NEGOTIABLE INSTRUMENTS ACT, 1881
A negotiable instrument is a written document and is freely transferrable.
This document specifies payment to a specific person or the bearer of the instrument at a
specific date.
Section 13 of Negotiable instrument Act provides for three kind of negotiable instrument
a. promissory note
b. bills of exchange and
c. cheque
The law relating to Negotiable Instruments is laid down in Negotiable Instruments Act,
1881.
According to Section 13 of the Act, "Negotiable instrument means a promissory note, bill
of exchange or cheque payable either to order or to bearer, whether the word "order" or "
bearer" appear on the instrument or not."
Thus, the term, negotiable instrument means a written document which creates a right in favour of
some person and which is freely transferable
CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT
A negotiable instrument has the following characteristics:
a. Instrument is a written document
b. The instrument is freely transferable
c. It should create a right of a person to receive money and a liability of a person to pay money.
d. A holder in due course acquires a good title irrespective of any defect in a previous holder's
title.
e. A holder in due course is one who receives the instrument, for his goods or services
irrespective of any defect in the title of transferor.
f. It can be transferred any number of time until the payment.
Presumption of Negotiable Instruments
1. Consideration
It is presumed that every negotiable instrument was made, drawn, accepted, endorsed, or
transferred for consideration.
2. Date
It is presumed that the instrument was drawn or made on the date it bears.
3. Time of Acceptance
The acceptance of a bill of exchange is presumed to have been made within a reasonable
time after its date and before its maturity.
4. Time of Transfer
The transfer of a negotiable instrument is presumed to have taken place before its maturity,
not after it became overdue.
5. Order of Endorsements
Endorsements on the instrument are presumed to have been made in the order in which
they appear.
6. Stamp
It is presumed that instrument is duly stamped.
Types of Negotiable Instruments
Promissory Note
A promissory note is a written instrument that includes promise signed by a person to pay a certain
sum of money to a certain person or to the bearer of that instrument. The one who makes the
promissory note and promises to pay a certain sum of money is called the maker, and the person to
whom the payment is to be paid is called the payee.
Essential of Promissory Note
The promissory note must be in writing.
It must contain an undertaking to pay There must be an express promise to pay.
The promise to pay should be unconditional.
The maker must sign the promissory note.
The sum payable must be certain
Bill of exchange
A bill of exchange is a written instruction to pay a pre-specified sum of money at a pre-specified
date or on demand. It involves a drawer and a drawee. The drawer is the entity that creates and
issues the payment instruction, while the drawee is required to make the payment as per the
instruction. The major use of bills of exchange can be found in international trading.
Essential of Promissory Note
It must be issued in a physical, written document or electronic format.
The payment instruction to the drawee cannot be conditional.
A bill of exchange becomes valid only if it carries the drawer’s signature.
A bill of exchange becomes legal only when the drawer or the buyer accepts it.
A valid bill of exchange must mention a date by which the drawee needs to pay the sum.
Cheque
A cheque is a document that orders a bank to pay a specific amount of money from a person's
account to the person in whose name the cheque has been issued. The person writing the cheque,
known as the drawer, has a banking account where the money is held. Cheques are frequently used
as forms of payment in all commercial operations. A dated, written, and signed check instructs a
bank or other financial institution to pay the bearer a specific amount of money .
Essentials of Cheque:
The Cheque is Payable on demand
Drawn on a Specified Banker
The Cheque does not require any acceptance
The Cheque is not entitled to days of grace
Cheque can be crossed
There are three parties to a cheque
Drawer: The Customer who draws the Cheque on his Account.
Drawee: The Banker on whom the cheque is presented.
Payee: The Person on whose name is mentioned and the beneficiary of the payment.
Drawer and Payee can be the same individual.
Endorsement and its types
When the maker or holder of a negotiable instrument signs it (on the back, front, or on an attached
slip of paper) to transfer it to someone else, this act is called endorsement and the person signing is
called the endorser. The person to whom the instrument is endorsed is called endorsee.
Types of endorsement
There are five types of endorsement. These are applicable for endorsement in banking and various
types of endorsement cheques:
1. Blank or General Endorsement
The endorsement where the endorser just signs on the instrument without mentioning the
name of the person in whose favour the endorsement is made. Endorsement in blank
specifies no endorsee. It simply consists of the signature of the endorser.
2. Full or Special Endorsement
When the endorser signs the instrument and writes the name of the person to whom the
payment should be made, it is called a special or full endorsement. The person whose name
is written becomes the new payee and has the right to collect the money or sue for it if
needed.
3. Conditional Endorsement
The endorsement where the endorsee limits his liability by putting some condition in the
instrument is called a conditional endorsement.
A conditional endorsement, unlike the restrictive endorsement, does not affect the
negotiability of the instrument. It is also sometimes called a qualified endorsement.
4. Restrictive Endorsement
A restrictive endorsement limits the further transfer of the instrument. It may state that the
endorsee cannot pass it on, or that the endorsee only has the authority to use it in a certain
way as directed by the endorser.
5. Partial Endorsement
When the endorser transfer, simply a portion of the amount payable to the endorsee, it is
called a partial endorsement. Such an endorsement does not operate as a negotiation of the
instrument.
Dishonour and discharge of negotiable instrument
Dishonour means not honouring the obligation. A negotiable instrument may be dishonoured by-
(a) Non acceptance
When the acceptance of the bill is not done within 48 hrs from the time of presentment
for acceptance by the drawee.
When drawee is a fictitious person and cannot be traced
When drawee is incompetent to contract.
When drawee accepts with qualified acceptance.
When drawee is insolvent or dead.
(b) Non-payment
When a bill is accepted then it has to be presented on the date of its maturity.
When the acceptor fails to pay when it is due, the bill is dishonoured by non-payment.
When the banker refuses to pay then the cheque is dishonoured by non-payment.
Important questions on Negotiable Instruments Act, 1881
1. What is a negotiable instrument?
2. Name the three types of negotiable instruments under Section 13 of the Act.
3. State any three characteristics of a negotiable instrument.
4. What is presumed regarding the date on a negotiable instrument?
5. Define a promissory note.
6. Who is the maker and who is the payee in a promissory note?
7. Define a bill of exchange.
8. Who is the drawer and who is the drawee in a bill of exchange?
9. Mention any three essentials of a bill of exchange.
10. Define a cheque. Name the three parties to a cheque.
11. Differentiate between a bill of exchange and a cheque.
12. What is endorsement? Explain the different type of it.
13. What do you mean by “dishonour” of a negotiable instrument?