Negotiable Instruments Act,1881

Law of Negotiable Instruments

In business dealings, all the transactions do not take place
in terms of money.
Due to many reasons, business men adopted a new method
of exchanging documents (such as bills of exchange,
cheques, DD etc. )
Documents used as substitute for money are called
negotiable instruments (NI).

The law relating to Negotiable Instruments is contained in

the NI acts of 1881.It extends to the whole of India

Definition of a negotiable instrument

The word negotiable means transferable by delivery

Instrument means a written document in which a right is

created in favour of some person.
Negotiable instrument is a written document
transferrable by delivery
- Written promise or order to pay money which may be

transferred from one hand to another as a substitute for

money.

It is a piece of paper which entitles a person to a sum of money

mentioned in it, and which is freely transferable from person
to person.
It is transferred by:
Mere delivery or
Endorsement and delivery
section 13 of NI Act:
A negotiable instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer

(a) Payable to order:

A bill , note or cheque is payable to order which is expressed
to be payable to a particular person or his order.
E.g.: Pay A, Pay A or order
- It should not contain any words prohibiting transfer
E.g.: Pay to A only
(b) Payable to bearer:
Payable to any person whosoever bears it

Note:
NI should be freely transferable
A person to whom the NI is transferred becomes entitled to
get the money mentioned in it, not withstanding the defective
title in the person who transferred it.
But, he should get instrument in good faith and for
consideration

Essential characteristics of Negotiable

Instrument
1.Easily Negotiability
2.Transferee can sue in his own name without giving notice

to the debtor.
3.Better title to a bonafide transferee for value
4.Presumptions

Presumptions of negotiable instruments

1.That every negotiable instrument was drawn, accepted and

endorsed, made or transferred for consideration.

2. That the date it bears is the date on which it was made.
3.That it was accepted with in a reasonable time after being

made and before maturity.

4.That every transaction was made before maturity.
5.That the endorsements were made in the same order in
which they appear.
6.That the lost instrument was duly signed and stamped

Reserve Bank of India- Provisions

1.No person in India other than RBI or central

Government can make or issue a promissory note

payable to bearer .
2. No person in India other than RBI or central
Government can draw or accept a bill of exchange
payable to bearer on demand

3.A cheque payable to bearer on demand can be drawn on

a persons account with a banker.

The effects of provision

1. A promissory note cannot be originally made payable to
bearer, no matter whether it is payable on demand or after a
certain time. It must be made payable to the order
initially.
2. A Bill of exchange may be originally made payable to
bearer

3. A cheque drawn on a bank can be originally made payable

to the bearer on demand.

Promissory Note(PN)
Definition:
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.
- The person who makes promise to pay is called the maker
(debtor)
- The person to whom payment is to be made is called the
payee (creditor).

Negotiable instrument in writing containing an unconditional

promise by one person to pay a certain sum of money to a
specified person.
Specimen:
Bangalore
Sept 27, 2014
Three months after date, I promise to pay Mr. Ramesh the sum of Rs.1000/=( Rs. One
thousand only) for value received.

Signature
(Mr. Girish)

Essentials
1.

It must be in writing

2.

It must contain an express promise to pay

3.

The promise to pay must be unconditional

4.

It must be signed by the maker

5.

The maker must be a certain person

6.

The payee must be certain

7. The sum payable must be certain

8. The amount payable must be in legal tender money of
India
9. Other formalities

Bills of Exchange(BOE)
According to the Act 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.

Parties:
- Drawer- person who makes the bill
- Drawee-person who is directed to pay
- Payee- the person to whom the payment is to be made.

Bangalore
Feb 24, 2014
Three months after date pay to Mr. Suresh or order the sum of Rs. 1000/= ( Rs. One
thousand ), for value received.
To
Mr. Gowrish

Signature
(Mr.Ramesh)

Essentials
1.
2.
3.
4.
5.
6.
7.
8.

It must be in writing
It must contain express order to pay
The order to pay must be unconditional
It must be signed by the drawer
The drawer, drawee and payee must be certain
The sum payable must be certain
It must contain an order to pay money only
Other formalities

Special benefits of BOE

1.A BOE is a double secured instrument

2.In case of immediate need of money, a bill can be discounted

with a bank by the payee
3.Two separate trade debts can be discharged by a BOE

Distinction between a Pro-note and a Bill

1.Number of parties
2.The maker cannot be the payee
- PN maker cannot be the payee
- BOE maker can be the payee
3.Promise and order
4.Acceptance
- PN no acceptance
- BOE- needs acceptance before it is presented for payment
5.Nature of liability
-liability of maker of PN is primary and absolute
- Liability of the drawer of a bill of exchange is secondary and
conditional

6.Makers position
7.Payable to bearer
8.Notice of dishonour
- No notice is required for a PN

- Notice must be given by the holder to all prior parties who

are liable to pay in BOE
9.Applicability of certain provisions- only for BOE

Cheque
A "cheque" is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand.
It is NI, in writing which contains an unconditional order directing a
specified banker to pay a certain sum of money to the bearer of the
instrument or to a specified person .

Essentials
1. It must have all the essentials of B/E
2. It must be drawn on a specified banker
3. It must be payable on demand
4.A cheque may be written on a paper or it may be in the
electronic form.
5.A cheque must ne authenticated with a hand written signature
or by the digital signature.

Specimen of cheque

Bank draft
Is an order issued by one bank on another bank or on its own

branch instructing the latter to pay a specified sum of

money to a specified person or his order.
- Cannot be so easily countermanded as a cheque
- Cannot be made payable to the bearer.

Difference btw cheque & BOE

1.A cheque is always drawn on the banker, while a bill may be

drawn on any person , including a banker

2.A cheque can only be drawn payable on demand, bill can be
drawn payable on demand or after the expiry of a certain
period after sight
3.A cheque payable to bearer on demand is valid, bill payable

to bearer on demand is void

4.A cheque does not require any acceptance by the drawee

before payment can be demanded. Bill requires acceptance

5.A cheque does not require any stamp , BOE must be properly
stamped
6. Three days of grace allowed for bill, not for cheque
7.Unlike cheques, a bill cannot be crossed.

Crossing of a cheque:
A crossed check is payable only through a collecting banker
and not directly at the counter of the bank.
Types of crossing:
1.General-where the cheque bears a cross on its face, two

transverse parallel lines with or without words like not

negotiable, and company etc.

2.Special-where cheque bears across its face an addition of the

name of banker, either with or without words, not

negotiable etc.

3.Non -negotiable crossing:

The effect of the words not negotiable on a crossed cheque is

that the title of the transferee of such a cheque cannot be

better than that of its transferor

Bouncing of the cheque:

A drawer of the bounced cheque shall be deemed to have
committed an offence.
The court have held the following amounting to dishonor for
insufficient funds:
Stop payment instruction to the payee bank.
Request Payee to not to present the cheque till further
intimation.
The cheque received from the payee bank with the remarks
account closed.
Cheque should be presented within validity.
The cheque was issued for the discharge of legally enforceable
debt

Conti
The payee is to give notice regarding payment within 30

days.
The drawer is liable only if he fails to pay within the 15 days
of such notice period.

The written complaint to the judicial magistrate of first class

is made within one month of cause of action arised.

Self Reading
- When banker must refuse payment of his customers
cheque
- When banker may refuse payment of his customers
cheque

Parties to a NI
1. Parties to PN
a. Maker
b. Payee
c. Holder
d. Endorser
e. Endorsee
2. Parties to B/E
a. Drawer : The maker of a bill of exchange or cheque
b. Drawee : The person thereby directed to pay

c. Payee
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".
d. Holder
e. Indorser
f. Indorsee
3.Parties to a cheque
Drawer
Drawee

Negotiation of NI
Transfer of a NI is known as negotiation.
Negotiation:
When a promissory note, bill of exchange or cheque is

transferred to any person, so as to constitute the person

the holder thereof, the instrument is said to be
negotiated.

Modes of negotiation
Accordingly, two modes of negotiation
1. Negotiation by delivery
2. Negotiation by endorsement and delivery

1.Negotiation by delivery: NI payable to bearer can be

transferred by mere delivery but
It must actually be delivered and
The delivery must be voluntary

2.Negotiation by endorsement and delivery :

If NI is payable to a particular person or his order

Two formalities required:
1.
2.

The holder must endorse the NI i.e. he must sign his

name on the instrument
The duly signed instrument must be delivered to the
transferee ( endorsee)

Presentment of NI
The money due on the instrument can be received only after
presenting NI to the parties liable for payment
It is a process of presenting or placing the instrument before
the maker, acceptor or drawee
Presentment of a NI is required for any one of the
following purposes:
1. Presentment for acceptance
2. Presentment for sight
3. Presentment for payment

Presentment for acceptance is required in case of BOE only

Presentment for sight only in case of PN
But, presentment for payment is necessary in all kinds of NI

1.Presentment of a BoE for acceptance

- Required in case of bills of exchange only.

- If the bill is not presented for acceptance, no party is liable to the

holder.
Acceptance of a bill: The indication by the drawee of his assent to
the drawer that he will pay the amount in BoE on due date.
Acceptance must be in writing oral acceptance is not a valid
acceptance

The liability of the drawee arises only when the BoE has been validly
accepted by him.

Essentials of a valid acceptance:

1.

The acceptance must appear on the BoE itself.

2.

The acceptance must be in writing.

3.

The acceptance must be signed by the drawee or his duly authorized

agent

4.

The acceptance must be completed either by delivering the accepted

BoE to the holder or by giving notice of acceptance to the holder

Though, in certain cases, it is optional to present the BoE, it is also desirable

1.

In order to obtain additional security

2.

In order to have an immediate right of recourse against the drawer and

other parties if the bill is dishonored by non-acceptance

Following types of bill of exchange need not

acceptance
1.

BoE payable on demand

2.

BoE payable on fixed date

3.

BoE payable on fixed number of days after date

be presented for

BoE that needs to be presented for acceptance

1.

BoE payable at a given time after acceptance or after sight

2.

BoE having express term that it shall be presented for

acceptance before it is presented for payment

3.

BoE payable at a place other than the place of residence or

business of the drawee

Acceptance:
When the drawee of the bill signifies his assent in writing to the
drawers order in the bill, by signing across the face of the bill
with or without the word accepted and delivers back the bill to
the holder or gives notice 0f acceptance to the holder, the bill

is said to be accepted.

Kinds of acceptance
1.

General acceptance- without any condition or

qualification.

2. Qualified or Conditional acceptance :

Instances of conditional acceptance.
a. Acceptance on the happening of an event.
b. Acceptance of partial amount.
c. Acceptance for payment at a specified place.
d. Acceptance for payment at a different time.
e. Acceptance by some of the drawee only.
f. Acceptance for payment in installments.

Rules regarding the presentment of a BoE for

acceptance:
1.

Persons who should present the bill for acceptance : any person
who is entitled to demand the acceptance Holder or his duly authorized
agent

2.

Persons to whom the bill should be presented for acceptance :

person who can accept the same i.e.

The drawee of a BoE or his duly authorized agent

The joint drawees of a BoE

The legal representatives

The official receiver or assignee

The drawee in case of need

The acceptor for honor

3. Time for presentment for acceptance : stated as under

a)

Where the time for presentment is specified

b)

Where the time for presentment is not specified

4. Place for presentment for acceptance

a)

Where the place for presentment is specified

b)

Where the place for presentment is not specified

Effect of non-presentment of a BoE

Cases in which presentment for acceptance is excused

The holder becomes entitled to recover the amount only when

the bill is duly presented for acceptance and the same is

dishonored due to non-acceptance
Sometimes excused, and treat the bill as dishonored :
cases
a)

When, after reasonable search, the drawee cannot be found.

b)

When the drawee is a fictitious person or incapable of

contracting.

Drawees time for deliberation

The holder can allow drawee 48 hours ( exclusive of public
holidays) to consider whether he will accept the bill.
The drawee can take time before taking the liability.

If the drawee does not return the accepted bill within

48hours the holder should treat the bill as dishonoured.

2.Presentment for sight:

- Is necessary only for a PN , which is made payable at a certain
period after sight , so that the maturity of the note may be
ascertained.
3.Presentment of NI for payment :
After a NI is made ( completed by acceptance or sight, where
required) the next stage is that it must be presented for
payment to the parties who are primarily liable.
Thus, PN, BoE, and cheque must be presented for payment to
the maker, acceptor or drawee respectively

Rules regarding the presentment of NI for payment

1.

Persons who should present an instrument for payment :

person who can give valid discharge to the debtor

2.

Persons to whom the instrument should be presented for

payment

3.

Time for presentment for payment :

a)

Where an instrument is payable after a fixed period of time note the

delay even of a brief period discharges all parties other than maker or
acceptor of instrument

b)

Where an instrument is payable on demand : reasonable time

otherwise discharge from liability

c) Where a PN is payable by installments : presented for

payment on the third day after the date fixed for payment of
each installment if not paid can be treated as dishonored
4. Place of presentment for payment
Effect of non-presentment of NI for payment
Then, except party who is primarily liable, all are discharged

Cases in which presentment of NI for payment is

unnecessary
1.When presentment is intentionally prevented.
2.Place of business closed.
3.Payer absents from place of payment.

4.When the payer cannot be found.

5.Waiver of presentment.
6.Where drawer could not suffer damage.

Dishonour of NI
NI may be dishonored in either of the following ways:
1.Due to non-acceptance
2.Due to non-payment
1.Dishonor of NI due to non-acceptance :
In the following cases

a.
b.

c.
d.
e.

Where drawee or one of the several drawees makes default in

acceptance upon being duly required to accept the bill.
Where the presentment for acceptance is excused and the bill
is not accepted.
Where the drawee is incompetent to contract
Where the drawee makes qualified acceptance
Drawee cannot be found even after reasonable search.

2.Dishonor of NI due to non-payment

PN,BoE,Cheque is said to be dishonoured by nonpayment.

- Notice of dishonor
A notice must be given by the holder to all such parties to
whom he wants to make liable on the instrument i.e.
from whom he wants to recover the amount.
-Persons by whom the notice of dishonor should be given:
By holder or some other party who is liable on the instrument
- party receiving the notice should also give the notice to
the previous parties if in the hands of agent NI is
dishonored

- Persons to whom the notice of dishonor should be

given :
- Exception in the case of cheque holder cannot make banker
liable
- To agent , legal representatives
if death information is not known and notice is given.
Notice of dishonor is not necessary to the maker of PN and to
the drawee or acceptor of BoE and cheque
- Mode of giving notice of dishonor : oral or written
- Time of giving notice of dishonor

Effect of default in giving notice of dishonor

All who are entitled to require notice are discharged from their
liability
Cases in which notice of dishonor is excused ( page no 384-385
M C Kuchhal)
1.Notice of dishonour waived off
2.Drawer of a cheque has countermanded payment
3.Where the drawer has closed his account with the bank
4.Party entitled to notice cannot be found
5.When the drawer also happens to be the acceptor
6.Party promises to pay unconditionally without the notice, the
full amount due on the instrument

Discharge of the instrument and the parties

Partys liability on the instrument coming to an end - However
Discharge in relation to NI has two meanings
1.
2.

Discharge of the NI
Discharge of one or more parties from their liability on the
NI

1.Discharge of NI :
- No person related with the instrument has any further claim
- Happens when the party who is primarily liable, is discharged
from his liability

Ways in which NI is discharged:

1.

By payment in due course

2.

By the primarily liable party becoming the holder of the

instrument

3.

By renunciation of the rights by the holder

4.

By cancellation of the NI

5.

By discharge as a simple contract

2.Discharge of one or more parties from their

liability on the NI

Note: NI is said to be discharged only if all the parties to a

NI are discharged
Otherwise, it is only a discharge of some of the parties and
NI continues to be negotiable
Amount can be recovered from the undischarged parties

A party may be discharged in any one of the following

ways
1. By cancellation of the name of a party
2.By release of a party
3.By payment
4.By allowing the drawee more than 48 hours to accept the BoE
5.By taking qualified acceptance
6.By not giving notice of dishonour
7.By non-presentment of a BoE for acceptance
8.By delay in presenting a cheque for payment
9.By material alteration
10.By negotiation back of bill.