Negotiable Instruments Act 1881

Negotiable Instruments are the most common credit devices utilized in

business today. They are more readily transferred and transferee acquires the right
in it. Negotiable instruments are written promises or orders to pay money such as
promissory notes, bills of exchange, cheques which when in proper term may be
transferred from hand to hand as substitute of money. For e.g. when a person pays a
debt by cheques he is using a negotiable instrument. He might have paid in cash but
for convenience and possibly for safety he uses cheque.

The law relating to negotiable instruments is found in the Negotiable

Instruments Act. The Act deals with Promissory Notes, Bills of Exchanges and
Cheques.

Meaning of Negotiable Instrument

Negotiable Instrument means a promissory notes, bill of exchanges or cheque

payable either to order or bearer whether the words order or bearer appear or not
on the instrument.

Essential Elements of Negotiable Instruments

1. A negotiable instrument must be in writing

2. It must be signed by the maker or drawer.
3. There must be promise or order to pay.
4. The promise or order must be unconditional
5. It must call for payment in money only.
6. It must not only call for payment in money but amount should be certain,.
7. Negotiable Instrument must be payable at a time which is certain to arrive.
8. In case of bill of exchange and cheque the name of drawee must be
mentioned.
Promissory Note:-
Definition-
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.
Illustrations
A signs instrument in the following terms:
(a) "I promise to Pay B or order Rs.500".
(b) "I acknowledge myself to be indebted to B in Rs.1,000, to be paid on demand, for
value received."
(c) "Mr B I.O.U Rs.1,000."
(d) "I promise to pay B Rs. 500 and all other sums which shall be due to him."
(e) "I promise to pay B Rs. 500 first deducting thereout any money which he may
owe me."
(f) I promise to pay B Rs. 500 seven days after my marriage with C.
(g) I promise to pay B Rs. 500 on D's death, provided D leaves me enough to pay
that sum.
(h) I promise to pay B Rs. 500 and to deliver to him my black horse on lst January
next.
The instruments respectively marked (a) and (b) are promissory notes. The
instruments respectively marked (c), (d), (e), (f), (g) and (h) are not promissory
notes.

Specimen of a Promissory Note

Rs. 10000/- Bombay

Date Jan 4, 2013

On demand I promise to pay Vijay Kumar or order the sum of Rupees Ten
Thousand Only together with interest 10% per annum for value received.

Sd/- (Gopal)
Gopal is a maker
Vijay Kumar is payee

Bill of Exchange

Definition 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 or a certain person or to the bearer of the instrument.
The definition of bill of exchange is very similar to that of promissory note and
for most purposes the rule which apply to promissory note are in general applicable
to bill of exchange. The fundamental requirements and ingredients are the same.
The drawer like the maker must be certain the order to pay must be unconditional,
amount of bill, payee and drawee must be certain and the contract must be in
writing.
The maker of note corresponds to the acceptor of bill.
When note is endorsed it is exactly similar to bills for then it is an order by the
endorsed of the note upon the maker to pay the endorsee.
The endorser is the drawer, maker the acceptor, the endorsee is the payee.
But a bill differs from a note in some particulars.
Difference between Promissory Note and Bill of Exchange
1. In a note there are only two parties the maker (debtor) and the payee
(creditor). In a bill there are three parties namely drawer, drawee & payee,
though any two out of the three capacities may be filled by one and the
same person. In a bill the drawer is the maker who orders the drawee to
pay the bill to a person called the payee or his order. When the drawee
accepts the bill he is called the acceptor.
2. A note can not be made payable to the maker himself, while in a bill the
drawer and payee or drawee and payee may be the same person.
3. A note contains an unconditional promise to pay to the payee or order. In a
bill there is an unconditional order to the drawee to pay according to the
drawers directions.
 4. A note is presented for payment without any prior acceptance by the
maker. A bill payable after sight must be accepted by the drawee before it
can be presented for payment.
5. The liability of the maker of a note is primary and absolute but the liability
of the drawer of a bill is secondary and conditional.
6. The maker of the note stands in immediate relation with the payee, while
the maker or drawer of accepted bill stands in immediate relation with the
acceptor and not the payee.
7. Bills must be protested for dishonour when such protest is required to be
made by the law of the country where they are drawn but no such protest
is necessary in the case of a note.
8. When a bill is dishonored due notice of dishonor is to be given by the
holder to the drawer and the intermediate indorsers, but no such notice
needs to be given in the case of a note.
Specimen of Bills of Exchange

Rs.10,000/- Bombay
Date-January 5, 1995
Stamp

Three months after date pay R. Patel or order the sum of Rs. 10,000/- ( Rupees ten
thousand only) for value received.

To
Seth B. Mehta
Karol baug
New Delhi Shiv Ram

Shiv Ram is drawer

R. Patel is payee
Seth B. Mehta is drawee
When B. Mehta accepts the bill, he is acceptor.
The acceptance by Seth B. Mehta will be made across the face of the bill as
under.

Accepted
B. Mehta
New Delhi
Date January 10, 1995

Shivram is a manufacturer and that he owed Patel Rs.10, 000/- for raw materials
supplied while Mehta is a shopkeeper who has bought manufactured articles from
Shiv Ram and owes bills more than that amount. In this case the bill is a Trade Bill
and its commercial advantages are quite obvious, for the payment by Mehta to Patel
will discharge two separate trade debts. But there are other advantages not quite so
obvious. Patel may want money at once for further trade purposes and if he does, he
can take the bill at once to his banker and ask him to discount it. If the banker knows
Shiv Ram as a man of good credit, he will discount. Patel must sign his name on the
back of the bill with or without a further order to pay the bill to the banker. Patel then
becomes endorser and the banker on crediting Patels account with Rs.10,000/- less
discount as agreed, becomes holder for value of the bill, and if neither Mehta nor
Shiv Ram should pay the bill at the maturity then Patel, as endorser, would be liable
to pay it. The banker can either keep the bill and present it for acceptance and
payment or can pass it on to some other person.
Accommodation Bill
All bills are not genuine trade bills as they are often drawn as a convenient
mode of accommodating a friend. Thus Patel may be in want of money and
approach his friend. Shiv Ram and Mehta who, instead of a lending the money
directly, propose to draw Accommodation Bill in his favour. Patel promises to
reimburse Mehta over the period of 3 months is up. If the credit of Shiv Ram and
Mehta is good, this device enables Patel to get or advance of Rs.1000/- from his
banker at the Commercial rate of discount. The real debtor in this case is not Mehta
(the acceptor), but Patel (the payee) who has engaged to find the money for its
ultimate payment, and Patel is here the principal debtor and other merely sureties.
 Cheque
Definition A cheque is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise on demand.
In simple language cheque is a bill of exchange drawn on a bank payable on
demand. Thus all cheques are bills of exchange but all bills are not cheques. A
cheque being a species of a bill of exchange, must satisfy all the requirements of a
bill it must be signed by the drawer and must contain an unconditional order on a
specified banker to pay a certain sum of money to or to the order of a certain person
or to the bearer of the cheque. However, it does not require acceptance.
Distinction between Bills and cheques
1. A cheque is a always drawn on a banker, while a bill may be drawn on any
one including a banker.
2. A cheque can only be drawn payable on demand, a bill may be drawn
payable on demand or on the expiry of a certain period after date or sight.
3. A bill must be accepted before payment can be demanded, a cheque does
not require acceptance and is interested for immediate payment.
4. A grace of 3 days is allowed, in a the case of time bills, while no grace
given in the case of cheque.
5. The drawer of a bill is discharged if it is not presented for payment, but
drawer of cheque is discharged only if cheque is not presented for
payment.
6. Notice of dishonour of a bill is necessary, but not in the case of cheque.
7. A cheque being a revocable mandate, the authority may be revoked by
countermanding payment, and is determined by the notice of the
customers death or insolvency. This is not so in the case of a bill.
8. A cheque may be crossed, but not a bill.

Sec.138. Dishonour of cheque for insufficiency, etc., of funds in the

accounts

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 out of that
account for the discharge, in whole or in part, of any debt or other liability, is
returned by the bank unpaid, either because of the amount of money standing to
 the credit of that account is insufficient to honour the cheque or that it exceeds
the amount arranged to be paid from that account by an agreement made with
that bank, such person shall be deemed to have committed an offence and shall
without prejudice to any other provisions of this Act, be punished with
imprisonment for a term which may extend to one year, or with fine which may
extend to twice the amount of the cheque, or with both:
PROVIDED that nothing contained in this section shall apply unless-
(a) the cheque has been presented to the bank within a period of six
months from the date on which it is drawn or within the period of its
validity, whichever is earlier.
(b) the payee or the holder in due course of the cheque, as the case may
be, makes 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
(c) the drawer of such cheque fails to make the payment of the said
amount of money to the payee or, as the case may be, to the holder in due
course of the cheque, within fifteen days of the receipt of the said notice.
Explanation: For the purpose of this section, "debt or other liability" means
a legally enforceable debt or other liability.
Sec. 139. Presumption in favour of holder

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, or any debt or other liability.
Sec. 140. Defence which may not be allowed in any prosecution under section
138

It shall not be a defence in a prosecution of 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 that section.
Sec.141. Offences by companies

(1) If the person committing an offence under section 138 is a company, every
person who, at the time the offence was committed, 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:
PROVIDED that nothing contained in this sub-section shall render any
person liable to punishment if he proves that the offence was committed
without his knowledge, or that he had exercised all due diligence to
prevent the commission of such offence.
(2) Notwithstanding anything contained in sub-section (1), where any
offence under this Act, has been committed by a 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.
Explanation: For the purpose of this section
(a) "Company" means any body corporate and includes a firm or other
association of individuals; and
(b) "Director", in relating to a firm, means a partner in the firm.
142. Cognizance of offences

Notwithstanding anything contained in the Code of Criminal Procedure,

1973 (2 of 1974),-
(a) 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;
(b) such complaint is made within one month of the date on which the
cause -of- action arises under clause (c) of the proviso to section 138;
(c) no court inferior to that of a Metropolitan Magistrate or a Judicial
Magistrate of the first class shall try any offence punishable under section
138.