Introduction

 Negotiable Instruments Act 1881 contains the law relating to instruments of credit which are
convertible into money and are easily transferable.
 This Act deals with three instruments – Promissory Notes, Bills of Exchange and Cheques.
 Negotiable instruments Act 1881 came into force on 1st March 1882.
 This Act extends to whole of India.
 This Act applies to all persons resident in India- whether foreigner or Indians.
 The provisions of this Act are also applicable to Hundis, unless there is a local usage to the contrary.

Meaning

 It is an instrument which is transferable (with or without endorsement) by delivery to another person,

by the person who currently holds them. T
 The ownership of the instrument gets transferred to bonafide transferee.
 Section 13(1)
A ―negotiable instrument‖ means
 a promissory note,
 bill of exchange or
 cheque
Payable either to order or to bearer.

Section 13(2)
A negotiable instrument
 may be made payable to two or more payees jointly, or
 it may be made payable in the alternative to one of the two, or
 one or some of several payees.

Two or more payees jointly Pay Mr. X and Mr. Y

One of the two payees Pay Mr. X or Mr. Y
One or some of ‗Pay Mr. X or Mr. Y or Mr. Z‘ or ‗Pay any two from
severalpayees Mr X,
Mr. Y ,Mr.Z‘

However, Reserve Bank of India Act prohibits following-

 issue of promissory note which is ‗payable to bearer‘ (but RBI and Central Government can
issue such notes);
 drawing of bills of exchange which is ‗payable to bearer on demand‘ (but RBI and
Central Government can issue such bills);
A cheque ‗payable to bearer on demand‘ can be drawn on a person‘s account with a bank
Essential Characteristics of Negotiable Instruments

1 Written A negotiable instrument is compulsorily a written instrument. It is also duly

instrument signed.

2 Transfer/ Instruments which These are transferred by one person to another by

negotiation by are payable to order endorsement and delivery.
endorsement Instruments which These are transferred by one person to another by
and/or delivery are payable to bearer simple delivery of the instrument.

3 Negotiable  It is presumed that every negotiable instrument is made or drawn for a

instrument is consideration.
made/drawn for  The onus of proof is on the person who challenges the existence of
consideration consideration.
4 Transferee can  Transferee can sue the debtor if the instrument is dishonoured on
sue the debtor presentation.
 The holder of a note, bill or cheque has the right to recover something
debtor i.e. the person who wrote the note or cheque or who accepted the
bill.
5 Good title to  A person who takes the instrument for bonafide and valuable consideration,
transferee obtains a good title. This is true even when there is a defect in the title of the
transferor.

6 Presumptions  Section 118 lays down following presumptions in relation to a
negotiable instrument (until the contrary is proved) –
Consideration It is presumed that every NI was made or drawn for a
consideration.
It is also presumed that every negotiation/ acceptance/
endorsement/ transfer is done for consideration.
Date It is presumed that every negotiable instrument bearing a
date was made or drawn on such date.
Time of It is presumed that every accepted bill of exchange was
acceptance accepted within a reasonable time after its date and before
its maturity
Order of That the endorsements appearing upon a NI were made in

endorsements the order in which they appear thereon

Time of It is presumed that every transfer of a negotiable
transf instrument was made before its
er maturity.
Stamp It is presumed that a lost promissory note, bill of exchange
or cheque was duly stamped.
Holder is a It is presumed that a holder is a holder in due course.
holder in due
course
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Promissory Note
Definition
Promissory Section 4 A ―promissory note‖ is an instrument in writing (not being
Note 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.
-

 A promissory note is valid even if it contains an undertaking to pay the amount only to
a particular person. Hence, even though negotiability is restricted, it remains a valid
promissory note. Such a promissory note will not be treated as a negotiable instrument.
 If the promissory note contains an undertaking to pay the amount to a person or his
order, it is a negotiable instrument.
 A promissory note which is payable to bearer is not valid due to provisions of RBI Act.
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Essentials of a Promissory Note

1 It should be in  A promissory note should always be in writing.

writing  A verbal promissory note has no meaning.
 No particular format of words have been prescribed.

2 Bank note or  Bank note/currency note also contain a promise to pay thebearer a
currency note is certain sum of money.
not a promissory  But these are not covered by Negotiable Instruments Act 1881.
Note

3 It should contain  The promissory note shall contain an undertaking to pay.

an unconditional  Such undertaking should be unconditional.
undertaking to  If any condition is attached to the undertaking, it is not a valid
pay promissory note.
 Example- ―I promise to pay B ₹ 500 after seven days‖. This is an
unconditional undertaking. Hence, it is a promissory note.
 Example- ―I promise to pay B ₹ 500 seven days after my
marriage with C.‖ This is a conditional undertaking becausemarriage
with C is not certain. Hence, it is not a promissory note.

4 Instrument must  A promissory note is valid only when it is signed by the maker.
be signed by the  Signature can be placed at any part of the instrument.
maker

5 Amount should be  The amount should be certain and predefined.

certain and
definite  Example-―I promise to pay B ₹ 500 and all other sums which
shall be due to him.‖ This is not a valid promissory note as the
amount mentioned is not definite.
 In the following cases, the sum shall be treated as certain –
 where the sum includes future interest;
 where the sum is payable at an indicated rate of exchange;
 sum payable is according to course of exchange.

6 The person to  Promissory note shall be payable to a specific person. It isirrelevant

whom promise is if the person is misnamed or designated by description only.
made must be a  If the promissory note is made payable to maker himself, it is
definite person. invalid. However, if such note is endorsed to some other person it
become valid.

Miscellaneous  No specific form of word is prescribed.

features  Place of payment and date of making is not necessary. Undated
promissory note is presumed to be made on the date of delivery.
 Ante dated and post dated note is also valid.
 The words ―for value received‖ may not be mentioned as it is
presumed that promissory note is made for value.
 The words ‗or order‘ may not be written as it is presumed that
the person in whose favour it is made, can transfer it.
Bill of Exchange

Definition
Bill of Section 5 A ―bill of exchange‖ is an instrument in writing containing
Exchange - 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.

 A bill of exchange can be made payable to a particular person only. Even though,
such bills of exchange are valid, but they are not treated as negotiable instrument.
 As per provisions of Section 31 of RBI Act, a bill of exchange cannot be made payable
to bearer on demand.
 If it is payable to bearer, then it shall be payable after a certain period of time.
 If it is payable on demand, then it shall be payable to order of someone.
 Thus, a bill of exchange is an order by the drawer to pay a specified amount to a
specified person or to his order or to the bearer.

Parties to a bill of exchange

 There are three parties to a bill of exchange – drawer, drawee and payee.
 It doesn‘t mean that there should be three distinct persons. One person can play the role of two
parties. For Example-
 When a bill is drawn as ‗Pay to me or my order‘, drawer and payee are same person.
 When the bill is subsequently endorsed in favour of drawee, the drawee and payee are same
person.
 When one draws a bill of exchange on himself, the drawer and drawee are the same
person.
 But, the names of the three parties should be clearly mentioned in the bill of exchange.
Now, we discuss the three parties in detail--
1 Drawer  Section 7
―The maker of a bill of exchange or cheque is called the
drawer .............................................................. ‖
 The person who draws or makes the bill of exchange or
cheque is termed as a drawer. The drawer is the person who
directs the drawee to pay the amount.
 Drawer needs to essentially put his signature on the bill of
exchange.

2  Section 7
Drawee
―......the person thereby directed to pay is called the drawee
.................................................................... ‖
 Drawer directs a person to pay. The person to whom such
direction is given, is known as drawee.

3 Payee  Section 7
―........The person named in the instrument, to whom or
to whose order the money is by the instrument directed to
be paid, is called the payee.................................. ‖
When the drawer directs the payee to pay the amount to
the order of a third person, such third person becomes the
payee.
 When the drawer directs the payee to pay the amount on
his own order, then the drawer becomes payee as well.
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Essential of a valid bill of exchange

1 Written A bill of exchange is always in writing. There is no specific format

instrument for
such instruments. However, it should be drawn in a form that
complies with the requirements of Section 5.

2 Order to pay Bill of Exchange must contain an order to pay i.e. a direction to
pay. The
Order is from the drawer to drawee.
3 Unconditiona  The order to pay must be unconditional. Thus, a bill of exchange
l order must be paid under all circumstances and not be based on a
contingent event. A bill containing a conditional order to pay is
invalid.
4 Signature of The bill of exchange should be signed by the drawer. An unsigned
bill of
drawer Exchange is not valid and is ineffective. However, such signature
can be put even after issuance of the bill.
5 Necessary The parties to a bill of exchange are – the drawer, the
parties drawee/acceptor and
The payee.
6 Sum must be The bill of exchange must mention a definite and certain sum of
certain money to paid. In the following cases, the sum shall be treated as
certain –
 where the sum includes future interest;
 where the sum is payable at an indicated rate of exchange;
 Sum payable is according to course of exchange.

7 Payment must Bill of exchange cannot contain an order to pay anything in kind. It
be in terms should contain an order to pay in terms of money only.
of money
8 Delivery to Bill of exchange must be delivered to the payee, otherwise it
payee becomes
Inchoate and ineffective.
9 All All the formalities regarding a bill of exchange must be fulfilled.
formalities Such formalities can be – stamp, date, etc.
must be
fulfilled
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Cheque

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 and
- it includes the electronic image of a truncated cheque and a
cheque in the electronic form.

 A cheque is a bill of exchange which is

 drawn on a bank and
 is payable on demand.
 The essential of a cheque are as under --
 it must be in writing;
 it must contain an unconditional order to a specified banker to pay a specified amount to aspecified
person or to the order of the specified person or to the bearer;
 it must be signed by the maker;
 it is always payable on demand.
 Even though a cheque is a type of bill of exchange, it does not require any acceptance f r o m t h e
drawee i.eBanker
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1. Parties to bill of exchange

1. Drawer: The maker of a bill of exchange is called the ‘drawer’.
2. Drawee: The person directed to pay the money by the drawer is called the ‘Drawee’,
3. Acceptor: After a Drawee of a bill has signed his assent upon the bill, or if there are more parts
than one, upon one of such pares and delivered the same, or given notice of such signing to the holder
or to some person on his behalf, he is called the ‘ acceptor’.
4. Payee: The person named in the instrument, to whom or to whose order the money is directed to
be paid by the instrument is called the ‘payee’. He is the real beneficiary under the instrument. Where
he signs his name and makes the instrument payable to some other person, that other person does not
become the payee.
5. Indorser: When the holder transfers or indorses the instrument to anyone else, the holder becomes
the ‘indorser’.
6. Indorsee: The person to whom the bill is indorsed is called an ‘indorsee’.
7. Holder: A person who is legally entitled to the possession of the negotiable instrument in his own
name and to receive the amount thereof, is called a ‘holder’. He is either the original payee, or the
indorsee. In case the bill is payable to the bearer, the person in possession of the negotiable instrument
is called the ‘holder’.
8. Acceptor for honour: In case the original Drawee refuses to accept the bill or to furnish better
security when demanded by the notary, any person who is not liable on the bill, may accept it with the
consent of the holder, for the honour of any party liable on the bill. Such an acceptor is called
‘acceptor for honour’.

2. Parties to a Promissory Note

1. Maker. He is the person who promises to pay the amount stated in the note. He is the debtor.
2. Payee. He is the person to whom the amount is payable i.e. the creditor.
3. Holder. He is the payee or the person to whom the note might have been indorsed.
4. The indorser and indorsee (the same as in the case of a bill).

3 Parties to a Cheque
1. Drawer. He is the person who draws the cheque, i.e., the depositor of money in the bank.
2. Drawee. It is the drawer’s banker on whom the cheque has been drawn.
3. Payee. He is the person who is entitled to receive the payment of the cheque.
4. The holder, indorser and indorsee (the same as in the case of a bill or note).
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Modes of negotiation
Negotiation may be effected in the following two ways:
1.Negotiation by delivery (Sec. 47):
Where a promissory note or a bill of exchange or a cheque is payable to a bearer, it may be
negotiated by delivery thereof.
Example: A, the holder of a negotiable instrument payable to bearer, delivers it to B’s
agent to keep it for B. The instrument has been negotiated.

2. Negotiation by endorsement and delivery (Sec. 48):

A promissory note, a cheque or a bill of exchange payable to order can be negotiated only be
endorsement and delivery. Unless the holder signs his endorsement on the instrument and
delivers it, the transferee does not become a holder. If there are more payees than one, all
must endorse it.

ASSIGNMENT
Bills, notes and cheques represent debts and as such have been held to be assignable without
endorsement. Transfer by assignment takes place when the holder of a negotiable instrument
sells his right to another person without endorsing it.
The assignee is entitled to get 22 possession and can recover the amount due on the
instrument from the parties thereto. Of the two methods of transfer of negotiable instruments
discussed, transfer by negotiation is recognised by the Negotiable Instrument Act.

Negotiation and Assignment Distinguished

The various points of distinction between negotiation and assignment are as below:
1. Negotiation requires delivery only to constitute a transfer, whereas assignment requires a
written document signed by the transferor.
2. Consideration is always presumed in the case of transfer by negotiation. In the case of
assignment consideration must be proved.
3. In case of negotiation, notice of transfer is not necessary, whereas in the case of
assignment notice of the transfer must be given by the assignee to the debtor.
4. The assignee takes the instrument subject to all the defects in the title of the transferor. If
the title of the assignor was defective the title of the assignee is also defective. However, in
case of negotiation the transferee takes the instrument free from all the defects in the title of
the transferor. A holder in due course is not affected by any defect in the title of the
transferor. He may therefore have a better title than the transferor.
5. In case of negotiation a transferee can sue the third party in his own name. But an assignee
cannot do so.
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Importance of delivery in negotiation

Delivery is a voluntary transfer of possession from one person to another. Delivery is
essential to complete any contract on a negotiable instrument whether it be contract of
making endorsement or acceptance.
The property in the instrument does not pass unless the delivery is fully completed.
Section 46 of the Act provides that a negotiable instrument is not made or accepted or
endorsed unless it is delivered to a proper person.
For instance, if a person signs a promissory note and keeps it with himself, he cannot be said
to have made a promissory note; only when it is delivered to the payee that the promissory
note is made. Delivery may be actual or constructive.
Delivery is actual when it is accompanied by actual change of possession of the instrument.
Constructive delivery is effected without any change of actual possession.

ENDORSEMENT
The word ‘endorsement’ in its literal sense means, writing on the back of an instrument. But
under the Negotiable Instruments Act it means, the writing of one’s name on the back of the
instrument or any paper attached to it with the intention of transferring the rights therein.
Thus, endorsement is signing a negotiable instrument for the purpose of negotiation. The
person who effects an endorsement is called an ‘endorser’, and the person to whom
negotiable instrument is transferred by endorsement is called the ‘endorsee’.
Essentials of a valid endorsement
The following are the essentials of a valid endorsement:
1. It must be on the instrument. The endorsement may be on the back or face of the
instrument and if no space is left on 24 the instrument, it may be made on a separate paper
attached to it called allonage. It should usually be in ink.
2. It must be made by the maker or holder of the instrument. A stranger cannot endorse it.
3. It must be signed by the endorser. Full name is not essential. Initials may suffice. Thumb-
impression should be attested. Signature may be made on any part of the instrument. A
rubber stamp is not accepted but the designation of the holder can be done by a rubber stamp.
4.. 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.
Thus, where a person endorses an instrument to another and keeps it in his papers where it is
found after his death and then delivered to the endorsee, the latter gets no right on the
instrument.
5.. It must be an endorsement of the entire bill. A partial endorsement i.e. which purports to
transfer to the endorse a part only of the amount payable does not operate as a valid
endorsement.
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If delivery is conditional, endorsement is not complete until the condition is fulfilled.

Who may endorse?
The payee of an instrument is the rightful person to make the first endorsement. Thereafter the
instrument may be endorsed by any person who has become the holder of the instrument.
The maker or the drawer cannot endorse the instrument but if any of them has become the holder
thereof he may endorse the instrument. (Sec. 51).
The maker or drawer cannot endorse or negotiate an instrument unless he is in lawful possession of
instrument or is the holder there of. A payee or indorse cannot endorse or negotiate unless he is the
holder there of.

Dishonour of Cheque –
1) Sections 138 to 142 deals with dishonor of cheques and provides for criminal penalties in
the event of dishonor of cheques for insufficiency of funds.
2) Penalty for dishonour of cheque –
The drawer, under Section 138, may be punished with imprisonment up to 2 years or with a
fine up to twice the amount of the cheque or with both.
However, in order to attract the aforesaid penalties, following conditions must be satisfied:
The cheque should have been dishonored due to insufficiency of funds in the account
maintained by him with a banker for payment of any amount of money to another person
from out of that account.
The payment for which the cheque was issued should have been in discharge of a legally
enforceable debt or liability in whole or part of it.
The cheque should have been presented within 3 months from the date on which it is
drawn.
Presumption in favor of holder - Section 139
It shall be presumed that the holder of a cheque received the cheque for the discharge of any
debt or other liability.
Defence which may not be allowed in any prosecution under section 138 - Section 140
It shall not be a defense in a prosecution of an offence under section 138 that the drawer had
no reason to believe when he issued the cheque that the cheque may be dishonored on
presentment because of insufficiency of funds
Offences by Companies - Section 141
If the person committing an offence is a company, every person, who at the time the offence
was committed and the company shall be jointly liable for the offence.
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Procedure to be followed before charging penalty –

Cheque is issued by drawer
The payee/holder presents it for payment.
The collecting bank informs payee/holder about dishonor of cheque.
The payee or the holder in due course of the cheque should have given notice demanding
payment within 30 days from the drawer in receipt of information of dishonor of cheque from
the bank.
Notice can be served by ordinary post or even telegram.
The drawer is liable only if he fails to make the payment within 15 days of such notice
period.
The payee or holder in due course of the cheque dishonored should have made a complaint
within one month of cause of action arising out of Sec. 138.

Cognizance of offences – Section 142

A) Filing case –
1) Court shall take cognizance of any offence punishable under section 138 only if it is in
writing.
2) Time limit for filing the complaint is 1 month.
3) No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first
class shall try any offence punishable under section 138.
B) Place of Jurisdiction of court for the trail of offence:
The offence under section 138, which deals with the dishonor of cheque, shall be inquired
into and tried only by a court within whose local jurisdiction -
a) if the cheque is delivered for collection through an account, the branch of the bank where
the payee or holder in due course, as the case may be, maintains the account, is situated; or
b) if the cheque is presented for payment by the payee or holder in due course, otherwise
through an account, the branch of the drawee bank where the drawer maintains the account, is
situated
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DISHONOUR OF A NEGOTIABLE INSTRUMENT

When a negotiable instrument is dishonoured, the holder must give a notice of dishonour to
all the previous parties in order to make them liable.
A negotiable instrument can be dishonoured either by nonacceptance or by non-payment.
A cheque and a promissory note can only be dishonoured by non-payment but a bill of
exchange can be dishohoured either by non-acceptance or by non-payment.

Dishonour by non-acceptance (Section 91)

A bill of exchange can be dishonoured by non-acceptance in the following ways:
1. If a bill is presented to the drawee for acceptance and he does not accept it within 48 hours
from the time of presentment for acceptance. Ordinarily when there are a number of drawees
all of them must accept the same, but when the drawees are partner’s acceptance by one of
them means acceptance by all.
2. When the drawee is a fictitious person or if he cannot be traced after reasonable search.
3. When the drawee is incompetent to contract, the bill is treated as dishonoured.
4. When a bill is accepted with a qualified acceptance, the holder may treat the bill of
exchange having been dishonoured.
5. When the drawee has either become insolvent or is dead.
6. When presentment for acceptance is excused and the bill is not accepted. Where a drawee
in case of need is named in a bill or in any indorsement thereon, the bill is not dishonoured
until it has been dishonoured by such drawee.
Dishonour by non-payment (Section 92)
A bill after being accepted has got to be presented for payment on the date of its maturity.
If the acceptor fails to make payment when it is due, the bill is dishonoured by non-payment.
In the case of a promissory note if the maker fails to make payment on the due date the note
is dishonoured by non-payment.
A cheque is dishonoured by non-payment as soon as a banker refuses to pay.
An instrument is also dishonoured by non-payment when presentment for payment is excused
and the instrument when overdue remains unpaid (Sec 76).