UNIT I11

NEGOTIABLE INSTRUMENTS

CHAPTER-1

Negotiable Instruments

1. Definition of Negotiable Instruments:-Negotiable instruments

have occupied a prominent place not only in trade and commerce but also
in public life. The term 'negotiable instrument' literally means a 'written
document which creates a right in favour of some person and which is
freely transferable. These instruments have gained prominence as the principal
instruments for making payments and discharging business obligations.
These instruments pass on freely from hand to hand and thus form an
integral part of the modern financial transactions.

A negotiable instrument is a piece of paper which entitles a person

to a sum of money and which is transferable from person to person by
mere delivery or indorsement and delivery. The person to whom it is so
transferred becomes entitled to the money and also to the right to further
transfer it.

Justice K.C. Willis states, "A negotiable instrument is one, the property
in which is acquired by any one who takes it bona fide and for valu?
notwithstanding any defect of title in the person from whom he took it."
In words of Thomas, "An instrument is negotiable when it is, by a
legally recognised custom of trade or by law, transferable by delivery or
by endorsement and delivery, without notice to the party liable, in such
way that (a) the holder of it for the time being may sue .upon it in his
Own name, and (b) the property in it passes to a bona fide transferee for
value free from any defect in the title of the person from whom he obtained
it."
In Halsbury's Laws of England, it is stated that to be negotiable, an
nstrumeat must be "capable of being sued upon by the holder of it pro
Tempore in his own name; and it must be, by the custom of trade, transferable
ke cash by delivery (including indorsement and delivery in the case of
an instrument payable to order)".
The Negotiable Instruments Act, 1881 does not define a negotiable
instrument and Section 13 merely states that "(1) A 'negotiable instrument'
Cans a pronissory note, bill of exchange or cheque payable either to order

or to bearer.
 I70
Law of Banking
Unit-111, Ch-
Explanation I:- A promissorv note, bill of
exchange or cheque is
payabie to order which is
expressed to be so
to be
payable to a particular person, and does payable or which is expressed
not contain words
ranster or prohibiting
indicating an intention that it shall not be transferable.
Explanation I1: A promissory note, bill of exchange or cheque is
payable to bearer which is expressed to be so payable or on which the
only or, last indorsement is an indorsement in blank.

Explanation 1l:- Where promissory note, bill of exchange or chea..

que
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 navakl.
to him or his order at his option.
(2) A negotiable instrument may be made payable to two or more
payees jointly, or it may be made payable in the alternative to one of two
or some of several payees.

Fundamentally, the negotiable instrument is a document embodying

an obligation on the part of one person to pay money, to another. The
latter will normally hold the document and will then receive payment when
the time for this comes round.
He may, however, wish to make some payment to a third party. If
the document possesses the quality of negotiability, it may be passed to
a third party in such a way as to entitle him to claim the money from
the person originally bound. The third party may in his turn pass the
document to a fourth party, and so on.
Now we can conclude by saying that a negotiable instrument is one,
which when transferred by delivery or endorsement and delivery passes
to a transferee a good title to payment according to its tenor and irespective
of title of the transferor.

2. Salient features or characteristics of a Negotiable Instrument:

Essential characteristics of a negotiable instrument are as under Dasiug
various judicial decisions:
( ) A negotiable instrument must be easily transferable and it may
be payable either to bearer or to order of the named payee.
(2) A bona fide transferee for value, subject to his complying wI
S0me other
conditions, acquires absolute and good title to the instru
even if the transferor had no title or a defective title.
erson
Ihis is the
lakes a important characteristic of a negotiable instrument. AP
negotiable instrument from another person, who na olen
th

cDody else, will have absolute and indisputable title

nstrument, provid he receives the same for value and in good faith without
knowing that the
knowing transferor was not the true owner o f the instrument.
of the instru
(3) A holder in due course can sue
on the
need not depend instrument in his
o his
upon another's title.. Nor is he under any nis title
itle
in the first instance.
duty to justity
Other characteristics of
Negotiable Instruments are:
(4) An instrument must be in
writing.
(5) The negotiable instrument should not be
conditional.
(6) There must be clear and specific period of time for its
payment.
(7) No notice of transfer is required to the
person liable for payment.
(8) It is presumed that the instrument was drawn for consideration and it
was accepted or negotiated for consideration.

(9) A negotiable instrument can be transferred infinitum i.e. can be

transferred any number of times till its maturity.
(10) It must call for payment in money and money only and it should
contain the sum of money to be paid through it.
(11)There must be a promise ororder to pay on the negotiable instrument.
(12) It must be signed by the maker or drawer.
 6. Salient features of Negotiable Instruments Act, 1881, as
amended upto 2015
(1) The Act is called the Negotiable Instruments Act, 1881
(2) It extends to the whole of India and it came into force on the first day
ofMarch, 1882.
(3) It is an Act to define and amend the law relating to Promissory Notes,
Bills of Exchange and Cheques.
(4) At first the Act contained 137 Sections in 16 Chapters.
(5) The Act was amended several times and Chapter XVII containing
Sections 138 to 142 was introduced by the
and Negotiable Instruments Laws
Banking Public Financial Institutions
(Amendment) Act, 1988 with effect from
1.4.1989.
(6) The Negotiable Instruments (Amendment and Miscellaneous
Provisions) Act, 2002 amended the Sections 6, 64, 81, 89, 131, 138, 141, 142 of
the Act and new Sections 143 to 147 were
added to the Chapter XVIl of the
Act.
(7) Chapter I (Preliminary) explained the short title local extent and the
definition of'Banker.
 (8) Chapter Il.
containing Sections 4 to
sharacteristies of notes, bills and cheaues 25, explained the meanmg a
9)Chapter Inlpresents the provision relating to
cheques namely. minor, Ageney, parties to notes, bills and
legal
acceptor and mdorser and their liabilityrepresentative, drawer, drawee, maker,
in Sections from 26 to 45-A.
(10) Chapter IV, containing Sections
46 to 60
explains different kinds of
negotiation such elivery, indorsement.
as

(11) Chapter V of the Act,

nresentment for containing Sections 61 to 77, has dealt with
acceptance and for payment.
(12) Chapter VI of the Act,
the
containing Sections 78 to 81, has considered
provisions of payment and interest.
(13) Chapter VIll of the Act,
the provisions of discharge from
containing Sections 82 to 90, has explained
liability on notes, bills and cheques.
(14) Chapter VIII (Sections 91 to
98) considered the provisions of
dishonour, Chapter IX (Sections 99 to
104A) has explained the provisions of
noting and protest, and Chapter X (Sections 105 & 106) has dealt about
reasonable time.

(15) Chapter XI (Sections 108 to 116) is concerned with the

and payment for honour and reference in case of acceptance
need; Chapter XIl containing
Section 117 has explained the rules
of compensation and Chapter XII (Sections
118 to 122) has explained special rules of evidence
and estoppels.
containing presumptions
(16) Chapter XIV (Sections 123 to 131A) has dealt with the provisions of
crossed cheques; Chapter XV (Sections 132 & 133) has explained the bills in
sets and Chapter XVI (Sections 134-137) has considered the law governing the
foreign (international) instruments.
(17) Chapter XVII, containing Sections 138 to 142 has been inserted in
1988 through an Amendment Act. It deals with the penalties in case ofdishonour
of cheques due to insufficiency of funds in the account of the drawer of the

cheque.
(18) Sections 143 to 147 has been inserted in 2002 through an Amendment
Act providing the procedure of Courts in connection with dishonour of a cheque.
orders/Bankers' Cheques
(19) Period for payment of Cheques/Drafts/Pay
months.
ISSued on or after April 1, 2012 is three
in detail in forthcoming chapters
All these provisions have been presented
ofthis unit.