NEGOTIABLE INSTRUMENTS - Banking regulation and operations (BRO)

Notes 14 Pages

Savitribai Phule Pune University

Bachelor of Business Administration

AYK

Contributed by

Alpa Yash Khare

FACULTY NAME: Mrs NALINI.N
COLLEGENAME: MES INSTITUTE OF MANAGEMENT
SUB:BANKING REGULATION AND OPERATION

UNIT-3
NEGOTIABLE INSTRUMENTS
NEGOTIABLE INSTRUMENTS
MEANING:
Many documents are used in the modem commercial world. But, certain documents are freely
used in commercial transactions which are called negotiable instruments. ‘Negotiable’ means
transferable whereas ‘instrument’ means a document, therefore negotiable instruments means
a transferable document. A negotiable instrument is one the legal title of which can be
transferred freely from all defects and the transferee can sue in his own name. But this
negotiable instrument is not assignable, but transferable. Thus, negotiability "easy
transferability from one person to another in return for consideration". Negotiable
Instruments Act In India, the negotiable instruments are governed by the Negotiable
Instruments Act of 1881. Sec.13 of the Negotiable Instruments Act simply states that
"negotiable means promissory note of exchange or cheque payable either to order or to bearer
". Thus, Law recognizes three kinds of negotiable instruments, namely a cheque, a bill of
exchange and a promissory note. But, in recent times because of mercantile usage or custom,
certain other documents have been included in the category of Negotiable Instruments there
are: dividend warrants, bearer bonds, bearer scrips debentures payable to bearer, share
warrants to bearer and treasury bills. Definition: A Negotiable Instruments thus plays a key
role in the modern business as a document which can be transferable with ease. Wills defines
it as "one property is acquired by anyone who takes it bonafide and for value, not
withstanding any defects of title in the person from whom he took it."

Characteristics of Negotiable Instruments
(i) Free Transfer: there is no formality to be complied with for the transfer of a
negotiable instrument. It can be very easily transferred from one person to
another, either by mere delivery or, by endorsement and delivery.
(ii) Transfer free from Defects: it confers an absolute and goods title on the
transferor has a bad title to the instrument, he can still pass on a good title to any
holder, who takes it in good faith and without negligence and for valuable
consideration. Thus, it cuts off prior defences in the instruments. This is a peculiar
feature of a negotiable instrument.
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(iii) Right to Sue: it confers a right on the holders to Sue in his own name, in case of
need.
(iv) No Notice of transfer: the transferor of Negotiable Instruments can simply
transfer the documents, without serving any notice of transfer, to the party who is
liable on the instruments to pay.
(v) Presumptions as Negotiable Instruments: Secs.118 and 119 of the Negotiable
Instruments Act deal with certain presumptions which are applicable only to all
Negotiable Instruments. For instance, it is presumed that the instrument has been
always obtained for consideration. Likewise there are other presumptions
regarding date time of acceptance, time of transfer, order of endorsements, stamp
holder to be a holder in due course etc.
(vi) Credit of the party: the credit of the party who signs the Instruments to the
instruments. Therefore, such instruments will never be dishonored normally.
Types of Negotiable Instruments
In India law recognizes only three instruments as negotiable and they are:
(i) Promissory note;
(ii) Bill of Exchange
(iii) Cheque.

PROMISSORY NOTE
A promissory note has been defined by Sec. 4 of the Act as follows: A "promissory note" is
an instrument in writing (not being a bank-note or a currency note) 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 making the promise to pay is called the "maker" and the person to whom the
payment is to be made is called the "payee". Arun is the maker and Vijay is the payee. Thus a
promissory note contains a promise by the debtor to the creditor to pay a certain sum of
money after a certain date. Hence, it is always drawn by the debtor. He is called the maker' of
the instrument.
Essentials of Valid Promissory Note:
1. It must be in writing: A promissory note must be in writing. An oral promise cannot
become a promissory note. It may be handwritten, typed or printed. It also includes writings
in pencil.
2. An express promise to pay: There must be an express promise to pay. It cannot be
implied. A mere acknowledgement of a debt is not sufficient. For example, a promissory
note, "I am indebted to pay B Rs. 500", is not a promissory note because there is not an
express promise to pay but only an acknowledgement of debt. It should be noted that the use
of the word 'promise' is not necessary. However, there must be clear intention to show an
unconditional undertaking to pay.
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3. Promise must be certain and unconditional: The promise to be valid must not be
uncertain or conditional, otherwise the instrument will be invalid. Examples:
(a) "I promise to pay B Rs. 500 when I am able to pay." (b) "I promise to pay B Rs. 500 on
my marriage with C," However, a promise to pay which is conditional on the happening of an
event which must happiness not conditional within the meaning of Sec. 4,
For example:
(i) Promise to pay at a specified time;
(ii) Promise to pay at a specified place;
(ii) Promise to pay after the happening of an event which is certain to happen, may be
uncertain. For example, a promise to pay on the death of a certain person is not
regarded conditional within the meaning of Sec.
4. The instrument must be signed by the maker: The instrument be signed by the maker
even if it has been written by the promissor himself in his own handwriting. The law is not
very particular about the place or form of signature. The signature may be done at any place,
even at the top or at the back of the instrument. It is not necessary that the signature should be
done at the bottom. The signature may be in full or mere initials. It may be in pencil or ink.
Even a rubber stamp or facsimile may be used for the signature. The only thing is that it
should prima facie show the intention of the maker to sign the instrument. In case the maker
of the promote is illiterate, his thumb impression is sufficient.

5. The amount of the instrument must be certain: The amount to be paid must be certain;
otherwise the instrument will be invalid.
For example, A promises to pay B Rs. 500 and all other sums which become1 due. This is not
a valid promissory note because the sum is not certain as nobody knows what other sums will
become due in the above case. However, a promise to pay money with interest is valid. If the
rate of interest is not given, it will not be valid. For example, A's promise to pay B Rs. 500
with interest, is not valid.
6. Promise to pay must be in legal tender money: The promise to pay must be in legal
tender money of India. It will be invalid if it is payable in foreign money or in goods.
Examples: (a) A promises to pay to B 500 at Mumbai. It is not a valid promissory note A
promises to pay B Rs. 500 and a suit. It is
7. Bank note or currency note is not a promissory note: They have been expressly
excluded from the definition as they are treated at par with money. In other words, a bank
note or a currency note is money itself.
8. The parties must be certain: The person making the promise, i.e., the person by whom
the payment is to be made and the person to whom the payment is to be made must be
certain. They may be named or their designations may be given. The maker may be a single
person or may be more than one person. In case there are two or more persons, they will bind
themselves jointly and severally or jointly but not alternatively. A promissory note payable to
the maker himself is not valid promissory note, however, if it is endorsed by him, it becomes
a bearer instrument and is valid.
9. Miscellaneous formalities: Promissory note must be stamped according to the Indian
Stamp Act, otherwise it will be inadmissible in evidence. However, other formalities like
place of making the instrument, date or the words, "value received" are not necessary in law.
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In practice, however, these formalities are usually complied with. The date of the instrument
can be proved independently.

BILL OF EXCHANGE
A bill of exchange has been defined under Section 5 of the Act as “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 order of, a certain person or to the bearer of the
instrument.”
A bill of exchange is also called a draft. 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. In some cases drawer and payee may be one person.
The payee, or if, it is endorsed; endorsee is called the holder of the bill. The drawee of a bill
of exchange who has signified his assent to the order of the drawer is called the acceptor. The
acceptor becomes liable to the holder only when he has communicated his assent but not
before.
Essentials of a bill of exchange:
In order that an instrument may be called a bill of exchange it should satisfy the following
conditions:
1. It must be in writing.
2. It must contain an unconditional order to pay.
3. It must be signed by the drawer.
4. There must be three parties to the instrument and the parties must be certain.
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. It must comply with the formalities as regards date, consideration, stamp etc.

Difference between Promissory note and bill of exchange

Sl no
Basis of difference
Bill of exchange
Promissory note
1
Parties
There are three parties to a
bill of exchange, 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.
A bill of exchange requires an
acceptance of the drawee
before it is presented for
payment,
while a promissory note does
not require any acceptance
since it is signed by the
persons who is liable to pay
4
Liability
the liability of a drawer of bill
of exchange is secondary and
conditional. It is only when
the drawee fails to pay that
the drawer would be liable as
While the liability of the
maker of a promissory note
is primary and absolute,
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a surety.
5
Notice of dishonor
In case of dishonor of bill of
exchange either due to non-
payment or non-acceptance,
notice must be given to all
persons liable to pay.
But in the case of a
promissory note, notice of
dishonor to the maker is not
necessary.
6
Maker’s position
Maker’s position The drawer
of a bill of exchange stands in
immediate relationship with
the acceptor and not the
payee.
While in the case of a
promissory note, the maker
stands in immediate
relationship with the payee.
7
Nature of
acceptance
a bill of exchange can be
accepted conditionally.
while a promissory note can
never be conditional,
8
Copies
A bill of exchange can be
drawn in sets,
but a promissory note cannot
be drawn in sets.

9
Payable to bearer
a bill of exchange can be so
drawn provided it is not
payable to bearer on demand.
while a promissory note
cannot be made payable to a
bearer,
10
Payable to maker
in the case of a bill of
exchange, the drawer and the
payee may be one person.
While in a promissory note,
the maker cannot pay to
himself.
11
Protest

Foreign bills must be
protested for dishonour when
such protest is required by the
law of the place where they
are drawn.
But no such protest is
required in the case of a
promissory note.

CHEQUES
A cheque, being a Negotiable Instruments can be passed from hand to hand easily and so it
has become a popular mode of payments. A cheque is the most economical and safe method
of money transaction because the transfer cost is very low and also the possibility of loss is
minimum.
A cheque is a document that orders a bank to pay a specific amount of money from a person's
account to the person in whose name the cheque has been issued. The person writing the
cheque, the drawer, has a transaction banking account (often called a current, cheque,
chequing or checking account) where their money is held. The drawer writes the various
details including the monetary amount, date, and a payee on the cheque, and signs it, ordering
their bank, known as the drawee, to pay that person or company the amount of money stated.

A cheque, is a bill of exchange drawn on a specified banker, expressed to be payable only on
demand (Sec.6). Although a cheque is a bill of exchange, yet is have two additional
characteristics, namely:
(i) A cheque is always drawn on a specified banker with whom the drawer has
deposited the money;
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(ii) It is always payable on demand. Thus all cheques are bills of exchange but all bills
of exchange are not cheques.

THE SALIENT FEATURES OF A CHEQUE
1. Instruments in writing: A cheque must necessarily be an instrument in writing. Oral
orders therefore do not constitute a cheque. There is no specific rule regarding the writing
materials to be used. According to the Negotiable Instruments Act, writing out cheques with
lead pencils also. But, bankers in their own interest, and in the interest of their customers,
allow the cheques to be drawn only in ink. In all other cases, fraudulent alterations
unauthorized by the drawer are easy to make but difficult to detect.
2. An Unconditional Order: A cheque is an order to pay and it is not request. It is not
essential that the word 'order' must form a part of the writing because the word ‘order' must
form a part of the writing because the word 'pay' itself denotes a command and words like
'please' or 'kindly' are dispensed with in cheque.
3. On a Specified Banker: A Cheque is always drawn on a particular banker only. Usually
the name and address of the banker is clearly printed of the cheque leaf itself. It is advisable
that the full name of the banker is mentioned in the cheque. For e.g. instead of "l O B" it must
be written "Indian Overseas Bank."
A cheque drawn on a particular branch of a particular bank cannot be encashed at another
branch of the same bank, unless there is an agreement between the parties.
4. Payee to be certain: In order that a cheque may be a valid one, it must be made payable to
the order of a certain specified person or to his agent or the bearer thereof. That is why Sir
John Paget rightly points out that "A normal cheque is one in which there is a drawer, a
drawee whom the amount the cheque is payable. The payee must, therefore, be a certain
person. He may be a human being or an artificial person i.e., a body corporate, e.g., a
company, an authority, a trade union etc.
5. A Certain Sum of Money: A cheque is usually drawn for a definite sum of money.
Indefiniteness has no place in monetary transaction any phrase like 'less than Rupee One
Hundred Only' or Above rupees two hundred only does not give a clear and concrete idea to
the parties concerned and it will render the cheque invalid. That is why the modem bankers
request their customers to draw the amount both in words and figures
6. Payable on Demand: A cheque is always payable only on demand. It is not necessary to
use the word ‘on demand’ as in the case of a demand bill. As per Sec.19 of the Negotiable
Instruments Act, unless a time factor is specified by the drawer, the cheque is always payable
on demand.
7. To signed by the drawer: The cheque must be signed by the drawer (maker) i.e., the
drawer normally puts his- signature at the bottom right hand comer of the cheque. The
signature must be that of the person in whose name the account is kept or his authorised
agent. When the signature differs from the specimen or it is slightly different, the banker need
not honour the cheque.

TYPES / KINDS OF CHEQUES

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1. Bearer Cheque: When the words "or bearer" appearing on the face of the cheque are not
cancelled, the cheque is called a bearer cheque. The bearer cheque is payable to the person
specified therein or to any other else who presents it to the bank for payment. However, such
cheques are risky, this is because if such cheques are lost, the finder of the cheque can collect
payment from the bank.
2. Order Cheque: When the word "bearer" appearing on the face of a cheque is cancelled
and when in its place the word "or order" is written on the face of the cheque, the cheque is
called an order cheque. Such a cheque is payable to the person specified therein as the payee,
or to any one else to whom it is endorsed (transferred).
3. Uncrossed / Open Cheque: When a cheque is not crossed, it is known as an "Open
Cheque" or an "Uncrossed Cheque". The payment of such a cheque can be obtained at the
counter of the bank. An open cheque may be a bearer cheque or an order one.
4. Crossed Cheque: Crossing of cheque means drawing two parallel lines on the face of the
cheque with or without additional words like "& CO." or "Account Payee" or "Not
Negotiable". A crossed cheque cannot be encashed at the cash counter of a bank but it can
only be credited to the payee's account.
5. Anti-Dated Cheque: If a cheque bears a date earlier than the date on which it is presented
to the bank, it is called as "anti-dated cheque". Such a cheque is valid up to three months
from the date of the cheque.
6. Post-Dated Cheque: If a cheque bears a date which is yet to come (future date) then it is
known as post-dated cheque. A post dated cheque cannot be honoured earlier than the date on
the cheque.
7. Stale Cheque: If a cheque is presented for payment after three months from the date of the
cheque it is called stale cheque. A stale cheque is not honoured by the bank

CROSSING OF CHEQUES
Cheques are of two types, open cheques and crossed cheques.
Open cheques are those which are paid over the counter of the bank. In other words, they
need not be put through a bank account. Open cheques are liable to great risk in the course of
circulation. They may be either lost or stolen and the finder or thief can get it encased at the
bank unless the drawer has in the meantime countermanded payment. With a view to
avoiding such risks, and protect the owner of cheque, a system of crossing was introduced.

Crossing is a direction to the banker not to pay the cheque across the counter but to pay to a
bank only or to particular bank in an account with the bank. Thus crossing provides a
protection and safeguard to the owner of the cheque as by securing payment through a
banker; it can easily be detected to whose use the money is received. Crossing does not,
however, affect the negotiability or transferability of a cheque.
Kinds of crossing:
Crossing is of two type's namely general crossing and special crossing.
1. General Crossing: In a general crossing, simply two parallel transverse lines, with or
without the words 'not negotiable' in between, may be drawn. Such a cheque is crossed
generally.
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The effect of general crossing is that the payment of the cheque will not be made at the
counter; it can be collected only through a banker.
Essential of General Crossing:
1. Two lines are to paramount importance in crossing.
2. The lines must be drawn parallel and transverse, Transverse means, that, they should be
arranged in a crosswise direction. They should not be straight lines.
3. The lines are generally drawn on the left hand sign so as not to obliterate or alter the
printed number of the cheque. Preferably, the line should cut cross some of the writings.
4. The words ‘And company' or its abbreviation may be Written in between the lines. They
themselves are not essential, and so, they do not constitute crossing without two parallel
transverse lines.
5. So also, the words 'Not negotiable' may be added to a crossing but they themselves do not
constitute a crossing.
Significance of general crossing:
(i) The effect of general crossing is that it gives a direction to the paying banker.
(ii) The direction is that, the paying banker should not pay the cheque at the counter. It should
be paid only to a fellow banker. In other words, payment is made through an account and not
at the counter.
(iii) If a crossed cheque is paid at the counter contravention of the crossing:
 The payment does-not amount to payment in due course. So, the paying banker will
lose his statutory protection.
 He has no right to debit his-customer's account since, it will constitute a breach of his
customer's mandate.
 He will be liable to the drawer for any loss, which he may suffer,
 He will be liable to the true owner of the cheque who may be a third party,
irrespective of the fact, that, there is no contract between the banker and the third
party. As a general rule, a banker is answerable only to his customer and this liability
to a third party here is an exception.
(iv) The main intention of crossing a cheque is to give protection to it. When a cheque is
crossed generally, a person who is not entitled to receive its payment is prevented from
getting that cheque cashed at the counter of the paying banker.
2. Special Crossing
A special crossing implies the specification of the name of a banker on the face of the cheque.
Sec.124 of N.I. Act 1881 reads. “Where a cheque bears across its face an addition of the
name of a banker, either with or without the words “Not Negotiable” that addition shall be
deemed a crossing and the cheque shall be deemed to be crossed specially, and to be
crossed to that banker”.
Drawing of two transverse and parallel lines is not necessary in case of a special crossing.
When a cheque has been specially crossed, the banker upon whom it has been drawn will
make the payment only to that banker in whose favour it has been crossed. The effect to
special crossing is that the paying banker will be the amount of the cheque only through the
bank named in the cheque.
Essential of Special Crossing:
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(a) Two parallel transverse lines are not at all essential for a special crossing.
(b) The name banker must be necessarily specified across the face of the cheque. The name
of the banker itself constitute special crossing.
(c) It must appear on the left hand side, preferably on the corner, so as not to obliterate the
printed number of the cheque.
(d) The two parallel transverse line and the words 'Not negotiable' may be added to a special
crossing.

Significance of special crossing:
is also a direction to the paying banker. The direction is that, the paying banker should
pay the cheque only to the banker whose name appears in the crossing or to his agent.
n the capacity of
its agent, the paying banker is justified in returning the cheque.
cheque still safer because, a person, who does not have a real claim for it, without find it
difficult to obtain payment. In special crossing, the cheque is specially crossed to the payee's
banker.

DIFFERENCE BETWEEN GENERAL AND SPECIAL CROSSING

GENERAL CROSSING
SPECIAL CROSSING
1. Drawing of two parallel transverse lines is
not essential.
Drawing of two parallel transverse lines is a
must.

2, Inclusion of the name of a banker is not
essential.

Inclusion of the name of a banker is essential.

3,In General Crossing paying banker to
honor the cheque from any bank A/C.

In Special Crossing paying banker to honor
the cheque only when it is presented through
the bank mentioned in the crossing and no
other bank.
General Crossing can be converted into a
Special Crossing.

Special Crossing can never be converted to
General Crossing
In case of General Crossing the words “And
Company” or “& Company” or “Not
Negotiable” between the transverse lines to
highlight the crossing does not carry special
significance.
In case of Special Crossing the name of a
banker may be written within two parallel
transverse lines or with the words “And
Company” or “Account Payee Only” or “Not
Negotiable” the inclusion of these words has
become customary.

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3. Not Negotiable Crossing: A person is taking cheque crossed generally or specially,
bearing in either case the words 'not negotiable' shall not be able to give a better title to the
holder than that of the transferor.
The effect of a not negotiable crossing is that the cheque can be transferred but the transferee
will not acquire a better title to the cheque. Thus a cheque is deprived of its essential feature
of negotiability.
The objects of "not negotiable" crossing is to protect the drawer against loss or theft in the
course of transit.
Significance of not negotiable crossing: 'Not Negotiable' does not mean transferable. Not
Negotiable crossing does not affect the transferability; it kills only the 'negotiability'.
Negotiability is something different from transferability. As per law, negotiability means
transferability by mere delivery or endorsement and delivery plus transferability free from
defect.
4. Account Payee Crossing: Section 123 of Negotiable Instruments Act defines that when a
cheque crossed generally bears across its face an addition of the words ‘Payee’s Account’
between the two parallel transverse lines, it is known as Payee’s Account Crossing.
Significance of Account Payee Crossing:
A/c payee crossing does not restrict the transferability of cheques. This type of crossing gives
a further protection to a cheque. This crossing gives a direction to the collecting banker. The
direction is that, the collection banker should not collect it for any person other than the
payee. In other words, a colleting banker should ensure that, the cheque is credited only to the
account of the payee. Hence such cheque cannot be negotiated further in actual practice, A/c
payee crossed cheques cannot be collected to the account of any person other than the payee
himself. The safest form of crossing will be a combination of 'Not Negotiable' and A/c payee
crossing, which give the fullest protection to a cheque.
6. Double Crossing: When a cheque bears two separate special crossing, it is said to have
been doubly crossed. Sec.125 of the Act provides that "where a cheque is crossed specially,
the banker to whom it is crossed may be again cross it especially to another banker, his agent
for collection".
Sec. 127 of the Act lays down that, "where cheque is crossed specially to more than one
banker except when crossed to an agent for the purpose of collection the banker on whom it
is drawn shall refuse payment therefore”.
Thus, if a cheque is crossed to two or more banks, the paying banker in put in confused
position as to whom he should pay. Such ambiguity renders the cheque is crossed, can cross it
again in favour of another banker for the purpose of collection It does not render the cheque
invalid.

ENDORSEMENT
The word ‘endorsement’ in its literal sense means, a writing on the back of an instrument. But
under the negotiable instruments Act it 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.
Thus endorsement is signing a negotiable instrument for the purpose of negotiation. The
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NEGOTIABLE INSTRUMENTS - Banking regulation and operations (BRO)

NEGOTIABLE INSTRUMENTS - Banking regulation and operations (BRO)

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