BOOK VI THE LAW RELATING TO NEGOTIABLE INSTRUMENTS “Negotiable” means transferable by delivery and “instrument” means a written document by which a right is created in favor of some person. The term negotiable instrument, therefore, literally means “a document transferable by delivery”. THE PROMISSORY NOTE Definition “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.”—Sec. 4.

Essential Elements of Promissory Notes 1 Essential Elements of Promissory Notes 1. The instrument must be in writing. 2. The instrument must contain a promise to pay. The promise to pay must be express. It cannot be implied or inferred. A mere acknowledgement of indebtedness is not enough. 3. The promise to pay must be unconditional. If the promise to pay is coupled with a condition it is not a promissory note. 4. The maker of the instrument must be certain and definite. 5. The instrument must be signed by the maker of it. A signature in pencil or by a rubber stamp or facsimile is good. An illiterate person may use a mark or cross instead of writing out his name. The signature or mark may be placed, anywhere on the instrument, not necessarily at the bottom. It may be at the top or at the back of the instrument. 6. The sum of money to be paid must be certain. 7. The money must be payable to a definite person or according to his order. (A promissory note cannot be made payable to the bearer on demand) 8. The payment must be in the legal tender money. A promise to pay a certain quantity of goods or a certain amount of foreign money is not a promissory note.

BILL OF EXCHANGE Definition. “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.”—Sec. 5. The maker of a bill of exchange is called the Drawer. The person who is directed to pay is called the Drawee. The person who will receive the money is called the Payee. When the payee has custody of the bill, he is called the Holder. It is the holder's duty to present the bill to the Drawee for his acceptance. The Drawee signifies his acceptance by signing on the bill. After such signature the Drawee becomes the Acceptor.

Essential Elements of a Bill of Exchange. 1. The instrument must be in writing. 2. The instrument must contain an order to pay, which is express and unconditional. 3. The drawer, drawee and the payee must be certain and definite individuals. 4. The instrument must be signed by the drawer. 5. The amount of money to be paid must be certain. 6. The payment must be in the legal tender money of India. 7. The money must be payable to a definite person or according to his order. A bill of exchange cannot be made payable to the bearer on demand.

Differences between a promissory note and a bill of exchange. In a promissory note there are two parties—the maker and the payee. In a bill of exchange there are three parties—the drawer, the drawee, and the payee. 2. In a promissory note there is a promise to pay. In a bill of exchange there is an order to pay. 3. A promissory note is signed by the person liable to pay ; therefore, no acceptance is necessary. A bill of exchange, except in certain cases, requires to be accepted by the drawee before it is binding upon him. 4. The maker of a promissory note is primarily liable on the instrument. The drawer of a bill is liable only when the drawee does not accept the instrument or pay the money due. 5. In case of non-payment or non-acceptance of a bill notice must be given to all persons liable to pay. This is called the notice of dishonor. In the case of a promissory note, notice of dishonor to the maker is not necessary.

CHEQUES Definition: A cheque is a bill of exchange drawn upon a specified banker and payable on demand.—Sec. 6. A cheque may be payable to bearer or to order but in either case it must be pa) able on demand. The banker named must pay it when it is presented for payment to him at his office during the usual office hours, provided the cheque is validly drawn and the drawer has sufficient funds to his credit. Different types of cheques. There are two types of cheques Open Cheques and Crossed Cheques. An open cheque is one which is payable in cash across the counter of the bank. A crossed cheque is one which has two short parallel lines marked across its face.

“Account Payee”. The words ‘account payee' on a cheque is interpreted as a direction on the banker to credit the proceeds of the cheque to the account of the payee. The negotiation of such cheques is not prohibited. "Not Negotiable”. A cheque marked with the words “not negotiable” can be transferred or assigned by the payee. The transferee will get the same rights; as regards payment, as the transferor had. But the transferee will not get the rights of a holder in due course. Certification of Cheques by Banks. In some countries there is a custom of making a cheque with the words “good for payment” by the drawee bank ( i.e. in U.S.A.). Where there is such a custom, marking a cheque as good is equivalent to acceptance by the bank concerned and binds the bank to pay the cheque when presented for payment by the payee or any transferee from him. Crossing after issue. Section 125 of the Negotiable Instruments Act provides as follows : Where a cheque is uncrossed, the holder may cross it generally or specially. Where a cheque is crossed generally, the holder may cross it specially. Where a cheque is crossed generally or specially, the holder may add the words, “not negotiable”. Where a cheque is crossed specially, the banker to whom it is crossed specially may again cross it specially to another banker, his agent, for collection.

. A bill of exchange is said to be accepted when the drawee puts his signature on it, thereby acknowledging his liability under the bill. There are certain special cases where a bill need not be accepted. Except in these cases, the drawee is not liable on a bill until and unless he accepts the bill. The usual mode of acceptance is writing the word “accepted“ across the bill and signing under it. Writing the word “accepted" is not essential but the signature is. The signature may be put anywhere, on the face of the bill or on the back of it. Acceptance may be either (i) General or (ii) Qualified. Acceptance is General when it is unconditional and unqualified, i e. when the drawee accepts liability to pay the amount mentioned in the bill in full, without any condition or limitation. The acceptor may mention the bank where payment will be made. This does not amount to putting a condition. Acceptance is said to be qualified when the acceptor puts some conditions on the acceptance

When acceptance is not necessary. Acceptance is not necessary in the case of bills of exchange payable on demand or at sight, unless in any such bill it is specially mentioned that it is to be accepted before payment. All other bills require acceptance. The Presentment for Acceptance. (Sec. 61). A bill which requires to be accepted must be presented for acceptance before the drawee or his authorized agent. When presentment for acceptance is not necessary. Presentment for acceptance is not necessary in the following cases 1. When after a reasonable search the drawee cannot be found—Sec. 61. 2. When the bill is drawn on a non-existing or fictitious person or on a person who is incapable of entering into contracts (eg. A minor or a lunatic).—Sec. 91. 3. When the drawee is insolvent or dead.—Sec. 75.

Who can accept a bill? 1. The drawee of the bill. 2. The drawee in case of need. 3. When there are several drawees, any one or more of them can accept the bill. If the several drawees are partners, any one of them can accept on behalf of all of them. But if they are not partners, each drawee can accept only on behalf of himself and not on behalf of anybody else, unless specially authorised.—Sec. 34. 4. A bill may be accepted by a person for the honour of the drawee. This is known as acceptance for honour. This is the only case where a bill may be accepted by a stranger to the instrument. BANKER’S DRAFTS Banker’s drafts are of two kinds : from one office to another of the same bank and from one bank to another. The first type cannot be payable to a bearer on demand (Section 31 of the Reserve Bank of India Act). Section 131A of the Negotiable Instruments Act provides that a draft drawn by one branch of a bank upon another and payable to order, is governed by the same rules as a cheque.