Infolinks ad

Gyanmandu LOGO



Ad Above News Title

Negotiable Instruments

Introduction and Presumptions of Negotiable Instruments

Exchange of goods and services is the basis of every business activity. Goods are bought and sold for cash as well as on credit. All these transactions require flow of cash either immediately or after a certain time. In modern business, large numbers of transactions involving huge sums of money take place every day. It is quite inconvenient as well as risky for either party to make and receive payments in cash. Therefore, it is a common practice for businessmen to make use of certain documents as means of making payment. Some of these documents are called negotiable instruments.

Negotiable instrument is a transferable document, where negotiable means transferable and instrument means document. To elaborate it further, an instrument used as a means for making some payment and it is negotiable i.e., its ownership can be easily transferred is negotiable instrument. In other word negotiable instruments are written promises or orders to pay money, such as promissory notes, bills of exchange and cheques which, when in proper form, may be transferred from hand to hand as a substitute for money.

Negotiability confers absolute and good title on the transferee. It means that a person who receives a negotiable instrument has a clear and undisputable title to the instrument. However, the title of the receiver will be absolute, only if he has got the instrument in good faith and for a consideration. Also the receiver should have no knowledge of the previous holder having any defect in his title. Such a person is known as holder in due course. For example, suppose Rajiv issued a bearer cheque payable to Sanjay. It was stolen from Sanjay, who passed it on to Girish. If Girish received it in good faith and for value and without knowledge of cheque having been stolen, he will be entitled to receive the amount of the cheque. Here Girish will be regarded as ‘holder in due course’ if he has got the instrument in good faith and for a consideration.

The general principle relating to transfer of property is “ memo dat quod non habet” (no one can transfer a better title than he/she him/herself has) Negotiable instrument is an exception of this principle if someone has got it in good faith and for a consideration.

The following are the presumptions why negotiable instruments are transferable instruments:

  • Every Negotiable Instrument was made or drawn, accepted, endorsed and negotiated or transferred for consideration.
  • It bears the date on which it was made or drawn. 
  • Every accepted bill was accepted within a reasonable time after its date and before its maturity.
  • The endorsements appearing on it were made in the order in which they appear thereon.
  • The holder of instrument is a holder in due course.

Essential Elements for a valid Negotiable Instrument

The following are the essential elements for a validity of a negotiable instrument.

1. Must be in writing: Except cheque there is no prescribing form for bill or note but they should be written in such a way as to include the essential features. Note and bill may be typed or printed or hand written.

2. Signed by a maker (promissory note) or drawer (bill of exchange and cheque )

3. There must be promise to pay (promissory note) or order to pay (bill of exchange)

4. Promise/ Order must be unconditional:If Ram promises to pay 50k to Hari when he gets married to Gita. It does not constitute negotiable instrument as it is not sure that Hari will marry Gita, he might get married to someone else or he might not get married.

5. Amount must be specified: - Rs 50,000 not about Rs.50, 000.  - With 10 % interest rate not lawful interest rate.   - One cannot make a promissory note on assets, securities, or goods.

6. Must be payable at a certain time (Site or Time): It means that the instrument must be payable at a time which is           certain to arrive. If the time is mentioned as ‘when convenient’ it is not a negotiable instrument.

7. Must be made payable to bearer or order: Formalities like transfer deed, get it registered are not required while transferring a negotiable instrument. The ownership is hanged by mere delivery (when payable to the bearer) or by valid endorsement and delivery (when payable to order). Further, while transferring it is also not required to give a notice to the previous holder.

8. Drawee must be named:   In case of Cheque – Bank / FIs. In case of Note and bills persons including banks and financial institutions.

Promissory Note

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.

There are primarily two parties involved in a promissory note. They are:

 The Maker– the person who makes it and promises to pay the amount stated therein. In the above specimen, Krishna is the maker.
   The Payee – the person to whom the amount is payable. In the above specimen it is Ramesh.

Features of a Promissory Note

        A promissory note must be in writing, duly signed by its maker.

     It must contain an undertaking or promise to pay. Mere acknowledgement of indebtedness is not enough. For example, if someone writes ‘I owe Rs. 5000/- to Sita, is not a promissory note.

   The promise to pay must not be conditional. For example, if it is written ‘I promise to pay Suresh Rs 5,000/- after my sister’s marriage’, is not a promissory note.

        It must contain a promise to pay money only. For example, if someone writes ‘I promise to give Suresh a Maruti car’ it is not a promissory note.

       The parties to a promissory note, i.e. the maker and the payee must be certain.

   A promissory note may be payable on demand or after a certain date. For example, if it is written ‘three months after date I promise to pay Ram or order a sum of rupees Five Thousand only’ it is a promissory note.

        The sum payable mentioned must be certain or capable of being made certain. About 5 Thousand is not acceptable.

        The amount must be payable ( essential of consideration)

Bill of Exchange

A bill of exchange is an instrument in writing containing an unconditional order, signed by the drawer, 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.
There are following three parties involved in a bill of exchange.

        The Drawer – The person who makes the order for making payment. In the above specimen, Krishna is the drawer.
        The Drawee – The person to whom the order to pay is made. He is generally a debtor of the drawer. It is Ramesh in this case.
        The Payee – The person to whom the payment is to be made. In this case it is Ram.

Kinds of bill of exchange

1.       In a bill where a time period is mentioned, just like the above           specimen, is called a Time or usance Bill. .
 2.      A bill may be made payable on demand also. This is called a Demand or sight Bill.

Features of a bill of exchange

        A bill must be in writing, duly signed by its drawer.
        It must contain an order to pay. Words like ‘please pay Rs 5,000/- on demand and oblige’ are not used.
        The order must be unconditional.
        The order must be to pay money.
        The sum payable mentioned must be certain.
        The parties to a bill must be certain.


A cheque  is a bill of exchange drawn on a bank or Financial Institution and is payable on demand over a counter. 

There are following three parties in a cheque as bill of exchange:

Drawer - The person or entity who makes the cheque.
Payee - The recipient of the money.
   Drawee- The bank or other financial institution where the cheque can be presented for payment.

Features of cheque

  • A cheque must be in writing and duly signed by the drawer.
  • It contains an unconditional order to pay.
  • It is issued on a specified bank and Financial Institutions only.
  • The amount specified is always certain and must be clearly mentioned both in figures and words.
  • The payee must be certain.
  • It is always payable by drawee to the payee on demand.
  • The cheque must bear a date otherwise it is invalid and shall not be honored by Banks and Financial Institutions.

Types of Cheque

1. Bearer Cheque
A cheque which is payable to any person who presents it for payment at the bank counter is called ‘Bearer cheque’. A bearer cheque can be transferred by simple delivery and requires no endorsement.

 2. Order Cheque
An order cheque is one which is payable to a particular person. In such a cheque the word ‘bearer’ is cancelled. The payee can transfer an order cheque to someone else by signing his or her name on the back of it.
3. Crossing Cheque

    a. General crossing (& CO.)

A cheque which can be crossed by drawing two transverse parallel lines across the cheque, with or without writing ‘& Co’ and with or without using the word ‘not negotiable’ is called general crossing cheque.

b. Special Crossing
A cheque in which the name of the banker is written, across the face of the cheque in between the two transverse parallel lines, with or without using the word ‘not negotiable’.

4. A/C Payee
A cheque which can be crossed by drawing two parallel lines across the cheque, with the writing ‘Account payee’ or ‘Not Negotiable’ is called A/c payee cheque.

Modes of Negotiability of Negotiable Instrument

1.  By delivery - Title of a bearer cheque can be transferred by delivery only.

2. By endorsement – Endorsement means modes of transfer of title of any document or negotiable instrument to another person by signing on its back or face or on a slip of paper attached to it. In course of transfer of a Negotiable Instrument by payee and others, the parties involved may be Endorser i.e. the person who endorses the note in favor of another person. In the above specimen if Ram endorses it in favor of Gita and Gita also endorses it in favor of Sita, then Ram and Gita both are endorsers. Endorsee i.e. the person in whose favor the instrument is negotiated by endorsement is endorsee. In the above cheque, it is Gita and Sita who are endorsee. Promissory note, order cheque and bill of exchange can be transferred by endorsement.

No negotiability
If a cheque is a/c payee, & co. and not negotiable its title cannot be   transferred however & co cheque has partial feature of negotiability.

Distinction between a Promissory Note and a Bill of Exchange

           Promissory Note
               Bill of Exchange
It contains an unconditional  promise
It contains an unconditional order.
There are two parties – the Maker
and    Payee
 There are three parties – the
  drawer, the drawee and the payee.
It is made by the debtor.
 It is made by the creditor / beneficiary
 Acceptance is not required.
 Acceptance may be required.
The liability of the maker is primary
and absolute.
The liability of the drawer is secondary and conditional upon non-payment by the drawee.
Notice of dishonor is not required
If drawee refuse to honor notice of such dishonor need to be given to the drawer,

Distinction between a Cheque and a Bill of Exchange

 Bill of Exchange
 It is drawn only on a banker.
It can be drawn by anybody including a banker.
The amount is always payable
on    demand
The amount is payable on demand or after a specified period i.e. sight                                              and time.
It can be crossed to end its   Negotiability
It cannot be crossed. But endorsee can stop further negotiability.

-Utsav Dhakal

Ad After News Content


Enjoy Your Study