Negotiable Instrument Act 1881

Negotiable Instrument Act.
1881
Money is the most common medium of exchange in any advance society.
The reason for this is that money has the exchange value and is also freely
transferable.
Dr.D.Vetrivelan/AP/DoMS-PEC-VANIYAMBADI 22-09-2017
Negotiable Instrument
The word negotiable means transferable from one person to another in
return for consideration
Instrument mean written document by which is right is created favour of
some person
defintion
According to section 13(1) of the Negotiable instrument means a
promissory note, bill of exchange, or cheque payable either to order or to
bearer.
The act, thus mentioned three kinds of negotiable instruments, namely
Notes
Bills
Cheque.
Nature and requisites of Negotiable
Instrument
1. Writing and signature
2. Money
3. Freely transferable- one person to another person.
4. Title of holder free from all defects-
5. Notice
6. Presumptions
7. Special procedure
8. Popularity
9. Evidence.
Examples of Negotiable Instrument
Bill of exchange
Promissory note
Cheques
Govt promissory notes.
Promissory Notes
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.
The person who makes the promissory note and promise to pay is called the
maker. The person to whom is to be made is called the payee.
Example- A, signs instrument in the following terms: I promise to pay B or
order rs 500
Parties to promissory note
The parties to a promissory note are as follows:
1. Maker- Maker is the person who promises to pay the amount stated in the
note. He is the debtor.
2. Payee- Payee is the person to whom the amount of the note is payable, i.e.,
the creditor.
3. Holder- He is either the payee or the person to whom the note may have
been endorsed.
Specimen of promissory note
Rs 10,000.
Tirupattur
Novem/ 10 /2015.
Three month after date I promise to pay shri Ramesh (Payee) or to his order the sum of Rupee Ten Thousand, for value
received.
stamp
( Maker)
To,
Shri Ramesh
B.20 green mark
Tirupattur.
Characteristics of a promissory note
1.It is an instrument in writing.
2.It is a promise to pay
3.Signed by the maker
4.Other formalities- reg date, place, consideration etc.
5.Definite and unconditional promise
6.Promise to pay money only- the payment to be made under the instrument
must be in the legal tender of money of India.
7.Maker must be a certain person- the instrument itself must indicate with
certainty who is the person or are the persons engaging him or themselves to
pay.
8.Payee must be certain- for a valid promissory note it is also essential that the
sum of money promised to be payable must be certain and definite.
9. Sum payable must be certain. For a valid promissory note it is also essential
that the sum of money promised to payable must be certain and definite.
10. It may payable on demand or after a definite period of time.
Bill of Exchange section 31
A bill of exchange is an instrument 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. It is also called a draft.
Parties to a 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. Payee- the person in the instrument, to whom or to whose order the
money are directed to be paid by the instrument are called the payee.
Specimen of Bill of Exchange
Sushil of Delhi buys goods on credit from Rakesh of Bombay for Rs 500 to
be paid 3 month after date. Rakesh buys goods from Ram of Delhi for rs
500 on similar terms. Now Rakesh may order Sushil to pay the sum of rs 500
to ram. This order will be a bill of exchange.
Specimen of Bill of Exchange
Rs 500 Mumbai
July 10.2004
Three months after date pay to Ram (payee) order the sum of five hundred rupees, for value received.
To,
Susihl
415, Narayan Nagar
Lucknow-226020. ( Drawee)
Accepted Stamp
Sushil (Drawer)
Sd/Rakesh
Essential Elements of a Bill of Exchange
1. It must be writing
2. Order to pay- there must be order to pay.
3. Drawee- a bill, in order to be perfect, must indicate a drawee who should be called upon to
accept or pay it.
4. Signature of the Drawer-
5. Unconditional order-this order must be conditional, as the bill at all events.
6. Parties- the drawer, the drawee(acceptor) and the payee.
7. Certainty of amount.
8. stamping
Cheque section 6
Section 6 of the Negotiable Instrument Act, 1881 defines a cheque as a bill
of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand
A cheque is also, therefore, a bill of exchange with two additional
qualifications:
(1) It is always drawn on a specified banker.
(2) It is always payable on demand.
Essential Element of Cheque
1. In writing
2. Express order to pay
3. Definite and unconditional
4. Order to pay certain sum
5. Order to pay money only.
6. Certain three parties (the three parties(ie drawer, drawee and payee)
7. Drawn upon a specified banker
8. Payable on demand.
Parties to cheque
Drawer- drawer is the person who draws the cheque, i.e., the depositor of
money in the bank.
Drawee- Drawee is the drawers banker on whom the cheque has been
drawn.
Payee- payee is the person who is entitled to receive the payment of a
cheque.
Dishonour of Cheque
A cheque is said to be bounced or dishonoured by non-payment when the
drawee of the cheque makes default in payment upon being duly required to
pay the same.
Unless there are valid reasons to dishonour a cheque,the banker must take
utmost care to see that the cheque drawn by their customers are duly paid
when presented.
When banker must refuse payment of his
customer cheque
Stop payment
Garnishee order: when the banker receives a Garnishee order i.e., a prohibiting
order by any court attaching the money in the customers account.
Death
Insolvency- when the banker receives a notice of the insolvency of his customer.
Loss of cheque- when the banker receives a notice of loss of cheque from his
cutomer.
Parties to cheque
1.Drawer- The person who draws a cheque is called the drawer, i.e., the
depositor of money in bank.
2. Drawee: the person who is directed by the cheque to pay is called the
drawee. Here drawee must be a banker.
3. Payee: payee is the person who is entitled to receive the payment of a
cheque.
Holder
According to sec 8, 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.
A person who obtains possession of the instrument by illegal means, say
theft, is not a holder.
Thus in order to be called a holder a person must satisfy the following two
conditions:
(1) He must be entitled to the possession of the instrument in his own name.
(2) He must be entitled to receive or recover the amount due thereon from
the parties liable thereto.
Endorser- the person who indorses (i.e, transfer) the note to another person
is called the indorser
Endorsee- the person to whom the note is indorsed is called the endorsee
Holder in Due Course sec 9
According to sec 9, 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
sufficient cause to believe that any defect existed in the title of the person
from whom he derived his title
Qualifications of Holder in due course
He must be holder-
He obtained the instrument for valuable consideration
He must have become the holder of the instrument before maturity.
He must have obtained the instrument in good faith
He must take the instrument complete and regular on the face of it- if a
negotiable instrument is incomplete, for example, blank, undated, not
properly stamped.
Privileges of a holder in Due course.
Holder in due course acquiring the instrument for consideration and in good
faith gets the following rights under the act:
1. Right in case of inchoate Instrument:
(Inchoate means- Partly existence or incomplete instrument)- the right of a
holder in due course to recover money is not at all affected.
2. Liability of prior parties to holder in due course- every prior party to a
negotiable instrument is liable thereon to a holder in due course until the
instrument is duly satisfied.
3.Instrument cleansed of all defects- once a negotiable instrument passes
through the hands of a holder in due course, it gets cleansed of its defects
provided the holder was himself not a party to the fraud or illegality which
affected the instrument in some stage of its journey.
4.Acceptor Bound, although Bill drawn in Fictitious name- an acceptor of bill
of exchange drawn in fictitious name and payable to the drawers order is not
by reason that such name is fictitious, relived from liability to any holder in due
course claiming under a indorsement by the same hand as the drawers
signature.
5.No effect of conditional Delivery:
when a negotiable instrument is delivered conditionally or for some special
purpose and is negotiated to a holder in due course, it amounts to valid
negotiation and he acquires good title to it.
6.Instrument made without consideration- a contract made without
consideration is void- but if negotiable instrument gets into hands of holder in
due course, he entitled to recover the amount on it from any of the prior
parties thereof.
7.Good title deriving from holder in due course- 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.
8.Better title than that of the transferor-
(transferor means the person who transfers) although the holder of a
negotiable instrument does not get the better title that that of the transferor,
the position of a holder in due course is different. He gets a better title to the
instrument notwithstanding any defects in the title of the transferor.
Discharge of Negotiable Instrument
A Negotiable instrument is said to be discharged when the rights and
obligations created by it are extinguished, and the instruments does not give
rise to any cause of action.
After a negotiable instrument is discharged the rights against all the parties
thereto comes to an end, and no party, even a holder in due course, can claim
the amount of the instrument from any party thereto.
Discharge of Negotiable Instrument
The term discharge in relation to negotiable instrument has two conditions
namely:
(1) Discharge of the instrument and
(2 )Discharge of one or more parties for their liability
(1) Discharge of the instrument
A negotiable instrument is said to be discharged when it becomes completely
useless, that is no action on that will lie, and it cannot be negotiated further.
An instrument said to be discharged when all rights under it are extinguished,
it ceases to be negotiable and even a holder in due course does not acquire
any rights under it.
A negotiable instrument may be discharged:
1. By Payment sec 82(c )

2. By Acceptor becoming the holder sec 90- I f a bill of exchange which has
been negotiated is, at or after maturity, held by acceptor in his own right, rights
of action thereon are extinguished.
3. By Renunciation- a negotiable instrument is discharged when the holder
renounces or gives up his right against all the parties to the instrument.
4. By cancellation-the maker, acceptor or endorser respectively of a negotiable
instrument is discharged from liability thereon to a holder thereof who cancels
such acceptors or indorsers name with intent to discharge him, and all parties
claiming under such holder.
5- By discharge as a simple contract- a negotiable instrument may be
discharged in the same way as any other contract for the payment of money.
II Discharge of one or more parties for their
Liability
A Party is said to be discharged from his liability when his liability on the
instrument comes to an end.
When only some of the parties to a negotiable instrument are discharged,
the instrument continues to be negotiable and the undischarged parties
remain liable on it.
A party may be discharged in any one of the
following ways:
1. By Cancellation sec 82(a)
when the holder of a negotiable instrument or his agent cancels the name of
a party on the instrument with intent to discharge him, such party and all
subsequent parties, who have a right of recourse against the party, whose name
is cancelled are discharged from the liability to the holder.
2 By release- sec 82(b) if the holder of a negotiable instrument releases any
party to the instrument by any method other than cancellation of names, that
is, by a separate agreement of waiver, release or remission, the party so released
and all parties subsequent to him.
3.By allowing drawee more than 48 hours.
4. By taking Qualified acceptance sec 86-if the holder of a bill takes a qualified
acceptance all the previous parties whose consent is not obtained to such
acceptance are discharged from liability unless on notice being given, they
assent to such acceptance.
5.By not giving notice of Dishonour- any party to a negotiable instrument,
other than the party primary laible, to whom notice of dishonour is not sent by
the holder is discharged from liability as against the holder, unless the
circumstances are such that no notice of dishonour is required to be sent.
6.By non-presentment of cheque- where a cheque is not presented for payment
within a reasonable time of its issue, and the bank fails and the drawer suffer
actual damage the delay, he is discharged from liability to the holder to the
extent to which such drawer is a creditor of the banker, but no more.(sec.84)
7.By operation of law- a negotiable instrument may be discharged by the
operation of law as in the case of insolvency of the debtor, or lapse of time,
making the debt time- barred under the limitation act.
8.By material alteration- a material alteration of a negotiable instrument
renders the same void against persons when were parties thereto before such
alteration, unless they have consented to the alteration.

Negotiable Instrument Act 1881

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Negotiable Instrument Act.

1. By Payment sec 82(c )

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