CA Indresh Gandhi

THE NEGOTIABLE INSTRUMENTS ACT, 1881

The main objective of the Act is to legalise the system by which instruments contemplated by
it could pass from hand to hand by negotiation like any other goods. This is an Act to define
and amend the law relating to promissory notes, bills of exchange and cheques.
The Act applies to the whole of India, but nothing herein contained affects the Reserve Bank
of India Act, 1934, (section 21 which provides the Bank to have the right to transact
Government business in India), or affects any local usage relating to any instrument in an
oriental language.

Negotiable Instruments:-

1. Meaning of Negotiable Instruments:-

Negotiable Instruments is an instrument (the word instrument means a document) which is
freely transferable (by customs of trade) from one person to another by mere delivery or by
indorsement and delivery. The property in such an instrument pass to a bonafide transferee
for value.

The Act does not define the term ‘Negotiable Instruments’. However, Section 13 of the Act
provides for only three kinds of negotiable instruments namely bills of exchange, promissory
notes and cheques, payable either to order or bearer.
It is to be noted that Hundies, Treasury Bills, Bearer Debentures, Railway Receipts, Delivery
Orders, Bill of Lading etc. are also considered as negotiable instruments either by mercantile
custom or usage.

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1. A negotiable instrument is payable to order when:

a. It is expressed to be so payable.
b. When it is expressed to be payable to a specified person and does not contain words
prohibiting its transfer. (i.e. it is transferrable by indorsement and delivery)
2. A negotiable instrument is payable to bearer when:
a. When it is expressed to be so payable e.g. pay bearer
b. When the only or last indorsement (indorsement means signing of the instrument) on the
instrument is an indorsement in blank i.e., the person who possesses it can demand payment.
For example,. A cheque made payable to specified person and that cheque is endorsed by signing on the back of
the cheque by that specified person.

2.Characteristics of Negotiable Instruments:-

• It is necessarily in writing.
• It should be signed.
• It is freely transferable from one person to another.
• Holder’s title is free from defects.
• It can be transferred any number of times till its satisfaction.
• Every negotiable instrument must contain an unconditional promise or order to pay money.
The promise or order to pay must consist of money only.
• The sum payable, the time of payment, the payee, must be certain. The instrument should be
delivered. Mere drawing of instrument does not create liability.

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Promissory Note :-

1. Meaning:-
According to section 4 of the NI Act, 1881, “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.”

2. Parties to promissory note:

Maker: The person who makes the promise to pay is called the Maker. He is the debtor and
must sign the instrument.

Payee: Payee is the person to whom the amount on the note is payable.
Essential Characteristics of Promissory Note:-
a. In writing- An oral promise to pay is not sufficient.
b. There must be an express promise to pay. Mere acknowledgment of debt is insufficient.
c. The promise to pay should be definite and unconditional. Therefore, instruments payable on
performance or non-performance of a particular act or on the happening or non-happening
of an event, are not promissory notes. However, the promise to pay may be subject to a
condition, which according to the ordinary experience of mankind, is bound to happen.
d. A promissory note must be signed by the maker otherwise it is incomplete and ineffective.
e. Promise to pay money only.
f. Promise to pay a certain sum. But sometimes, the language of a promissory note is such
that the amount payable can be easily ascertained. In such cases, the promissory note will
be valid.
g. The maker and payee must be certain, definite and different persons. A promissory
note cannot be made payable to the bearer [Section 31 of the Bank of India Act, 1934 (RBI
Act)]. Only the Reserve Bank or the Central Government can make or issue a promissory
note 'payable to bearer’.
h. Stamping: A promissory note must be properly stamped in accordance with the provisions
of the Indian Stamp Act and such stamp must be duly cancelled by maker's signatures or
initials on such stamp or otherwise.

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Bills of Exchange:-

Meaning:-
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.

Parties to bill of exchange:-

Drawer: The maker of a bill of exchange.

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Drawee: The person directed by the drawer to pay is called the 'drawee'. He is the person on
whom the bill is drawn. On acceptance of the bill, he is called an acceptor and is liable for the
payment of the bill. His liability is primary and unconditional.

Payee: The person named in the instrument, to whom or to whose order the money is, by the
instrument, directed to be paid.

Characteristics of Bill of exchange:-

a. It must be in writing.
b. Must contain an express order to pay.
c. The order to pay must be definite and unconditional.
d. The drawer must sign the instrument.
e. Drawer, drawee, and payee must be certain. All these three parties may not necessarily be
three different persons. One can play the role of two. But there must be two distinct
persons in any case. As per Section 31 of RBI Act, 1934, a bill of exchange cannot be made
payable to bearer on demand. However, a bill of exchange payable on demand, in which name
of the payee is mentioned, is valid.
f. The sum must be certain.
g. The order must be to pay money only.
h. It must be stamped.

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Process of bill of exchange:

In above image, firstly the seller sold goods to the buyer/customer and then draws a bill of
exchange on him. The Bill of exchange is delivered by the buyer who accepts it without any
condition. On maturity of bill of exchange, the buyer will pay the amount due to the payee.
(The payee may be the drawer himself or a third party.)

Difference between promissory note and bill of exchange:-

S.no Basis Promissory Note Bill of Exchange
1. Definition "A Promissory Note" is an “A bill of exchange” is an instrument in
instrument in writing (not being a writing containing an unconditional
banknote or a currency-note) order, signed by the maker, directing a
containing an unconditional certain person to pay a certain sum of
undertaking signed by the maker, money only to, or to the order of a
to pay a certain sum of money certain person or to the bearer of the
only to, or to the order of, a instrument.
certain person, or to the bearer
of the instrument.
2. Nature of In a promissory note, there is a In a bill of exchange, there is an order
Instrument promise to pay money. for making payment.

3. Parties In a promissory note, there are In a bill of exchange, there are 3

only 2 parties namely: parties which are as under:
i. the maker and i. the drawer
ii. the payee ii. the drawee
iii. the payee

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4. Acceptance A promissory note does not A bills of exchange needs

require any acceptance, as it is acceptance from the drawee.
signed by the person who is liable
to pay.
5. Payable to A promissory note cannot be made On the other hand, a bill of
bearer payable to bearer. exchange can be drawn payable to
bearer. However, it cannot be
payable to bearer on demand.

Cheque (Section 6):-

Meaning:-
A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand and it includes the electronic image of a truncated cheque and a
cheque in the electronic form.

Payable on demand means - It should be payable whenever the holder chooses to present it to
the drawee (the banker). The expression “Banker” includes any person acting as a banker and
any post office saving bank [Section 3].

Explanation I: For the purposes of this section, the expressions-

a. Cheque in the electronic form-means a cheque drawn in electronic form by using any
computer resource, and signed in a secure system with a digital signature (with/without
biometric signature) and asymmetric crypto system or electronic signature, as the case may
be.
b. “a truncated cheque” means a cheque which is truncated during 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.

Explanation II: For the purposes of this section, the expression “clearing house” means the
clearing house managed by the Reserve Bank of India or a clearing house recognized as such by
the Reserve Bank of India.

Explanation III: For the purposes of this section, the expressions “asymmetric crypto system”,
“computer resource”, “digital signature”, “electronic form” and “electronic signature” shall have
the same meanings respectively assigned to them in the Information Technology Act, 2000.

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A combined reading of sections 5 and 6 tells us that a bill of exchange is a negotiable

instrument in writing containing an instruction to a third party to pay a stated sum of money at a
designated future date or on demand. Whereas a cheque is also a bill of exchange but is drawn
on a banker and payable on demand.

Parties to Cheque:-
1. Drawer: The person who draws a cheque i.e., makes the cheque (Debtor). His liability is primary and
conditional.
2. Drawee: The specific bank on whom cheque is drawn. He makes the payment of the cheque. In case
of cheque, drawee is always banker. “drawee in case of need”— When in the bill or in any
indorsement thereon, the name of any person is given in addition to the drawee to be resorted to in
case of need such person is called a “drawee in case of need”.
3. Payee: The person named in the instrument (i.e., the person in whose favour cheque is issued), to
whom or to whose order the money is, by the instrument, directed to be paid, is called the payee. The
payee may be the drawer himself or a third party.

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Essential Characteristics of a cheque

According to the definition of cheque under section 6, a cheque is species of bill of exchange.
Thus, it should fulfil:
a. all the essential characteristics of a bill of exchange
b. Must be drawn on a specified banker. Note: These two additional features distinguish
c. It must be payable on demand. a cheque from bill. Thus, all cheques are bills
while all bills are not cheques.

Classification of Negotiable Instruments:-

“Bearer instrument” and “order instrument” [Section 13]

Bearer Instrument: It is an instrument where the name of the payee is blank or where the
name of payee is specified with the words “or bearer” or where the last indorsement is blank.
Such instrument can be negotiated by mere delivery.
Order Instrument: It is an instrument which is payable to a person or Payable to a person or his
order or Payable to order of a person or where the last indorsement is in full, such instrument
can be negotiated by indorsement and delivery.

“Inland instrument” and “Foreign instrument” [Sections 11 & 12]

“Inland instrument”: 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.
An inland instrument remains inland even if it has been endorsed in a foreign country.

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“Foreign instrument”: A foreign instrument is one which is not an inland instrument.

In other words, can be understood as follows:

Liability of maker/ drawer of foreign bill

In the absence of a contract to the country, the liability of the maker or drawer of a foreign
promissory note or bill of exchange or cheque is regulated in all essential matters by the law of
the place where he made the instrument, and the respective liabilities of the acceptor and
indorser by the law of the place where the instrument is made payable (Section 134).
Inchoate and Ambiguous Instruments:

Inchoate Instrument: It means an instrument that is incomplete in certain respects. The

drawer/ maker/ acceptor/ indorser of a negotiable instrument may sign and deliver the
instrument to another person in his capacity leaving the instrument, either wholly blank or
having written on it the word incomplete. Such an instrument is called an inchoate instrument
and this gives a power to its holder to make it complete by writing any amount either within
limits specified therein or within the limits specified by the stamp’s affixed on it. The principle
of this rule of an inchoate instrument is based on the principle of estoppel.

Liability on drawing inchoate instrument: The person signing and delivering the inchoate
instrument is liable both to a holder and holder in due course. However, there is a difference in
their respective rights:
The holder of such an instrument cannot recover the amount in excess of the amount intended
to be paid by the signor.

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The holder in due course can, however, recover any amount on such instrument provided it is
covered by the stamp affixed on the instrument.

Section 20 of the Act reads as “Where one person signs and delivers to another a paper
stamped in accordance with the law relating to negotiable instruments then in force in India, and
either wholly blank or having written thereon an incomplete negotiable instrument, he thereby
gives prima facie authority to the holder thereof to make or complete, as the case may be, upon
it a negotiable instrument, for any amount specified therein and not exceeding the amount
covered by the stamp. The person so signing shall be liable upon such instrument, in the capacity
in which he signed the same, to any holder in due course for such amount. Provided that no
person other than a holder in due course shall recover from the person delivering the instrument
anything in excess of the amount intended by him to be paid thereunder”.

Ambiguous Instrument: Section 17 of the Act, reads as: “Where an instrument may be
construed either as a promissory note or bill of exchange, the holder may at his election treat it
as either, and the instrument shall be thenceforward treated accordingly.“

Thus, an instrument which is vague and cannot be clearly identified either as a bill of exchange,
or as a promissory note, is an ambiguous instrument.

In other words, such an instrument may be construed either as promissory note, or as a bill of
exchange. Section 17 provides that the holder may, at his discretion, treat it as either and the
instrument shall thereafter be treated accordingly. Thus, after exercising his option, the holder
cannot change that it is the other kind of instrument.
Negotiation (Transfer) of Negotiable Instruments:-

One of the essential characteristics of a negotiable instrument is that it is freely transferable

from one person to another. The rights in a negotiable instrument can be transferred from one
person to another by negotiation.
According to Section 14 of the N.I. Act, when a negotiable instrument is transferred to any
person with a view to constitute the person holder thereof, the instrument is deemed to have
been negotiated. Thus, there is a transfer of ownership of the instrument. Negotiable
instruments may be negotiated either by delivery when these are payable to bearer or by
indorsement and delivery when these are payable to order.

Modes of Negotiation:-
(i) A promissory note, bill of exchange or cheque payable to bearer is negotiable by the
delivery thereof.
(ii) A promissory note, bill of exchange or cheque payable to order is negotiable by the holder
by indorsement and delivery thereof.

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Negotiation by delivery [Section 47]:

Subject to the provisions of section 58 [Instrument obtained by unlawful means or for unlawful
consideration], a promissory note, bill of exchange or cheque payable to bearer is negotiable by
delivery thereof. Exception: A promissory note, bill of exchange or cheque delivered on
condition that it is not to take effect except in a certain event is not negotiable (except in the
hands of a holder for value without notice of the condition) unless such event happens.

Negotiation by indorsement [Section 48]:

Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable
to order, is negotiable by the holder by indorsement and delivery thereof.

Importance of Delivery in Negotiation [Section 46]:

Delivery of an instrument is essential whether the instrument is payable to bearer or order for
effecting the negotiation. The delivery must be voluntary, and the object of delivery should be
to pass the property in the instrument to the person to whom it is delivered. The delivery can
be, actual or constructive.

Actual delivery takes place when the instrument changes hand physically. Constructive delivery
takes place when the instrument is delivered to the agent, clerk or servant of the indorsee on
his behalf or when the indorser, after indorsement, holds the instrument as an agent of the
indorsee.

Section 46 also lays down that when an instrument is conditionally or for a special purpose only,
the property in it does not pass to the transferee, even though it is indorsed to him, unless the
instrument is negotiated to a holder in due course. The contract on a negotiable instrument until
delivery remains incomplete and revocable. The delivery is essential not only at the time of
negotiation but also at the time of making or drawing of negotiable instrument. The rights in the
instrument are not transferred to the indorsee unless after the indorsement the same has been
delivered. If a person makes the indorsement of instrument but before the same could be
delivered to the indorsee the indorser dies, the legal representatives of the deceased person
cannot negotiate the same by mere delivery thereof. (Section 57)

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Delivery when effective between the parties:-

Dishonour of Cheques for Insufficiency of Funds in the Accounts (Section 138 to 142):

Dishonour of Cheques for Insufficiency of Funds in the Accounts (Section 138):

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 that account

• for the discharge, in whole or in part, of any debt or other liability, [A cheque given as gift or
donation, or as a security or in discharge of a mere moral obligation, or for an illegal
consideration, would be outside the purview of this section]
• is returned by the bank unpaid,
• either because of the—
 amount of money standing to the credit of that account is insufficient to honor 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, be punished with
imprisonment for a term which may extend to two years, or with fine which may extend to twice
the amount of the cheque, or with both.

When section 138 shall be not apply: unless the below given conditions are complied with—

(a) Cheque presented within validity period: The cheque has been presented to the bank within a
period of three months from the date on which it is drawn or within the period of its
validity, whichever is earlier.
(b) Demand for the payment through the notice: 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

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by giving a notice, in writing, to the drawer of the cheque, within 30 days of the receipt of
information by him from the bank regarding the return of the cheque as unpaid, and
(c) Failure of drawer to make payment: 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.
Therefore we may conclude that compliant can be filed after 45 days of dishonor of the cheque
i.e., 30 days of notice period +15 days of the receipt of the said notice.

Penalty: According to Section 138 of the Act, the dishonour of cheque is a criminal offence and
is punishable with imprisonment up to 2 years or fine up to twice the amount of cheque or both.
Presumption in favor of holder (Section 139):
When a cheque is dishonoured, 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.
Presumption prescribed here is a “rebuttable presumption” as the provisions clearly provides
that the person issuing the cheque is at liberty to prove to the contrary. The effect of this
presumption is to place the evidential burden on the accused.

Defence which may not be allowed in any prosecution under section 138 (Section 140):-
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.

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Presentation of Instruments :-

Presentment for acceptance [Section 61]

A bill of exchange payable after sight must [if no time or place is specified therein for
presentment] be presented to the drawee thereof for acceptance [if he can, after reasonable
search, be found] by a person entitled to demand acceptance, within a reasonable time after it is
drawn, and in business hours on a business day.
In default of such presentment, no party thereto is liable thereon to the person making such
default. If the drawee cannot, after reasonable search, be found, the bill is dishonoured.
If the bill is directed to the drawee at a particular place, it must be presented at that place,
and if at the due date for presentment he cannot, after reasonable search, be found there, the
bill is dishonoured.
Where authorised by agreement or usage, a presentment through the post office by means of a
registered letter is sufficient.

Presentment of promissory note for sight [Section 62]

A promissory note, payable at a certain period after sight, must be presented to the maker
thereof for sight (if he can after reasonable search be found) by a person entitled to demand
payment, within a reasonable time after it is made and in business hours on a business day.
In default of such presentment, no party thereto is liable thereon to the person making such
default.

Drawee's time for deliberation [Section 63]

The holder must, if so required by the drawee of a bill of exchange presented to him for
acceptance, allow the drawee 48 hours (exclusive of public holidays) to consider whether he will
accept it.

Presentment for payment [Section 64]

Promissory notes, bill of exchange and cheques must be presented for payment to the maker,
acceptor or drawee thereof respectively, by or on behalf of the holder as hereinafter provided.

In default of such presentment, the other parties thereto are not liable thereon to such holder.

Where authorised by agreement or usage, a presentment through the post office by means of a
registered letter is sufficient.

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Exception: Where a promissory note is payable on demand and is not payable at a specified place,
no presentment is necessary in order to charge the maker thereof.

Notwithstanding anything contained in section 6, where an electronic image of a truncated

cheque is presented for payment, the drawee bank is entitled to demand any further information
regarding the truncated cheque from the bank holding the truncated cheque in case of any
reasonable suspicion about the genuineness of the apparent tenor of instrument, and if the
suspicion is that of any fraud, forgery, tampering or destruction of the instrument, it is entitled
to further demand the presentment of the truncated cheque itself for verification.
Provided that the truncated cheque so demanded by the drawee bank shall be retained by it, if
the payment is made accordingly.

Hours for presentment (Section 65):

Presentment for payment must be made during the usual hours of business, and, if at a banker's
within banking hours.

Presentment for payment of instrument payable after date or sight (Section 66):
A promissory note or bill of exchange, made payable at a specified period after date or sight
thereof, must be presented for payment at maturity.

Presentment for payment of promissory note payable by instalments (Section 67):

A promissory note payable by instalments must be presented for payment on the third day after
the date fixed for payment of each instalment; and non-payment on such presentment has the
same effect as non-payment of a note at maturity.

Presentment for payment of instrument payable at specified place and not elsewhere
(Section 68):
A promissory note, bill of exchange or cheque made, drawn or accepted payable at a specified
place and not elsewhere must, in order to charge any party thereto, be presented for payment at
that place.

Instrument payable at specified place (Section 69):

A promissory note or bill of exchange made, drawn or accepted payable at a specified place
must, in order to charge the maker or drawer thereof, be presented for payment at that place.

Presentment where no exclusive place specified (Section 70):

A promissory note or bill of exchange, not made payable as mentioned in sections 68 and 69,
must be presented for payment at the place of business (if any) or at the usual residence, of the
maker, drawee or acceptor thereof, as the case may be.

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Presentment when maker, etc., has no known place of business or residence (Section 71):
If the maker, drawee or acceptor of a negotiable instrument has no known place of business or
fixed residence, and no place is specified in the instrument for presentment for acceptance or
payment, such presentment may be made to him in person wherever he can be found.

Presentment of cheque to charge drawer (Section 72):

Subject to the provisions of section 84, a cheque must, in order to charge the drawer, be
presented at the bank upon which it is drawn before the relation between the drawer and his
banker has been altered to the prejudice of the drawer.

Presentment of cheque to charge any other person (Section 73):

A cheque must, in order to charge any person except the drawer, be presented within a
reasonable time after delivery thereof by such person.

Presentment of instrument payable on demand (Section 74):

Subject to the provisions of section 31, a negotiable instrument payable on demand must be
presented for payment within a reasonable time after it is received by the holder.

Presentment by or to agent, representative of deceased, or assignee of insolvent (Section

75):

Presentment for acceptance or payment may be made to the duly authorised agent of the
drawee, maker or acceptor, as the case may be, or, where the drawee, maker or acceptor has
died, to his legal representative, or, where he has been declared an insolvent, to his assignee.

Excuse for delay in presentment for acceptance or payment (Section 75A)

Delay in presentment for acceptance or payment is excused if the delay is caused by
circumstances beyond the control of the holder, and not imputable to his default, misconduct or
negligence. When the cause of the delay ceases to operate, presentment must be made within a
reasonable time.

When presentment unnecessary (Section 76)

No presentment for payment is necessary, and the instrument is dishonoured at the due date
for presentment, in any of the following cases:
(a) (i) If the maker, drawee or acceptor intentionally prevents the presentment of the
instrument, or
(ii) if the instrument being payable at his place of business, he closes such place on a
business day during the usual business hours, or
(iii) if the instrument being payable at some other specified place, neither he nor any
person authorised to pay it attends at such place during the usual business hours, or
(iv) if the instrument not being payable at any specified place, he cannot after due
search be found;

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(b) as against any party sought to be charged therewith, if he has engaged to pay
notwithstanding non-presentment;
(c) as against any party if, after maturity, with knowledge that the instrument has not been
presented—
 he makes a part payment on account of the amount due on the instrument,
 or promises to pay the amount due thereon in whole or in part,
 or otherwise waives his right to take advantage of any default in presentment for
payment;
(d) as against the drawer, if the drawer could not suffer damage from the want of such
presentment.

Liability of banker for negligently dealing with bill presented for payment (Section 77):
When a bill of exchange, accepted payable at a specified bank, has been duly presented there
for payment and dishonoured, if the banker so negligently or improperly keeps, deals with or
delivers back such bill as to cause loss to the holder, he must compensate the holder for such
loss.

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Rules of Compensation:-

Rules as to Compensation (Section 117)

The compensation payable in case of dishonour of promissory note, bill of exchange or cheque,
by any party liable to the holder or any endorsee, shall be determined by the following rules:

(a) the holder is entitled to the amount due upon the instrument, together with the expenses
properly incurred in presenting, noting and protesting it;
(b) when the person charged resides at a place different from that at which the instrument was
payable, the holder is entitled to receive such sum at the current rate of exchange between
the two places;
(c) an endorser who, being liable, has paid the amount due on the same is entitled to the amount
so paid with interest at 18% per annum from the date of payment until tender or realisation
thereof, together with all expenses caused by the dishonour and payment;
(d) when the person charged and such endorser reside at different places, the endorser is
entitled to receive such sum at the current rate of exchange between the two places;
(e) the party entitled to compensation may draw a bill upon the party liable to compensate him,
payable at sight or on demand, for the amount due to him, together with all expenses
properly incurred by him. Such bill must be accompanied by the instrument dishonoured and
the protest thereof (if any). If such bill is dishonoured, the party dishonouring the same is
liable to make compensation thereof in the same manner as in the case of the original bill.

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