UNIT 3

NEGOTIABLE INSTRUMENTS
UNIT 3 NEGOTIABLE
INSTRUMENTS
Negotiable Instruments Meaning &
Definition, Features, Kinds of Negotiable
Instruments; Meaning, Definition &
Features of Promissory Notes, Bills of
Exchange, Cheques; Crossing of Cheques;
Types of Crossing; Endorsements:
Meaning, Essentials & Kinds of
Endorsement.
NEGOTIABLE INSTRUMENTS

According to Section 13 (a) of the Act,

“Negotiable instrument means a
promissory note, bill of exchange or
cheque payable either to , to order or to
bearer, of the instrument .”
Characteristics Of A Negotiable Instrument

 Its an agreement to pay certain sum of money to other

person
 Freely transferable from one person to another by
mere delivery
 No legal formalities for transfer
 Title free from defects:.
 Tranferee gets better title than transferor
 legal formalities is completed
◦ Consideration
◦ Date:
◦ Time of transfer
◦ duly stamped.
1)Promissory note:

According to negotiable instruments Act

1881, section 4.”A promissory note is an
instrument in writing containing an
unconditional undertaking, signed by the
maker, to pay a certain sum of money
only or to the order of a certain person, or
to the bearer of the instrument
features
It must be in writing
It is a promise or undertaking to pay
The promise must be unconditional.
 It must be signed by the maker .
 The payee and amount payable must be
certain
Should properly stamped and fulfilled
Other formalities
The specimen of promissory note

Bangalore
Rs 8,000 5th April, 2023

Three months after date I promise to pay Mr. Arun

the sum of Rs eight thousand, for the value received.

Stamp
To Mr. Arun
Sd. H. Ravi
Bill of Exchange:

 “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.”
Bills of exchange
Essential Characteristics
t must be in writing
It must contain an order to pay money
The order to pay must be unconditional
It must be signed by drawer and accepted
by drawee
The sum payable must be certain
It must comply with the formalities as
regards date, Amount , stamps, etc.
Bills of exchange
The specimen of a bill of exchange

RS. 10, 000 Bangalore, 3rd March 2023

Two months after date pay to ‘Mr. Manu’ or order the sum of Rs Ten thousand only,
for value received.

To
Mr. Hari Stamp
201/A, Mumbai Accepted

Sd/- Hari
Md. Hasanur Rahman

Bills of exchange
cheque

According to the negotiable instruments

act 1881, section 6, “ a cheque is a bill of
exchange drawn on a specified banker and
not expressed to be payable otherwise
than on demand.”
Features cheque
It must be in writing
A cheque is always drawn on a banker
A cheque can only payable on demand
It must contain an order to pay
The order to pay must be unconditional
The sum payable must be certain
Sample of cheque
articulars Bill of Exchange Promissory note

1. Definition A bill of exchange is an instrument in A promissory note is an

writing containing an unconditional instrument in writing (not
order, signed by the maker, directing being a bank note or a
a certain person to pay a certain sum currency note) containing an
of money only to, or to the order of, unconditional undertaking,
a certain person or to the bearer of signed by the maker, to pay a
the instrument.” certain sum of money only or
to the order of a certain
person, or to the bearer of the
instrument.
2. Number of parties In a bill of exchange there are three In a promissory note there are
parties –the drawer, drawee and two parties – the maker of the
payee note and the payee
3. Promise and order A bill of exchange is an order for A promissory note contains a
making the payment promise to make the payment
4. Acceptance Bill payable after sight requires
acceptance of the drawee before it is Promissory note does not
presented for payment require it
5. Nature of liability The liability of drawer of a bill of
exchange is secondary and The liability of the maker of a
conditional promissory note is primary
and absolute
Bill of Exchange Cheque
drawn on some person or firm Always drawn on banker

used both for inland and foreign used for inland payments
payments.

must be accepted before its payment does not require any such acceptance.
can be claimed

payable on demand or on the expiry of always payable on demand

a fixed period.

three days of grace are allowed from without any days of grace
the due date.

cannot be crossed. Can be crossed

payment of a bill cannot be cancelled Drawer can ask for stop payment
by the drawer.
-

CHEQUE
Format for drawing the cheque
 The cheque should be properly drawn in format
 Date , payee and amount column should be filled
 Amount expressed in words and, figures
 It is neither stale nor post dated nor mutilated
 The signature should tallies with the specimen
 should be drawn on the branch during banking
hours
 There should be sufficient balance in the account
Endorsements should be proper.
 Duty to honour cheque stops

(a) On countermanding-stop payment of

cheque
(b)Notice about the death of the drawer.
(c)garnishee order
(d)Drawer becomes insolvent and/or a lunatic
at the time of drawing
Types of cheque
 Types of cheque

Basis of date Basis of payment Other types

Ante
dated
Current
dated
Post
dated
Out
dated
Open Order Mutilated
cheque cheque cheque
Types of cheque
 Open Cheque
An open cheque is a cheque which is payable at the counter of bank
 Bearer cheque
 A cheque with does no carry any name in the payee column and can
be directly encashed through cash counter.

 Order cheque
 A cheque which is payable only to specified person whos name is
mentioned on the payees coloumn is called order cheque

Crossed Cheque

A crossed cheque is a cheque which is payable only through a banker
where amount will be credited to any account
-
 Outdated or Stale Cheque
Cheque which is drawn after three months from
the date mentioned on the cheque is called
outdated cheque.
Mutilated Cheque

A cheque which is not in good physical condition

or torn is called mutilated cheque.
Material Altered Cheque

A cheque with any corrections or alterations after it

is drawn to bank is called material altered cheque.
 -
 Current Dated Cheque

A cheque which bears present date or same date when cheque is presented to
bank is called current dated cheque.

 Ante-Dated Cheque

A cheque bears a date earlier than date on which it is presented to the bank is
called ante-dated cheque.

 Post-Dated Cheque

A cheque which bears any future date or presented on a day which is

subsequent to the date mentioned is called post-dated cheque.
Crossing of cheque
Crossing is the process of putting two
parallel transverse lines, with or without
any words , on the left hand top corner of
the cheque
Types of crossing
General crossing
If a cheque bears
across its face two
parallel transverse
lines , either with or
without any words it
is general crossing
Special crossing
If a cheque is crossed
by specifying banker
name with or without
2 parallel lines or
either with or without
the words is special
crossing
 General Crossing Special Crossing
1. Drawing of two parallel transverse 1. Drawing of two parallel transverse lines is not
lines is a must. essential.
2. Inclusion of the name of a banker is not
2. Inclusion of the name of a banker is essential.
essential.
3. In Special Crossing paying banker to honor the
3. In General Crossing paying banker to
cheque only when it is presented through the bank
honor the cheque from any bank A/C.
mentioned in the crossing and no other bank.
4. General Crossing can be converted into 4. Special Crossing can never be converted to
a Special Crossing. General Crossing.
.
Account Payee or Restrictive
Crossing

if crossing is done by
adding the words account
payee in both general and
special crossing its
Account Payee crossing.

 In this type of crossing the

banker should credit the
amount of the cheque to
the account of the payee
mentioned on the cheque
only.
 Not Negotiable Crossing

if cheque is crossed by
words 'Not Negotiable'
written between parallel
line it is Not Negotiable
crossing.
It removes negotiability of
instrument
Double Crossing

 When banker to whom

a cheque is crossed,
cross it again to another
bank it is double
crossing.
Endorsement
 An endorsement, is
process of putting
signature on the back of
the instrument for the
purpose of transferring
the instrument to
another
 The person who endorse
the instrument is called
the endorser.
 The person to whom the
instrument is endorsed is
called the endorsee.
Endorsement:
Section 15 of the Negotiable Instrument Act, 1881 deals with the
Endorsement.
 Essential of Valid Endorsement:
1.Endorsement is on the back of the instrument
2.It must be made by the maker or holder.
3.It must be properly signed by the endorser.
4.It must be for the entire Negotiable Instrument.
5.There is no specific form of words are necessary for Endorsement
6. Full Signature is compulsory for the endorsement
 Effects of Endorsement:
1.The property in instrument is transferred from endorser to Endorsee.
2.The Endorsee gets right to negotiate the instrument further.
3.The Endorsee gets the right to sue in his own name to all other
parties.
Types of endorsement
Blank or General Endorsement: Where an endorsement on an
instrument of exchange specifies no endorse, it is an endorsement
in blank. Instrument so endorsed becomes payable to bearer. If the
payee or endorser does not specify the name and only signs his
name it is blank endorsement
 [ Signature]

Full or Special Endorsement: If the endorser adds a direction to pay

the amount specified in the instrument to, or to the order of, a certain
person, then the endorsement is said to be in full.When the payee or
endorser specifies the person to whom instrument is to be paid, the
endorsement is called special endorsement

Pay to the Order of [ Payee's Name]

[ Signature]
Types of endorsement
 Restrictive Endorsement:It is the endorsement by which the endorsee’s right of
negotiating the instrument endorsed is restricted or excluded by express words.
An endorsement is restrictive when it prohibits further transfer of a negotiable
instrument by adding the word “only”
For [Payee's Name] Only
[ Signature]

 Facultative endorsement – Under this the endorser gives up some right to which
they have entitlementA facultative endorsement is one by which the endorser, by
express words, abandons some rights or increases his liability under the
instrument, e.g., by using after signature, words such as ‘notice of dishonour
dispensed with’ or ‘waiver of notice of dishonour’ or notice of dishonour not
required’. The effect of facultative endorsement is to make the endorser liable,
though otherwise under the Negotiable Instruments Act, 1881, he may not be
liable.

: Pay A or order. Notice of dishonour waived

types
 Sans Recourse Endorsement: When the endorser
excludes his/her own liability on the instrument in case of
dishonour of the instrument, the endorsement is known as
‘sans recourse’ endorsement
sans recourse [ Signature]

 “Sans Frais endorsement-In Sans Frais Endorsement the

endorsee does not incur any expenses on his/her account
on the instrument drawn by the endorser. the endorser is
not passing on any financial burden related to the
endorsement process to the recipient.
Sans Frais
[Endorser's Signature]
-
Partial Endorsement:If only a part of the amount of
the instrument is endorsed, it is partial endorsement.
Pay Rs 5000[Partial Amount] to the order of [New Payee's Name]
[ Signature]
 Conditional Endorsement:If the endorser of
instrument specifies any condition to be fulfilled,
such endorsement is called a conditional
endorsement
Payment to be made after [Condition(s) Met]
[ Signature]