2. Negotiable Instruments
• According to Section 13(i) “ a negotiable instrument means a
promissory note, bill of exchange or cheque payable either on
order or to bearer”.
• It is a written and signed document entitling a person to a
sum of money specified in it and which is transferable from
one person to another .
• Thus, the term “negotiable instrument” literally means ‘a
written document which creates a right in favour of
somebody and is freely transferable by delivery.’
3. Presumptions
1. Consideration : Every negotiable instrument is deemed to
have been drawn and accepted , endorsed, negotiated, or
transferred for consideration
2. Date : Every negotiable instrument must bear the date on
which it is made or drawn
3. Acceptance : Every Bill of exchange was accepted within a
reasonable time after the date mentioned therein and before
the date of its maturity
4. Transfer : Every transfer should be made before the expiry
6. Promissory Notes
• Section 4 defines it 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”.
• The person who makes the promissory note is called the
maker.
• The person to whom payment is to be made is called the
payee. e.g. –
• I promise to pay B or order rs. 500
• I promise to pay B Rs.500 on D’ death, provided D leaves me
enough to pay that sum
8. Essentials of Promissory Note
• It must be in writing
• It must contain express promise to pay :- ‘I am liable to pay’
• The promise to pay must be unconditional
• It must be signed by maker
• The maker must be certain- It must describe the name &
designation of the maker, sum of money
• There are 2 parties involved i.e. maker and the payee
• The payee must be certain- It is essential that it must contain a
promise to pay some person ascertained by name or designation.
• The sum payable must be certain
• The payment must be in legal money
• A currency note is not a promissory note
9. Bill of Exchange
• Section 5, is defined as “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 of the instrument”.
• Parties to bill of exchange :
• Drawer – The person who makes/orders to pay bill of exchange.
• Drawee – The person who is directed to pay on bill. On acceptance
he becomes acceptor.
• Payee – The person to whom the payment is to be made.
• Drawer & Payee can be the same person.
• X sells goods worth Rs. 2000 to Y & allow him 3 months time to pay
the price. X then draws a bill on Y “ Three months after date, pay to
my order the sum of Rs. 2000 for value received”. X is drawer . Y is
Drawee.
10. Essential of Bills of Exchange
• It must be in writing
• It must contain an order to pay and a promise or request
• The order must be unconditional
• There must be 3 parties i.e. : drawer, drawee, and payee
• The parties must be certain
• It must be signed by the drawer
• Number, date and place are not essential
12. Cheques
• Section 6, defines it as “ A cheque is a bill of exchange drawn
on a specified banker & not expressed to be payable
otherwise than on demand”.
• It is always drawn on a bank
• It is payable to bearer on demand
• Parties To Cheque:
1. Drawer – who makes the cheque
2. Payee – to whom payment is to be made
3. Drawee – Bank .
13. Meaning of Crossing of Cheque
• Crossing of a cheque is a unique feature associated with a
cheque affecting to a certain level the responsibility of the
paying Banker and also its negotiable Character.
• Crossing of a Cheque is a direction to a particular Banker by
the Drawer that Payment should not be made across the
Counter. The payment on the crossed Cheque can be collected
only through a Banker.
• Crossing of the Cheque is affected by drawing two parallel
Transverse lines .
• The Cheque that is not crossed is an open Cheque.
14. Types of cheque
• There are two types of cheque:
1. Open cheque – those which can be en cashed across the
counter of the bank. Liable to great risk if stolen or lost.
Finder can get payment from bank.
2. Crossed cheque – which bears two transverse lines with or
without the words “ & co.”
15. Various kinds of Crossing
1. General Crossing:- which bears across its face the words “ &
co.” or the words “not negotiable”. For general crossing two
transverse lines on the face of cheque are essential. The
paying banker shall pay only to a banker. There are two
sloping parallel lines, marked across its face
• The cheque bears an short form "& Co. "between the two
parallel lines
• The cheque bears the words "A/c. Payee" between the two
parallel lines.
• The cheque bears the words "Not Negotiable" between the
two parallel lines.
17. Promissory Note
1. It contains a promise to pay.
2. It is presented for payment
without any previous
acceptance by the maker.
3. It cannot be made payable to
the maker himself. The maker
and the payee cannot be the
same person.
4. In the case of a promissory
note there are only two
parties, the maker and the
payee.
5. A promissory note can never
be conditional.
6. In case of dishonour no notice
of dishonour is required to be
given by the Holder
Bill of Exchange
1. It contains an order to pay.
2. It is required to be accepted either
by the drawee or by some one else
on his behalf, before it can be
presented for payment.
3. The drawer and payee or the
drawee and the payee may be the
same person.
4. There are three parties, drawer,
drawee and payee.
5. A bill of exchange cannot be
drawn conditionally, but it can be
accepted conditionally with the
consent of the holder.
6. A notice of dishonour must be
given in case of dishonour of a Bills
of Exchange.
18. Cheque
1. Drawee: Cheque can be drawn
only on a banker.
2. Time of payment: A cheque is
payable on demand.
3. Grace period: Cheque is payable
on demand and no grace period is
allowed.
4. Notice of dishonour: Notice of
dishonour is not necessary.
5. Acceptance: A cheque is not
required to be presented for
acceptance. It needs to be
presented only for payment.
6. Crossing: A cheque may be
crossed.
7. Validity period: A cheque is usually
valid for a period of six months.
Bill of exchange
1. The drawee may be any person.
2. A bill may be drawn payable on
demand or on expiry of certain
period after date or sight.
3. While calculating maturity three
day’s grace is allowed.
4. A notice of dishonour is required.
5. Bills require presentment for
acceptance and it is better to
present them for acceptance even
when it is not essential to do so.
6. A bill of exchange cannot be
crossed.
7. A bill may be drawn for any period.
19. • One of the essentials feature of a negotiable
instrument is its transferability. A negotiable
instrument may be transferred from one
person to another in either of the followings
way-
• 1-By negotiation
• 2-By assignment
20. Modes of negotiation
• By delivery
• Ex-A the holder of a negotiable instrument
payable to bearer , delivers it to B’s agent to
keep it for B. The instrument has negotiated.
• By endorsement
