The Negotiable Instruments

Act, 1881
[Act No. 3 of Year 1871]
 Course Content

Negotiable Instrument Act, 1881:

Definition and essentials of the Negotiable
Instruments, Promissory note, Bill of
exchange and Cheque, Parties to
Negotiable Instrument, Holder in Due
Course, Negotiation by Endorsements,
Crossing of a Cheque and Dishonor of a
Cheque
 Negotiable Instrument
Negotiable: transferable from one person to another so as to constitute the person the
holder thereof, the instrument is said to be negotiated.
Instrument: any written document by which a right is created in favour of some person.
Thus the negotiable instrument is a document by which rights vested in a person can be
transferred to another person in accordance of the provisions of the Negotiable
Instruments Act, 1881.

A "negotiable instrument" means a promissory note, bill of exchange or cheque payable

either to order or to bearer. [Sec 13]
Explanation 1 : A promissory note, bill of exchange or cheque is payable to order which is
expressed to be so payable or which is expressed to be payable to a particular person, and does
not contain words prohibiting transfer or indicating an intention that it shall not be transferable.
Explanation 2 : A promissory note, bill of exchange or cheque is payable to bearer which is
expressed to be so payable or on which the only or last endorsement is an endorsement in blank.
Explanation 3 : Where a promissory note, bill of exchange or cheque, either originally or by
endorsement, is expressed to be payable to the order of a specified person, and not to him or his
order, it is nevertheless payable to him or his order at his option.

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 two, or one or some of several payees. [Sec 13]
 Negotiable Instrument
Main Features
An instrument may be negotiable either by
Statute: PN, BE and Cheque, or
Usages: Bank Notes, drafts, share warrants, bearer debentures,
scripts and treasury bills.

Characteristics
Freely transferable:
by (1) delivery or (2) by endorsement and delivery
Holders title free from defects:
negotiability means transferability + HiDC acquiring a good title
notwithstanding any defect in a previous holders title.
The holder can sue in his own name
Can be transferred infinitum
Subject to certain presumptions
 Negotiable Instrument
Main Features
Presumptions as to Negotiable Instruments:
As to consideration
As to date
As to acceptance
As to transfer
As to the order of endorsement
As to lost instrument
As to holder-in-due-course
As To Dishonour
 Promissory Note
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 only to, or to the order of, a certain
person, or to the bearer of the instrument. [Section 4]

A signs instruments in the following terms:

(a) "I promise to Pay B or order Rs.500".
(b) "I acknowledge myself to be indebted to B in Rs.1,000, to be paid on
demand, for value received."
(c) "Mr B I.O.U Rs.1,000."
(d) "I promise to pay B Rs. 500 and all other sums which shall be due to him."
(e) "I promise to pay B Rs. 500 first deducting thereout any money which he may
owe me."
(f) I promise to pay B Rs. 500 seven days after my marriage with C.
(g) I promise to pay B Rs. 500 on D's death, provided D leaves me enough to
pay that sum.
(h) I promise to pay B Rs. 500 and to deliver to him my black horse on lst
January next.
The instruments respectively marked (a) and (b) are promissory notes. The
instruments respectively marked (c), (d), (e), (f), (g) and (h) are not
promissory notes.
 Essentials or Characteristics of a
Promissory Note
In writing
Promise to pay
Unconditional
Signed by the maker
Certain parties
Certain some of money
Promise to pay money only
Number, place, date etc
May be payable in installments
May be payable on demand or after a definite period
It can not be made payable to bearer on demand or even
to bearer after a certain period. (Sec 31 of RBI Act)
It must be duly stamped
 Bill of Exchange
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. [Sec 5]

Characteristic features:
Must be in writing
Must contain an order to pay and not a promise or request
The order must be unconditional
There must be three parties drawer, drawee and payee
The parties must be certain
Must be signed by the drawer
The sum payable must be certain
The order must be to pay money and money only
Must be stamped
Number, place and date are not essential. Oral evidence may be
obtained as to the date and place of execution.
 Cheque

A "cheque" is a bill of exchange drawn on

a specified banker and not expressed to
be payable otherwise than on demand.
[Sec 6]
Further, the expression includes the
electronic image of a truncated cheque
and a cheque in the electronic form. (wef
6/2/03)
 Electronic Cheque and Truncated Cheque

Electronic Cheque - Provisions of electronic cheque has been

made by Amendment Act, 2002. As per Explanation I(a) to section
6, A cheque in the electronic form means a cheque which contains
the exact mirror image of a paper cheque, and is generated, written
and signed by a secure system ensuring the minimum safety
standards with the use of digital signature (with or without biometrics
signature) and asymmetric crypto system.

Truncated Cheque - Provisions of electronic cheque has been

made by Amendment Act, 2002. As per Explanation I(b) to section
6, A truncated cheque means a cheque which is truncated during
the clearing cycle, either by the clearing house during the course of
a clearing cycle, either by the clearing house or by the bank whether
paying or receiving payment, immediately on generation of an
electronic image for transmission, substituting the further physical
movement of the cheque in writing.
 Features of a Cheque
It is a bill of exchange with two added features:
Always drawn on a specified banker
Always payable on demand

Being the bill of exchange, a Cheque must be:

In writing
Contain an unconditional order to pay
Drawn on a specified banker
For a certain some of money
The payee must be a definite person
Amount must be written both in figures and words
It must be dated antedated, post-dated and stale
 Parties in Negotiable Instruments
The principal parties to a bill of exchange and
cheque are the drawer/maker, drawee, and
payee, and in case of a promissory note are the
drawer/maker and the payee.

Promissory
Bill of Exchange Cheque
Note
Drawer Drawer Maker
Payee Drawee Drawee
Holder Payee Payee
Holder
Endorser Acceptor
Endorser
Endorsee Holder
Endorsee
Endorser Endorsee
 Parties in Negotiable Instruments
The maker of a bill of exchange or cheque is called the "drawer"; the person
thereby directed to pay is called the "drawee".
"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".
"Acceptor": person who accepts the bill. In practice a drawee is acceptor but
a third person may also accept on behalf of drawee.
Endorser: The person who endorces the bill by putting his signature.
Endorsee: Person in whose favour the bill is endorsed.
"Drawee in case of need": When the bill or in any endorsement thereon the
name of any person is given in addition to the drawee to be resorted to in
case of need, such person is called a "drawee in case of need".
"Acceptor for honour" : The person who may voluntary become party to a
bill as acceptor in the event of refusal by original drawee to accept. The
acceptor for honour offer to accept the bill supra protest with a view to
safegaurd the honour or prestige of the original drawer or any other
endorser. This happens when the bill gets dishonoured and a formal
certificate of dishonour, known as protest, is issued.
 Holder and Holder-in-due-course
The "holder" of a promissory note, bill of exchange or cheque
means any person entitled in his own name to the possession
thereof and to receive or recover the amount due thereon
from the parties thereto. [Sec 8]

"Holder in due course" means any person who for

consideration became the possessor of a promissory note, bill
of exchange or cheque if payable to bearer, or the payee or
endorsee thereof, if payable to order, before the amount
mentioned in it became payable, and without having sufficient
cause to believe that any defect existed in the title of the
person from whom he derived his title. [Sec 9]

Thus, a person who takes an instrument in good faith and for

value becomes the true owner of the instrument and is known
as holder-in-due-course.
 Rights and Privileges of a
Holder in due course
Derivation of a better title than that of transferor: as against a holder, the
HiDc is a privileged person in the sense that no holder gets a better title
than that of transferor, but a HiDc does. Moreover the party liable to pay
cannot plead against a HiDc that the instrument had been stolen or was
obtained by fraud or theft or for unlawfull consideration. [Sec 58]
Rights in case of inchoate instruments: Where one person signs and
delivers to another a stamped but otherwise inchoate (incomplete)
negotiable instrument, he is stopped from asserting, as against a holder in
due course, that the instrument has not been filled in accordance with the
authority given by him provided the amount filled is covered by the stamp
fixed. [Sec 20]
Liability of prior parties to a Holder in due course: Every prior party to a
Negotiable Instrument, i.e., the maker or drawer, the acceptor, and all the
intermediate endorsers continue to remain liable to the holder in due
course, both collectively and separately, until the instrument is duly
satisfied. [Sec 36]
Privileges in case of fictitious bills: Where a bill of exchange is drawn by a
fictitious person and is payable to his order, the acceptor cannot be relieved
from his liability to the holder in due course. The HiDc shall, however, have
to prove that the instrument was endorsed by the same hand as drawers
signature. [Sec 42]
 Rights and Privileges of a Holder in
due course
Privileges in case of conditionally delivered instruments:
Where an instrument is negotiated to a HiDc, the parties to
the instrument cannot escape liability on ground that the
delivery of the instrument was conditional or for a special
purpose only. [Sec 46]
Instrument absolved from all prior defects once it passes
through a HiDc: A holder of a negotiable instrument who
derives title from a holder in due course has the rights thereon
of that holder in due course. [Sec 53]
Estoppel against denying original validity of instrument: No
maker of a promissory note, and no drawer of a bill of
exchange or cheque shall in a suit thereon by a HiDC, be
permitted to deny the validity of the instrument as originally
made or drawn. [Sec 120]
Estoppel against denying capacity of payee to endorse: No
maker of a promissory note, and no acceptor of a bill of
exchange payable to order shall, in suit thereon by a HiDC, be
permitted to deny the payee's capacity, at the date of the note
or bill, to endorse the same. [Sec 121]
Negotiation by Endorsement
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. (Sec 14)
A bill or cheque payable to bearer is negotiated by mere delivery of
instrument which may be actual or constructive. (Sec 47)
An instrument is payable to bearer (1) where it is made so payable,
or (2) where it is originally made payable to order but the last
endorsement is in blank. A cheque which is originally drawn payable
to bearer remains bearer even though it is subsequently endorsed in
full. The rule is once a bearer cheque always a bearer cheque. (3)
where the payee is a fictitious person.
Instrument payable to a specified person or to the order of a
specified person can be negotiated only by endorsement and
delivery.
Negotiation by Endorsement
Endorsement : When the maker or holder of a negotiable
instrument signs the same, otherwise than as such maker, for the
purpose of negotiation on the back or face thereof or on a slip of
paper annexed thereto.. he is said to endorse the same,
and is called the "endorser". (Sec 15)

Endorsement "in blank" and "in full"-"endorsee

(1) If the endorser signs his name only, the endorsement is said to
be "in blank", and if he adds a direction to pay the amount
mentioned in the instrument to, or to the order of, a specified person,
the endorsement is said to be "in full", and the person so specified is
called the "endorsee" of the instrument.
(2) The provisions of this Act relating to a payee shall apply with the
necessary modifications to an endorsee.] (Sec 16)
Kinds of Endorsement
Blank or general endorsement . An endorsement is said to be blank or general
when the endorser merely puts his signature on the instrument, and the instrument so
endorsed becomes payable to bearer, even though originally it was made payable to
order. The effect of a blank endorsement is that the instrument can be further
negotiated by its simple delivery, as long as the endorsement continues to be in
blank.
Full or special endorsement. An endorsement is said to be special or in full where
the endorser signs his name and adds a direction to pay the instrument to, or to the
order of a specified person. Such an endorsement is generally made in the form of
Pay to X or order or Pay to X followed by the signature of the endorser.
Restrictive endorsement. The endorsement may, by express words, restrict or
exclude such right, or may merely constitute the endorsee an agent to endorse the
instrument or to receive its contents for the endorser or for some other specified
persons.
Examples of restrictive endorsements
Pay A only
Pay the contents to A only
Pay A for my use
Pay A or order for the account of B. Here B is the endorser.
.Kinds of Endorsement

Partial endorsement . A partial endorsement is one which purports to transfer to the

endorsee only a part of the amount payable or which purports to transfer, the bill to
two or more endorsees severally. X holds a bill for Rs 5,000 and endorses the same
as Pay Y or order Rs 2,500. The endorsement is partial and invalid. However, there
is an exception to this general rule. Where an instrument has been paid in part, the
fact of the part payment may be endorsed on the instrument and it may then be
negotiated for the residue. For example, a bill may be endorsed validly by writing Pay
Y or order, being the unpaid residue of the bill.
Conditional or qualified endorsement . An endorsement, which limits or excludes
the liability of the endorser, is called conditional or qualified endorsements. It is
different from restrictive endorsement. The restrictive endorsement prohibits further
negotiability whereas conditional endorsement simply limits or negates the liability of
the endorser.
By sans recours endorsement A qualified endorsement may be made by adding
the French words sans recours which means without recourse to me, making it
clear that the endorser does not incur the liability of an endorser to the endorsee or
subsequent holders and they should not look to him in case of dishonour of
instrument.
B, the holder of a bill, endorses it in favour of A by writing Pay A or order sans
recours or Pay A or order without recourse to me. In this case, B has disowned his
liability. If the instrument is dishonoured, A or any subsequent holder cannot ask B for
payment of the same.
..Kinds of Endorsement
Contingent endorsement If the holder while endorsing a negotiable
instrument makes his liability dependent upon the occurrence of a specified
event, the endorsee acquires no right to maintain an action for the recovery
of the amount until the condition is satisfied. If the condition becomes
impossible to perform or the conditions specified are not fulfilled, the
endorsee gets no title to the instrument, and cannot sue the endorser or any
prior party thereto.
For example, it is mentioned in a bill, Pay B or order, if a certain ship
arrives within six months. In this case the right to receive payment is
absolute and irrevocable if the ship arrives within the stipulated time. Or,
another bill mentions Pay B or order on his marrying C. In such a case, the
endorser shall not be liable until B marries C.
Facultative endorsement. Contrary to sans recours endorsement, when
the endorser, by express words, abandons some of his rights or increases
his liability under the negotiable instrument, the endorsement is said to be
facultative. He may do so by giving up some of his rights, he is entitled to
under the instrument. For example,
X is the holder of a bill of exchange for Rs 5,000. He makes an
endorsement on it reading as Pay to Y or order, notice of dishonour
waived. This is a facultative endorsement as in this case X has given up his
right to receive the notice in case of dishonour of bill, but will remain liable to
the endorsee for non-payment of the instrument.
 Crossing of Cheque
Crossing on a cheque is a direction to the paying banker by the
drawer that payment should not be made across the counter. The
payment on a crossed cheque can be collected only through a banker.
Unique feature associated with cheques affecting to certain extent the
obligation of the paying banker and also its negotiable chracter.

Meaning / Types of 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
word "not negotiable", that addition shall be deemed a crossing, and the
cheque shall be deemed to be crossed generally. [Sec 123]

Where a cheque bears across its face an addition of the name of a

banker, either 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. [Sec 124]
 Crossing of Cheque
Cheque bearing not negotiable (Not Negotiable Cheque)
A person taking a cheque crossed generally or specially, bearing in either
case the words "not negotiable", shall not have and shall not be capable of
giving, a better title to the cheque than that which the person from whom
he took it had.
A/c Payee Crossing: signifies that the drawer intends the payment to
be credited only to the payees account and in none else.
Not Negotiable, A/c Payee Crossing: renders an instrument not
negotiable (making the paying banker responsible to see that payment
is made to the person who is entitled to receive it) plus A/c payee
directs the collecting banker to collect it for the payee only.

A Cheque can be crossed by the drawer, holder or the banker.

Opening of crossing: can be done by the drawer by writing the words

pay cash and putting his full signature.
 Dishonour of a Cheque
Dishonour of cheque for insufficiency, etc., of
funds in the accounts
Where any cheque drawn by a person on an account
maintained by him with a banker for payment of any
amount of money to another person from out of that
account for the discharge, in whole or in part, of any debt
or other liability, is returned by the bank unpaid, either
because of the amount of money standing to the credit of
that account is insufficient to honour the cheque or that it
exceeds the amount arranged to be paid from that
account by an agreement made with that bank, such
person shall be deemed to have committed an offence
and shall without prejudice to any other provisions of this
Act, be punished with imprisonment for a term which may
extend to two year, or with fine which may extend to twice
the amount of the cheque, or with both:
 Dishonour of a Cheque
PROVIDED that nothing contained in this section shall apply unless-
the cheque has been presented to the bank within a period of six
months from the date on which it is drawn or within the period of its
validity, whichever is earlier.
the payee or the holder in due course of the cheque, as the case may
be, makes a demand for the payment of the said amount of money by
giving a notice, in writing, to the drawer of the cheque, within 30 days
of the receipt of information by him from the bank regarding the return
of the cheque as unpaid, and
the drawer of such cheque fails to make the payment of the said
amount of money to the payee or, as the case may be, to the holder in
due course of the cheque, within fifteen days of the receipt of the said
notice.
(Cause of action)
(Explanation: For the purpose of this section, "debt or other liability"
means a legally enforceable debt or other liability.
The plaintiff must file a complaint to a court not inferior to that of a
Metropolitan Magistrate or a Judicial Magistrate of First Class within
one month of the date when cause of action arose.