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A negotiable instrument is a piece of paper which entitles a person to a sum of money and which is transferable from person to person by mere delivery or by endorsement and delivery. The person to whom it is so transferred becomes entitled to the money also to the right to further transfer it. Thus, negotiable instruments play a major role in the trade world.


Main purpose of negotiable instruments is to avoid the carriage of higher amount of money and to reducing the risk of theft; robbery etc.

To give legal effect to negotiable instruments there is legislation and the name of that legislation is The Negotiable Instruments Act, 1881.

Introduction to Negotiable Instruments Act, 1881:

The Negotiable Instruments Act was enacted, in India, in 1881.Prior to its enactment, the provision of the English Negotiable Instrument Act were applicable in India, and the present Act is also based on the English Act with certain modifications. It extends to the whole of India except the State of J&K.


Negotiable Instrument is a transferable, signed document that promises to pay to a certain person or to the bearer of the instrument, a certain sum of money at a future date or on demand


According to section 13 of Negotiable Instruments Act, 1881- A ‘negotiable instrument’ means a promissory note, bill of exchange or cheque payable either to order or to bearer.

Features of a Negotiable Instrument:

The important features of negotiable instrument are:

1. Property: Negotiable instrument is the property like other valuable assets. The person for whom the instrument is drawn is the holder and owner of that property.

2. Defects in Title: The holder in good faith and for value called the ‘holder in due course’ gets the instrument free from all defects of any previous holder.

3. Payable to certain person: Certain person is a person whose name is mentioned in negotiable instrument. The Negotiable instrument instructs to pay only to the certain person.

4. Right: The holder in due course is not affected by certain defects which might be available against previous holder, for example, fraud, to which he is not a party.

5. Payable to Order: All the negotiable instruments are payable to order which is expressed to a particular person.

6. Payable to Bearer: The negotiable instrument is expressed to be payable to bearer when it is blank endorsement. It specifies that the person in possession of the bill is a bearer of the instrument which is so expressed payable to bearer.

7. Payment: A negotiable instrument may be made payable to two or more payees, or it may be payable in alternative to one or two payees.

8. Consideration: Consideration is the concept of legal value in connection with contracts. Consideration in the case of a negotiable instrument is unspecified

Kinds of Negotiable Instruments

The various kinds of Negotiable Instruments are as follows:

1. Promissory Notes

2. Bills of Exchange

3. Cheques

Promissory Notes:

Promissory Note [Section 4]:

Definition According to section 4 of Negotiable Instruments 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 to, or to the order of, a certain person or to the bearer of the instrument.

A promissory note is a promise in writing by a person to pay a sum of money to a specified person or to his order. [3]

Maker and Drawer: The person who makes the promissory note and promises to pay is called the maker.

Payee: The person to whom the payment is to be made is called the payee


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.


Features of a Promissory Note:

The important features of a Promissory Note are:

1. Instrument in Writing: The promissory note must be in writing. Oral engagement or promise is excluded.

2. Undertaking to Pay: It is not necessary to use the word “promise” but the intention must clearly show an ‘unconditional undertaking’ to pay the amount.

3. Unconditional: It must contain definite and an unconditional undertaking to pay. Promise to pay should be unconditional. A conditional instrument is invalid.

4. Signed by the maker: The instrument must be signed by the maker thereof. Person must sign with his consent. It should not only be a physical act but also a mental act with an intention to sign

5. Payable to certain person: The maker and payee of the instrument must be a definite person. A note may be made by several people to bind them jointly. A promissory note cannot be made by two persons. Two different people should fill in the role of a maker and payee.

6. Certain sum of money: The maker of the promissory note promises to pay a certain sum of money only.

7. Payable on demand: The amount is payable on demand of payee

8. Stamping: Promissory notes are chargeable with stamp duty. An unstamped or improperly or insufficiently stamped promissory note is not valid as evidence in court of law. No suit can be maintained upon an unstamped or improperly stamped promissory note.

Bill Of Exchange [Section 5]:

According to section 5 of Negotiable Instruments Act, 1881- 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. It is also called a Draft

Characteristic Features of a bill of exchange:

1. It must be in writing.

2. It must contain an order to pay and not a promise or request.

3. The order must be unconditional.

4. There must be three parties, viz., drawer, drawee and payee.

5. The parties must be certain.

6. It must be signed by the drawer.

7. The sum payable must be certain or capable of being made certain.

8. The order must be to pay money and money alone.

9. It must be duly stamped as per the Indian Stamp Act.

10. Number, date and place are not essential.

The Parties of Bills of Exchange

1. The Drawer: The person who draws a bill of exchange is called the drawer.

2. The Drawee: The party on whom such bill of exchange is drawn and who is directed to pay is called the drawee.

3. The Acceptor: The person who accepts the bill is known as the acceptor. Normally the drawee is the acceptor. But a stranger can also accept a bill on behalf of the drawee.

4. The Payee: The person to whom the amount of the bill is payable is called the payee.

5. The Endorser: When the holder transfers or endorses the instrument to any other person the holder becomes the Endorser.

6. The Endorsee: The person to whom the bill is endorsed is called the endorsee.

7. The Holder: Holder of bill of exchange means any person who is legally entitled to the possession of it and to receive or recover the amount due thereon form the parties.

Promissory NoteBill of Exchange
i) It contains a promise to pay.i) It contains an order to pay.
ii) The liability of the maker of a note is primary and absolute.ii) The liability of the drawer of a bill is secondary and conditional.
iii) It is presented for payment without any previous acceptance by the maker.iii) If a bill is payable some time after sight, it is required to be accepted either by the drawee himself.
iv) The maker of a promissory note stands in immediate relationship with the payee and is primarily liable to the payee or the holder.iv) The maker or drawer of an accepted bill stands in immediate relationship with the acceptor and the payee.
v) In case of dishonour no notice of dishonour is required.v) A notice of dishonour must be given in case of dishonour of Bills of Exchange.
vi) In the case of a promissory note there are only two parties, viz., the maker and the payee.vi) There are seven parties, viz, drawer, drawee, payee, acceptor, endorser, endorsee and holder.
vii) A promissory note cannot be drawn insets.vii) The bills of exchange can be drawn in sets.
viii) A promissory note can never be conditional.viii) A bill of exchange too cannot be drawn conditionally, but it can be accepted conditionally with the consent of the holder.
Cheque [Section 6]

According to section 6 of Negotiable Instruments Act, 1881- A cheque is defined as ‘a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand’. Thus, a cheque is a bill of exchange with two added features, viz.:

It Is Always Drawn On A Specified Banker. It Is Always Payable On Demand And Not Otherwise.


Cheque is an instrument in writing, containing an unconditional order, drawn on a specified banker, signed by the drawer, directing the banker, to pay, on demand, a certain sum of money only, to a certain person or to his order or to the bearer of the instrument.

Features of CTS-2022 Standard Cheque (Cheque Truncation System)
  1. Branch address with IFSC code printed top of the cheque
  2. Date in dd/mm/yyyy format with boxs
  3. Printers name with CTS-2010 in left side of cheque
  4. A pantograph which shows VOID/COPY while taking photocopy of the cheque below the account number
  5. New rupee symbol instead of bilingual format
  6. “Please sign above” is mentioned on bottom right of the cheque
  7. Watermark “CTS INDIA” to be visible cheque is held against any light.
  8. Ultra Violet logo of Bank printed at upper left corner of cheque to be visible in UV lamps
Essentials Of Cheque:

1. In Writing: The cheque must be in writing. It cannot be oral.

2. Unconditional: The language used in a cheque should be such as to convey an unconditional order.

3. Signature of the Drawer: It must be signed by the maker.

4. Certain Sum of Money: The amount in the cheque must be certain.

5. Payees Must be certain: It must be payable to specified person.

6. Only Money: The payment should be of money only.

7. Payable on Demand: It must be payable on demand.

8. Upon a Bank: It is an order of a depositor on a bank.

Parties of Cheque

There are three parties involved in every cheque or payment order:

i) Drawer: The person who draws the cheque.

ii) Drawee: The financial institution or Bank upon whom the cheque is drawn.

iii) Payee: The person or organization named to receive payment.

ChequeBills of Exchange
1. Cheque can be drawn only on a banker.1. The drawee may be any person.
2. A cheque may be crossed.2. A bill of exchange cannot be crossed.
3. Cheque is payable on demand and no grace period is allowed.3. While calculating maturity three day’s grace is allowed.
4. Notice of Dishonor is not necessary.4. A notice of Dishonor is required.
5. A cheque can be drawn to bearer and made payable on demand.5. A bill cannot be made bearer if it is payable on demand. A bill drawn ‘payable to bearer on demand’ is void.
6. A cheque is not required to be presented for acceptance.6. Bills sometimes, require presentment for acceptance.
7. No stamp duty is payable on cheques.7. Affixation of proper stamps is necessary in case of Bills of Exchange.
8. The drawer does not get discharged from his liability because of delay in presenting the cheque to the bank for payment.8. The drawer of the bill of exchange stands discharged from his liability if it is not duly presented for payment.
Features of Cheque

The main features of cheques are:

1. Cheque is an instrument inwriting

A cheque must be in writing. It can be written in ink pen, ball point pen, typed or even printed. Oral orders are not considered as cheques.

2. Contains an unconditional order

Every cheque contains an unconditional order issued by the customer to his bank. It does not contain a request for payment. A cheque containing conditional orders is Dishonored by the bank

3. Cheque is drawn on a specified banker

A cheque is always drawn on a specific banker. Cheque book facility is made available only to account holder who are supposed to maintain certain minimum balance in the account.

4. Cheque must be signed by customer

A cheque must be signed by customer (Account holder). Unsigned cheques or signed by persons other than customers are not regarded as cheque.

5. Payable on demand: A cheque when presented for payment must be paid on demand. If cheque is made payable after the expiry of certain period of times then it will not be a cheque.

6. Certain sum of money

The amount to be paid by the banker must be certain. It must be written in words and figures.

7. Payable to a certain person or to the bearer

The payee of the cheque should be certain whom the payment of a cheque is to be made i.e. either real person or artificial person like Joint Stock Company. The name of the payee must be written on the cheque or it can be made payable to bearer.

8. Cheque must be duly dated by customer of bank

A cheque must be duly dated by the customer of bank. The cheque must indicate clearly the date, month and the year. A cheque is valid for a period of three months from the date of issue.

Types of Cheque

Cheques can be categorized into two, viz:

1) Open Cheque

a) Bearer Cheque

b) Order Cheque

2) Crossed Cheque

a) General Crossing

b) Special Crossing

c) Double Crossing

1) Open cheque

An open cheque is a cheque which is payable at the counter of the drawee bank on presentation of the cheque.

a) Bearer cheque:

  A bearer cheque is the one which is issued without the name of the payee and the same can be encashed by any one. Bearer cheque is made payable to the bearer i.e. it is payable to the person who presents it to the bank for encashment.

b) Order cheque:

A cheque which is paid to a named person with the words ‘or order’ after the payee’s name, showing that he or she can endorse it and pass it to someone else if desired.

2) Crossed cheque

A crossed cheque is a cheque which is payable only through a collecting banker and not directly at the counter of the bank. Crossing ensures security to the holder of the cheque as the collecting banker credits the proceeds to the account of the payee of the cheque.

a) General Crossing: It is a cheque which bears across its face two parallel transverse lines without or with any words as (& Co.), A/C Payee, Not Negotiable written in between these two lines.

Specimen of General Crossing

b) Special Crossing

It is a cheque in which the name of the bank is written between the two parallel lines and hence it can be paid to that specific banker only.

Specimen of Special Crossing

a) Double Crossing:

Double crossing is a form of special crossing of cheque under which two collecting bankers’ name is mentioned between two parallel lines. One is the collecting banker of the payee and another banker is the agent for collection of cheque. It is very important to include the words “as agent for collection” under double crossing.

Difference between General Crossing and Special Crossing
Particulars General CrossingSpecial Crossing
MeaningGeneral crossing where a cheque bears across its face, an addition of the words; and company or any abbreviation thereof between two parallel transverse lines or of two parallel transverse lines simply, either with or without the words “not negotiable”, that addition shall be deemed to be a crossing, and the cheque shall be deemed to be crossed generally.Special crossing where a cheque bears across its face, an addition of the name of a banker, 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.
ObjectivesThe objective of general crossing is to make the cheque secure.The objective of special crossing is to provide a greater degree of security to the cheque.
Use of WordsIn general crossing, the use of words between the two parallel lines is optional.In special crossing, the mention of the name of a specific bank between the two parallel lines is essential.
PaymentIn case of general crossing, the payment for the cheque may be received through any bank.In case of special crossing, the payment for the cheque can be received only from the bank in whose name the cheque has been crossed.
NatureThe general crossing of cheque in the nature of general purposes.The special crossing of cheque in the nature of special purposes.


Endorsement is a signature which is used to legally transfer a negotiable instrument from one party to another. This means signing one’s name on negotiable instrument like bills of exchange, a promissory note or a cheque with a view to transfer the interest, right, property or title in the instrument to another person.

Section 15 of the Negotiable Instrument Act defines the term. “Endorsement is the signature by the maker or drawer or a holder of the negotiable instrument, with or without writing, for the purpose of negotiation. Depending on the case, the endorsement is done by the holder, and if no space is left then the endorsement is done on a separate paper slip annexed which is known as “allonge”.

The person doing the endorsement is known as endorser while the person receiving such endorsed instrument is known as endorsee.

Types of Endorsements

1.Blank Endorsement

2. Full Endorsement

3.Restrictive Endorsement

4. Conditional Endorsement

5. Sans Recourse Endorsement

6. Facultative Endorsement

Blank Endorsement

Blank endorsement is an endorsement without mentioning payee’s name and allowing any party in possession of the endorsed item to execute a claim. Once the cheque is signed, it can be used in a similar manner to cash.

Special of full endorsement:

Meaning- an endorsement in full is one where the endorser not only puts his signature on the instrument but also mentions the name of the person to whom the payment has to be made.

Restrictive endorsement:

Meaning- it is a kind of endorsement which either by express words restricts or prohibits further negotiation of the bill. The endorsement expresses that it is not a complete and unconditional transfer of the instrument but it is a mere authority to the endorsee to deal with the bill as expressed in section 50. A restrictive endorsement specifies the way in which a cheque can be negotiated. The most common form of restrictive endorsement is “account payee”.

Conditional Endorsement:

Section 52 States That If the Endorser of a Negotiable Instrument, By Express Words in The Endorsement, Makes His Liability Dependent on The Happening of a Specified Event, Such Endorsement Is Called a Conditional Endorsement. Such An Endorsement Limits the Liability of The Endorser.

3. Sans recourse endorsement: Under this endorsement, the endorser frees himself from any such liability arising from the Dishonor of the instrument. For ­­­example, pay Mr. X at his own risk.

Rules of endorsement:

* Place: The endorsement must be on the instrument. It can be either on the front or back side of the instrument. In case there is no space left on the instrument, a separate paper may be affixed to it. Such an attachment is called ‘allonge’ and should be in ink.

* Holder: The endorsement can only be made by the holder of the instrument.

* Intent to transfer: The endorsement may be made by the endorser either by signing his name on the instrument or by any words showing the intent to transfer or endorse the instrument to a specific individual.

*Delivery: The delivery of instrument must be done by the endorser or by someone on his behalf.

* Entire Bill: The endorsement should be an entire bill. A partial endorsement does not operate as a valid endorsement.

Essentials of endorsement:

The following are essentials of a valid endorsement:

i) it must be on the negotiable instrument.

ii) Signature may be made on any part of the instrument.

iii) It must be made by the maker or holder of the instrument. A stranger cannot endorse it.

iv) It must be signed by the endorser.

v) If thumb-impression, that should be attested.

vi) It may be made either by the endorser merely signing his name on the instrument or by any word showing an intention to endorse or transfer the instrument to a specified person.

vii) It must be completed by delivery of the instrument. The delivery must be made by the endorser himself or by somebody on his behalf with the intention of passing property therein.

viii) It must be an endorsement of the entire bill.

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