Negotiable Instrument Act, 1881

MEANING OF N.I.

According to Section 13 (a) of the Act, “Negotiable instrument means a

promissory note, bill of exchange or cheque payable either to order or to bearer,
whether the word “order” or “ bearer” appear on the instrument or not.”

In the words of Justice, Willis, “A negotiable instrument is one, the property in

which is acquired by anyone who takes it bonafide and for value
notwithstanding any defects of the title in the person from whom he took it”.

Thus, the term, negotiable instrument means a written document which

creates a right in favor of some person and which is freely transferable.
 DEFINITION OF N.I. [Sec. 13]

Negotiable instrument means:

• A promissory note; or
• Bill of exchange; or
• Cheque
And it is payable:
• Either to order; or
• to the bearer (The holder of document)
 Meaning Of Negotiable Instruments
Exchange of goods & services is the basis of every business activity.
Goods are bought & sold for cash as well as on credit. All these
transactions requires flow of cash either immediately or after a
certain time. In modern business, large number of transactions
involving huge sums of money takes place everyday. It is risky for
either party to make & receive payment in cash. Therefore, it is a
common practice for businessman to make use of certain documents
as means of making payment. Some of these document are called as
Negotiable Instruments.

Thus, we can say negotiable

instrument is a transferable document, where negotiable means
transferable and instrument means document.
 Essential characteristics of NI
1. Freely transferable from one person to another.

2. The holder of the instrument is presumed to be the owner of the

property contained in it.

3. Transferable infinitum (i.e., indefinitely)

4. Holder in due course (HIDC) gets the instrument free from all defects of

title of any previous holder.

5. A HIDC is entitled to sue on the instrument in his own name.

6. The instrument is transferable till maturity & in case of cheques till it

becomes stale ( On the expiry of 6 months from the date of issue).

 Contd..
1. Holder: A person who is legally entitled to the possession of the negotiable
instrument in his own name and to receive the amount thereof, is called a
‘holder’. He is either the original payee, or the endorsee. In case the bill is
payable to the bearer, the person in possession of the negotiable instrument
is called the ‘holder’.

2. Holder in due course: A person is a HIDC if he fulfills the following

conditions:

• That for a consideration becomes --the possessor of the instrument if

payable to bearer or -- the payee or endorsee thereof, if payable to order.

• That he became the holder of the instrument before its maturity.

• That he became the holder of the instrument in good faith.

SKIP
 Classification of NI

The basic types of negotiable instruments are as follows:

Bearer Instrument ;

Order Instrument ;

Inland Instrument ;

Foreign Instrument ;

Demand Instrument ;

Time Instruments.
 Contd…
1. Bearer Instruments:
A promissory note, a bill of exchange or a cheque is payable to bearer when
• it is expressed to be so payable,
• or the last endorsement on the instrument is an endorsement in blank. A
person who is a holder of a bearer instrument can obtain the payment of
the instrument.
A blank endorsement is a signature by the creator of an instrument, such as a
check, which enables any holder of the instrument to assert a claim for payment.
Because no payee is specified, such an endorsement essentially turns the
instrument into a bearer security.
NOTE:
AS PER PROVISIONS OF RBI ACT, 1934,
A promissory note- cannot be made payable to the bearer.
A bill of exchange- cannot be made payable to bearer on demand.

2. Order Instruments:
A promissory note, a bill of exchange or a cheque is payable to order in
which it is expressed to be so payable; or which is expressed to be payable
to a particular person and it does not contain any words prohibiting transfer
or indicating any intention that it shall not be transferable.
 Contd…

3. Inland Instruments:
A promissory note, bill of exchange or cheque drawn or made in
India and made payable in, or drawn upon any person resident in
India shall be deemed to be an inland instrument.
4. Foreign Instruments:
An instrument which is not an inland instrument is defined as a
foreign instrument.
 Contd…

5. Demand Instruments:
A promissory note or a bill of exchange in which no time for
payment is specified is an instrument payable on demand.
6. Time Instruments:
Time instruments are those instruments which are payable at
sometime in the near future. Therefore, a promissory note or a
bill of exchange payable after a fixed period, or after sight, or on
a specified day, or on the happening of an event which is certain
to happen, is known as a time instrument.
 Types of Negotiable Instruments
According to the negotiable instrument Act, 1881, there are three
types of negotiable instruments, they are;

Promissory
note

Bill of
Cheque
exchange

However many other documents are also recognized as negotiable

instruments on the basis of custom and usage, like hundis, treasury
bills, share warrants, etc., provided they posses the feature of
negotiability.
 Promissory note
Section 4 of the Negotiable Instrument Act,1881 defines a
Promissory note as ‘an instrument in writing (not being a bank
note or 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’.
 Specimen of Promissory Note
Rs. 10,000/- Mr. Promisor/ Maker/ Drawer
New Delhi
Sep 25,2011

On demand, I promise to pay Mr. Payee a sum of Rs. 10,000/-(Rupees Ten

Thousand only), for value received.

To,
Mr. Payee Sd/-
Address…….. Mr. Promisor
Stamp
 Parties to a Promissory Note

There are primarily two parties involved in a promissory note,

they are;
The Maker/ Drawer :- The person who makes the note &
promises to pay the amount. (Debtor)
The Payee :- :- The person to whom the amount is
payable. (Creditor)
 Holder:- He is the payee or the person to whom the note might have
been indorsed.
In course of transfer of a promissory note by payee and others, the parties
involved may be –
The Endorser/ Indorser :- The person who endorses the note in
favour of other.
The endorsee / Indorsee:- The person in whose favour the note is
endorsed .
 Features of a Promissory Note
1. A promissory note must be in writing, duly signed by its maker .
2. It must be properly stamped as per Indian stamp Act.
2. It must contain an undertaking or promise to pay. Mere
acknowledgement of indebtness is not enough.
3. The promise to pay must not be conditional.
4. It must contain a promise to pay money only.
5. The parties to a promissory note, i.e. the maker and the payee must be
certain.
6. A promissory note may be payable on demand or after a certain
date. The name of payee must be specified in the promissory note, otherwise
it will be invalid.
7. The sum payable mentioned must be certain or capable of being made
certain. It means that the sum payable may be in figures or may be such
that it can be calculated.
 Bill Of Exchange

Section 5 of the Negotiable Instruments Act, 1881 defines a bill

of exchange as ‘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 –

• A certain person; or

• to the order of a certain person; or

• to the bearer of the instrument.

 Specimen of a Bill Of Exchange
(A) Mr. Drawer/ Maker
Rs. 10,000/- New Delhi
Sep 25,2011

Five months after date, pay to Mr. payee (C ), a sum of Rupees Ten
Thousand only for the value received.

To, Stamp
Mr. Drawee (B) Sd-
Address… Mr.drawer
 Parties to a Bill of Exchange

There are primarily three parties involved in a Bill of Exchange, they

are;
 The Drawer :- The person who makes the order for
making payment or the person who draws
the bill. His liability is secondary &
conditional. His liability is primary &
conditional until the bill is accepted.
 The Drawee :- The person to whom the order to pay is
made. He is generally a debtor of the
drawer. He is called as acceptor. He becomes
liable for the payment of the bill. His liability
` is primary & unconditional.

 The Payee :- The person to whom the payment is to be

made.
[Endorser & Endorse- Same as in P.N.]
 Features of Bill Of Exchange
1. A bill must be in writing, duly signed by its drawer and properly
stamped as per Indian Stamp Act.

2. It must contain an order to pay. Words like ‘please pay on demand

and oblige’ are not used.

3. The order must be unconditional.

4. The order must be to pay money and money alone.

5. The sum payable mentioned must be certain or capable of being

made certain.

6. The parties to a bill must be certain.

 Cheque

The Negotiable Instruments 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.

Actually, a cheque is an order by the account

holder of the bank directing his banker to pay on demand, the
specified amount, to or to the order of the person named therein or
to the bearer.
 Specimen of a Cheque
Date: Sep 25,2011
Pay Mr. Payee ____________________________ a sum of Rupees Fifty
Thousand Only___________________________ Rs. 50,000/-

A/C No. 6537373892

Drawee Bank Sd-

Address… Mr.drawer
 Features of a Cheque
1. A cheque must be in writing and duly signed by the drawer.

2. It contains an unconditional order.

3. It is issued on a specified banker only.

4. The amount specified is always certain and must be clearly

mentioned both in figures and words.

5. The payee is always certain.

6. It is always payable on demand.

7. The cheque must bear a date otherwise it is invalid and shall not
be honored by the bank.
 Types of cheque
• 1) Bearer Cheque
Bearer cheques are the cheques which withdrawn to the cheque's owner.These types
of cheques normally used for a cash transaction.

2) Order Cheque
• Order cheques are the cheques which are withdrawn for the payee(the cheque
withdrawn for whose person).Before withdrawn to that payee, banks cross check
the identity of the payee.

3) Crossed Cheque
• On that type of cheques two parallel line made on the upper part of the cheques,
then that cheques formed to crossed cheques.This type of cheques payment does not
formed in cash while the payment of that type pf cheques transferred to the payee
account and the normal person's account who recommend by the holder on the
cheque.
•
• 4) Account Payee Cheque
• When two parallel lines along with a crossed made on the cheque and the
word 'ACCOUNT PAYEE' written between these lines, then that types of
cheques are called account payee cheque.The payment of the account payee
cheque taken place on the person, firm or company on which name the
cheque issue.

• 5) Company Crossed Cheque

• When two parallel lines along with a cross made on the cheque and the
word 'COMPANY' written between these lines, then that types of cheques
are called company crossed cheques.Then the type of withdrawn does not
take in cash while the person on which the cheque issue, transferred on its
account.Normally crossed cheque and company crossed cheque are same.
• 6) Stale Cheque
If any cheque issued by a holder does not get withdrawn from the bank till
three months, then that type of cheques are called stale cheque.

7) Post Dated Cheque

If any cheque issued by a holder to the payee for the upcoming withdrawn
date, then that type of cheques are called post-dated cheque.

8) Anti Dated Cheque

If any cheque issue for the upcoming withdrawn date but it withdraw before
the date printed on the cheque, then that type of cheques are called anti
dated cheques.
 Types of crossing
• 1. General Crossing :-

• Generally, cheques are crossed when

• There are two transverse parallel lines, marked across its face
or
• The cheque bears an abbreviation "& Co. "between the two
parallel lines or
• The cheque bears the words "Not Negotiable" between the
two parallel lines or
• The cheque bears the words "A/c. Payee" between the two
parallel lines.
• A crossed cheque can be made bearer cheque by cancelling
the crossing and writing that the crossing is cancelled and
affixing the full signature of drawer.
2. Special or Restrictive Crossing :-

• When a particular bank's name is written in between the two

parallel lines the cheque is said to be specially crossed.
↓
• In addition to the word bank, the words "A/c. Payee Only",
"Not Negotiable" may also be written. The payment of such
cheque is not made unless the bank named in crossing is
presenting the cheque. The effect of special crossing is that
the bank makes payment only to the banker whose name is
written in the crossing. Specially crossed cheques are more
safe than a generally crossed cheques.
Differences between Bill of Exchange,
Promissory Notes
and Cheques
Distinction between a Promissory Note
and a Bill of Exchange
PROMISSORY NOTE BILL OF EXCHANGE

1. It contains an unconditional promise. 1. It contains an unconditional order.

2. There are two parties- the maker & the 2. There are three parties- the drawer,
payee. drawee, & the payee.

3. Acceptance is not required. 3. Acceptance by the drawee is a must.

4. It is made by the debtor. 4. It is made by the creditor.

Distinction between a Cheque and a Bill
of Exchange

CHEQUE BILL OF EXCHANGE

1. It is drawn only on banker. 1. it can be drawn on anybody including a

banker.

2. The amount is always payable. 2. The amount is payable on demand or

after a specific period.

3. It can be crossed to end it’s negotiablity. 3. It cannot be crossed.

4. Accpetance is not required. 4. Accpetance is a must.

 Capacity of a person to be a party to a N.I. [Sec.26]

According to section 26, every person capable of contracting according to law to which he is
subject, may bind himself & be bound by making, drawing, acceptance, endorsement,
delivery & negotiation of a PN, BOE or cheque.

If a party is not competent to contract (Eg. minors, lunatics, idiots, drunken person) the
agreement is absolutely void and operative as against him but he can derive benefit under
it. Thus, a person incompetent to contract cannot make himself liable as a party to
negotiable instrument ,but he may make the other parties competent to contract liable
,because he can be a promisee or payee as per the Indian contract Act .
 Capacity of a person to be a party to a N.I. [Sec.26]

It shows, therefore, that if some of the parties to negotiable instrument are not
capable of contracting, instrument is void only as against such parties and the
other competent parties remain bound for it. If, however, all the parties are
incapable to contract ,then the negotiable instrument is a nullity does not have
any legal value whatsoever.

Where a minor is endorser or payee of an instrument which has been endorsed all
the parties except the minor are liable in the event of its dishonor.
 Negotiation(Sec14)- Meaning & methods
When a promise note, bill of exchange or cheque is transferred to
any person, so as to continue the person the holder thereof, the
instrument is said to be negotiated.
-Negotiation means transfer of negotiable instrument to any other
person so as to constitute that person the holder of such instrument.

METHODS OF NEGOTIATION
• Negotiation by delivery: A bearer instrument may be negotiated
by delivery & the deliver must be voluntary.
• Negotiation by endorsement & delivery: An order instrument
can be negotiated only by way of endorsement & delivery.
 ENDORSEMENT(Sec15)
When the maker or holder of an negotiable instrument signs the
same, otherwise than as such maker, for the purpose of negotiation,
on the back or face thereof or on a slip of paper annexed thereto, or
so signs for the same purpose a stamped paper intended to be
completed as a negotiable instrument, he is said to indorse the same,
and is called the endorser
It means
 Signing-
• On the face or back of NI; or
• On a slip of paper annexed to the NI
 By- the holder of NI
 For the purpose of- negotiating such NI.
 ESSENTIAL REQUIREMENT OF VALID ENDORSEMENT

• The endorsement must be in writing.

• The endorsement shall not be valid unless it is
signed.
• The endorsement shall be valid only if the NI
is signed by the holder.
 DISHONOR OF NEGOTIABLE INSTRUMENT

A bill may be dishonored by non-acceptance or by non-payment.

A promissory note & a cheque are dishonored by non-payment only.

When a negotiable instrument is dishonored, the holder must give

a notice of dishonor to all the parties in order to make them liable
on the instrument. If he fails to do so, he forfeits his right of action
against the prior parties entitled to the notice of dishonor. [Sec 93]
 DISHONOR BY NON-ACCEPTANCE [SEC 91

A bill of exchange is dishonored by non-acceptance in any of the

following ways:
• If the drawee doesn’t accept the bill within 48 hours from the
time of presentment.
• If there are several drawees who are not partners & all of them
do not accept.
• When the drawee is incompetent to contract.
• When the drawee gives qualified acceptance.
• When drawee is a fictitious person or after reasonable search
can’t be found.
 DISHONOR BY NON-PAYMENT [SEC 92]

• A promissory note, bill of exchange or cheque is said

to be dishonored by non-payment when the maker of
the note, acceptor of the bill or drawee of the cheque
makes default in payment upon being duly required to
pay the same.
 HOLDER [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.

• Where the note, bill or cheque is lost or

destroyed, its holder is the person so entitled at
the time of such loss or destruction.
Following persons are considered the holders of the
negotiable instruments:
(a) A principal whose name appears on an instrument
as the holder though it is executed in the name of
his agent for him.
(b)Where a negotiable instrument is a bearer one, any
person who is in the possession of such instrument
is the holder.
(c) Where a negotiable instrument is in the name of a
partner of a firm, it naturally becomes a holder, as it
is not a separate entity from the partner.
(d) The endorsee of a cheque is called a holder.
(e) If a holder of a negotiable instrument is dead, the
heirs of the deceased holder become the holders.
 Privileges of holder in due course

A holder in due course gets title to a negotiable instrument free

from equities (without obligations). Certain defenses which can be
set up against the person claiming on a negotiable instrument can’t
be set up against a holder in due course. The special privileges are:
• INCHOATE STAMPED INSTRUMENT: A holder in due
course gets title to a negotiable instrument, is excluded from
asserting, as against the holder in due course, that the instrument
has not been in accordance with the authority given by him, the
stamp being sufficient to cover the amount. [Sec 20]
• LIABILITY OF PRIOR PARTIES: Every prior party to a
negotiable instrument is liable thereon to a holder in due course
until the instrument is duly satisfied. [Sec 36]
• FICTITIOUS PAYEE: The acceptor of the bill can’t say, as
against the holder in due course, that the other parties to the bill
were fictitious. [Sec42]
• NEGOTIABLE INSTRUMENT WITHOUT
CONSIDERATION: When a negotiable instrument is made,
drawn, accepted, endorsed, or transferred without consideration,
it creates no obligation of payment between the parties to the
transaction. But if the negotiable instrument gets into the hand
of a holder in due course, he can recover the amount due on
such instrument from the transferor for consideration or any
prior party thereto. [Sec43]
• INSTRUMENT LOST BY UNLAWFUL MEANS OR FOR
UNLAWFUL CONSIDERATION: The person liable to pay on a
negotiable instrument can’t contend that he had lost it, or that it was
obtained from him by means of an offence or fraud or for an unlawful
consideration. [Sec 58]

• ESTOPPEL AGAINST DENYING ORIGINAL VALIDITY OF

INSTRUMENT: The maker of a promissory note, the drawer of a bill of
exchange or cheque & the acceptor of bill of exchange can’t deny the
validity of the instrument as originally made or drawn.

• ESTOPPEL AGAINST DENYING CAPACITY OF PAYEE TO

INDORSE: The maker of a promissory note & the acceptor of bill of
exchange payable to order can’t, in a suit thereon by a holder in due
course, deny the payee’s capacity to endorse the same.

• [ESTOPPLE-] When a person by his conduct or word spoken or written

leads another person to believe that a certain state of affairs exists, he is
stopped from denying the fact of the statement later.
 HUNDI
Hundies are indigenous negotiable instruments, written in
vernacular language. These are mostly like bill of exchange.
Sometimes these are like Promissory Notes.

The term Hundi is said to be derived from the Sanskrit word,

Hund, which means to collect. Hundies are governed by local
usage and customs.

Oral hundies, though it is not recognized by the N.I.Act, it is

regarded as valid in the law courts provided it is a local
custom.
 KIND OF HUNDIES

• DARSHNI HUNDI i.e. Hundi payable at sight.

• MUDDATI HUNDI OR MIADI HUNDI i.e. a Hundi payable

after a specific period.

 GENERAL TERMS
• ZICKRI CHIT- It is letter of introduction which is given to the
holder of a Hundi by the drawer or some prior party to the
hundi. It is addressed to some respectable person residing in
the town or area, where the hundi is payable, requesting him to
pay the amount of the hundi in case the drawee refuses to
accept or pay the amount of the hundi.
• KHOKA – When a Hundi is paid up and cancelled it is called a
Khoka.
• PETH – The duplicate of a Hundi when the original is lost is
called peth. The duplicate of a duplicate is called perperth.