amity business school

Amity Business SchoolMBA, Semester 1

Legal Aspects of BusinessMs. Shinu Vig

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Amity Business School

Negotiable Instruments Act, 1881

‘Instrument’ means any written document by which a right is created in favour of some person.

‘Negotiable Instrument’ means a document transferable from one person to another.


Characteristics of a Negotiable Instrument:

i. It must be in writing.

ii. It must be signed by the maker/drawer.

iii. It must involve payment of money only.

iv. There must be an unconditional promise or order to pay.

v. They are transferable by delivery or by endorsement and delivery.


Kinds of Negotiable Instruments:

The Act recognizes the following three types of negotiable instruments:

i. Promissory notes

ii. Bills of Exchange

iii. Cheques


Promissory Note (section 4):

Promissory Note is an instrument in writing (not being a bank or a currency note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money to, or to the order of, a certain parson or to the bearer of the instrument.

Parties to a promissory note:

i. The Maker

ii. The Payee


Essentials of a Promissory Note:

i. Must be in writing.

ii. Must contain an express undertaking to pay a certain sum of money.

iii. Undertaking to pay must be unconditional.

iv. Maker must sign the note.

v. Payee must be a definite person.

vi. Must be properly stamped according to the provisions of the Indian Stamp Act.


Bills of Exchange (Section 5):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 a Bill of Exchange:i. The drawerii. The drawee (also called the acceptor)iii.The payee


Essentials of a Bill of Exchange:

i. Must be in writing.

ii. Must be dated.

iii. Must contain an unconditional order to the drawee.

iv. Must be signed by the drawer.

v. The sum payable must be certain.

vi. The parties must be certain.

vii. It must be accepted by the drawee.

Types of Bill of Exchange:• Trade Bill• Accommodation Bill


Cheques (Section 6):

A cheque is a bill of exchange drawn on a specified banker, and not expressed to be payable otherwise than on demand.

Parties to a cheque:

i. The drawer

ii. The drawee

iii. The payee


Essentials of a Cheque:

i. Always drawn on a specified banker.

ii. Always payable on demand.

iii. It does not require acceptance.

iv. It may be made payable to drawer himself.

v. Must be dated.

vi. Valid for 6 months.

vii. No acceptance of cheque is required

viii. Cheque is not required to be stamped.


Crossing of Cheques:

Crossing is a direction to the paying banker to pay the money generally to a banker or to a particular banker and not to pay otherwise.

Modes of Crossing:

i.General crossing - In case of general crossing, the holder or payee cannot get the payment over the counter of the bank but through a bank only.

ii.Special crossing - In case of special crossing, the paying banker will pay only to the banker whose name appears across the cheque.


Negotiation of Instruments:

The transfer of an instrument by one party to another so as to constitute the transferee a holder thereof is called negotiation.

Negotiation of instruments can be effected in following ways:

i. By mere delivery (in case of instruments payable to bearer)

ii. By endorsement and delivery (in case of instruments payable to order)


Endorsement :Endorsement means and involves the writing of something on the back of an instrument for the purpose of transferring the right, title and interest therein to some other person.

Kinds of Endorsements:• Endorsement in blank• Endorsement in full• Restrictive Endorsement• Conditional Endorsement• Partial Endorsement


Dishonour of Instruments:Instruments are dishonoured either by non-acceptance or by non-payment.

Notice of Dishonour:When an instrument is dishonoured, the holder or some party liable thereon must give notice of dishonour to all other parties whom he seeks to make liable.

Omission to give notice of dishonour discharges all parties other than the maker or acceptor.


Dishonour of Cheque (Sections 138 to 142):

If a cheque is returned by the bank unpaid for the reason of insufficiency of the amount of money standing to the credit of the account on which the cheque was drawn, the drawer of such cheque shall be deemed to have committed an offence. The Act provides for criminal penalties in such case:

i. Imprisonment for term which may extend to 1 year, or

ii. Fine which may extend to twice the amount of cheque, or

iii. Both


In order to attract the aforementioned penalties following conditions must be satisfied:i. The cheque has been dishonoured due to insufficiency of funds only.ii. The cheque should have been presented to the paying banker within 6 months from the date on which it is drawn.iii. The payee of the cheque should have given notice in writing to the drawer demanding payment, within 15 days of the receipt of information of dishonour of the cheque from the bank.iv. The drawer is liable only if he fails to make the payment within 15 days of the receipt of such notice.v. The payee of the cheque dishonoured should have made a complaint within 1 month of the cause of action.

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