Summary

Chapter Nine

Negotiable Instruments Act

Learning Objectives:

1. History of Negotiable Instruments and its types

2. Negotiations and maturity
3. Promissory Note and Bill of Exchange
4. Presentment, Honor and Dishonor of N.I.
5. Hundi, Cheques and Demand Drafts

9.1. History of Negotiable Instruments and its types

The Act was originally drafted in 1866 by the India Law Commission and introduced in
December, 1867 in the Council and it was referred to a Select Committee. The draft then
modified several times and was introduced in the Council and was passed into law in
1881 being the Negotiable Instruments Act, 1881. Subsequent amendments were then
implemented from time to time.
Promissory note, bill of exchange, cheques etc. are the types of negotiable instruments.
Drawer, drawee, acceptor, payee, holder etc. are the terms used in negotiations. Money
orders, postal orders, share certificates, promissory note etc. are types of non-negotiable
instruments.
9.2 Negotiations and maturity

When a promise note, bill of exchange or cheque is transferred to any person, so as to

continue the person the holder thereof, the instrument is said to be negotiated. A
negotiable instrument payable to a particular person or his order can be transferred by
making an endorsement on it and then delivering the same. In a promissory note or bill of
exchange, the expressions “at sight” and “on presentment” means on demand. The
maturity of a promissory note or bill of exchange is the date at which it falls due. Every
promissory note or bill of exchange which is not expressed to be payable on demand, at
 sight or on presentment; is at maturity on the third day after the day on which it is
expressed to be payable.

9.3 Promissory Note and Bill of Exchange

A promissory note is an instrument in writing containing an unconditional undertaking
signed by the maker, to pay a certain sum of money to, or the order of a certain person or
to the bearer of the instrument. Also, the promissory note should contain a promise to pay
money and money only i.e., legal tender money. The promise cannot be extended to
payments in the form of goods, shares, bonds, foreign exchange, etc. The money must be
payable to definite person or according to his order. It may be payable on demand or after
certain definite period of time. And, a promissory note should bear sufficient stamp ; It
should be dated, and the rate of interest per annum must be mentioned.
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. A bill of exchange may be
payable on demand or at a specified date or after a specified period of time. If no time of
payment is mentioned, the instrument is payable on demand. The maturity of a bill of
exchange is the date at which it falls due.

9.4 Presentment, Honor and Dishonor of Negotiable Instruments

Promissory notes, bill of exchange and cheques must be presented for payment to the
maker, acceptor or drawee thereof respectively, by or on behalf of the holder. Honoring
means payment of the amount due on a promissory note, bill of exchange or cheque;
made to the holder of the instrument. A bill of exchange is said to be dishonored by non-
acceptance when the drawee, or one of several drawee not being partners, makes default
in acceptance upon being duly required to accept the bill, or where presentment is
excused and the bill is not accepted. Where the drawee is incompetent to contract, or the
acceptance is qualified the bill may be treated as dishonored.

9.5 Hundi, Cheques and Demand Drafts

The Negotiable Instruments Act does not apply to Hundis. Hundis are governed by the
custom and usages of the locality in which they are intended to be used. Cheques are the
most common and popular form of negotiable instruments. It may be in bearer form or
crossed form. 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 a crossing, and the cheque shall be deemed to be crossed
generally. Now a days, electronic cheques are the most popular instrument of transaction.
The demand draft , or the bank draft, is kind of bill of exchange drawn by one office of
a bank upon another office of the same bank. It is similar to a cheque. It is an order to pay
money. It cannot be made payable to bearer on demand. Next to cheque, demand drafts
are used widely in economic transactions in India, as they are the safest form of transfer
of funds and are hence most popular.

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