Negotiable Instruments Act
The Negotiable Instruments Act, 1881
VARIOUS TYPES OF NEGOTIABLE INSTRUMENTS
Bill of exchange
Besides, certain other instruments such as documents of title
to goods, govt. promissory notes, hundies etc. have acquired
the character of negotiability and these are known as quasi-
By virtue of Sec. 13(a) a negotiable instrument means a
promissory note, bill of exchange or cheque payable either to
order or bearer, whether the words order or bearer appear on
the instrument or not. Any other instruments if satisfies the
conditions of transferability by delivery or endorsement and is
capable of being sued upon by the person holding it in his own
name, may also be included as negotiable instrument. The
definition simply mentions the names of Negotiable
Instruments and does not explain their nature in the act.
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Requirements of Negotiable Instruments An NI must be in
writing, signed by the maker or the drawer, must be an
unconditional promise or order to pay, must call for payment
in money only which should be a certain sum of money
payable at a certain time and the drawee must be named or
Presumptions as to Negotiable Instruments
Section 118 provides certain presumptions as to Negotiable
Instruments until the contrary is proved:
: NI was made, drawn, accepted, endorsed and negotiated or
transferred for consideration.
: It bears the date on which it was made or drawn
: It was accepted within a reasonable time after its date and
: Every transfer of Negotiable Instruments was made before
: Endorsements appearing on NI were made in the order in
which they appear thereon.
: It was duly stamped and stamp duly cancelled, when the NI
: Holder is holder in due course.
Promissory note (Sec 4) is an instrument in writing containing
an unconditional undertaking, signed by the maker, to pay a
certain sum of money to or to the order of a certain person.
Matters of form like no., place, date etc are usually found given
in notes but they are not essential in law.
Parties to a promissory note are a maker, payee, holder,
endorser and endorsee.
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Bill of Exchange (Sec5) 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.
Where a bill is lost, the drawer is under obligation (Sec 45A) to
issue a duplicate bill.
Parties to a BOE are drawer, drawee, acceptor, payee, holder,
endorser, endorsee, drawee in case of need an acceptor for
Cheque (Sec 6) is a bill of exchange drawn on a specified bank
and not expressed to be payable otherwise than on demand.
Parties to a cheque are drawer, drawee, payee, holder,
endorser and endorsee.
The definition given in section 8 implies that:
-holder must be entitled to the possession of the NI in his own
name. Mere legal right to possess is enough and actual
possession is not essential.
-holder must be entitled to receive or recover the amount of NI
from the parties to the same. Hence he should be bearer or
payee or endorsee.
-A person who was entitled to receive payment of an
instrument and the instrument has been lost; he will continue
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to be treated as holder. Person who finds the instrument lying
somewhere will not become its holder by mere possession.
A holder has following legal rights:
-he can obtain a duplicate of the lost instrument.
-he can cross the cheque if not already crossed, convert a
general crossing to a special crossing and endorse and can
negotiate, if the negotiation is not restricted.
-he can sue or be sued in his own name in relation to the
HOLDER IN DUE COURSE
The definition implies the fulfillment of the following
-person who claims to be holder in due course must have the
negotiable instruments in his possession. He must be payee or
endorsee and a bearer.
-he must obtain possession of it for real, valuable and lawful
consideration (and not as a gift) before its maturity, as after
maturity of a bill, subsequent holders cannot be the holders in
due course, even though they acquire in good faith and for due
-he must obtain it in good faith without any sufficient reason to
believe that any defect existed in the title of the person from
whom he obtained it.
The holders in due course have following legal rights:
-if any inchoate/incomplete instrument has been handed over
for a sum greater than what it was intended by maker, the
maker cannot challenge the right of holder in due course to
recover the amount mentioned (Sec 20).
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-If a bill is drawn payable to the drawer’s order in a fictitious
name, the acceptor is not relieved from liability to any holder in
due course, provided endorsement and the drawer’s
signatures are in the same handwriting (Sec42)
-A person, liable on an NI, cannot be relieved from his liability
towards the holder in due course on the ground that the bill
was lost or obtained by fraud or for unlawful consideration
-Every prior party to an NI is liable thereon to a holder in due
course until the instrument is duly satisfied (Sec 36).
Distinction between holder and holder in due course:
-Holder in due course obtains the instrument for lawful
consideration while the condition of consideration does not
apply to holder.
-A person must acquire the possession of NI before maturity to
become a holder in due course while the holder may obtain the
possession, after maturity even.
-NI must have been acquired in good faith and title of a person
from whom it is acquired, to be a holder in due course. On the
other hand this qualification is not needed to be a holder.
NEGOTIATION AND ENDORSEMENTS
Negotiation is the transferring of any instrument from one
person to another in such a manner as to convey title and to
constitute the transferee the holder thereof. The negotiation is
different from transfer by assignment as in negotiation mere
delivery of a bearer instrument is enough while assignment
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requires a written document to be signed by a transferor.
Notice of assignment is also needed in assignment and the
transferee takes the title with all the defects. In Negotiable
Instruments consideration is presumed unless otherwise
U/s 46 delivery is very important in Negotiable Instruments
which may be actual or constructive or it may be conditional
for a specific purpose.
Negotiation by endorsement and delivery would be required in
case of Negotiable Instruments payable to other than the
The endorsements may be blank or general, special or full,
restrictive, partial and conditional or qualified.
In a blank endorsement, the endorser merely writes his name
without mentioning any thing.
If the endorser signs his name and adds a direction to pay the
amount to or to the order of a specified person, it would be a
special or full endorsement.
When the endorser restricts further negotiation, say, pay to B
only, it would be known as restrictive endorsement.
When endorsement purports to transfer a part of the amount
payable in the instrument, it would be known as a partial
endorsement, which does not operate as a negotiation of the
Effect of endorsement is that an unconditional endorsement of
an NI followed by its unconditional delivery transfers to the
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endorsee the property therein, vesting in him the title to the
instrument. The endorsee acquires a right to negotiate the
instrument to any one he likes and sue all parties whose
names appear or on it.
Negotiation of Negotiable Instruments obtained through
unlawful means or consideration cannot be affected unless
such possessor or endorser or some person through whom he
claims, was a holder thereof in due course (Sec 58).
Types of endorsements
If the endorser signs his name only without adding any words
of directions, the endorsement is said to be blank (Sec 16(1).
Endorsement in full
Liability of endorser
By endorsing an instrument, the endorser impliedly promises
that (a) on due presentment, the instrument will be accepted
and paid, in case of dishonour of bill, (b)he will compensate
the holder, provided the notice of dishonour is given (c) he will
not deny to a holder in due course, the genuineness or
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regularity of a drawer’s signature and endorsement and (d) he
will not deny the validly of endorsement and his title to the
instrument to any subsequent endorsee.
Regularity of endorsements
To consider an endorsement as regular and valid, the following
conditions should be fulfilled:
-payee or endorsee of a bill himself or his duly authorised
agent must sign the endorsement.
-If a cheque is payable to two persons, both of them must
endorse in their own hand writing.
-endorser should not sign in capital letter, otherwise, it will be
treated as irregular.
-spelling of the name of the endorsee must be the same as
appearing in the instrument. If his name is wrongly spelt, he
must sign in the manner shown on the instrument and again
with correct spelling.
-initials of the name of payee or holder should not be changed
in the endorsement. All pre-fixes and suffixes should be
dropped while endorsing an instrument.
Who can cross ?
As per Sec 125, a drawer at the time of issue, a holder (general
to special or not negotiable crossing) and a banker who
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receives the cheque for collection (special crossing), can
cross the instruments.
Types of crossing
Account payee crossing
Cancellation of crossing
Form of cheques
Validity of cheques and Stale cheques :
Payment in due course
As per Sec 10, a payment would be considered in due course
: Payment is in accordance with the apparent tenor of the
: Payment must be made in good faith and without negligence
and under circumstances which do not afford a reasonable
ground for believing that the person to whom it is made is not
entitled to receive the amount,
: Payment must be made to the person in possession of the
: Payment must be made under circumstances which do not
afford a reasonable ground for believing that he is not entitled
to receive payment of the amount mentioned therein
: Payment must be made in money only.
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Material alteration relates to:
: Sum payable
: Time of payment
: Place of payment
: Rate of interest
: Addition of new party
: Tearing material part of the NI : Date of endorsement.
BILLS OF EXCHANGE
The bills are of following kinds:
-inland bills and foreign bills
-time bills and demand bills
-trade bill and accommodation bills
-clean bills and documentary bills.
Dishonour of a bill
A bill of exchange is said to be dishonoured either by non-
acceptance, when drawee default in acceptance or by non-
payment when the acceptor/drawee make default in payment
also, where the drawee is incompetent to contract or
acceptance is qualified, the bill is said to be dishonoured
(Section 91 & 92).
When a bill is dishonoured, the holder thereof must give notice
that the instrument has been so dishonoured to all other
parties or some of several parties whom the holder seeks to
make jointly liable thereon. It is not necessary to give notice to
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the mater of the dishonoured promissory note, or the drawee or
acceptor of the dishonoured bill of exchange or cheque
No notice of dishonour of a bill is necessary (Section 98):
-when it is dispensed with by the party entitled thereto.
-in order to charge the drawer when he has countermanded
-when the party charged could not suffer damage for want of
-when the party entitled to notice cannot after due search be
found or the party bound to give notice is, for any other reason,
unable without any fault of his own to give it.
-to charge the drawers when the acceptor is also a drawer.
-when the party entitled to notice knowing the facts, promises
unconditionally to pay the amount due on the instrument.
On dishonour, the holder may cause such dishonour
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