A BRIEF OVERVIEW OF NEGOTIABLE INSTRUMENTS ACT 1881

INTRODUCTION:
When the British entered India, the commercial activities increased to a larger extent. The
demand for money increased to a large extent, and the growing demand could be met by mere
supply of coins, and the instrument of credit took the function of money which they represented.

When there was no concept of any rules relating to negotiation, the law of Negotiable Instrument
of England was applied by the courts in India where any such question related to instruments
arose between Europeans. In the case of Hindu party, their personal laws were held to apply.
They don’t even follow on the rules that were provided by the England Law. During the course
of time there had developed in the country a strong body of usage relating to Hundis, which even
the Legislature could not without hardship to Indian bankers and merchants ignore. In fact,
the Legislature felt the strength of such local usages and though fit to exempt them from the
operation of the Act with a proviso that such usage may be excluded altogether by appropriate
words. In the absence of any such customary law, the principles derived from English law were
applied to the Indians as rules of equity justice and good conscience.
The history of this act is a long history. The act was first drafted in 1866 by the law commission,
India. Then it introduced in 1867 in the council and further referred to a select committee. After
that, the objectives were raised by the business community to the numerous deviations from the
British Law contained in it. The bill had been redrafted in 1877, but because of the sufficient
criticism by the Local Government, it had been delayed and hence couldn’t reach to the final
stage. In 1880, by the order of Secretary of the State, the bill had been referred to a new law
commission, and then redrafted and again sent to the new selected law committee. The draft had
been prepared and hence the Negotiable Instrument was finally implemented in India in
1881.

The law relating to Negotiable Instruments is found in the Negotiable Instruments Act, 1881,
which came into force on 1st March 1882. It operates subject to the provision under Section 31
and 32 of the Reserve Bank of India Act, 1934. According to Section 31, No person other than
the Reserve Bank of India or the Central Govt. shall accept, make, draw or issue any bill of
exchange, Promissory Note or engagement for the payment of money payable to bearer or on
demand. According to Section 32, it makes the issuing of such bills or notes punishable with fine
which may extend to the amount of the instrument, and furthermore the instrument will be
considered illegal and unenforceable.

EFFECTS OF PROVISIONS SECTION 31 AND 32:

The effects of these provisions is that,

 A bill of exchange cannot be made payable to bearer on demand, although it can

subsequently become payable to bearer on demand on being endorsed in blank.
 A promissory note cannot be made payable to bearer, no matter whether it is payable on
demand or after a certain time.
 But a cheque (though a bill of exchange) payable to bearer on demand can be drawn on a
person’s account with a banker.

MEANING OF NEGOTIABLE INSTRUMENT:

According to Section 13(a)

“Negotiable Instrument means a promissory note, bill of exchange or cheque payable either to
bearer or to the bearer appear on the instrument or not.”

The act includes only these three instruments that have been highlighted in the given definition.
But on the other side, it does not exclude the possibility of adding any other instrument if it
satisfies the following two conditions.

1. It is by custom of trade transferrable by delivery or by endorsement and delivery.

2. It is capable of being sued upon person holding it pro tempore (for the time being) in his
own name.

NEGOTIABLE INSTRUMENT PAYABLE TO ORDER [EXPLANATION 1 TO SECTION

13(1)]

A promissory note, bill of exchange or cheque is payable to order if, either of the following two
conditions is fulfilled.

 It must be expressed to be so payable

 It must be expressed to be payable to a particular person and it must not contain words
which prohibit transfer or indicate an intention that it shall not be transferrable.
NEGOTIABLE INSTRUMENT PAYABLE TO BEARER [EXPLANATION II TO SECTION
13(1)]

A promissory note, bill of exchange or cheque is payable to bearer if either of the following two
conditions are fulfilled.

 It must be expressed to be so payable

 The only or last endorsement must be an endorsement in blank.

CLARIFICATION REGARDING NEGOTIABLE INSTRUMENTS PAYABLE TO ORDER

OR TO A SPECIFIED PERSON [EXPLANATION III TO SECTION 13(1)]:

Where a promissory note, bill of exchange or cheque, either originally or by endorsement, is

expressed to be payable to the order of a specified person and not to him or his order, it is
nevertheless payable to him or his order at his option.

Consider the given case study, Asfar vs. Bihari Lal, the document signed by Asfar stated, “I
promise to pay you (Bihari Lal) on demand the sum of Rs. 70000. It was contented that as the
document stated nothing about the amount being payable to the order of a person or to the bearer,
it was not a negotiable instrument and hence not a promissory note. Held that even if the amount
was payable to a specified person it was a valid promissory note.

INSTRUMENTS NEGOTIABLE AND NON NEGOTIABLE

Following are the instruments that are negotiable

 Promissory Note
 Bill of exchange
 Cheque
 Overdrafts
 Hundis
 Bank Draft
 Bonds, Bearers
 Treasury Bills

The instruments that are not negotiable are,

 Money Order
 Pay order
 Deposit Receipts
 Share Certificates
 Dock Warrants
 Bill of Lading
Note:

It is pertinent to note that negotiable instruments constitute an exception to the general principle
of law nemo dat quod non-habet (no one can transfer a better title than he himself has)

HOLDER IN DUE COURSE:

According to Section 9,

“Holder in Due Course means any person who for consideration becomes the possessor of a
promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorsee
thereof, if payable to order, before it became overdue, without notice that the title of the person
from whom he derived his own title was defective.”

A person who takes the negotiable instrument in good faith and for value acquires good title to it
(i.e., becomes its owner) even if he takes from a person who has no title to it (i.e. he is a thief or
finder), it is termed as Holder in Due Course.

A person called Holder in due Course must satisfy the following conditions.

 He must be a Holder.
 Must have become for consideration, either the possessor of the instrument if payable to
bearer, or payee or endorsee thereof, if payable to order. Such consideration must not be
unlawful and need not be adequate.
 Must have obtained before maturity. He must become Holder before the amount becomes
payable thereon. A person taking the bill or note on the day when it becomes payable is
not a holder as he takes it after it has become payable since the instrument may be
discharged at any time on that day.
 He must have obtained the instrument in good faith, i.e., without having sufficient cause
to believe that any defect existed in the title of the person from whom he derived his title.
 He must receive the instrument complete and regular on the face of it.

Consider the given case study of Arab Bank Ltd. vs. Ross (1952) 2Q. B. 216; the payee in the
promissory note was described as F and F.N & Co. whereas endorser endorsed the note as F and
F.N. omitting the words company. Held, the endorsee did not constitute to be a Holder in Due
Course since the endorser and the payee appeared to be a different person making the instrument
incomplete and regular on the face of it.
ESSENTIAL ELEMENTS OF NEGOTIABLE INSTRUMENT:

In order to have an instrument to be negotiable, it must possess the following necessary

elements.

 It must be in writing, which includes typing, printing and engraving

 The instrument must be signed by the drawer or maker.
 It must contain an unconditional promise to pay.

Consider the example, if the instrument is a promissory note, it must contain an unconditional
order or command to pay. If it contains some conditions, the instrument will be non-negotiable.

 The instrument must call for payment of a certain amount of money only.
 It must be payable at a specified time. If in case it is payable “when convenient”, it will
be non-negotiable.
 In case of other negotiable instruments like bill or cheque, the drawee of that instrument
must be named with a reasonable certainty.
 The instrument must be in such a state that it can be transferred like cash or by simple
delivery. It is merely possible only when it is payable to bearer.
 If it is payable to order, it becomes negotiable and also makes the transferee the owner
when it is properly endorsed before delivery.

ENDORSEMENT:
According to Section 15 of Negotiable Instrument Act, 1881.

When a maker or holder writes the person’s name on the face or back of the instrument & puts
his signatures thereto for the purpose of negotiation, it is called ‘endorsement’.

The person who signs is the endorser

The person to whom it is endorsed is called endorsee.

ENDORSEMENT IN BLANK AND IN FULL:

According to Section 16,

1. If the endorser signs his name only, the endorsement is said to be’ in blank’ and if he
adds a direction to pay the amount mentioned in the instrument to, or to the order of a
specified person, the endorsement is said to be’ in full.’ And the person so specified is
called the endorsee of the instrument.
2. The provision of this act relating to a payee shall apply with the necessary modifications
to an endorsee.
ESSENTIAL ELEMENTS OF ENDORSEMENT:
For endorsing any of the negotiable instruments, it must possess certain essential elements.

 It must be endorsed on the back or face of the instrument.

 It must be made by maker or holder.
 It must be properly signed by the endorser.
 It must be for the entire negotiation instrument.
 In this instrument, no specific form of words is necessary for endorsement.

KINDS OF ENDORSEMENT:
Following are different kinds of endorsements that can be done in a negotiable instrument.

BLANK OR GENERAL ENDORSEMENT:

Where endorsee simply puts his signature on the back of instrument without writing name of the
person in whose favor the instrument is endorsed, it is termed as Blank or General Endorsement.

SPECIAL OR FULL ENDORSEMENT:

An endorsement with the direction to pay the amount mentioned in the instrument to a specified
person or his order and the endorser mentions his signature under it, it is termed as Special or
Full Endorsement.

PARTIAL ENDORSEMENT:

When an endorser is willing to transfer to an endorsee only a part of the amount of the
instrument. Such an endorsement does not operate as a negotiation of the instrument.

EFFECTS OF ENDORSEMENT:

 The property in instrument is transferred from endorser to endorsee.

 Endorsee has the right to further negotiate the instrument.
 Endorsee is entitled to sue in his name to all other parties.

PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTS:

According to Section 118 of the Act, it provides that unless contrary is provided, the following
presumptions shall be made.

 Of Consideration: That every negotiable instrument was made or drawn, accepted,

endorsed and negotiated or transferred for consideration.
 As to Date: That it bears the date on which it was made or drawn.
 As to time of acceptance: That every accepted bill was accepted within a reasonable time
after its date and before its maturity.
 As to time of transfer: That every transfer of a negotiable instrument was made before
maturity.
 As to time of endorsement: That the endorsements appearing on it were made in the order
in which they appear thereon.
 As to Stamp: Where an instrument has been lost or destroyed, that it was duly stamped
and the stamp was duly cancelled.
 As to Holder in Due Course: that the holder of a negotiable instrument is a holder in due
course except when the instrument has been obtained from its lawful owner or from any
person in lawful custody thereof, by means of an offence or fraud, or has been obtained
from the maker or acceptor thereof by means of fraud or unlawful consideration, and the
burden of proving that the Holder is a Holder in Due Course lies upon him.

In the given case of Adikanda Behera vs. Daini Krishna Murthy Patra, 1983 Orissa 238, a
pronote was executed by the defendant and registered. By a subsequent document, the
plaintiff admitted that the pronote was obtained from the defendant by way of additional
security

ESSENTIAL CHARACTERISITCS OF NEGOTIABLE INSTRUMENT:

The essential characteristics of a negotiable instrument have been summarized below.

 PAYABLE TO ORDER OR TO BEARER: It must be payable either to order or to

bearer.
 FREELY TRANSFERRABLE: An instrument payable to order is negotiable by
endorsement and delivery and an instrument payable to bearer is negotiable by mere
delivery.
 PRESUMPTIONS AS TO HOLDER: Every holder of a negotiable is presumed to be a
Holder in Due Course.
 TITLE OF HOLDER IN DUE COURSE FREE FROM ALL DEFECTS: A holder in due
course (i.e, the person who became the possessor of negotiable instrument before
maturity, for valuable consideration and in good faith) gets the instrument free from all
defects in the title of all defects in the title of transferor.
 PRESUMPTIONS AS TO CONSIDERATION: Every negotiable instrument is presumed
to have been made, drawn or accepted, endorsed, negotiated or transferred for
consideration.
MAJOR INSTRUMENTS TO BE DISCUSSED IN NEGOTIABLE INSTRUMENTS ACT,
1881

Following are some of the major instruments that tend to be discussed in this report.

Promissory Note

Bill of exchange

Cheque

PROMISSORY NOTE:

According to Section 4 of the negotiable Instruments Act, 1881

“A promissory note is an instrument in writing (note being a bank note or a currency note)
containing an unconditional undertaking signed by the maker of the instrument 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 TO A PROMISSORY NOTE:

Following are two important parties to a promissory note

THE MAKER: The person who makes the promissory note is called the maker.

THE PAYEE: the person to whom or to whose order the payment is to be made is called payee.

A promissory note cannot be made payable to the maker himself. Such a note is invalid.
However it becomes a valid instrument if it is endorsed by the maker as it then payable to bearer
(if endorsed in blank) or it becomes payable to the endorsee or his order (if endorsed specially).
SPECIMEN OF A PROMISSORY NOTE

Payee Maker

In the given specimen Riaz Khan sells goods to Mr. Ayaz Khawar for Rs. 10000 to be paid in 3
months after date. If Ayaz Khawar promises to pay in writing, this promise will be considered as
a promissory note.
ESSENTIAL CHARACTERISTICS OF A PROMISSORY NOTE:

Following are some of the essential characteristics of a promissory note

It must be in writing: The instrument must be in writing. Mere verbal promise to pay will not
do as it does not constitute an instrument.

Example: A promises to pay B a sum of Rs. 500 on telephone. According to the law, the promise
will not make a promissory note since it is not an instrument.

It must contain an express promise or clear undertaking to pay: A promise to pay cannot be
inferred. It must be express. A mere acknowledgement is not enough.

Following are not promissory notes as they don’t contain an express promise to pay.

 Mr. B, I owe you Rs 500

 I am liable to pay you Rs. 500
 I have taken from you Rs. 500; whenever you ask for it, I have to pay

The promise to pay must be unconditional: In order for an instrument to be negotiable, it must
contain an unconditional undertaking or order. So a promise to pay must be unconditional. A
conditional undertaking destroys the negotiable character of an otherwise negotiable instrument.
Therefore, the promise to pay must not depend upon the happening of some outside event. It
must be payable absolutely.

Example: A promises to pay ‘when able’ or ‘when convenient’ or as soon as I can or’ after my
marriage with C,’ or out of money due to me from B as soon as B pays it or on A’s death
provided he leaves me sufficient funds to pay, is conditional and not binding as a promissory
note. But a promise to pay at a particular place or after a specified time or on the happening of an
event which must happen is not conditional.

The maker must sign the Promissory Note: The instrument is complete when it is signed by
the maker of the instrument. Even when it is written by him and his name appears in the body of
the instrument. Signature may be in any part of the instrument, and may be expressed by a thumb
mark if the executant is illiterate. The signature may be indicated by a facsimile or by stamping
the name.

The maker must be a certain person: The note itself must show clearly who the person is
engaging himself to pay. Where the promisors are more than one, they may bind themselves
jointly or jointly and severally but not in the alternative.
The payee must be certain: The payee must be certain. Where the payee is designated by
description only (say captain of a particular cricket team, president of a particular club, manager
of a particular bank) the promissory note is valid if the payee can be ascertained by evidence.

A promissory note cannot be made payable to the maker himself. Such a note is invalid.
However it becomes a valid instrument if it is endorsed by the maker as it then payable to bearer
(if endorsed in blank) or it becomes payable to the endorsee or his order (if endorsed specially).

Promise to Pay a Certain Sum: The promise must be to pay a certain sum. Negotiable
Instruments are meant for free circulation and if their value is not clearly mentioned on the
instruments, their circulation would be materially impeded. The sum payable must be certain in
the following scenarios.

a) Where it is payable along with interest and either the amount of interest itself or the rate
of interest is given.
b) Where it is payable at a specified rate of exchange.
c) Where it is payable by installments with a provision that a default being made in
payment, the unpaid balance shall become due [Section 5].

Other matters of forms like number, place, date etc. are usually found given in notes, but they are
not essential in law.

CHEQUE:

Cheque is another important topic of negotiable instrument that needs to be discussed.

According to Section 6 of Negotiable Instrument Act, 1881

“A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand.”

Thus, a cheque is a bill of exchange drawn on bank payable on demand. A cheque is a bill of
exchange with two additional qualifications.

It is always drawn on a bank

It is always payable on demand.

Consequently, all cheques are bill of exchange but all bill of exchange are not cheques. A cheque
being the species of bill of exchange must satisfy all requirements of a bill

It must be signed by the drawer.

It 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 instrument.
A cheque is a payment, unless dishonored the payment becomes effective from the delivery of
the cheque and does not wait till it is honored and money paid.

PARTIES TO A CHEQUE:

In a cheque, there are three parties.

DRAWER: The person who draws the cheque is called the drawer.

BANKER: The bank on which the cheque is drawn is called

PAYEE: The person in whose favor the cheque is drawn is called the payee. The payee may be a
third party or the drawer himself.

DISTINCTION BETWEEN BILL OF EXCHANGE AND CHEQUE

BILL OF EXCHANGE CHEQUE

1) A cheque is always drawn on a banker
2) A cheque can only be made payable on
demand.
3) A cheque does not require acceptance
and is intended for immediate payment.
4) A grace of 3 days is allowed in case of
time bills.
5) A bill of exchange cannot be crossed
6) Notice of dishonor of a bill of exchange
is necessary.
7) A bill of exchange, except in some of
the cases needs to be stamped.
1) A bill may be drawn on anyone
including a banker.
2) A bill may be made 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.
4) In case of a cheque, no grace is given.
5) A cheque may be crossed.
6) In case of a cheque, no notice of
dishonor is necessary.
7) A cheque does not require any stamp

CROSSING OF CHEQUES:

MEANING OF CROSSING: The crossing of cheque is an instance of alteration which is

authorized by the act. A cheque is crossed when it bears across its face two parallel transverse
lines which are usually drawn on the left hands top corner of the cheque.

According to Section 123 of the Negotiable Instruments Act, 1881

When a cheque crossed generally bears across its face an addition of the words and company or
any abbreviation thereof between two parallel lines or of two parallel transverse lines simply,
either with or without the words, not negotiable that addition shall be deemed a crossing and the
cheque shall be deemed to be crossed generally.
OBJECTIVES OF CROSSING OF CHEQUE:

The objective of crossing is to secure payment to a banker so that it could be traced to the person
receiving the amount of cheque. The crossing is made to warn the banker, but not to to stop
negotiability of the cheque. To restrain negotiability addition of words Not Negotiable or
Account Payee only. A crossed bearer cheque can be negotiated by delivery and crossed order
cheque by endorsement and delivery.

TYPES OF CROSSING OF CHEQUE:

There are two types of crossing which may be used on a cheque namely,

 General Crossing.
 Special Crossing.

GENERAL CROSSING:

According to Section 123 of Negotiable Instruments Act, 1881

When a cheque crossed generally bears across its face an addition of the words and company or
any abbreviation thereof between two parallel lines or of two parallel transverse lines simply,
either with or without the words, not negotiable that addition shall be deemed a crossing or the
cheque shall be deemed to be crossed generally.

The major points in this definition is,

 The words ‘and Company’ or any abbreviation thereof between two parallel transverse
lines.
 Two parallel transverse lines simply either with or without the words “Not negotiable.”

The two transverse lines on the face of the cheque are essential for general crossing and not for
special crossing. If a cheque is crossed generally, the paying banker shall only pay to the banker.

SPECIAL CROSSING:
SPECIAL CROSSING:

According to Section 124 of the Negotiable Instruments Act, 1881,

Where a cheque bears across face an addition of the name of the banker, either with or without
words “not negotiable”, that addition shall be deemed a crossing, and the cheque shall be deemed
to be crossed specially, and to be crossed to that banker.

Thus a special crossing requires the name of the banker to whom or to whose collecting agent
payment of the cheque should be made to be written on the face of the cheque. In case of special
crossing, transverse lines are not compulsory.

DOUBLE CROSSING:

According to Section 127 of the Negotiable Instruments Act, 1881

If a paying banker receives a cheque crossed specially to two bankers he must not pay it;
however, if one of the bankers named is acting as an agent for collection for the other, the cheque
may be paid to the agent’s bank. Collection through an agent may be resorted to where the
banker in whose favor the cheque is specially crossed is not a member of the clearing house or
does not have a branch where the cheque is to be paid.

RESTRICTIVE CROSSING:

In this, some more forms have been adopted by commercial and banking usage in order to
obviate the risk of a thief obtaining payments. These forms consist in adding to the general or
special crossings the words “Account Payee”, “Account Payee only” or Account John Smith
only.”

These crossings warn the collecting banker that the proceeds are to be credited only to the
account of the payee, or the party named, or his agent. If the collecting banker allows the
proceeds of a cheque so crossed to be credited to any other account he may be held guilty of
negligence in the event of action for wrongful conversion of the funds.

WHO MAY CROSS A CHEQUE?

According to Section 125 of the Negotiable Instruments Act, 1881

 A cheque may be crossed generally or specially by the drawer.

 Where a cheque is uncrossed, the holder may cross it generally or specially.
 Where a cheque is crossed generally, the holder may cross it specially.
 Where a cheque is crossed generally or specially, the holder may add the words “Not
Negotiable”
 Where a cheque is crossed specially, the banker to whom it is crossed may again cross it
especially to another banker for collection.
  Where an uncrossed cheque or a cheque crossed generally is sent to a banker for
collection, he may cross it specially, to himself. But such crossing does not enable the
collecting banker to enjoy statutory protection against being sued for conversion.

PROMISSORY NOTE BILL OF EXCHANGE

 It contains a promise to pay  It contains an order to pay.

 It is presented for payment without any  It is required to be accepted either by

previous acceptance by the maker. the drawee or by someone else on his
behalf, before it can be presented for
payment.

 It cannot be made payable to the maker  The drawer and payee or the drawee
himself. The maker and the payee and the payee may be the same person.
cannot be the same person.
 In the case of a promissory note there  There are three parties, drawer, drawee
are only two parties, the maker and the and payee.
payee.

 A promissory note can never be  A bill of exchange cannot be drawn

conditional. conditionally, but it can be accepted
conditionally with the consent of the
holder.

 n case of dishonour no notice of  A notice of dishonour must be given in

dishonour is required to be given by the case of dishonour of a Bills of
Holder Exchange.