NEGOTIABLE INSTRUMENTS ACT

Negotiable Instruments are money/cash

equivalents. These can be converted into liquid
cash subject to certain conditions. They play an
important role in the economy in settlement of
debts and claims. The transactions involving the
Negotiable Instruments in our country are
regulated by law and the framework of the
Statute which governs the transaction of these
instruments is known as The Negotiable
Instruments Act. This act was framed in our
country in the year 1881 when the British ruled
our country. Prior to 1881 the transactions
governing Negotiable Instruments were
regulated under the cover of Indian Contract Act
1872. This act has been amended as many as
23 times to meet the needs of the time. The last
amendment was made in 2002.
Preamble
It became a statutory necessity to enact law
governing Promissory Notes, Bills of Exchange
and cheques.
What is a Negotiable Instrument
Section 13:- " A Negotiable instrument means a
promissory note, bill of exchange or cheque
either to order or bearer."
This definition does not say anything about the
characteristics of a negotiable instrument but it
mentions about instruments, which can be
legally called as a negotiable instrument. It
fortunately, however does not prohibit any other
instrument which satisfies the features of
negotiability from being designated as
negotiable instruments. Justice K.C.Wills
defines negotiable instrument as "ONE THE
PROPERTY IN WHICH IS ACQUIRED BY ANY
ONE WHO TAKES IT BONAFIED FOR VALUE,
NOT WITHSTANDING ANY DEFECT OF TITLE
IN THE PERSON FROM WHOM HE TOOK IT".
Transferability
A Negotiable instrument as a document of title to
money is transferable either by the application of
the law or by the custom of the trade concerned.
Special feature of N.I
The special feature of such an instrument is the
privilege it confers to the person who receives it
bonafide and for value, to possess good title
thereto, even if the transferor has no title or had
defective title to the instrument.
Distinctive features of Negotiable
Instruments
- Easily transferable from one person to another
- Confers absolute and good title on the
transferee
- The holder of a Negotiable Instrument
(P.N./B.E./Cheque) is called as the holder in
due course and possesses the right to sue upon
the instrument in his own name.
Types of Negotiable Instruments
• Negotiable instruments by Statue are of
three types, cheques, bills of exchange and
promissory note.
• Negotiable instruments by custom or
usage :- Some other instruments have
acquired the character of negotiability by the
the custom or usage of trade. Section 137 of
Transfer of Property Act 1882 also
recognizes that an instrument may be
negotiable by Law or Custom. Thus in India
Govt. Promissory notes, Shah Jog Hundis,
Delivery Orders, Railway Receipts, Bill of
 Lading etc. have been held negotiable by
usage or custom. These can be said as
quasi statutory Negotiable Instruments.
Exceptions
Sometimes the Drawer and Holder can take
away the negotiability of an instrument by
expression such as "Not Negotiable", Pay to "A"
only. Here "A" (the holder) cannot transfer a
better title to the transferee.
Promissory Note
Section 4: "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."
Bill of Exchange
Section 5: "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."
According to Section 7, the maker/creator of the
instrument is known as 'Drawer'. The person to
whom payment may be made is known as
"Payee". The person who is directed to pay the
amount is known as Drawee. He accepts to pay
the amount mentioned in the instrument. In case
of a promissory note Drawer and Drawee are
same. In case of a cheque the Drawee is
always a Banker.
Cheque
As per Section 6 "A cheque is a bill of exchange
drawn on a specified banker and not expressed
to be payable otherwise than on demand." After
2002 amendment cheque includes " the
electronic image of a truncated cheque and a
cheque in the electronic form." In terms of
Explanation I,
(a) " '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 in a secure system ensuring the
minimum safety standards with the use of digital
signature (with or without biometrics signature)
and asymmetric crypto system;
(b) “ 'a truncated cheque' means a cheque which
is truncated 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."
M.I.C.R.Cheques/Drafts
In MICR (Magnetic Ink Character Recognition)
cheques:
• First six number indicate the cheque number
• Next three numbers indicate city code
• Next three numbers indicate Bank code
• Next three numbers indicate Branch code

Characteristics of Cheque, Bill of Exchange

and Promissory Note
1) Instrument in writing: Pencil writing is not
forbidden by the law but to prevent alternation,
etc. the custom and usage do not allow this.
(2) Unconditional order/promise: Cheque and
bill of exchange are orders of creditors
(Drawers) to the debtors (Drawee) to pay
money. Instruments with expressions such as
"I.O.U. Rs.500/-" is not a bill of exchange. On
the other hand a promise with following narration
duly signed, dated and accepted by a drawee is
a Bill of Exchange B/E – "I promise to pay B or
order Rs.5,000/-"
(3) Difference between cheque and bill of
exchange: The main difference between a
cheque and a bill of exchange is that the former
is always drawn on and is payable by a banker
specified therein.
(4) Certainty of the sum: The amount of the
instrument must be certain.
(5) Payable to order or bearer: The
instrument must be payable either to order or to
bearer as per the provision of Section 13 of the
Act. For example if a cheque is drawn with the
expression " Pay to Ram Lal" it indicates that it
can be paid to Ram Lal or any person as per his
order. But if it is written pay to 'Ram Lal' only it
must be paid to Ram Lal only. A bill of exchange
and cheque are payable to bearer if it is
expressed to be so payable or if the only or the
last endorsement is an endorsement in blank.
(6) Payee must be a certain person: The term
'person' includes besides individuals, bodies
corporate, local authorities, Co-operative
Societies, etc. and it also includes Registrar,
Principal, director, Secretary, etc. of those
institutions. Payee may be more than one
person
(7) Term of payment: A cheque is always
payable on demand, though words to this effect
are not mentioned therein. A bill may be payable
at sight or after a period of time specified
therein. A promissory note or bill of exchange
in which no time for payment is specified is
payable on demand (Section 19). If the bill is
payable after a certain period it must be
accepted by a drawee. But no such acceptance
is necessary in case of a cheque.
(8) Signature of the drawer/promisor: The
negotiable instrument is valid only if it bears the
signature of the drawer/promisor.
(9) Delivery of the instrument: The making,
acceptance or endorsement of an instrument is
completed by delivery in terms of Section 46 of
the Act. Stamping of promissory notes and bill
of exchange is necessary. The Indian Stamp Act
1899 requires that the promissory note and the
bill of exchange except cheques to be stamped.
(11) Currency note: The currency note is a
promissory note payable to bearer on demand.
Section 21 of RBI Act prohibits creation of this
type of promissory notes by others excepting the
Reserve Bank of India.