Negotiable instruments act' 1881

Negotiable Instruments
Act’1881
Dr. S. Raj Bino

Definition:
The word ‘ negotiable’ means transferable by delivery and the word instrument means ‘ a written document
transferable by delivery.
According to Sec 13(1) of the act defines a negotiable instrument thus. “ A negotiable instrument means a
promissory note, bill of exchange or cheque payable either to order or to bearer”.
The negotiable instruments act expressly recognises only three instruments viz:
1. Promissory Note
2. Bills of Exchange
3. Cheque

Characteristics of a Negotiable Instrument:
Freely Transferrable
Better Title
Right to Sue
Presumptions
Credit of the party
Presumptions of Negotiable Instrument:
Sec 118 and 119 lay down certain presumptions to all negotiable instruments, unless the contrary is proved. In
case of any disputes about these presumptions, these need not be proved by the person who holds the negotiable
instrument, until the contrary is proved.

Consideration
Date
Time of acceptance
Time of transfer
Order of endorsement
Stamp
Holder in due course
Proof of protest

Types of Negotiable Instrument:
The negotiable instruments can be classified into two types
Negotiable by Statute
Negotiable by Custom or Usage
Negotiable by Statute:
Section 13 of the Negotiable Instrument Act states only three kinds of negotiable instruments viz. promissory
notes, bills of exchange and cheques. These are instruments by statute.
Negotiable by Custom or Usage:
These are instruments which gained the character of negotiability by the usage or custom of trade. In India,
Government promissory notes, banker’s drafts and pay orders, hundis, delivery orders and railway receipts for
goods have been held to be negotiable by usage or custom.

Negotiable by Statute:
The negotiable instruments can be classified under this category are
Promissory Notes
Bills of Exchange
Cheques
Negotiable by Custom or Usage:
Govt. Promissory Notes
Banker’s Draft
Pay Order
Delivery Receipt
Railway Receipts

Promissory Notes:
According to Sec. 4 of the Act, 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 the bearer of the instrument.
The person who promises to pay in writing is called the maker of the instrument.
The person to whom it is payable is called the payee.
Characteristics:
1.In Writing:
The instrument must be in writing. In this context, writing includes writing with pen, pencil, typewriting or print.
2. Promise to Pay:
There should be an undertaking or promise to pay. A mere acknowledgment of indebtedness is not sufficient to constitute
a promissory note.

3. Unconditional:
The undertaking or promise to pay must be unconditional. Any condition in promise will make it invalid.
4. Signed by the Maker:
If the instrument is not signed by the maker it is incomplete and is not valid. It is just not sufficient to have the
signature. It is essential that the mind of the person signing should accompany the signature.
5. Certain Parties:
The instrument must clearly show who the maker of the instrument is and who the payee is. A promissory note
made payable to the maker himself is a nullity. But if it is endorsed by the maker to some other person or endorsed
in blank it becomes a valid promissory note.

6. Certain Sum of Money:
The amount payable on the promissory note should be certain and should be specified in the promise.
7. Promise to Pay Money Only:
An instrument containing a promise to pay something other than money or something in addition to money, cannot
be a promissory note.
8. Bank note or Currency Note is not a Promissory Note:
Though there is a promise in the bank note or currency note it is not considered as a promissory note because it is
money itself.
9. Formalities:
Certain formalities like number, date place etc. are found in all instruments though they are not essential. But it is
necessary that it should bear the stamp required under the Indian stamp Act 1899

10. Payable on Demand or After a Definite Period of Time:
The promissory note should state when it becomes payable. The term “On demand’ means that it is payable
immediately.
BILL OF EXCHANGE
According to Section 5 of 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 A bill of exchange has three parties viz. drawer, drawee and payee. A person who makes the bill is called
“Drawer”. It is he who gives the order to pay. The person who is directed to pay is called the, “drawee”. when the
drawee accepts the bill, he is called the “acceptor.” The person to whom the actual payment is to be made is called
the “payee”. If the drawer does not pass on the instrument to somebody, he himself will be the payee.

The person, who is in possession of the bill is called the holder.
When the holder endorses the instrument to another he is called the endorses.
The person to whom the instrument is endorsed is called the endorses
Characteristics
The characteristics of a Bill of exchange are similar to those of a promissory note. The important among them are
as follows.
1.The bill must be in writing.
2. It must contain an order to pay.
3. The order contained must be unconditional.
4. The order must be to pay money.

5. The money payable must be certain.
6. It requires three parties viz. drawer, drawee and payee.
7. It must be signed by the drawer.
8. The formalities like number, date, consideration, signature, stamp etc. are similar like in the case of a
promissory note.

Distinction between a Promissory Note and a Bill of Exchange:
Promissory Note Bill of Exchange
There are two parties to the promissory note, 1.
Maker and 2. Payee
There are three parties to the bill of exchange, 1.
Drawer 2.Drawee and 3.Payee
It contain an unconditional promise to pay It contains an unconditional order to pay
It cannot be made payable to the maker, who is a
debtor. The maker and the payee cannot be the same
person
The drawer and the payee may be the same person.
Drawer can order the drawee to pay the money to
drawer himself
It requires no acceptance as it is signed by the
person who is liable to pay
The drawer of a bill of exchange is generally
creditor of the drawee and, therefore it must be
accepted by the drawee before it can be presented
for payment.

Promissory Note Bill of Exchange
The liability of the maker of a note is primary and
absolute
The liability of the drawer of a bill is secondary and
conditional. When the acceptor fails to pay the money
he becomes liable
When a pro-note is dishonored, it is not necessary to
give notice of dishonor to the maker.
Notice of dishonor must be given by the holder to all
the prior parties to the bill
A pro-note cannot be drawn payable to the bearer It can also drawn provided It is not drawn payable to
bearer on demand
Dishonor of a pro-note protest is not necessary A foreign bill must be protested if such a protest is
necessary according to law of the place, where it is
drawn
Pro-note cannot be drawn in sets Bills can be drawn in sets

CHEQUE :
According to Section 6 of the Negotiable Instruments Act ”A cheque is a bill of exchange drawn upon a specified
banker and payable on demand.” Cheques belong to the specie of bills of exchange. It can be seen from the
definition that all cheques are bills of exchange. But it should be noted that all bills of exchange are not cheques. A
cheque has all the essential elements of a bill of exchange such as it must be signed by the maker, it must contain
an unconditional order, the order must be on a specified Banker, it is to pay a certain sum of money to or to the
bearer of the cheque. But like bill of exchange a cheque need not get acceptance.
A cheque has the following additional qualifications viz.
(1) It is drawn on a specified banker
(2) It is always payable on demand.

Distinction between Bills of Exchange and Cheques:
Bill of Exchange Cheques
Any person can be a drawee Only a banker can be a drawee
It needs acceptance Acceptance is not required
The amount may be payable on demand or after a
specified time
The amount is always payable on demand
It can never be crossed A cheque may be crossed
It must be properly stamped It requires no stamp
A bill is noted or protested to establish dishonor A cheque is not to be noted or protested in case of
dishonor
The payment of bill cannot be countermanded The payment of a cheque may be countermanded
by the drawer

Bill of Exchange Cheques
Notice of dishonor is necessary to hold the parties
liable thereon
Notice of dishonor is not necessary. The parties
thereon remain liable even if no notice of dishonor is
given
A grace of three days is allowed in case of time bill. No grace days is given

Classification of Negotiable Instrument:
Bearer Instrument
Order Instrument
Inland Instrument
Foreign Instruments
Instruments payable at sight
Time Instruments
Accommodation Bills
Fictitious Bills
Documentary Bills or Clean Bills
Escrow
Ambiguous Instruments
Inchoate Instruments

Capacity of Parties to the Negotiable Instrument Act :
 An Minor
Person of Unsound Mind
Insolvent Person
Corporation
Agent
Partners of Firm
Joint Hindu Family

Parties to the Negotiable Instruments:
Parties to the Promissory Note:
Maker : The person who makes the note promising to pay the amount stated therein is called the maker.
Payee : The person to whom the amount of promissory note is payable.
Holder: A person who is either the payee or endorsee of the promissory note. Holder is a person who is entitled
to the possession of the instrument in his own name and is also entitled to received the money due on it.
Endorser : The person who endorses the note to another person is called the endorser.
Endorsee : The person to whom the note is endorsed is called the endorsee

Parties to the Bill of Exchange:
Drawer : The maker of the bill of exchange of the drawer.
Drawee : The person who is directed to pay the bill of exchange by the drawer is called drawee.
Acceptor: The person who accepts the bill of exchange is called the acceptor. Generally drawee accepts the bill and on
acceptance the drawee becomes the acceptor.
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 payee.
Holder: A person who is either the payee or endorsee of the bills of exchange. Holder is a person who is entitled to the
possession of the instrument in his own name and is also entitled to received the money due on it.
Endorser : The person who endorses the bills of exchange to another person is called the endorser.
Endorsee : The person to whom the bills of exchange is endorsed is called the endorsee

Cheque :
Drawer: The person who draws the cheque
Drawee: The person who is directed to pay the specified sum written on the cheque.
Payee : The person to whom the amount of cheque is payable.
Holder: A person who is either the payee or endorsee of the cheque. Holder is a person who is entitled to the
possession of the instrument in his own name and is also entitled to received the money due on it.
Endorser : The person who endorses the cheque to another person is called the endorser.
Endorsee : The person to whom the cheque is endorsed is called the endorsee

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 received or recover the amount due thereon from the parties thereto”.
The payee of the instrument one of the original parties to a negotiable instrument. It is his right to retain
possession of the instrument and receive money on it, or he can negotiate the same to any person to whom he owes
money.
In the case of bearer of instrument, however the bearer himself is the holder, but in the case of an order instrument,
the endorsee becomes the holder. If the payee does not negotiate it, he himself will be the holder.
The person to be called a ‘ holder’ a person must satisfy the following two conditions:
He must be entitled to the possession of the instrument in his own name.
He must be entitled to received or recover the amount due thereon from the parties liable thereto.

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.
The holder in due course of the negotiable instrument, if all the following conditions are satisfied:
He must be entitled to the possession of the instrument in his own name under a legal title and to recover the
amount thereof from the parties liable thereon.
He obtained the instrument for a valuable consideration. There must be some consideration to which law
attaches value. The consideration, need not be adequate. A done who acquires title to the instrument by way of
gift is not a holder in due course for want of consideration. The consideration must also be lawful.
The holder who acquires a negotiable instrument after maturity cannot be holder in due course

He must have obtained the instrument in good faith. He had no cause to believe that any defect existed in the
title of the person from whom he derived his title. Therefore, even if he obtains the instrument from a thief, but
without knowledge thereof he obtains a valid title.
If a negotiable instrument is incomplete, the holder will not becomes the holder in due course of such
instrument.

Distinction between holder and holder in due course:
Holder Holder in Due Course
The holder cannot have a good title on an
instrument if the title of any of the prior parties is
defective
The holder in due course may have a good title even if
the title of the prior parties is defective provided that
he had no notice of such defect.
It is not necessary that the holder must have
received the instrument for some consideration
Consideration is necessary to become a holder in due
course
A holder does not enjoy any special privileges A holder in due course enjoys certain special
privileges
A holder means any person entitled in his own name
to the possession of the instrument and to recover or
receive the amount due thereon from the parties
A holder in due course means a holder who has taken
the instrument in good faith and for value and also
before its maturity

Privileges of Holder in Due Course :
Holder in due course gets better title that of the transferor.
Privileges in case of inchoate instruments
Liability of prior parties
Privileges in case of fictitious bills
Privileges when an instrument delivered conditionally is negotiated
Estoppel against denying original validity of the instrument
Estoppel against denying capacity of the payee to endorsee.

Liability of Parties in Negotiable Instruments:
Liability of Drawer :
Drawer means a person who signs a cheque or a bill of exchange ordering his or her bank to pay the amount to the
payee.
In case of dishonour of cheque or bill of exchange by the drawee or the acceptor, the drawer of such cheque or bill
of exchange needs to compensate the holder such amount. But, the drawer needs to receive due notice of
dishonour.
So, the nature of the drawer’s liability on drawing a bill is:
(i) On due presentation:- It should be accepted and paid accordingly.
(ii) In the case of dishonour:- Drawer needs to compensate the holder such amount, only when he receives a
notice of dishonour by the drawee.

Liability of the Drawee of Cheque (Section 31)
The person who draws a cheque i.e drawer having sufficient funds of the drawer in his hands properly applicable to the payment
of such cheque must pay the cheque when duly required to do so and, or in default of such payment, he shall compensate the
drawer for any loss or damage caused by such default.
The drawee of a cheque will always be a banker. As a cheque is a bill of exchange, drawn on a specified banker by the drawer,
the banker is bound to pay the cheque of the drawer, i.e., the customer. For the following conditions are need to be satisfied:
(i) Sufficient amount of funds to the credit of customer’s account should be there with the banker.
(ii) Such funds are required to be properly applied against the payment of such cheque, e.g., the funds are not under any kind of
lien etc.
(iii) The cheque is duly required to be paid, during banking hours and on or after the date on which it is made payable.
If the banker unjustifiably refuses to honour the cheque of its customer, it shall be liable for damages.

Liability of Acceptor of Bill and Maker of Note (Section 32)
As per section 32 of negotiable instrument act, in the absence of a contract to the contrary, the maker of
a promissory note and the acceptor before the maturity of a bill of exchange are under the liability to pay the
amount thereof at maturity.
They need to pay the amount according to the apparent tenor of the note or acceptance respectively. The acceptor
of a bill of exchange at or after maturity is liable to pay the amount thereof to the holder on demand.
The liability of the acceptor of a bill or the maker of a note is absolute and unconditional but is subject to a
contract to the contrary and may be excluded or modified by a collateral agreement.

Liability of Endorser (Section 35)
An endorser is the one who endorses and delivers a negotiable instrument before maturity. Every endorser has a
liability to the parties that are subsequent to him.
Also, he is bound thereby to every subsequent holder in case of dishonour of the instrument by the drawee,
acceptor or maker, to compensate such holder of any loss or damage caused to him by such dishonour. However,
he is to compensate only after the fulfilment of the following conditions:
(i) There is no contract to the contrary
(ii) The Endorser has not expressly excluded, limited or made conditional his own liability
(iii)And, such endorser shall receive due notice of dishonour

Liability of Prior Parties (Section 36)
Until the instrument is duly satisfied, every prior party to a negotiable instrument has a liability towards the holder
in due course. The prior parties include the maker or drawer, the acceptor and all the intervening endorsers. Also,
there liability to a holder in due course is joint and several. In the case of dishonour, the holder in due course may
declare any or all prior parties liable for the amount.
Liability of Acceptor when Endorsement is Forged (Section 41)
An acceptor of a bill of exchange who had already endorsed the bill is not relieved from liability even if
such endorsement is forged. This is so even if he knew or had reason to believe that the endorsement was forged
when he accepted the bill.

Acceptor’s Liability when Bill is drawn in a Fictitious Name
An acceptor of a bill of exchange who draws a bill in a fictitious name, payable to the drawer’s order will be liable
to pay any holder in due course. He or she will not be relieved from such liability by reason that such name is
fictitious.

Negotiable instruments act' 1881

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