Negotiable Instrument

Meaning:
 A negotiable instrument is a signed document promising the amount of payment to a specified
person or assignee.
 In other words, it is a formal type of IOU (I owe you) a transferable, signed document that promises
to pay the bearer an amount at a future date or on demand.
 A payee is a person who is receiving the payment, and his name should be on the instrument.
 These instruments are transferable signed documents promising to pay the amount to the holder
on demand or at any time in future.
 As mentioned above, these documents are transferable. The final holder takes the funds and can
use them as per his/her requirements. This means that, once an instrument is transferred, the
holder of such instrument gets full legal rights to such instrument.
Definition of the negotiable instrument
 As per section 13 of the Negotiable Instruments Act, “A negotiable instrument means a promissory
note, bill of exchange or check payable either to the order or to the bearer.”
 The term “negotiable” in a negotiable instrument refers to the fact that they are transferable to
different parties. If it is transferred, the new holder receives full legal title to it.
CHARASTERISTICS OF THE ACT:
 Section 13 of the Negotiable Instruments Act, 1881 sets out the requirements for a negotiable
instrument to be valid and enforceable.
 According to this section, a negotiable instrument must meet the following requirements:
 It must be in writing.
 It must contain an unconditional promise or order to pay.
 It must be signed by the maker or drawer.
 It must be payable on demand or at a fixed or determinable future time.
 It must be payable to a specific person or to the bearer.
KINDS OF NEGOTIABLE INSTRUMENTS
 As per Section 13 of the Negotiable Instruments Act, “A negotiable instrument means a
 promissory note,
 bill of exchange or
 check payable either to the order or to the bearer.”
SECTION 4: PROMISSORY NOTE
 Section 4 of the Negotiable Instruments Act, 1881 defines “Promissory Note” as a Negotiable
Instrument.
 A “Promissory Note” is a written document in which one party, called the maker, makes an
unconditional promise to pay a certain sum of money to another party, called the payee, on
demand or on a specified date.
 Promissory notes are used as a means of borrowing money, and they are often used in business
and commercial transactions.
 They are also used in personal loans, such as loans between family members or friends.
 Promissory notes are negotiable instruments, which means that they can be transferred from one
party to another.
 The holder of a promissory note has the right to receive payment from the maker, and can transfer
that right to another party through endorsement.
The essential features of a Promissory Note include:
 The name of the maker who promises to pay
 The name of the payee who will receive the payment
 The amount of money to be paid
 The date or event when the payment will be made
 It must be signed, sealed, and written down;
 There must be a commitment or undertaking to pay; The mere admission of debt is insufficient;
 There must be no conditions;
 It must include a commitment to pay just money;
 A promissory note’s maker and payee, or its parties, must be certain;
 It is repayable immediately or following a specific date; and
 The amount owing must be certain.
 If the maker fails to pay the amount due on the promissory note, the payee can take legal action to
recover the amount owed.
 The promissory note can be used as evidence in court to prove the existence of the debt and the
terms of repayment.
PARTIES TO PROMISSORY NOTE
The parties to a promissory note are:
 Maker: The maker is the person who creates the promissory note and promises to pay the amount
specified in the note. The maker is also known as the borrower or debtor.
 Payee: The payee is the person or entity to whom the maker promises to pay the amount specified
in the promissory note. The payee is also known as the lender or creditor.
 Endorser: An endorser is a third party who endorses or signs the promissory note to guarantee the
payment of the note in case the maker defaults. The endorser becomes liable for the payment of
the note if the maker fails to pay.
 Holder: The holder is the person or entity who is in possession of the promissory note and has the
right to receive payment from the maker.
FORMS OF ROMISSORY NOTES
There are different forms of promissory notes, including:
 Simple promissory note: This is the most basic form of promissory note, in which the maker
promises to pay a certain sum of money to the payee at a specified time or on demand.
 Installment promissory note: This type of promissory note specifies that the payment will be made
in installments over a certain period of time.
 Secured promissory note: This type of promissory note is backed by collateral, such as property or
other assets, which the lender can seize if the borrower defaults on the payment.
 Unsecured promissory note: This type of promissory note is not backed by any collateral, and the
lender relies solely on the borrower’s promise to repay the debt.
 Demand promissory note: This type of promissory note is payable on demand by the payee, rather
than at a specified time.
 Joint and several promissory note: This type of promissory note is signed by two or more makers,
who are jointly and severally liable for the payment of the debt.
 Callable promissory note: This type of promissory note gives the lender the option to call in the
loan before the specified maturity date.
These are some of the common forms of promissory notes used in financial transactions.
SECTION 5: BILL OF EXCHANGE
 Section 5 of the Negotiable Instruments Act,1881 defines “Bills of Exchange” as Negotiable
Instrument.
 A “Bill of Exchange” is a written document in which one party, called the drawer, orders another
party, called the drawee, to pay a certain sum of money to a third party, called the payee, on
demand or on a specified date.
 It is used as a means of payment in commercial transactions, especially in international trade.
 A bill of exchange is also a negotiable instrument, which means that it can be transferred from one
party to another.
 The holder of a bill of exchange has the right to receive payment from the drawee, and can transfer
that right to another party through endorsement.
The essential features of a Bill of Exchange include:
 The name of the drawer who orders payment
 The name of the drawee who is ordered to make payment
 The name of the payee who will receive payment
 The amount of money to be paid
 The date or event when the payment will be made
 The signature of the drawer
 There must be a commitment or undertaking to pay; The mere admission of debt is insufficient;
 There must be no conditions;
 It must include a commitment to pay just money;
 A promissory note’s maker and payee, or its parties, must be certain;
 It is repayable immediately or following a specific date; and
 The amount owing must be certain.
 If the drawee fails to pay the amount due on the bill of exchange, the payee can take legal action to
recover the amount owed.
 The bill of exchange can be used as evidence in court to prove the existence of the debt and the
terms of repayment.
PARTIES TO BILL OF EXCHANGE
There are three parties involved in a bill of exchange:
 Drawer: The drawer is the person who creates the bill of exchange and orders the payment. The
drawer can be an individual or a company.
 Drawee: The drawee is the person or entity upon whom the bill of exchange is drawn, and who is
responsible for making the payment. The drawee can be an individual or a company, and is usually
the debtor of the drawer.
 Payee: The payee is the person who is entitled to receive the payment. The payee can be the
drawer or any other person to whom the drawer wants to make the payment.
In addition to these three parties, there may also be an endorser or an endorsee in some cases.
FORMS OF BILL OF EXCHANGE
There are different forms of bills of exchange, including:
 Sight bill: This type of bill of exchange is payable immediately upon presentation to the drawee (the
person or entity required to make the payment).
 Time bill: This type of bill of exchange is payable at a fixed or determinable future date.
 Demand bill: This type of bill of exchange is payable on demand by the payee.
 Clean bill: This type of bill of exchange does not have any accompanying documents or goods.
 Documentary bill: This type of bill of exchange is accompanied by documents such as bills of lading
or invoices, which prove the existence of the underlying goods being traded.
 Inland bill: This type of bill of exchange is drawn and payable within the same country.
 Foreign bill: This type of bill of exchange is drawn in one country and payable in another country.
These are some of the common forms of bills of exchange used in international trade transactions.
SECTION 6: CHEQUE
 Section 6 of the Negotiable Instruments Act 1881, also defines “Cheque” as Negotiable Instrument.
 A “Cheque” is a written document that directs a bank or financial institution to pay a certain sum of
money to a person or entity named on the cheque.
 It is a type of negotiable instrument that is widely used for making payments in business and
personal transactions.
 Cheques can be either bearer cheques or order cheques.
 Bearer cheques can be encashed by anyone who presents the cheque to the bank, while order
cheques can only be encashed by the payee named on the cheque or by someone who has been
authorized by the payee
 Cheques can also be post-dated, which means that they are dated for a future date when payment
is to be made.
 They can also be crossed, which means that they can only be paid into a bank account and cannot
be encashed over the counter.
 In the case of Surendra Madhavrao Nighojakar v. Ashok Yeshwant Badave (2001), the Supreme
Court of India held the following:
1. A cheque is a bill of exchange written by the owner of an account payable on demand to a bank.
2. A post-dated cheque becomes a cheque under Section 138 of the Negotiable Instruments Act of
1881 on the date specified on the face of the cheque, and the 6-month term must be calculated
from that date for purposes of Proviso (a) of Section 138 of the Negotiable Instruments Act of
1881.
3. The cheque is not made payable in any other way than on demand just because the payment date
for it has been moved to a later date.
4. Legal action may be brought against the banker (the drawee in the case of a cheque) if it honours
the cheque before the date stated on the cheque’s face.
5. When a cheque is described as “payable on demand,” the payee of the cheque is referring to
“payable at once.”
The essential features of a Cheque include:
 The name of the account holder who is authorizing payment
 The name of the payee who will receive payment
 The amount of money to be paid
 The date on which the cheque was issued
 The signature of the account holder
 If there are insufficient funds in the account to cover the amount of the cheque, the cheque will
bounce, and the bank will not honour it.
 The person or entity that presented the cheque may be charged a fee for the bounced cheque, and
the account holder may be liable for any damages or legal action resulting from the bounced
cheque.
PARTIES TO CHEQUE
The parties involved in a cheque transaction are:
Drawer: The drawer is the person or entity that writes the cheque and orders the payment of a specific
amount to the payee.
Payee: The payee is the person or entity that is named in the cheque as the recipient of the payment.
Drawee: The drawee is the bank or financial institution on which the cheque is drawn, and which is
responsible for making the payment to the payee.
Endorser: An endorser is a third party who endorses or signs the back of the cheque to transfer the right to
receive payment to another party.
Holder: The holder is the person or entity who is in possession of the cheque and has the right to receive
payment from the drawee.
These are the main parties involved in a cheque transaction. However, in some cases, there may be
additional parties involved, such as a co-drawer or a guarantor, who assume liability for the payment of the
cheque.
FORMS OF CHEQUES
There are different forms of cheques, including:
Bearer cheque: This type of cheque can be encashed by anyone who presents it to the drawee bank, as
long as the cheque is not crossed or marked “account payee only.”
Order cheque: This type of cheque can only be encashed by the payee named in the cheque or by
someone authorized by the payee.
Crossed cheque: This type of cheque is marked with two parallel lines across the face of the cheque,
indicating that the cheque can only be deposited into a bank account and cannot be encashed over the
counter.
Open cheque: This type of cheque does not have any crossing, and the payee can either deposit the
cheque into their bank account or encash it over the counter.
Post-dated cheque: This type of cheque has a future date written on it, and it cannot be encashed until
that date.
Traveller’s cheque: This type of cheque is used for travel purposes and is pre-printed with the name of the
payee. It can be used as a form of payment in foreign countries and can be replaced if lost or stolen.
Self cheque: This type of cheque is written by the account holder and is payable to themselves. It can be
used to withdraw cash or transfer funds between accounts.

Difference between promissory note and bill-of-exchange

1. A bill of exchange contains an unconditional order to pay, but a promissory note contains an
unconditional promise to pay.
2. There are only two parties in a promissory note, the maker and the payee, whereas there are
three parties in a bill of exchange, namely, the drawer, the drawee, and the payee.
3. In a promissory note, acceptance is not necessary; in a bill of exchange, however, the drawee
must accept.
4. In a bill of exchange, the obligation of the drawer is secondary and contingent upon the
drawee’s failure to pay; in a promissory note, the liability of the drawer or the note’s
manufacturer is main and absolute.
Difference between cheque and bill-of-exchange
1. A bill of exchange can be drawn on anyone, including a banker, unlike a cheque, which is drawn on
a banker.
2. According to Section 19 of the Negotiable Instruments Act of 1881, a cheque is always payable
immediately; a bill of exchange, however, is either payable immediately or after a certain amount
of time.
3. One can cross a cheque to make it non-negotiable, but one cannot cross a bill of exchange.
4. Acceptance is not necessary for a cheque, but it is necessary for a bill of exchange.