Negotiable Instrument Act 1881

Negotiable Instrument:

DEFINITION:

Section 13 of the Negotiable Instrument Act, 1881, defines a

negotiable instrument as: “A negotiable instrument means a promissory note, bill of

exchange or cheque payable either to order or to bearer.” [Sec. 13(1)].

Explanation: A promissory note, bill of exchange or cheque is payable to order,

which is expressed to be so payable, or which is expressed to be payable to a

particular person, and does not contain words prohibiting transfer or indicating an

intention that it shall not be transferable.

‘Negotiable’ literally means ‘transferable’. ‘Instrument’ means a

‘document.’ Therefore, negotiable instrument means an ‘a transferable document’.

However, it does not mean that an instrument in order to be valid must be

negotiable. Instruments may be marked ‘not negotiable’ yet they are valid

instruments and governed by the provisions of the Act.

The Act narrows down the meaning of instrument. It regulates only

three types of instruments, viz., Promissory Notes, Bills of Exchange and Cheques.

A negotiable instrument is one which entitles the holder to the receipt

of money. It gives him the right to transfer the same by mere delivery or

endorsement thereon. The negotiability of the instrument continues till its maturity.

Characteristics\Features of Negotiable Instrument:

These are the following characteristics of a negotiable instrument:

1. Property:

The possessor of the instrument is the holder and owner thereof. A

negotiable instrument does not exactly give possession of the instrument, but right

to property. Whosoever gets possession of the instrument becomes its owner and is

entitled to the sum mentioned therein as the holder. The complete right of

ownership in a negotiable instrument passes by mere delivery where instrument is

payable to bearer. Where instrument is payable to order, right of ownership passes

by endorsement and delivery.

2. Good Title to the Instrument:

The holder is good faith and for value called the ‘holder in due

course’ gets the instrument free from all defects of any previous holder.

3. Rights of Holder in Due Course:

The holder in due course is not affected by certain defences

which might be available against previous holder, for example, fraud, criminal,

smugglers, to which he is not a party.

4. Writing & Signature:

According to the Rules of Negotiable Instrument, it must be

written and signed by all the parties according to the rules relating to the promissory

notes, bills of exchange, and cheques.

5. Payment:

A negotiable instrument may be made payable to two or more payees

jointly, or it may be made payable in the alternatives to one or two, or some of

several payees [Sec. 13(2)].

6. Payable by legal Tender Money of India:

Negotiable Instruments are payable to legal tender

money of India. The liabilities of the parties of negotiable instruments are fixed in

terms of legal tender money only.

7. No Need of giving Notice:

It is not necessary to give notice of transfer of a

negotiable instrument in his own name for the recovery of the amount mentioned

therein. Consideration in the case of a negotiable instrument is presumed.

PROMISSORY NOTES;

DEFINITION:

Section 4 defines a promissory notes as under: “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.”

Essentials Characteristics of a Promissory Note:

1. All kinds of negotiable instruments, including a promissory note, must be in

writing:

The promissory note must be in writing. In a oral form or promise is

made, they all are excluded form this. Whatever the words may be used, it is not

compulsory writing by using pen or pencil or ink pen or even may be printed or

cyclostyled. But the important thing is that the words should be visible. Intention of

writing, it should be clear.

2. The instrument must contain an express or unconditional promise to pay:

It is not necessary to use the word “promise” but the intention must

clearly show an ‘unconditional undertaking’ to pay the amount. It was held that

absence of the word promise does not mean that a document is not a promissory

note, provided it should fulfills the requirements of this section and there is clear

intention on the part of the parties to treat the document as a promissory note.

ILLUSTRATIONS:

This are the promissory notes:

“I acknowledge receipt of Rs. 1,000 for value received.”

“I promise to pay B Rs. 1,000 on demand.”

“I promise to pay B or order Rs. 1,000 on demand.”

“I acknowledge myself to be indebted to B in Rs. 1,000 to paid on demand, for

value received.”

“Received from X Rs. 1,000, which I promise to pay on demand with interest”.

This are not the promissory notes:

“I acknowledge receipt of Rs. 1,000.”

“I owe you Rs. 1,000.”

“Mr. Prakash Rs. 1,000.”

A document which is a receipt for money paid by cheque and which

incidentally contains a promise to repay the amount is not a promissory note, as

there is no intention of creating a negotiable instrument at all.

3. Unconditional:

The undertaking to pay must be definite and unconditional. If the

promise is uncertain or conditional, the negotiable instrument is not valid. Hence,

promissory notes, payable on the death of a person or persons, or at a particular

place, or after a specified time, are valid notes, under Section 5 (2). At a particular

place or at a specified time. A promise given for an executed consideration. Any

promise to pay an instrument on lapse of certain period, after a specified event

which is certain to happen.

Valid Conditional Promissory Notes:

“I promise to pay B Rs. 1000, three days after the death of X.

“I promise to pay B Rs. 1000 at Mumbai.”

“I promise to pay B Rs. 1000 on 31st December 1977.”

4. The promissory note must be signed by the maker, otherwise, it is incomplete

and of no effect with free consent:

Person must sign the instrument with the physically and

mentally act with an intention to sign without the signature the instrument is not

valid person must sign with a free consent.

5. Both the drawer and the payee must be indicated or designated with certainty

on the face of the promissory note:

Where two or more persons sign the promissory note, their

liabilities will be joint and several.

Two distinct persons should fill in the role of a maker and

payee. A note cannot be made payable to the maker himself. However, if the maker

endorses the note, it is then valid. A note may be made payable to two or more

persons jointly. Payee must be a certain person. If he is capable of being ascertained

where he is misnamed or wrongly described, he will be a certain person.

For example:

A promissory note payable to “my only niece living in England” is a

valid promissory note.

6. Specific Sum:

The sum payable must be certain and must not be capable of

contingent subtractions or additions.

Illustrations:

I promise to pay A Rs. 1000 and all other sums due to him.

I promise to pay A Rs. 2000 together with the fine according to the rule.

The sum payable under a promissory note is certain in the following cases:

When it is payable with interest. However, if the rate of interest is not

mentioned in the instrument, it is not a promissory note.

When it is payable by installments, with a provision that on default of payment

of an installment, the balance unpaid shall become due (Sec. 5).

Thus, the act does require that the amount should be stated in both words and

figures form.

7. Promise to pay must be money only:

A promissory note should contains only payment of

money rather than any thing else or other than the money.

Illustrations:

“I promise to pay B Rs. 100 in cash and Rs. 199 worth of cosmetics.”

“I promise to pay B Rs. 299 and to deliver him my black horse.”

“I promise to pay B Rs. 999 in Government Bonds.”

“These above are all invalid promissory notes.”

8. Stamping:

As in every instrument which is legal, there are certain formalities

which are compulsory should be included and such formalities are date, place,

consideration, etc should be mentioned in the instrument. Without all this

formalities, the instrument is said to be invalid.

Types of Promissory Notes:

There are four kinds of promissory notes, and they are

1. Promissory notes payable on demand;

2. Promissory notes payable after date;

3. Joint promissory notes; and

4. Joint and several promissory notes.

1. Promissory notes payable on demand:

When the drawer or you can say the maker gives an

unconditional undertaking, under his signature, to pay on demand certain sum of

money to the payee, it is called a promissory note payable on demand. In such a

note, no time is fixed for payment.

Specimen of a Promissory Note Payable on Demand

2. A Promissory Note Payable after Date:

When the maker or drawer promises, under his

signature to pay certain sum of money to the payee, at a future date, say for

example, three months after date, it is called a promissory note, payable after date,

or at a future date.

Mumbai,Rs. 5,000/- 1st June, 1999

On Demand, I promise to pay Prakash or order the sum of rupees five thousand with interest at 18 per cent per annum, for value received.

Sd/-

ToPrakash,Empty Stomach,Mumbai 400 052.

StampXYZ

Specimen of a Promissory Note Payable after Date

3. Joint Promissory Notes:

When a promissory note is made by two or more

persons jointly, it is known as a joint promissory note. In such a case, the liability of

the makers (Promisers) is joint and collective towards the payee, i.e., in case of a

default, the payee can take legal action one or all of them. If he elects to take action

against one of the promisers, it is deemed to be action against all of them. He

cannot, in that case, take action against the remaining promisers. The payee has only

one right of action.

Joint promissory notes may be payable on demand or

after date. Following is a specimen of a joint promissory note:

Specimen of a Joint Promissory Note


Three months after date, I promise to pay Srichand Rohra or Bearer/Order the sum of rupees five thousand, for value received.

Sd/-

Stamp XYZ

ToSrichand Rohra,Jai Palace,Mumbai 400 052.


We jointly promise to pay on demand to the Bank of India, or order, the sum of Rs. 5,000/- (Rupees five thousand) only for value received with interest at 10 per cent per annum.

Sd/-1. Signature:

Address:

2. Signature:

Stamp

Address:

Stamp

4. Joint and Several Promissory Notes:

When a promissory note is made by two or more

persons jointly and severally, it is called a joint and several promissory notes. The

promisers of such a promissory note are not only collectively liable to the payee but

they are also separately and individually liable to him. In other words, the payee has

more than one right of action against the promisers. He can take action-

a. Against all the promisers simultaneously, or

b. Against any one of them, or

c. Against one promiser after another till the full amount of the note is recovered.

A joint and several promissory note may be payable on

demand or after date. In India, there is no difference in practice between a joint

promissory note and joint and several promissory notes. A holder of a joint promissory

note may, therefore, treat it as a joint and several promissory note and accordingly

proceed as (1) against any one of the promisers, or (2) against all of them

simultaneously, or (3) against one promiser after another till the full amount of the note

is recovered.

Specimen of a Joint and Several Promissory Notes


We jointly and severally, promise to pay on demand to the Bank of India, or order, the sum of Rs. 5,000/- (Rupees five thousand) only for value received with interest at 10 per cent per annum.

1. Signature………… Address…………..2. Signature………… Address…………..3. Signature………… Address…………..



Sd/-1. Signature:

Address:

2. Signature:

Stamp

Address:



Sd/-2. Signature:

Address:

2. Signature:

Stamp

Address:

BILLS OF EXCHANGE:

DEFINITION:

“Section 5 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, or to the order of a certain person, or

to the bearer of the instrument.”

Essentials\Characteristics of Bill of Exchange:

The following are the essentials of a bill of exchange:

1. Writing:

A bill of exchange, is like a promissory note, must be in writing. It

may be written in any language and in any form. It should be with the requirements

of Section 5. The provisions of promissory notes relating to writing, as discussed

above, are also applicable to bills of exchange.

2. Parties:

There are generally three parties to a bill of exchange, known as:

a) Drawer,

b) Drawee and

c) Payee.

a) Drawer:

The drawer is a person, who makes the bill of exchange, or who gives

the order to the drawee to pay a certain sum of money to the payee.

b) Drawee:

The drawee is a person, who is directed by the drawer to pay the

money to the payee.

c) Payee:

According to the section 7 of the Act defines ‘Payees’ as the person

named in the instrument, to whom or to whose order the money is, by the instrument

directed to be paid.

All these parties must be named or otherwise indicated with

reasonable certainty. Sometimes the drawer and the payee are the same persons, as

for example, where a bill is drawn “pay to me or my order.” But the drawer and the

drawee cannot be the same, because there cannot be an order to oneself.

3. Drawee and Acceptor:

The drawer or the payee, who is in possession of the bill, is

called the holder. The holder must be present the bill to the drawee for his

acceptance. When the drawee accepts the bill, he becomes the acceptor. Which

means one person can plays the two roles at a time of drawee and acceptor.

4. Order to Pay:

The bill of exchange must contain an order by the drawer to

drawee to pay certain sum of money under any circumstances. The order must be

imperative; it should not be in a request form.

5. An Unconditional Order to Pay:

The bill of exchange must contain an order for promise to pay

certain amount it should be unconditional. If there is conditional order which is

invalid means their should not be like that if this event is happen then only I will

pay to you, it is invalid. Conditional bill should not be their because it is invalid.

6. Signed by Drawer:

The bill of exchange must be signed by the drawer.

7. Payee must be certain:

It must be payable to a definite person or his order. The payee

must be certain. Bill may be made payable to two or more payees jointly or in the

alternative.

8. Stamping:

Bill of exchange is chargeable with stamp duty.

Types of Bills of Exchange:

There are five types of bills of exchange namely, (1) bill

of exchange payable on demand. (2) bill of exchange payable after date, (3) inland

bill of exchange, (4) foreign bill of exchange, and (5) accommodation bill of

exchange.

1. A Bill of Exchange Payable on Demand:

When a bill is made payable on demand, or at sight, or

on presentment, it is known as a bill of exchange payable on demand.

Following is a specimen of a bill of exchange payable on demand:

A bill of exchange payable to bearer on demand is

illegal under Section 25 of the Indian Paper Currency Act and also under Section

31(2) of the Reserve Bank of India Act, 1934. Hence, such a bill cannot be drawn

by a firm or an individual.

2. A Bill of Exchange Payable After Date:

When a bill is made payable after the expiry of a stipulated

period, or payable so many days after sight, it is known as a bill of exchange

payable after date, or a time bill.

Following are a couple of specimens of bills of exchange payable after date and after sight:

Mumbai,Rs. 20,000/- 20th August, 1999

Stamp

On demand, pay to Prof. P.P. Prakash, or order, a sum of rupees twenty thousand only for value received.

For Airedale & Company,Sd/-

Partner420, P.P. Road, Mumbai 400 004.

ToProf. P.P. Prakash,25, Raja Mahan, AcceptedMumbai 400 001. Sd/-

R S T 21-8-1999

In the above bill, A.G. Joshi is the drawer; B.K. Shah is the drawee

who has accepted the bill; therefore acceptor; and M.N. Patel is the payee. The bill is

made payable after date.

3. An Inland Bill of Exchange:

An Inland Bill of Exchange is one, which is—

a. Drawn and made payable in India, or

b. Drawn in India on a resident of India though the place of payment may be

outside India.

For example, a bill of exchange, drawn by a merchant in Mumbai upon

another merchant in Calcutta, made payable in India, is inland bill. Similarly, a bill

of exchange, drawn by a merchant in Chennai upon another merchant in Delhi and

payable in Washington, is an inland bill.

4. A Foreign Bill of Exchange:

A foreign bill of exchange is one, which is –

a. Drawn in India and made payable in some other country other than India.

b. Drawn upon a person who is a resident of a foreign country.

Mumbai,Rs. 20,000/- 20th August, 1999

Stamp

Three months after pay M.N. Patel, 12 V.P. Road, Surat, or order, the sum of rupees ten thousand only for value received.

Sd/- A.G. Joshi,

245, Mahatma Gandhi Road,Mumbai 400 001.

ToM.N.Patel15, Netaji Subhash Lane, AcceptedSurat. Sd/-

B.K. Shah 10-6-1999

Cheques:

Definition:

Section 6 defines a cheque as under: “A cheque is a bill of exchange,

drawn on a specified banker and not expressed to be payable otherwise than on

demand.”

Definition:

“Cheque is an instrument in writing containing an unconditional order,

addressed to a banker, sign by the person who has deposited money with the banker,

requiring him to pay on demand a certain sum of money only to or to the order of

certain person or to the bearer of the instrument.

Essentials\Characteristics of a Cheque:

1. Instrument in Writing:

A cheque must be writing. It can be written in ink, ball

point pen, typed or even printed. The ink used for writing the cheque should not be

easily erasable. Any overwriting or alteration will make the cheque dishonor. Oral

orders are not considered as cheques.

2. Unconditional Order:

In cheque there must be an order by a depositor

(drawer) on its bank (drawee) for paying money to the holder (payees) and order

should be unconditional. A cheque containing conditional order is dishonoured by

the bank.

3. Payable on Demand:

A cheque when presented for payment must be paid on

demand. If cheque is made payable after the expiry of certain period of time then it

will not be require.

4. Certain Sum of Money:

Cheque must be for money only and it must be written

in words and figures. If the amount in words and figured will differ from each other

or if there will be insufficient balance in the account then the cheque will be

dishonoured.

5. Payee must be Certain:

The payee of the cheque should be certain person i.e.

either real person or artificial person e.g. Joint Stock Company. The name of payee

must be written on the cheque or it can be made payable to bearer.

Types of Cheques:

There are two types of cheques:

1) Those which are uncrossed are popularly known as “bearer” or open cheques;

and

2) Crossed Cheques.

1) Bearer Cheques or Open Cheques:

Bearer or open cheques are payable at the

counter of drawee banker on presentment. As the bearer cheques carry risk of being

lost or stolen and the finder may be able to get it encashed, crossing of cheques

avoids such a contingency and secures payment.

2) Crossed Cheques:

Crossing of cheques is of different types:

I. Cheques crossed generally (Sec. 123 &126).

A cheque is crossed generally when;

A. It has two parallel lines marked across its face; or

B. It bears an abbreviation “& Co.” between the parallel line; or

C. It bears the words “not negotiable” between the two parallel lines (Sec. 123).

A cheque crossed generally will be paid to the banker through

which it is presented. It is a direction to the drawee banker to pay the sum only

through a banker. Where a cheque is crossed generally, the banker on whom it is

drawn shall not pay it otherwise than to a banker (Sec. 126).

Specimens of General Crossing

II. Cheques crossed specially (Secs. 124 & 126):

When a cheque is crossed by two parallel

transverse lines and also the name of the banker is written between the two parallel

lines, with or without the words, ‘not negotiable’ it is called “special crossing” (Sec.

124). It is to be payable to that person only on which the bill is drawn which means

it is not a risky document as Bearer Cheque is. The banker on whom it is drawn

shall not pay it otherwise than to the banker to whom it is crossed or his agent for

collection (Sec. 126). It will paid only when presented by the banker.

Specimens of Special Crossing

Payment of cheque crossed especially more than once (Sec. 127):

A cheque cannot be crossed more than once

specially, except the banker on whom it is crossed specially can cross it again to his

agent for purpose of collection only. If the cheque is crossed especially more than

once, the banker has a right to refuse payment thereof.

III. Cheques crossed ‘A/c. Payee’:

Often cheques are crossed with two parallel

transverse lines and in between the two parallel lines the words “a/c payee” or “a/c

payee only” are written. This means that the proceeds of the cheque are to be

credited to the account of the payee only. This type of crossing is also called

“Restrictive crossing”. Insertion of words “A/c. Payee” does not restrict its

negotiability. It serves a good protection to drawer from loss or theft.

Specimens of Cheques Crossed A/c Payee

Or Restrictive Crossing

IV. Cheque bearing ‘Not Negotiable’ (Sec. 130):

A cheque crossed generally or specially may bear

additional words ‘not negotiable’. A person taking a cheque crossed generally or

specially bearing in either case the words ‘not negotiable’ shall not have and shall

not be capable of giving a better title to the transferee than that which the person

from whom he took it had.

It will be observed that writing the words ‘not

negotiable’ is a type of special crossing or general crossing. Cheques crossed

generally or specially, can be added with the words “not negotiable”. The words

“not negotiable” are not the same thing as special crossing, because in a special

crossing, the banker on whom it is drawn shall not pay it otherwise than to the

banker on whom it is crossed or his agent for collection. When the cheque is marked

with the words “not negotiable” in addition to the special crossing, it deprives the

cheque of its main feature of negotiability.

V. Crossing after issue (Sec. 125):

Crossing of cheque other than that authorized by the act

is unlawful. The following crossings are permissible:

a. Where a cheque is uncrossed, the holder may cross it generally or specially.

b. Where a cheque is crossed generally, the holder may cross it specially.

c. Where a cheque is crossed generally or specially, the holder may add the words “not

negotiable.”

d. Where a cheque is crossed specially, the banker to whom it is crossed may again

cross it specially to another banker or his agent, for collection.

“Criminal Action against Dishonour Cheque”

1. Imprisonment, or Fine, or Both, for dishonour of Certain Cheques for

Insufficient Funds (Sec. 138):

Sec. 138 lays down that where any cheque, drawn by a

person, on an account, maintained by him with a banker, for payment of any amount

of money to another person, from and out of that account, for the discharge, in

whole or in part, of any debt or other liability, is returned by the Bank unpaid

because –

I. The amount of money, standing to the credit of that account, is insufficient to

honour the cheque or,

II. It exceeds the amount, arranged to be paid from that account by an agreement

made with that Bank, or,

III. Instructions were issued to the bank for stop payment, such person shall be

deemed to have committed an offence and shall, without prejudice to any other

provision of this Act, be punished –

a. With imprisonment for a term extending to one year, or,

b. With fine, which may extend to twice the amount of the cheque, or.

c. With both.

The following three conditions, however, are required to be fulfilled to

constitute the said offence under Sec. 138.

I. The cheque must have been presented to the bank within a period of six months

from the date, on which, it was drawn, or, within the period of its validity,

whichever is earlier

II. The payee, or the holder in due course of the cheque, as the case may be must have

made a demand for the payment of the said amount of money, by giving a notice, in

writing, to the drawer of the cheque, within fifteen days of the receipt of

information by him from the bank, regarding the return of the cheque as unpaid; and

III. The drawer of such cheque must have failed to make the payment of the said

amount of money to the person within fifteen days of the receipt of the said notice.

2. Presumption in Favour of Holder (Sec. 139):

It shall be presumed, unless the contrary is proved, that the

holder of a cheque received the cheque of the nature, referred to in section 138, for

the discharge, in whole or in part, of any debt, or their liability.

3. Defence, which may not be allowed in Any Prosecution, Under Section 138:

Sec. 140 lays, down that it shall not be a defence in a

prosecution for an offence under section 138 that the drawer had no reason to

believe, when he issued the cheque, that the cheque may be dishonoured on

presentment for the reasons, stated in section 138.

4. Such Offences by Companies:

If the person, committing an offence under section 138, is a

company, every person, who at the time of commission of the said offence, was in

charge of and was responsible to the company for the conduct of the business of the

company, as well as the company, shall be deemed to be guilty of the offence and

shall be liable to be proceeded against and punished accordingly [Sec. 141(1)].

5. Liability of Director, Manager, Secretary, or other Officer of the Company

[Sec. 141(2)]:

Notwithstanding anything contained in sub-section (1), where

any offence, under this Act, has been committed by company and it is proved that

the offence has been committed, with the consent or connivance of, or is attributable

to any neglect on the part of any director, manager, secretary, or other officer of the

company, such director, manager, secretary, or other officer, shall also be deemed to

be guilty of that offence and shall be liable to be proceeded against and punished

accordingly.

6. Cognisance of Offences:

Sec. 142 says that notwithstanding anything contained in the

Code of Criminal Procedure, 1973 (2 of 1974), --

I. No court shall take cognizance of any offence punishable under Section 138

except upon a complaint, in writing, made by the payee, or as the case may be, the

holder in due course of the cheque.

II. Such complaint is made within a period of one month of the date, on which, the

cause of action arises, under clause (c) of the provision to section 138.

Negotiable Instrument Act 1881

Documents

Transcript of Negotiable Instrument Act 1881