Negotiable Instruments Act of 1881

Negotiable Instruments
Act of 1881
Negotiable Instruments Act of 1881
• Act to define law relating to negotiable

instruments
• Enacted by Imperial Legislative Council, India on 9
Dec 1881
• Effective from 1 Mar 1882
• 17 Chapters, 148 Sections
• Applicable to whole of India
MBA (Business Law) 2

Brief History of the Act
France
develops a Enactment of
code for Negotiable Amendments
mercantile Instruments to Chapters
trading Act in India 6(1)-6(10).
1867 1882 2002

1818 1881 1981
Mercantile England Negotiable

trading enacts the Instruments
code Bills of Amendment and
introduced Exchange Miscellaneous
in India by Act. Provision Act
British amended the original
Empire Act in various aspects

What is meant by a
Negotiable Instrument?
A Negotiable Instrument is an financial instrument which,
by the custom of trade, has come to acquire the following
characteristics
 The instrument is transferable by delivery
 The property in the instrument came into possession of the
transferee in a bonafide manner and for value
 The instrument can be traded/negotiated as per custom
 The instructions in the instrument can be enforceable in a
court

Definition of Negotiable Instrument
• Section 13
• The Act does not define a negotiable instrument but refers to
three kinds of negotiable instrument
 Promissory Note
 Bill of Exchange
 Cheque
• There can also be other instruments too, especially those
that are in vogue, which has the characteristics or attributes
of a negotiable instrument

Legal Principle employed in
The Legal Principle employed is
That which is paid by the order of another

is the same as though it were paid to himself
(Quod ipsis qui contraxerunt obstat estsuccessoribus corum obstabit)

By Statute By Custom/Usage
•
• Promissory Note (PN) Government Promissory Note (GPN)
• Banker’s draft (BD)
• Bills of Exchange (BoE) • Pay Orders (PO)
•
• Cheques Delivery Orders (DO)
• Hundis
• Railway Receipts (RR)
• Bill of Lading (BoL)
• Dock warrants
• Bearer bonds etc

Promissory Note (PN)
• Section 4
• 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.
A certain
person
Promissory An unconditional undertaking To pay to

Or his
Note order
Signed by maker Certain Or bearer of

money the instrument

The 10 essentials
of a Promissory Note
1. It must be in writing 6. The sum payable must be
certain
2. It must contain a promise/
undertaking to pay 7. It cannot be made payable
3. The promise to pay must be to the bearer (NA for notes
issued by RBI/GoI)
unconditional and definite
4. It must be signed by the 8. The amount must be in
legal tender in India
drawer/maker
5. There can only be two 9. Other formalities such as
place and date
persons – the DRAWER and
PAYEE only. No DRAWEE 10.It must be duly stamped

Specimen of a Promissory Note
To <PAYEE> <Place>
<address> <date>
<Six months> after date I PROMISE to pay <PAYEE> or order

the sum of Rupees <amount in words> only (Rs.<amount in
figs> for value received.
________
<Signature>
<DRAWER>

Specimen of a Promissory Note

Find the correct answer
A signs the instrument in the following manner. State the

instruments which cannot be considered as promissory
note
a) I promise to pay B or order Rs 500
b) I acknowledge myself to be indebted to B Rs 1,000 to
be paid on demand, for value received
c) I promise to pay B Rs 10,000 after three months
d) I promise to pay B Rs 500 seven days after my
marriage with C

Bill of Exchange (BoE)
• Section 5
• 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.
PAYEE
Makes an unconditional Certain
undertaking directing To pay person
DRAWER Or his
order
Certain Or bearer of
DRAWEE/ACCEPTOR money the instrument
Certain person

Essentials of a Bill of Exchange
1. It must be in WRITING ambiguity must lie”
2. It must contain an ORDER 6. The SUM payable must be
to pay CERTAIN
3. Order to pay must be 7. The bill must contain order
UNCONDITIONAL to pay MONEY only
4. It must be SIGNED by the 8. Must comply with the
DRAWER formalities as regards
date, consideration,
5. The drawer, drawee and stamps, etc
payee must be certain
because of the rule of law
“where liability lies, no

Specimen of a Bill of Exchange
To <PayeeName>
<Place3>
<Six months> after date PAY TO <PayeeName> or order

the sum of Rupees <amount in words> Only <amount in figs>
for value received.
Accepted
________ __________
<Signature> <Signature>
<DrawerName>. <AcceptorName>
<Place1> <Place2>
<Date1> <Date2>

Presentment of BOE
FIRST IN CASE OF
PRESENTMENT DEFAULT
For  His liability arises only when the bill is
ACCEPTANCE not accepted by the DRAWEE
Drawee  The Bill is not dishonoured until it has
In Case Of been dishonoured by DICN
Two types of Need (DICN)
Presentment
in case of BoE
IN CASE OF
DEFAULT
For  AFH is liable to pay the amount of the
SECOND PAYMENT bill
 AFH is entitled to recover the amount
PRESENTMENT Acceptance paid from the party for whose honour
For Honour the bill was accepted or from any prior
(AFH) party

Essential elements of
ACCEPTANCE of BoE
1. Acceptance must be written (oral Acceptance not valid)
2. Acceptance must be signed (if not signed, not accepted as
Acceptance)
3. Acceptance must be on the bill (should be normally on the
face of the bill; even signature behind has been upheld by
courts)
4. Acceptance must be completed by delivery (Drawee not
bound if actual delivery not completed)
5. When bill is drawn in sets, then Acceptance need to be put
on one part only (if signed separately on parts, then he
becomes liable on each of them)

Kinds of BOE
INLAND BILL FOREIGN BILL

• Drawn in India & payable in India • Drawn outside India & payable outside
although on a non-resident India
• Drawn in India & drawn upon a resident • Drawn outside India & payable in India
although payable outside • Drawn outside India & drawn on resident
• Drawn in single copy • Drawn outside India & drawn on non-
resident
• Dishonour requires noting
• Drawn in India & upon a non-resident
payable outside India
• Drawn in triplicate
• Dishonour requires protesting

PN vs BOE
PROMISSORY NOTE BILL OF EXCHANGE
Number of parties ONLY TWO parties THREE parties
(MAKER and PAYEE) (DRAWER, DRAWEE and
PAYEE)
MAKER cannot DRAWER and PAYEE can
be the PAYEE be one person
(“Pay to me or my order”)
Instruction PROMISE ORDER
to make payment to make payment
Acceptance Requires Must be
NO ACCEPTANCE ACCEPTED BY DRAWEE

PN vs BOE
Nature of liability Liability is PRIMARY Liability is SECONDARY
and CONDITIONAL. Only
when the ACCEPTOR
does not honor, the
liability falls on the
DRAWER.
Maker’s position Contains an ACCEPTOR may accept
UNCONDITIOINAL PROMISE the bill conditionally
to pay. He stands in immediate (S.86) However DRAWER
relation to the payee and cannot has to make an
make the PN conditional UNCONDITIONAL ORDER to
pay

PN vs BOE
Notice of dishonor No notice necessary Notice of dishonor must
be given by holder to all
prior parties liable to
pay
Provisions relating to Not for Promissory Note Applicable only to BoE
presentment for
acceptance, acceptance,
acceptance supra
protest and drawing in
sets

Parties to a bill of exchange are

a) Drawer
b) Drawee
c) Acceptor
d) All of the above

CHEQUE
• Section 6
• A cheque is a bill of exchange drawn on a specified banker and
not expressed to be payable otherwise than on demand and
includes the image of a truncated cheque & a cheque in the
electric form.
• truncated cheque means a cheque which is truncated during the course of 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 further physical movement of the cheque in writing
• cheque in the electronic form means a cheque drawn in electronic form by
using any computer resource and signed in a secure system with digital
signature (with or without biometrics system) and asymmetric crypto system
or with electric signature (as per Information Technology Act 2000).

Specimen of a Cheque
<DATE>
PAY <PayeeName> OR
BEARER
Rs. 10,000/-
RUPEES TEN THOUSAND ONLY---
<DRAWEE-ALWAYS-A-BANK>
<BRANCH> <CHEQUE NUMBER> ---------------------
<BANCK ACCOUNT NO> (Signature of the Account Holder)

Essentials of a Cheque
1. It must be in writing and duly signed by the drawer.

2. It contains an unconditional undertaking.
3. It is issued on a specific banker only.
4. The amount specified is always certain and must be clearly
mentioned both in figures and words.
5. The payee is always certain.
6. It is always payable on demand.
7. The cheque must bear a date; otherwise it is invalid and
shall not be honoured by the bank.

Cheque vs BOE
CHEQUE BOE
A cheque is always drawn on a A BoE may be drawn on any
banker. person including a banker.
A cheque can only be drawn A BoE may be drawn payable on
payable on demand. demand or on the expiry of a
certain period after date or sight.
A cheque drawn ‘payable to A BoE drawn ‘payable to bearer
bearer on demand’ is valid. on demand’ is absolutely void and
illegal.
A cheque does not require any A BoE requires acceptance by the
acceptance by the drawee before drawee before he can be made
payment can be demanded. liable thereon.

Cheque vs BOE
CHEQUE BOE
A cheque does not require any A BoE must be properly stamped.
stamp.
A cheque is always payable on Three days of grace are allowed
demand; there is no question of while calculating the maturity
allowing any days of grace. date in the case of ‘time bills’.
A cheque can be crossed. A BoE cannot be crossed.
Payment of a cheque can be Payment of a BoE cannot be
countermanded. countermanded.

Cheque vs BOE
CHEQUE BOE
There is no system of Noting or BoE require Noting and Protest in
Protest in the case of a cheque. case of dishonor.
A cheque can be presented for The drawer of a BoE is discharged
payment within 6 months from from liability, if it is not duly
the date of drawal. presented for payment.

Types of Cheque
1. Open cheque
2. Crossed cheque
3. Bearer cheque
4. Order cheque
5. Ante-dated cheque
6. Stale cheque
7. Mutilated cheque
8. Post-dated cheque

Types of Cheque
• Open cheque: Cheque that can be cashed over the

counter at the bank. The holder of an open cheque can
do the following:
 Receive its payment over the counter at the bank;
 Deposit the cheque in his own account; or
 Pass it to someone else by signing at the back of a cheque.
• Crossed cheque: Cheque where the payment is not
made over the counter at the bank; but is only credited
to the bank account of the payee.

Types of Cheque
• Bearer cheque: Cheque that is payable to any person

who presents it for payment at the bank counter. It can
be transferred by mere delivery and requires no
endorsement.
• Order cheque: Cheque which is payable to a certain
person. In such a cheque, the word ‘bearer’ may be cut
out or cancelled and the word ‘order’ may be written.
The payee can transfer an order cheque to someone
else by signing his or her name on the back of it.

Types of Cheque
• Ante-dated cheque: Cheque in which the drawer

mentions the date earlier to the date of presenting
it for payment. For example: a cheque issued on 20
January 2019 may bear a date 1 January 2019.
• Stale cheque: Cheque which is presented for
payment after the expiry of a stipulated period;
and on which no payment will be made by the
bank.

Types of Cheque
• Mutilated cheque: Cheque that is torn into 2 or more

pieces and then presented for payment. The bank will
not payment against such a cheque without getting
confirmation of the drawer.
• Post-dated cheque: Cheque on which drawer mentions
a date which is subsequent to the date on which it is
presented. For example: If a cheque is presented on 1
January 2019 and bears the date 1 March 2019, it is a
post-dated cheque. The bank will make payment only
on the date which the cheque bears.

Crossing of Cheque
• Crossing of the cheque is a direction given by the drawer to the banker
to not to make the payment over-the-counter
• While the cheque remains legally negotiable, the “account payee”
crossing hinders the negotiability of the cheques in practice
• The payment can only be made through a bank to a payee or endorsee;
otherwise the banker is responsible
• Only a cheque can be crossed - not a bill or a note
• In case of crossing, there is always a PAYING banker and COLLECTING
banker
• Paying bank is not liable to see to which account the credit is made
except in case of “not negotiable crossing”. The liability is on the
collecting banker to ensure about the account.

Types of crossing of cheques
Two types of crossing

a) General crossing: refers to drawing two parallel
transverse lines with or without the words “A/c
Payee” or “And Co” or “Not Negotiable”
b) Special crossing: The name of the particular
banker is mentioned with or without lines. The
paying bank releases payment only if it is
presented through the specified collecting bank.

Dishonour of cheques
• Instruction by customer for • In case of joint account

stop payment holders, then absence of one
or more signatures
• In case of receipt of notice of
insolvency, insanity or death • Material alteration
of the customer
• Closure of account
• In case of suspicion as to title
• Post-dated cheque
• Stale cheque ie validity is
• Mutilated cheque – cheque
over
that is defaced
• Not tallying of signature
• Insufficiency of funds
(bouncing of cheques)

Punishment for dishonour of cheques in
case of insufficiency of funds
• Section 138
• A person found guilty of dishonour of cheque for
insufficiency of funds is liable to be punished
i. With imprisonment for a term up to TWO years, or
ii. With a fine which may extend to TWICE the amount of the
cheque
iii.With both the above punishments
• However, even payment made after committing the offence
would not absolve the accused of liabilities of criminal
offence.

The validity period of a cheque is for

a) 1 month
b) 2 months
c) 3 months
d) 6 months

In order to cross a cheque, two parallel transverse

lines can be drawn anywhere on the face or back of
the cheque
a) True
b) False

A cheque marked “Not-negotiable” is not

transferable
a) True
b) False

The paying bank is not liable to see as to which

account the amount is being credited to except in
case of not negotiable crossing
a) True
b) False

HUNDI
• Hund means “To Collect”
• Hundi is a financial instrument indigenously developed for use in trade
and credit transactions. They were widely used in the sub-continent in
local vernacular languages.
• Hundi is described as "an unconditional order in writing made by a person
directing another to pay a certain sum of money to a person named in the
order.” (RBI)
• The Negotiable Instruments Act does not explicitly mention about Hundi;
however the Courts have always upheld its validity and treated Hundi on
par with other negotiable instruments.
• Kinds of Hundis: Shah-jog, Nam-jog, Dharshani, Muddati, Dhani-jog,
Jawabi, Jokhami, Firman-jog.
A negotiable instrument recognised by usage or

custom of trade is a
a) Cheque
b) Bill of exchange
c) Promissory note
d) Hundi

Parties to Negotiable Instruments
Acceptor Drawee in
Acceptor Drawee
for honour case of need
One who accepts If a bill is The person on In a bill of
the bill of dishonoured by whom the bill of exchange or any
exchange. non-acceptance, exchange is drawn indorsement
the holder may and who is thereon, the
allow some other directed to pay. name of any
person (the person given in
acceptor for addition to the
honour) to accept In case of cheque, drawee is the
it for the honour the drawee is drawee in case of
of the drawer or always a banker. need.
any one of the
indorsers.

Parties to Negotiable Instruments
Drawer Holder Indorsee Indorser Payee
The person Any person The person The person The person
who makes entitled in to whom the who indorses named in the
or draws a his own BOE, PN, or the BOE, PN, BOE, PN, or
BOE or name to the cheque is or cheque. cheque to
cheque. possession indorsed. whom or to
and to whose order,
receive or the money
recover the has to be
amount due paid.
of a PN, BOE,
or cheque.

Holder and Holder in due course
Holder in due course

Holder
(HIDC)
• Holder refers to a person • HIDC refers to a person:
who is in possession of a
Who obtains the
Negotiable Instrument.
instrument for
• The title of the holder is consideration,
same as that of transferor
In good faith or bonafide,
Possesses the instrument
before maturity.

Privileges enjoyed by a HIDC
• Protection against inchoate holder in due course remain
(incomplete) instrument. undiminished.
• Liability of prior parties until the • Any defect in the title of the
instrument is duly satisfied. transferor will not affect the rights
of the HIDC, even if he had the
• Protection against fictitious payee.
knowledge of the prior defect,
• Protection against the instrument provided he himself is not a party
without consideration i.e., the to the fraud.
pleas of absence of consideration
cannot be raised against the HIDC.
• Protection against instrument
obtained by unlawful means or for
• The liabilities of the parties that the unlawful consideration.
negotiated the instrument to the

A obtains a cheque drawn by B by way of gift. Here A

is a
a) Holder in due course
b) Holder of value
c) Holder
d) None of the above

In legal terms, a person who takes the instrument

bonafide for value before it is over due, in good faith
is known as
a) Holder in due course
b) Holder of value
c) Holder

Presentment
of a Negotiable Instrument
Presentment
• When the drawer presents the negotiable
FOR instrument to the drawee for acceptance.
ACCEPTANCE
Presentment
• When the holder of the Negotiable instrument
FOR presents it for payment to the payee.
PAYMENT
• This happens only in the case if a PN, where the maker himself
is the person liable for it.
Presentment • PN payable after certain period after sight must be presented
FOR SIGHT to the maker for sight in order to fix its maturity.
• In the event of the maker being untraceable, the instrument is
dishonoured.

Dishonour
• Refers to not accepting a bill of exchange or refusing payment.
• Notice of dishonour: This is to inform the concerned parties about the
accruing liabilities.
• Noting: This consists of recording the fact of dishonour by a notary
public upon the instrument within a reasonable time after the
dishonour.
• Protesting: Having noted the dishonoured instrument, the notary public
issues a certificate containing:
 The transcript of the instrument;
 The name of the person against whom the protest is registered;
 The fact and reason for dishonour and its place and time; and
 Signature of the notary public.
• The noting and protesting helps the holder to possess evidence in the
event of a suit.

Dishonour
Notice of Noting Protesting

dishonour
• This is to inform • This consists of •Having noted the
the concerned recording the fact dishonoured
parties about the of dishonour by a instrument, the notary
public issues a
accruing liabilities. notary public certificate containing:
upon the •The transcript of the
instrument within instrument;
a reasonable time •The name of the
after the person against whom
dishonour. the protest is
registered;
•The fact and reason
for dishonour and its
Dishonour refers to not The Noting and Protesting helps place and time; and
•Signature of the
accepting a BOE or the holder to possess evidence in notary public.
refusing payment the event of a suit.

Discharge
• Refers to cessation of the liabilities the instrument entails.
• A negotiable instrument is discharged when all rights of
action under it are completely extinguished and it is no more
negotiable.
• There is a possibility that one or more of the parties involved
may be discharged from liability and for the rest who are
liable, the instrument is still negotiable.

Presumptions on
Negotiable Instrument
• Consideration: The NI is drawn for a consideration
• Date: Drawn on the date mentioned on NI
• Time of acceptance: Assumed to be accepted within 48
hours
• Time of transfer: Assumed that all transfers took place
before maturity
• Order of endorsement: Order is same as it appears
• Stamped: For lost instrument, assumed that it was duly
stamped
• It is presumed that the party having the instrument is HIDC

A negotiable instrument drawn in favour of a minor is

a) Void
b) Void but not enforceable
c) Valid

A promissory note drawn jointly by A, a minor and B,

a major is
a) Void
b) Void but not negotiable
c) Valid but can be enforced only against B

Due date & Maturity date
• Due date refers to the date decided between the

parties for payment
• Maturity date
• is the date given by the law for payment
• Refers to the date on which it falls due plus THREE
additional days (grace days)
Maturity date = Due date + 3 Grace days

Find the answer
A Bill of Exchange dated 31 August 2019 is made

payable three months after date.
What is the date of maturity of the instrument?
3 December 2019

Find the answer
A Bill of Exchange drawn on 15 October 2017 is made

payable twenty days after sight. The bill is presented
for acceptance on 31 October 2017.
What is the date of maturity of the instrument?
23 November 2017

Endorsement/Indorsement
• Section 151
• When the holder of the NI signs the same otherwise
than as such maker for the purpose of negotiation
(transfer) on the back or the face or on a slip of paper
annexed thereto, he is said to have endorsed the same.
• The person who signs is called the Endorser and the
person to whom it is endorsed is called Endorsee
• The slip of paper annexed to the instrument on which
additional endorsements are made is called “allonge”

The name of the slip of paper annexed to the

negotiable instrument on which additional
endorsements are made is called
a) Sans Frais
b) Sans Recourse
c) Allonge


Negotiable Instruments Act of 1881

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Negotiable Instruments

• Act to define law relating to negotiable

MBA (Business Law) 2

1867 1882 2002

Mercantile England Negotiable

MBA (Business Law) 3

MBA (Business Law) 4

MBA (Business Law) 5

The Legal Principle employed is

That which is paid by the order of another

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Promissory An unconditional undertaking To pay to

Signed by maker Certain Or bearer of

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<Six months> after date I PROMISE to pay <PAYEE> or order

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A signs the instrument in the following manner. State the

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<Six months> after date PAY TO <PayeeName> or order

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Two types of Need (DICN)

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INLAND BILL FOREIGN BILL

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Parties to a bill of exchange are

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1. It must be in writing and duly signed by the drawer.

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• Open cheque: Cheque that can be cashed over the

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• Bearer cheque: Cheque that is payable to any person

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• Ante-dated cheque: Cheque in which the drawer

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• Mutilated cheque: Cheque that is torn into 2 or more

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Two types of crossing

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• Instruction by customer for • In case of joint account

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The validity period of a cheque is for

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In order to cross a cheque, two parallel transverse

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A cheque marked “Not-negotiable” is not