business law, what is negotiable instruments?

Information about negotiable instruments, promissory note, bill of exchange and cheque. In this the introduction and characteristics of promissory note or elements of bills of exchange

1. TOPIC: NEGOTIABLE INSTRUMENTS

2. NEGOTIABLEINSTRUMENTS
INTRODUCTION
(1)The law relating to negotiable instruments in India is contained in the Negotiable
Instruments Act, 1881.
(2)TheActcameintoforcewithaffectfromMarch1,1881.
(3)It extends to the whole of India.
(4)TheActcontains147sections.
(5)The Act mentions three kinds of negotiable instruments, namely, promissory notes, bills of
exchange and cheques.
DEFINITION
Thetermnegotiableinstrumentmeansadocumenttransferablebydelivery.Accordingto
section13(1)oftheNegotiable Instruments Act, “A negotiable instrument means a promissory
note, bill of exchange or cheque payable either to order or to bearer.”

3. CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT
A negotiable instruments has the following characteristics:
1.Property: The prossessorof the negotiable instrument is presumed to be the owner of the
property contained therein. The property in a negotiable instrument can be transferred
without any formality.
2.Negotiability: The property in a negotiable instrument is freely transferable by from one
person to another.
3.Good Title: A holder in due course i.e.apersonwhoisabonafidetransfereeofanegotiable
instrumentforvalue,getsagoodtitleevenifthetransferorhadthedefectivetitle.
4.Right tosueinownname:Wherethenegotiableinstrumentisdishonoured, the transferee of
that negotiable instrument has right to sue in his own name for the recovery of the amount.
5.Presumptions:Therearecertain presumptions which are applicable to all negotiable
instruments e.g., consideration has been paid under it, order of endorsement and that of
reasonable time.
6.PromptPayment: A negotiable instrument ensures the holder prompt payment because in
the case of dishonor, the goodwill of the persons who are party to that negotiable instrument

4. may be adversely affected and ruin their credibility.
7.Writing:Anegotiableinstrumentmustbe in writing.
8. Signature: A negotiable instrument must be authenticated by the signature of the maker.
PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTS
1.Consideration:Itshallbepresumedthateverynegotiableinstrument was made, drawn,
accepted or endorsed for consideration.
2.Date: Where a negotiable instrument is dated, the presumption is that it has been made or
drawn on such date, unless the contrary is proved.
3.Timeofacceptance:Unless the contrary is proved, every accepted bill of exchange is
presumed to have been accepted within a reasonable time after its issue and before its
maturity.
4.Timeoftransfer: Unless the contrary is proved it shall be presumed that every transfer of a
negotiable instrument was made before its maturity.
5.Orderofendorsements: Until the contrary is proved, it shall be presumed that the
endorsements appearing upon a negotiable instrument were made in the order in which they
appear there on.

5. 6. Stamp: Unless the contrary is proved, it shall be presumed that a lost promissory note, bill of
exchange or cheque was duly stamped.
7.Holderinduecourse: Every holder of a negotiable instrument is presumed to have paid
consideration for it and to have taken it in good faith.
8.Proofofprotest:Section 119 lays down that in a suit upon an instrument which has been
dishonoured, the court shall on proof of the protest, presume the fact of dishonor, unless and
until such fact is disproved.

6. PROMISSORY NOTE
DEFINITION
Apromissorynoteisdefinedbysection 4 of the Negotiable Instruments Act as, “ 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.’
ESSENTIALS OF A PROMISSORY NOTE
An instrument to be a promissory note must fulfill the following essentials:
(1)It must be in writing: A promissory note must always take the form of a written document.
Mere verbal promise to pay will not do.
(2)The promise to pay must be express: The essential of a promissory note is an express
promise to pay. A mere acknowledgement of debt without express promise to pay is not a
promissory note.
(3)Thepromisetopaymustbeunconditional:Apromissorynotemustcontainan
unconditionalpromiseto pay. The promise to pay must not depend on the happening of a

7. contingency. A conditional promissory note is not negotiable and hence invalid.
(4)Itmustbesignedbythemaker:Thesignatureofthemakeron the face of the note is the
most essential feature. In the absence of the signature of the maker, an instrument cannot be
called a promissory note.
(5)Themakermustbecertain: The maker of the note must be definite. The note must show on
its face the person who is liable as a maker.
(6)Promisemustbetopayacertainsum:Theamountpromisedtobepaid by the promissory
note must be certain and definite. If the amount to be paid is uncertain the instrument will not
operate as a promissory note.
(7)Thepromiseshouldbetopaymoneyandmoneyonly:Itisessential thatthemedium of
payment must be money only and not bonds, bills or any other article. Thus, moneadocument
containing a promise to pay money and paddy is not a promissory note.
(8)Thepayeemustbecertain:Itisessential tothevalidityofapromissorynotethattheperson
who is to receive the money should be capable of being ascertained from the instrument iself.
(9)Otherformalities:Formalitieslikenumber,place,date,attestation,etc.,areusuallyfoundin
thepromissorynote,buttheyarenotessential inlaw.

8. (10) It may be payable on demand or after a definite period of time: Where no time is
mentioned, the note is payable on demand.
(11) It cannot be made payable to bearer on demand:
Form of promissory note: No special form is laid down in the Act. But all the above essentials
must be present. A promissory note may be in the form of a letter or any other form. The
words used must clearly bring out a promise to pay.
Specimen formofPromissoryNote
Patiala
15 July , 2002
On demand, I promise to pay Mr. XY or order Rs.2000 (rupees
twothousandonly) with interest at 8 percent annum for value received.
Stamp
Sd/-A.B.

9. BILL OF EXCHANGE
Definition
Section5definesabillofexchangeas“aninstrument in writing containing an unconditional
order, signed by the maker , directing a certain sum of money only to or to order of a certain
person or to the bearer of the instrument”.
Parties to a bill
There are three parties to a bill of exchange , namely drawer, drawee and payee. The maker of
the bill is called the drawer, the person who is ordered to pay is called the drawee, and the
person to whom or to whose order the money is directed to be paid is called the ‘payee’.
Essentialsofabillofexchange:
(1)It must be in writing.
(2)Itmust contain an unconditional order to pay.
(3)Itmustbesignedbythedrawer.
(4)There must be three parties to the instrument and the parties must be certain.

10. (5) The order must be to pay a certain sum of money.
(6)The instrument must contain an order to pay money and money only.
(7)Itmustcomplywiththeformalities as regards date, consideration, stamp etc.
Abillofexchange like a promissory note may be written in any language. It may be written in
any form of words provided the requirements of the section are complied with.
Specimenformofbillofexchange
Chandigarh
May31,2009
Threemonths after date, pay to XY or order , the sum of
Rs10,000(rupeestenthousandonly)forvaluereceived.
Stamp
Sd/-A.B.
To
M/s P.Q.
ChowkSadar
Meerut

11. Promissorynoteandbillofexchange compared. The following are the points of distinction
between a promissory note and a bill of exchange.
(1)Parties:There are three parties to a bill osexchange namely, the drawer, the drawee and the
payee; while in a promissory note there are only two parties-maker and payee.
(2)Nature of payment: In a bill of exchange, there is an unconditional order to pay, while in a
promissory note there is an unconditional promise to pay.
(3)Acceptance:Abillofexchangerequiresanacceptancesofthedraweebeforeitispresented
for payment, while a promissory note does not require any acceptance since it is signed by
the person who is liable to pay.
(4)Natureofacceptance:A promissory note can never be conditional, while a bill of exchange
can be accepted conditionally.
(5)Copies:A bill of exchange can be drawn in sets,butapromissorynote cannot be drawn in
sets.
(6)Payable to bearer: A promissory note cannot be made payable to a bearer, while a bill of
exchange can be so drawn provided it is not payable to bearer on demand.
(7)Payabletomaker:Inapromissory note, the maker can not pay to himself. While in the case
of a bill of exchange, the drawer and the payee may be one person.

12. CHEQUE
DEFINITION
Achequeisthemeansbywhichthepersonwhohasfundsinthehandofabank
withdraws the same or some part ofit.
Section 6 of the Negotiable Instrument Act defines a cheque as a bill of exchange
drawn on a specified banker and not expressed to be payable otherwise than on
demand and it includes the electronic image of a truncated cheque and a cheque in
the electronic form.

13. Form of cheque: The following is the usual form of a cheque.
N0…………. Dated………………20
CENTRAL BANK OF INDIA THE MALL PATIALA
Pay………………………………………………………………….or Bearer.
Rupees…………………………………………………………………………………………………
Rs……………………………………………………………………………………………………
Account No………………..

14. Cheque and bill of exchange distinguished
Chequeandbillsofexchangeareinmanyrespectsgovernedbythesamerulesandprinciples
astheyhavemanypointsincommon. Both are negotiable instruments. Therearethreeparties
inachequeaswellasinabillofexchange. There is an unconditional order to pay in acheque
and bill of exchange.
(1)Drawee: A cheque is always drawn on a bank or a banker while a bill of exchange can be
drawn on any person including a banker.
(2)Acceptance: A cheque does not require any acceptance, while a bill must be accepted
before the drawee can be mode liable upon it.
(3)Payment: A cheque is payable immediately on demand without any days of grace, but a bill
of exchange is normally entitled to three days of grace unless it is payable on demand.
(4)Crossing: A cheque may be crossed but there is no such a provision in the case of a bill of
exchange.
(5)Stamp: A bill of exchange must be stamped, whereas a cheque does not require any stamp.
(6)Payabletobearerondemand:Achequecan be drawn payable to bearer on demand. But a
bill of exchange cannot be so drawn.

15. THANK YOU
Name: Kavita
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subject: business law