NEGOTIABLE INSTRUMENTS IN BANKING LAW - DETAILED NOTES (For Exam Preparation)
INTRODUCTION
- The law relating to negotiable instruments in India is governed by the Negotiable Instruments Act,
1881.
- Negotiable Instruments are written documents that guarantee the payment of a specific amount of
money, either on demand or at a future date.
- They play a vital role in the banking and commercial system by providing a convenient and safe
mode of transferring money.
DEFINITION
Section 13(1) of the Negotiable Instruments Act defines a negotiable instrument as:
"A promissory note, bill of exchange or cheque payable either to order or to bearer."
CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS
1. Freely Transferable - Can be easily transferred from one person to another.
2. Title of the Holder - A person who acquires it in good faith gets a good title.
3. Written Document - Must be in writing.
4. Payment of Money Only - It involves payment in money only, not goods or services.
5. Unconditional Promise or Order - Payment must be unconditional.
6. Presumption as to Consideration - Every negotiable instrument is presumed to be made for
consideration.
7. Endorsement and Delivery - Transferable by endorsement or delivery.
TYPES OF NEGOTIABLE INSTRUMENTS
1. Promissory Note (Section 4):
- A written and signed promise by one party to pay another a definite sum of money.
- Example: "I promise to pay A or order Rs. 10,000." Signed by B.
- Parties: Maker and Payee.
2. Bill of Exchange (Section 5):
- A written order by one person to another to pay a certain sum to a third person.
- Example: A directs B to pay C Rs. 5,000.
- Parties: Drawer, Drawee, and Payee.
3. Cheque (Section 6):
- A bill of exchange drawn on a specified banker and payable on demand.
- Always drawn on a bank.
- Parties: Drawer, Drawee (Bank), and Payee.
OTHER NEGOTIABLE INSTRUMENTS (BY USAGE)
- Hundis (indigenous instruments used in trade)
- Treasury Bills
- Bank Drafts
- Bearer Bonds
DIFFERENCE BETWEEN PROMISSORY NOTE, BILL OF EXCHANGE, AND CHEQUE
Basis | Promissory Note | Bill of Exchange | Cheque
Nature | Promise to pay | Order to pay | Order to pay
Drawn on | Debtor | Another person | Bank only
Acceptance | Not required | Required | Not required
Payable | On demand or after time | On demand or after time | On demand only
ESSENTIAL ELEMENTS
1. Must be in writing.
2. Must be signed by the maker or drawer.
3. Must contain an unconditional promise or order to pay.
4. Must be payable in money only.
5. Must be payable to order or bearer.
6. Amount must be certain.
HOLDER AND HOLDER IN DUE COURSE
- Holder (Section 8): A person entitled in his own name to the possession of the instrument and to
receive the amount due.
- Holder in Due Course (Section 9): A person who acquires the instrument for consideration, in good
faith, before maturity, and without any defect in title.
PRESENTATION OF NEGOTIABLE INSTRUMENTS
1. For Acceptance - Applies to bills of exchange.
2. For Sight - To know the date of maturity.
3. For Payment - To receive the amount due.
DISHONOUR OF NEGOTIABLE INSTRUMENTS
- Occurs when payment or acceptance is refused.
Types:
1. Dishonour by Non-Acceptance - When drawee refuses to accept.
2. Dishonour by Non-Payment - When drawee fails to pay.
NOTICE OF DISHONOUR
- When an instrument is dishonoured, notice must be given to all prior parties to make them liable.
NOTING AND PROTEST
- Noting: Recording of dishonour by a Notary Public.
- Protest: A formal certificate issued by Notary Public when an instrument is dishonoured.
LIABILITIES OF PARTIES
1. Drawer - Liable until payment is made.
2. Drawee - Liable if he accepts the bill.
3. Endorser - Liable to all subsequent holders.
4. Maker - Liable absolutely on a promissory note.
DISCHARGE OF NEGOTIABLE INSTRUMENT
1. By payment in due course.
2. By cancellation.
3. By release of parties.
4. By material alteration.
5. By operation of law.
OFFENCES UNDER THE ACT - SECTION 138
- Dishonour of cheque due to insufficient funds is an offence.
- Punishment: Imprisonment up to 2 years or fine up to twice the cheque amount or both.
- Essential Conditions for Section 138:
1. Cheque must be issued for legally enforceable debt.
2. Dishonour due to insufficient funds.
3. Notice to drawer within 30 days.
4. Drawer fails to pay within 15 days of receipt of notice.
AMENDMENTS AND IMPORTANT SECTIONS
- Section 13: Definition of Negotiable Instrument.
- Section 138-142: Dishonour of Cheque and Penalties.
- Amendment Act, 2018: Introduced interim compensation to the complainant.
ROLE IN BANKING LAW
- Negotiable Instruments facilitate commercial transactions and credit systems.
- Cheques, bills, and promissory notes form the backbone of bank payments.
- Help maintain trust and efficiency in the banking system.
CONCLUSION
The Negotiable Instruments Act, 1881 provides the legal framework for transferring money and
settling debts securely. It strengthens banking operations, builds financial credibility, and ensures
accountability in financial dealings through provisions like Section 138.