But a bill may also be dishonoured
by non-acceptance because bill of exchange is the only negotiable instrument which requires its
presentment for acceptance and non-acceptance thereof, can amount to dishonour.

Dishonour of negotiable instrument by Non-payment:

A promissory note, bill of exchange, or cheque is said to be dishonoured by non-payment when

the maker of the note, acceptor of the bill, or drawee of the cheque commit default in payment
upon being duly required to pay the same.

Dishonour by non-acceptance vs Dishonour by non-payment:

If a bill is dishonoured either by non-acceptance or by non-payment, the drawer and all the
endorsers of the bill are liable to the holder, provided notice of such dishonour is given to them.
The drawee, on the other hand, shall be liable to the holder only in the event of dishonour by non-
payment.
Dishonour of Cheque for insufficient of funds in the account:

A cheque drawn by a person on an account maintained by him with a bank for payment of any
amount of money to another person can be returned unpaid for lack of enough funds in the said
account. This is called dishonour of cheques for insufficiency of funds (in the drawer’s account)

NOTING AND PROTEST (NEGOTIABLE INSTRUMENT ACT, 1881)

1) Noting –
According to Section 99 of the Negotiable Instrument Act, 1881 when a promissory note or bill
of exchange has been dishonored by non-acceptance or non-payment, the holder may cause such
dishonor to be noted by a notary public upon the instrument, or upon a paper attached thereto,
or partly upon each, such note must be made within a reasonable time after dishonor and must
specify the date of dishonor.
2) Protest
As per Section 100 of the said Act, when a promissory note or bill of exchange has been dishonored by
non-acceptance or non-payment, the holder may, within a reasonable time, cause such dishonor to be
noted and certified by a notary public. Such a certificate is called a protest.

3) Protest for better security :

When the acceptor of a bill of exchange has become insolvent, or his credit has been publicly
impeached (to accuse someone for something ) , before the maturity of the bill, the holder may, within a
reasonable time, cause a notary public to demand better security of the acceptor, and on its being
refused may, with a reasonable time, cause such facts to be noted and certified as aforesaid. Such
certificate is called a protest for better security.

4) Contents of protest (Section 101) –

A protest under section 100 must contain,-

(a) either the instrument itself or a literal transcript of the instrument and of everything written or
printed thereupon;
(b) the nature of the person for whom and against whom the instrument has been protested;
(c) when the note or bill has been dishonored, the place and time of dishonor, and, when
better security has been refused, the place and time of refusal;

(d) the subscription of the notary public making the protest;

(e) in the event of an acceptance for honor or of a payment for honor, the name of the person
by whom, of the person for whom, and the manner in which, such acceptance or payment
was offered and effected.

Notice of protest –

According to Section 102 , when a promissory note or bill of exchange is required by law to
be protested, a notice of such protest must be given instead of notice of dishonor, in the
same manner and subject to the same conditions; but the notice may be given by the notary
public who makes the protest.
Protest for non-payment after dishonor by non-acceptance:

As per Section 103 of the said Act, all bills of exchange drawn payable at some other
place than the place mentioned as the residence of the drawee, and which are
dishonored by non-acceptance, may, without further presentment to the drawee, be
protested for non-payment, in the place specified for payment, unless paid before
or at maturity.

Protest of foreign bills (Section 104) –

Foreign bills of exchange must be protested for dishonor when such a protest is
required by the law of the place where they are drawn.

When noting equivalent to protest

For the purposes of this Act, where a bill or note is required to be protested within a
specified time or before some further proceeding is taken, it is sufficient that the
bill has been noted for a protest before the expiration of the specified time or the
taking of the proceeding; and the formal protest may be extended at any time
thereafter as of the date of the noting. (Section 104A.)