Negotiable instruments- Meaning, Types & Differences

Negotiable Instrument
Negotiable Instrument






  • What is a Negotiable Instrument?


A Negotiable Instrument is that document that includes a ‘promise to pay’ a certain amount of money to the bearer of the document. Its a mode of transferring a debt from one person to another. Negotiable Instruments are always in written form.


Examples of Negotiable instruments are- a cheque, a promissory note, a bill of exchange.




Documents of a certain type which are used in commercial transactions and monetary dealings, are known Negotiable instruments.

“Negotiable” means transferable by delivery and

“instrument” means a written document by which a right is created in favor of some person.  Thus, negotiable instrument means a document which is transferable by delivery.

According to Section 13(i) of negotiable instrument Act, 1881 a negotiable instrument includes and means a promissory note, bill of exchange or cheque.



  • Freely transferrable:The property in a negotiable instrument gets transferred by a simple process of mere delivery if it is payable to bearer, endorsement and delivery or payable to order.
  • Recovery: One can sue upon the instrument in his own name.
  • Presumption as to considerations: These instruments are presumed to have been
  • made,
  • drawn,
  • accepted,
  • endorsed,
  • negotiated
  • or transferred for consideration.
  • Payable to order or bearer: It must be payable either to order or bearer.
  • Holder’s title free from all defects: The holder (one who acquires the instrument in good faith and for consideration) in due course gets title free from all defects.
  • Presumption as to holder-:Every holder of negotiable instrument is presumed to be holder in due course.



There are two types of Negotiable Instruments:

Instruments Negotiable by Statute:

The Negotiable Instruments Act mentions orgy three kinds of negotiable instruments (Section 13). These are:

  • Promissory Notes
  • Bills of Exchange
  • Cheques:

Instruments Negotiable by Custom or Usage:

There are certain other instruments which have occupied the character of negotiability as a result of  usage or custom of trade. For example:

  • Exchequer bills.
  • Bank notes,
  • Share warrants,
  • Circular notes,
  • Bearer debentures,
  • Dividend warrants,
  • Share certificates with blank transfer deeds, etc.




Section 4 of the Act defines a promissory note as an instrument in writing.

It contains an unconditional undertaking which is signed by the maker to pay of certain sum of money to, to the order of certain person, or to the bearer of the instruments. The person, who makes the promissory note, promises to pay and is called the maker. The person to whom the payment is to be mode is called the payee.

Essential features:

The following are the essential features of a Promissory note,:

  1. The promise must be in writing.
  2. The promise must be signed by the maker or payer.
  3. The promise must be unconditional.
  4. The amount to be paid must be definite in terms of money.
  5. It must be payable on demand or at a fixed or determinable future date.
  6. It must be payable to a definite person. The Payee must be certain.
  7. Promissory note must bear stamp at the rate prescribed by law of a country.
  8. There are two parties a promissory note,
  • Maker
  • Payee

NOTE: An instrument containing a promise to pay a sum after educating necessary expenses or imposing any other condition is not a promissory note.


  • I promise to pay X Rs. 1500, and all other sums which shall be due to him.
  • I promise to pay Y Rs. 5500, first deducting there out any money which he may owe me.


In Chandabolu Bhaskara Rao’s case, the Honble High Court of Andhra Pradesh held that since promissory note is not a compulsorily attestable document, even if the signatures of the attesters are taken and after its execution it does not amount the material alteration. So it does not get vitiated. Therefore, whether there were attesters or not at the time of its execution is immaterial, more so when its execution is admitted.
In Haribhavandas Parasaran and Co. v. A.D. Thakur [A.I.R. 1963 Mys. 107], it was held that- It is mandatory that the presumption under Section 118(a) should be made until the contrary is proved.



It is an instrument in writing. Further, it contains an unconditional order signed by the maker, directing a certain person to pay

  • a certain sum of money only to, or
  • to the order or
  • certain person to the bearer of the instrument.


  • The amount payable must be certain.
  • The payment must be made in money.
  • The bill Payable may be either on demand or after a specified period.
  • The bill may be payable either to the bearer or to the order or payee.


  • Please let the bearer have Rs. 15000 and oblige.
  • We hereby authorize you to pay on our account to the order of X, Rs 65000.


A cheque is a bill of exchange drawn on a specified banker. It is expressed to be payable otherwise than on demand.


  • In writing
  • Express order to pay
  • Definite and unconditional order
  • Signed by drawer
  • Order to pay certain amount
  • Payable on demand


Drawer: The maker of a bill of exchange.

Drawee: The person directed to pay the money by the drawer.

Payee: To whom or to whose order the money ore directed to be paid by the instruments. The person named in the instrument only.


Dashrath Roopsingh Rathod Vs. Stae of Maharashtra & Anr.

The Supreme Court in this case has changed the basic criteria under Section 138 of Negotiable Instruments Act to prosecute a person who had presented the cheque which had been returned due to insufficiency of funds or if the amount exceeds the amount in the bank of the payer.


Types of Cheques: 

Cheques are of different kinds-

  1. 1.Open cheques: An open cheque is one which is payable in cash across the counter of the bank
  2. 2. Crossed cheques: A crossed cheque is one which has Iwo short parallel lines marked across its face. It can be paid only to another banker. The advantage of crossing is that it reduces the danger of unauthorized persons getting possession of a cheque and cashing it.
  3. Bearer Cheque
  4. Order Cheque
  5. Marked Cheque
  6. Not payable or bad cheque
  7. Ante-dated Cheque
  8. Post dated Cheque
  9. Stale Cheque
  10. Multilated Cheque
  11. Digital Cheque- Cheques in Electronic form and Truncated Cheques.
  12. Banker Cheque
  13. Golden Cheque
  14. Travellers Cheque





Promissory Note Bill of Exchange
1.      It contains an unconditional promise. 1.      It contains an unconditional order.
2.      There are two parties –

·         the maker and

·         the payee.

2.      There are three parties –

·         the drawer,

·         the drawee and

·         the payee.

3.      It is made by the debtor. 3.      It is made by the creditor.
4.      Acceptance is not required 4.      Acceptance by the drawee is a must
5.      The liability of drawer is primary and absolute as well. 5.      The liability of the maker/drawer is secondary. Also, it is conditional upon non-payment by the drawee.


Cheque Bill of Exchange
1.      It is drawn on a banker. 1.      It can be drawn on anybody including a banker.
2.      The amount is always payable on demand only. 2.      The amount is payable on demand or even after a specified period.
3.      It can be crossed to end its negotiability. 3.      It cannot be crossed.
4.      Acceptance is not required. 4.      Acceptance is a must.



Bill in sets: 

Foreign bills are generally drawn in set of 3 each. To avoid miscarriage during transit, they are drawn in different parts and each part is transmitted separately and all these parts, as a whole constitute a complete bill.


Accommodation Bill: 

They are drawn, accepted and subsequently discounted from a bank for accommodating a friend.They are not real bills and hence, do not represent acknowledgement of an actual debt.

Example: A in order to financially help X, writes a bills on a mutual friend X who accepts the bill, Y then gets the bill discounted from a bank. He pays the required amount on maturity to X (acceptor) who in turn makes payment to the bank. Thus in an accommodation bill it is the payee who is the principal debtor and the drawer and accept or act as a surety for him.

Ambiguous Instruments (Section 17)

An instrument, which in form is such that it may either be treated by the holder as a bill or as a note, is an ambiguous instrument. Bill drawn to. to the order of the drawee, by an agent on his principal, by one branch of a bank on another, by the direction of a company, their cashier are also ambiguous instruments.

Example: where P draws a bill payable to P’s order, it is not an ambiguous instrument and cannot be treated as a promissory note.


Inchoate Stamped Instrument (Sec 20):

When one person gives to another such a document, the other person is prima facie entitled to complete the document and make it into a proper negotiable instrument up to the value mentioned in the instrument, or up to the value covered by the stamp affixed on it.
The person signing the instrument is liable on it to any holder in due course.
Inland and foreign Bills: 

A bill which is

  • drawn or made in India and also made payable in India or
  • drawn or made in India upon any person resident in India, although it may be made payable in a foreign country, is deemed to be an inland bill.

Example: A bill of exchange drawn in Bombay and made payable in Mumbai, although the drawee may be residing outside India. Or a bill of exchange drawn in Raipur on a person resident in Mumbai, although it may be made payable outside India.

A bill which is not an inland bill, is deemed to be a foreign bill.

Example : A bill of exchange drawn in India, on a person residing outside India and made payable outside India.


Forged Instruments:

  • In Forged instruments, there is a complete absence of title from the very beginning. Forged instruments in the eyes of law have no existence whatsoever. A forged signature is altogether inoperative.





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