Negotiable Instruments Act,1881
• MEANING AND DEFINITION OF NEGOTIABLE
The word ‘Negotiable’ means transferable from one person to
another in return of consideration and instrument means a
written document by which a right is created in favour of
some person. Thus, a negotiable instrument is a document
which entitle of person to a sum of money and which is
transferable from one person to another by mere delivery or
by endorsement and delivery.
• The term ‘negotiable’ as such is not defined in the Negotiable
Instrument Act, 1881.Section 13, however, provides that a
negotiable instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer.
• FEATURES / CHARACTRERISTICS OF NEGOTIABLE
1. Freely Transferable : The property in an negotiable
instrument passes from one person to another by delivery, if
the instrument is payable to bearer; and by endorsement and
delivery, if it is payable to order.
2. Title of holder free from all defects : A person taking an
instrument bona fide and for value gets the instrument free
from all defects in the title of the transferor. He is not in any
way affected by any defect in the title of the transferor or of
any prior party.
3. Presumptions : It is presumed by law that every negotiable
instrument is made or drawn for a consideration. But it is not
an irrebuttable presumption. It must be rebutted by proof
that the instrument has been obtained from its lawful owner
by means of fraud, undue influence or for unlawful
consideration. The onus of proof is on the person who
challenges the existence of consideration.
4. Recovery : A person taking an instrument bona fide and for
value can sue upon an negotiable instrument in his own name
for the recovery of amount.
• Types of negotiable instruments
• Instruments negotiable by statute: The Negotiable
Instruments Act, 1881 mentions only three kinds of
negotiable instruments. They are, Promissory Note, Bill of
Exchange and cheque. These instruments are negotiable by
• Instruments negotiable by custom or usage: There are
certain other instruments , which have acquired the character
of negotiability by the usage or custom of trade. In India,
Government Promissory note, Bankers Draft and pay order,
Hundis, Delivery orders and railway receipts for the goods
have been held to be negotiable by usage or custom.
• Promissory note
• A promissory note is an instrument in writing containing
unconditional undertaking signed by the maker, to pay a
certain sum of money only to, or to order of, a certain person,
or to the bearer of instrument.
The person who makes the promissory note and promises top
pay is called the maker. The person to whom the payment is
to be made is called the payee.
For an instrument to become a promissory note, it must have
the following essential elements:1. The instrument must be in writing.
2. The instrument must contain an express promise to pay. A
mere acknowledgement of indebteness is not sufficient.
3. The promise to pay must be definite and unconditional.
4. The instrument must be signed by the maker, otherwise it is
incomplete and has no effect.
5. The instrument must point with certainly as to who the maker
is and who the payee is. Where the maker and the payee
cannot be identified with certainty from the instrument itself
the instrument, even if it contains an unconditional to pay, is
not a promissory note.
6. The sum payable must be certain and must not be capable of
contingent additions or subtractions.
• 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.
The person who gives the order to pay or who makes the bill is
called the drawer. The person who is directed to pay is called the
drawee. The person to whom the payment is to be made is
called the payee.
For an instrument to become a bill of exchange, it must have the
following essential elements:
1. It must be in writing
2. It must contain an unconditional order to pay
3. It requires three parties i.e. drawer drawee and the payee.
4. The parties must be certain.
5. It must be signed by the drawer
6. The sum payable be certain.
A cheque is a bill of exchange drawn upon a specified banker and
payable on demand.
A cheque is a species of a bill of exchange, but it has the following
two additional qualifications, namely:I. It is always drawn on a specified banker; and
II. It is always payable on demand.
All cheques are bill of exchange; but all bill of exchange are not