CHAPTER 7 NIA - Summary Raghav

www.tcaludhiana.
com TOPPERS COMMERCE ACADEMY (tca) CA Foundation/CH - 7
CHAPTER-7
NEGOTIABLE
INSTRUMENTS ACT, 1881
1. MEANING OF NEGOTIABLE INSTRUMENTS
Negotiable Instruments is An Instrument (the word instrument means a document) which is
Freely Transferable (by customs of trade) from one person to another by mere delivery or by
indorsement and delivery. The property in such an instrument passes to a bonafide transferee for value.
The Act does not define the term ‘Negotiable Instruments’. However, Section 13 of the Act provides for
only three kinds of negotiable instruments namely bills of EXCHANGE, PROMISSORY NOTES and CHEQUES,
payable either to order or bearer.
It is to be noted that Hundies, Treasury Bills, Bearer Debentures, Railway Receipts, Delivery
Orders, Bill Of Lading etc. are also considered as negotiable instruments either by mercantile custom
or usage.
CA Raghav Singhania +91-81463-77900 Page 1

www.tcaludhiana.com TOPPERS COMMERCE ACADEMY (tca) CA Foundation/CH - 7
Essential Characteristics of Negotiable Instruments
1. It is necessarily in writing.
2. It should be signed.
3. It is freely transferable from one person to another.
4. Holder’s title is free from defects.
5. It can be transferred any number of times till its satisfaction.
6. Every negotiable instrument must contain an unconditional promise or order to pay money.
The promise or order to pay must consist of money only.
7. The sum payable, the time of payment, the payee, must be certain.
8. The instrument should be delivered. Mere drawing of instrument does not create liability.
2. PROMISSORY NOTE
Meaning
According to section 4 of the NI Act, 1881, “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.”

Parties to promissory note
1. Maker: The person who makes the promise to pay is called the Maker.
He is the debtor and must sign the instrument.
2. Payee: Payee is the person to whom the amount on the note is payable.
Essential Characteristics of a Promissory Note
a. In writing- An oral promise to pay is not sufficient.
b. There must be an express promise to pay. Mere acknowledgment of debt is insufficient.
c. The promise to pay should be DEFINITE and UNCONDITIONAL.
d. A promissory note must be signed by the maker otherwise it is incomplete and ineffective.
e. Promise to pay money only.
f. Promise to pay a certain sum.
g. The MAKER and PAYEE must be certain, definite and different persons.
h. Stamping: A promissory note must be properly stamped in accordance with the provisions of the Indian
Stamp Act and such stamp must be duly cancelled by maker's signatures or initials on such stamp or
otherwise.

3. BILLS 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.
Parties to the bill of exchange
a. Drawer: The maker of a bill of exchange.
b. Drawee: The person directed by the drawer to pay is called the 'drawee'. On acceptance of the bill, he
is called an acceptor and is liable for the payment of the bill. His liability is primary and unconditional.
c. Payee: The person named in the instrument, to whom or to whose order the money is, by the
instrument, directed to be paid.
Essential characteristics of bill of exchange
(a) It must be in Writing.
(b) Must contain an express Order To Pay.
(c) The order to pay must be Definite and Unconditional.
(d) The drawer must Sign the instrument.
(e) Drawer, drawee, and payee must be certain.
(f) The sum must be Certain.
(g) The order must be to Pay Money only.
(h) It must be Stamped.

S.no Basis Promissory Note Bill of Exchange
1. Definition "A Promissory Note" is an “A bill of exchange” is an

instrument in writing containing instrument in writing containing
an unconditional undertaking an unconditional order,
2. Nature of In a promissory note, there is a In a bill of exchange, there is an

Instrument Promise to pay money. Order for making payment.
3. Parties In a promissory note, there are In a bill of exchange, there are

only 2 Parties namely: 3 Parties which are as under:
i. the maker and i. the drawer
ii. the payee ii. the drawee
iii. the payee
4. Acceptance A promissory note does not require A bills of exchange needs

any acceptance, as it is signed by acceptance from the drawee.
the person who is liable to pay.
5. Payable to A promissory note cannot be On the other hand, a bill of

bearer made payable to bearer. exchange can be drawn payable to
bearer. However, it cannot be
payable to bearer on demand.
4. CHEQUE [SECTION 6]
A “CHEQUE” is 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.

Payable on demand means- It should be payable whenever the holder chooses to present it to the drawee
(the banker). The expression “Banker” includes any person acting as a banker and any post office saving
bank [Section 3]
Explanation I: For the purposes of this section, the expressions-
(a) Cheque in the electronic form-means a cheque drawn in electronic form by using any computer
resource, and signed in a secure system with a digital signature (with/without biometric signature)
and asymmetric crypto system or electronic signature, as the case may be;
(b) “A Truncated Cheque” means a cheque which is truncated during a clearing cycle, either by the
clearing house or by the bank whether paying or receiving payment, immediately on generation of an
electronic image for transmission, substituting the further physical movement of the cheque in writing.
Parties to Cheque
1. Drawer: The person who draws a cheque i.e., makes the cheque (Debtor). His liability is primary and
conditional.
2. Drawee: The specific bank on whom cheque is drawn. He makes the payment of the cheque. In case of
cheque, drawee is always banker.
“drawee in case of need”— When in the bill or in any indorsement thereon, the name of any person is
given in addition to the drawee to be resorted to in case of need such person is called a “drawee in case
of need”.
3. Payee: The person named in the instrument (i.e., the person in whose favour cheque is issued), to
whom or to whose order the money is, by the instrument, directed to be paid, is called the payee.

Essential Characteristics of a cheque
According to the definition of cheque under section 6, a cheque is a species of bill of exchange. Thus, it
should fulfil:
5. CLASSIFICATION OF NEGOTIABLE INSTRUMENTS
“Bearer instrument” and “order instrument” [Section 13]
Bearer Instrument: It is an instrument where the name of the payee is blank or where the name of payee
is specified with the words “or bearer” or where the last indorsement is blank. Such instrument can be
negotiated by mere delivery.
Order Instrument: It is an instrument which is payable to a person or Payable to a person or his order or
Payable to order of a person or where the last indorsement is in full, such instrument can be negotiated
by indorsement and delivery.
“Inland instrument” and “Foreign instrument” [Sections 11 & 12]
“Inland instrument”: A promissory note, bill of exchange or cheque drawn or made in India and made
payable in, OR drawn upon any person resident in India shall be deemed to be an inland instrument.

“Foreign instrument”: A foreign instrument is one which is not an inland instrument.
In other words, can be understood as follows:
Liability of maker/ drawer of foreign bill
In the absence of a contract to the contrary, the liability of the maker or drawer of a foreign promissory
note or bill of exchange or cheque is regulated in all essential matters by the law of the place where he
made the instrument, and the respective liabilities of the acceptor and indorser by the law of the place
where the instrument is made payable (Section 134).
Example 12: A bill of exchange is drawn by A in Berkley where the rate of interest is 15% and accepted
by B payable in Washington where the rate of interest is 6%. The bill is indorsed in India and is
dishonoured. An action on the bill is brought against B in India. He is liable to pay interest at the rate of
6% only. But if A is charged as drawer, he is liable to pay interest at 15%.
Inchoate and Ambiguous Instruments
Inchoate Instrument: It means an instrument that is INCOMPLETE in certain respects. The drawer/
maker/ acceptor/ indorser of a negotiable instrument may Sign And Deliver the instrument to another
person in his capacity leaving the instrument, either wholly blank or having written on it the word
incomplete. The principle of this rule of an inchoate instrument is based on the principle of estoppel.

Liability on drawing inchoate instrument: The person signing and delivering the inchoate instrument is
liable both to a holder and holder in due course. However, there is a difference in their respective rights:
The holder of such an The holder in due

instrument cannot course can, however,
recover the amount in Recover Any Amount
excess of the amount on such instrument
intended to be paid provided it is covered
by the signor. by the stamp affixed
on the instrument.
Ambiguous Instrument: Section 17 of the Act, reads as:
“Where an instrument may be construed either as a promissory note or bill of exchange, the
holder may at his election treat it as either, and the instrument shall be thenceforward treated
accordingly.“
6. NEGOTIATION (TRANSFER) OF NEGOTIABLE INSTRUMENTS

One of the essential characteristics of a negotiable instrument is that it is Freely Transferable from one
person to another. Negotiable instruments may be negotiated either by delivery when these are payable
to bearer or by indorsement and delivery when these are payable to order.
Modes of Negotiation
(i) A promissory note, bill of exchange or cheque payable to bearer is negotiable by the delivery thereof.
(ii) A promissory note, bill of exchange or cheque payable to order is negotiable by the holder by
indorsement and delivery thereof.

Importance of Delivery in Negotiation [Section 46]
Delivery of an instrument is essential whether the instrument is payable to bearer or order for effecting
the negotiation. The delivery must be voluntary, and the object of delivery should be to pass the property
in the instrument to the person to whom it is delivered. The delivery can be, actual or constructive.
Actual delivery takes place when the instrument changes hand physically. Constructive Delivery takes
place when the instrument is delivered to the agent, clerk or servant of the endorsee on his behalf or
when the indorser, after indorsement, holds the instrument as an agent of the endorsee.
7. DISHONOUR OF CHEQUES FOR INSUFFICIENCY OF FUNDS IN THE

ACCOUNTS [SECTION 138 TO 142]
DISHONOR OF CHEQUE FOR INSUFFICIENCY, ETC., OF FUNDS IN THE ACCOUNTS [SECTION 138]
Where any cheque drawn by a person on an account maintained by him with a banker—
• for payment of any amount of money
• to another person from that account
• for the discharge, in whole or in part, of any debt or other liability,
• is returned by the bank unpaid,
• either because of the—
▪ amount of money standing to the credit of that account is insufficient to honor the cheque, or
▪ that it exceeds the amount arranged to be paid from that account by an agreement made
with that bank,
such person shall be deemed to have committed an offence and shall, be punished with imprisonment for
a term which may extend to 2 years, or with fine which may extend to twice the amount of the cheque,
or with both.
[A cheque given as gift or donation, or as a security or in discharge of a mere moral obligation, or for an
illegal consideration, would be outside the purview of this section]

When section 138 shall be not apply: unless the below given conditions are complied with—
(a) Cheque presented within validity period: The cheque has been presented to the bank
within a period of 3 months from the date on which it is drawn or within the period of
its validity, whichever is earlier.
(b) Demand for the payment through the notice: the payee or the holder in due course
of the cheque, as the case may be, makes a demand for the payment of the said
amount of money by giving a notice, in writing, to the drawer of the cheque, within 30
days of the receipt of information by him from the bank regarding the return of the
cheque as unpaid, and
(c) Failure of drawer to make payment: the drawer of such cheque fails to make the
payment of the said amount of money to the payee or, as the case may be, to the
holder in due course of the cheque, within 15 days of the receipt of the said notice.
Explanation: For the purpose of this section, “debt or other liability” means a legally enforceable debt.
Therefore we may conclude that compliant can be filed after 45 days of dishonour of the cheque i.e., 30
days of notice period +15 days of the receipt of the said notice.
A Post-Dated Cheque is deemed to have been drawn on the date it bears and the three months period for
the purposes of section 138 is to be counted from that date.
DEFENCE WHICH MAY NOT BE ALLOWED IN ANY PROSECUTION UNDER SECTION 138 [SECTION 140]
It shall not be a defence in a prosecution of an offence under section 138 that the drawer had no reason
to believe when he issued the cheque that the cheque may be dishonoured on presentment for the
reasons stated in that section.

8. PRESENTMENT OF INSTRUMENTS
Presentment for acceptance [Section 61]
A bill of exchange payable after sight must [if no time or place is specified therein for
presentment] be presented to the drawee thereof for acceptance [if he can, after
reasonable search, be found] by a person entitled to demand acceptance, within a
reasonable time after it is drawn, and in business hours on a business day.
In default of such presentment, no party thereto is liable thereon to the person making such default. If
the drawee cannot, after reasonable search, be found, the bill is dishonoured.
Drawee's time for deliberation [Section 63]
The holder must, if so required by the drawee of a bill of exchange presented to him for acceptance, allow
the drawee 48 hours (exclusive of public holidays) to consider whether he will accept it.
Hours for presentment (Section 65)
Presentment for payment must be made during the usual hours of business, and, if at a banker's within
banking hours.
Presentment for payment of instrument payable after date or sight (Section 66)
A promissory note or bill of exchange, made payable at a specified period after date or sight thereof,
must be presented for payment at maturity.
Presentment for payment of promissory note payable by instalments (Section 67)
A promissory note payable by instalments must be presented for payment on the 3rd day after the date
fixed for payment of each instalment; and non-payment on such presentment has the same effect as
non-payment of a note at maturity.
Presentment for payment of instrument payable at specified place and not elsewhere (Section 68)
A promissory note, bill of exchange or cheque made, drawn or accepted payable at a specified place and
not elsewhere must, in order to charge any party thereto, be presented for payment at that place.
Presentment where no exclusive place specified (Section 70)
A promissory note or bill of exchange, not made payable as mentioned in sections 68 and 69, must be
presented for payment at the place of business (if any) or at the usual residence, of the maker, drawee
or acceptor thereof, as the case may be.

Presentment when maker, etc., has no known place of business or residence (Section 71)
Such presentment may be made to him in person wherever he can be found.
Presentment by or to agent, representative of deceased, or assignee of insolvent (Section 75)
Presentment for acceptance or payment may be made to the duly authorised agent of the drawee, maker
or acceptor, as the case may be, or, where the drawee, maker or acceptor has died, to his legal
representative, or, where he has been declared an insolvent, to his assignee.
Excuse for delay in presentment for acceptance or payment (Section 75A)
Delay in presentment for acceptance or payment is excused if the delay is caused by circumstances
beyond the control of the holder, and not imputable to his default, misconduct or negligence. When the
cause of the delay ceases to operate, presentment must be made within a reasonable time.
When presentment unnecessary (Section 76)
No presentment for payment is necessary, and the instrument is dishonoured at the due date for
presentment, in any of the following cases:
(a) (i) If the maker, drawee or acceptor intentionally prevents the presentment of the instrument, or
(ii) if the instrument being payable at his place of business, he closes such place on a business day
during the usual business hours, or
(iii) if the instrument being payable at some other specified place, neither he nor any person
authorised to pay it attends at such place during the usual business hours, or
(iv) if the instrument not being payable at any specified place, he cannot after due search be found;
(b) as against any party sought to be charged therewith, if he has engaged to pay notwithstanding non-
presentment;
(c) as against any party if, after maturity, with knowledge that the instrument has not been
presented—
• he makes a part payment on account of the amount due on the instrument,

• or promises to pay the amount due thereon in whole or in part,
• or otherwise waives his right to take advantage of any default in presentment for payment;
(d) as against the drawer, if the drawer could not suffer damage from the want of such presentment.

9. RULES OF COMPENSATION
Rules as to compensation (Section 117)
The compensation payable in case of dishonour of promissory note, bill of exchange or cheque, by any
party liable to the holder or any endorsee, shall be determined by the following rules:
(a) the holder is entitled to the amount due upon the instrument, together with the expenses properly
incurred in presenting, noting and protesting it;
(b) when the person charged resides at a place different from that at which the instrument was
payable, the holder is entitled to receive such sum at the current rate of exchange between the two
places;
(c) an indorser who, being liable, has paid the amount due on the same is entitled to the amount so paid
with interest at 18% per annum from the date of payment until tender or realisation thereof, together
with all expenses caused by the dishonour and payment;
(d) the party entitled to compensation may draw a bill upon the party liable to compensate him,
payable at sight or on demand, for the amount due to him, together with all expenses properly incurred
by him.



CHAPTER 7 NIA - Summary Raghav

Uploaded by

Copyright:

Available Formats

CHAPTER 7 NIA - Summary Raghav

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CHAPTER 7 NIA - Summary Raghav

Uploaded by

Copyright:

Available Formats

www.tcaludhiana.

com TOPPERS COMMERCE ACADEMY (tca) CA Foundation/CH - 7

CA Raghav Singhania +91-81463-77900 Page 1

Essential Characteristics of Negotiable Instruments

3. It is freely transferable from one person to another.

4. Holder’s title is free from defects.

5. It can be transferred any number of times till its satisfaction.

The promise or order to pay must consist of money only.

CA Raghav Singhania +91-81463-77900 Page 2

Parties to promissory note

Essential Characteristics of a Promissory Note

a. In writing- An oral promise to pay is not sufficient.

b. There must be an express promise to pay. Mere acknowledgment of debt is insufficient.

c. The promise to pay should be DEFINITE and UNCONDITIONAL.

e. Promise to pay money only.

f. Promise to pay a certain sum.

CA Raghav Singhania +91-81463-77900 Page 3

Parties to the bill of exchange

a. Drawer: The maker of a bill of exchange.

Essential characteristics of bill of exchange

(a) It must be in Writing.

(b) Must contain an express Order To Pay.

(c) The order to pay must be Definite and Unconditional.

(d) The drawer must Sign the instrument.

(e) Drawer, drawee, and payee must be certain.

(f) The sum must be Certain.

(g) The order must be to Pay Money only.

(h) It must be Stamped.

CA Raghav Singhania +91-81463-77900 Page 4

S.no Basis Promissory Note Bill of Exchange

1. Definition "A Promissory Note" is an “A bill of exchange” is an

2. Nature of In a promissory note, there is a In a bill of exchange, there is an

3. Parties In a promissory note, there are In a bill of exchange, there are

4. Acceptance A promissory note does not require A bills of exchange needs

5. Payable to A promissory note cannot be On the other hand, a bill of

CA Raghav Singhania +91-81463-77900 Page 5

Explanation I: For the purposes of this section, the expressions-

CA Raghav Singhania +91-81463-77900 Page 6

Essential Characteristics of a cheque

5. CLASSIFICATION OF NEGOTIABLE INSTRUMENTS

“Bearer instrument” and “order instrument” [Section 13]

“Inland instrument” and “Foreign instrument” [Sections 11 & 12]

CA Raghav Singhania +91-81463-77900 Page 7

“Foreign instrument”: A foreign instrument is one which is not an inland instrument.

In other words, can be understood as follows:

Liability of maker/ drawer of foreign bill

Inchoate and Ambiguous Instruments

CA Raghav Singhania +91-81463-77900 Page 8

The holder of such an The holder in due

Ambiguous Instrument: Section 17 of the Act, reads as:

6. NEGOTIATION (TRANSFER) OF NEGOTIABLE INSTRUMENTS

CA Raghav Singhania +91-81463-77900 Page 9

Importance of Delivery in Negotiation [Section 46]

7. DISHONOUR OF CHEQUES FOR INSUFFICIENCY OF FUNDS IN THE

• for payment of any amount of money

• to another person from that account

• for the discharge, in whole or in part, of any debt or other liability,

• is returned by the bank unpaid,

• either because of the—

CA Raghav Singhania +91-81463-77900 Page 10