UNIT-3 Negotiable Instruments Act, 1881

The Negotiable Instruments Act, 1881 is an Indian legislation that

governs the legal framework for negotiable instruments, such as
promissory notes, bills of exchange, and cheques. The act was enacted
to facilitate the use of negotiable instruments as a means of payment,
credit, and transfer of funds.
Meaning: The Negotiable Instruments Act, 1881 is an Indian
legislation that governs the legal framework for negotiable
instruments. Negotiable instruments are financial instruments that
guarantee the payment of a specific amount of money to the bearer or
to the person named in the instrument.
As per Section 13 of the Negotiable Instruments Act, 1881, a
negotiable instrument is defined as "a promissory note, bill of
exchange or cheque payable either to order or to bearer." In simpler
terms, a negotiable instrument is a written document that promises to
pay a specific amount of money to the person who holds the
instrument, or to the person named in the instrument, or to the order
of that person.
Key provisions of the Negotiable Instruments Act, 1881:
Types of Negotiable Instruments: The act recognizes three types of
negotiable instruments - promissory notes, bills of exchange, and
cheques.
Parties to a Negotiable Instrument: The act specifies the various
parties involved in a negotiable instrument, such as the drawer, payee,
and drawee.
Endorsement: The act also provides for endorsement, which is the
process of transferring the ownership of a negotiable instrument to
another person.
Liability of Parties: The act specifies the liability of parties involved
in a negotiable instrument, such as the liability of the drawer,
acceptor, and endorser.
Dishonour of Negotiable Instrument: The act also provides for the
consequences of the dishonour of a negotiable instrument, such as the
right to sue for recovery of the amount due.
Legal Proceedings: The act provides for legal proceedings in case of
disputes related to negotiable instruments, such as the procedure for
filing a complaint in case of dishonour of a cheque.
Overall, the Negotiable Instruments Act, 1881 provides a legal
framework for the use of negotiable instruments, which helps in
promoting commerce and trade. It also provides for the rights and
liabilities of parties involved in negotiable instruments, which helps in
ensuring fair and transparent transactions.

Features:
Legal validity: The Negotiable Instruments Act, 1881 provides legal
validity to negotiable instruments. This means that a negotiable
instrument is a legally binding document that can be used as evidence
in a court of law.
Transferability: One of the most important features of negotiable
instruments is that they are transferable. This means that the
ownership of the instrument can be transferred from one person to
another by delivery or endorsement.
Negotiability: A negotiable instrument can be bought or sold, just like
any other asset. The holder of a negotiable instrument has the right to
negotiate it, which means that they can transfer the instrument to
another person for value.
Payment guarantee: Negotiable instruments are a guarantee of
payment. The issuer of the instrument promises to pay a certain
amount of money to the holder of the instrument on demand or at a
future date.
Parties involved: The Negotiable Instruments Act, 1881 specifies the
various parties involved in a negotiable instrument, such as the
drawer, payee, and drawee.
Endorsement: The act provides for endorsement, which is the process
of transferring the ownership of a negotiable instrument to another
person.
Liability of parties: The act specifies the liability of parties involved
in a negotiable instrument, such as the liability of the drawer,
acceptor, and endorser.
Dishonour of negotiable instrument: The act also provides for the
consequences of the dishonour of a negotiable instrument, such as the
right to sue for recovery of the amount due.
TYPES OF NEGOTIABLE INSTRUMENTS
1.Promissory Notes: According to the Negotiable Instruments Act of
1881 in India, Section-4, a promissory note is defined as a written
instrument that contains an unconditional promise signed by the
maker to pay a certain sum of money to the payee or to the order of
the payee on demand or at a specified future time.
In simpler terms, a promissory note is a written promise made by one
person (the maker) to pay a certain amount of money to another
person (the payee) at a future date or upon demand. It is a legally
binding contract that can be transferred to others, and it is considered
a negotiable instrument.
Example-
A promise to pay Z, the sum of Rs. 100000 on or before 1/5/23 at
interest rate of 6% per annum.
Parties involved in promissory note
 Maker: The person who makes the promise to pay is called the
maker of the promissory note.
 Payee: The person to whom the payment is to be made is called
the payee of the promissory note.
Features of a promissory note
 Parties: A promissory note must contain the names of the parties
involved, i.e., the maker (borrower) and the payee (lender).
 Amount: The amount of money promised to be paid must be
clearly stated in the note.
 Date of payment: The date on which the payment is due or the
date on which the note becomes payable must be mentioned.
 Interest rate: If applicable, the interest rate at which the loan is
being given should be included.
 Maturity date: This is the date on which the note becomes due
for payment.
 Terms of payment: The mode of payment, i.e., whether it will be
paid in a lump sum or in instalments, should be mentioned.
 Collateral: If the loan is secured by collateral, such as property
or assets, it should be clearly stated in the note.
 Signature: The promissory note must be signed by the maker.
 Legal provisions: The note may include legal provisions such as
the governing law, jurisdiction, and any penalties for defaulting
on the payment.
 Transferability: The note may be made transferable, allowing
the payee to assign it to a third party, thereby making it a
negotiable instrument.
 Promise must be certain and unconditional-The promise to be
valid must not be uncertain and conditional otherwise the
instrument will be invalid.
 Promise to pay must be in legal tender money- The Promise to
pay must be in legal tender money of India (Rupee notes or
coins). It will be invalid if it is payable in foreign money.

Specimen of Promissory Note

*In the above specimen Shyam is the drawer /borrower and Prem
Chand is the payee/lender.

2.Bills of Exchange: A bill of exchange is a negotiable instrument

that is used to facilitate the transfer of funds from one party to
another. As per the Negotiable Instruments Act, 1881, a bill of
exchange is defined as follows:
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."
In simpler terms, a bill of exchange is a written order from the
creditor (maker) to the debtor (drawee) to pay a certain sum of money
to a specific person (payee) or to the bearer of the instrument. The bill
must be signed by the maker and the order to pay must be
unconditional.

Parties involved in bills of exchange

 Drawer: The person who draws the bill and makes an order to
pay is called the drawer of the bill of exchange.
 Drawee: The person on whom the bill is drawn and who is
directed to pay is called the drawee of the bill of exchange.
  Payee: The person to whom the payment is to be made is called
the payee of the bill of exchange.
Features of bill of exchange
 Parties: There are three parties involved in a bill of exchange –
the drawer (maker), the drawee (debtor), and the payee (the
person to whom the payment is to be made).
 Amount: The amount of money to be paid must be clearly stated
in the bill.
 Unconditional order: The order to pay must be unconditional,
i.e., it cannot be subject to any conditions or contingencies.
 Signature: The bill must be signed by the maker or the
authorized representative of the maker.
 Payee: The bill must specify the name of the payee or be made
payable to the bearer of the instrument.
 Bills of exchange are widely used in international trade and
commerce as a means of payment and financing.

Specimen of Bills of Exchange

*In the above specimen, Alpha is a Drawer, Gamma is the Drawee

and Beta is the Payee.
3.Cheques
A cheque is a negotiable instrument that is used to facilitate the
transfer of funds from one bank account to another. As per the
Negotiable Instruments Act, 1881, a cheque is defined as follows:
Section 6: "A cheque is a bill of exchange drawn on a specified
banker and not expressed to be payable otherwise than on demand."
In simpler terms, a cheque is a bill of exchange that is drawn on a
specific bank and is payable on demand.
Parties involved in a cheque
 Drawer: The person who draws the cheque and gives the
direction to pay is called the drawer of the cheque.
 Drawee bank: The bank on which the cheque is drawn is called
the drawee bank.
 Payee: The person to whom the payment is to be made is called
the payee of the cheque.
Features of a cheque
 Parties: There are three parties involved in a cheque – the
drawer (person who issues the cheque), the drawee (bank on
which the cheque is drawn), and the payee (person to whom the
payment is to be made).
 Amount: The amount of money to be paid must be clearly stated
in the cheque.
 Payable on demand: The cheque must be payable on demand,
i.e., it can be presented for payment at any time.
 Signature: The cheque must be signed by the drawer or the
authorized representative of the drawer.
 Payee: The cheque must specify the name of the payee or be
made payable to the bearer of the instrument.
 Cheques are widely used for making payments in business
transactions, personal payments, and other financial
transactions. They offer a convenient and secure way of
transferring funds, especially for transactions involving large
amounts of money.
Specimen of Cheque

Types of Cheque
There are different types of cheques that can be used for different purposes,
some of which are:
 Bearer Cheque: A bearer cheque is a cheque that is payable to the bearer
of the cheque, which means that the cheque can be cashed by anyone who
presents it to the bank.
 Order Cheque: An order cheque is a cheque that is payable only to the
person whose name is written on the cheque. It can only be cashed by the
person who is named as the payee on the cheque.
 Crossed Cheque: A crossed cheque is a cheque that has two parallel lines
drawn across it, which indicates that the cheque can only be deposited
into a bank account and cannot be cashed over the counter. This provides
an added layer of security against fraudulent activities.
 Open Cheque: An open cheque is a cheque that can be cashed over the
counter at the bank or deposited into a bank account.
 Post-dated Cheque: A post-dated cheque is a cheque that is dated for a
future date. It can only be cashed or deposited into a bank account on or
after the date written on the cheque.
 Stale Cheque: A stale cheque is a cheque that has not been cashed within
six months of the date written on the cheque. It may not be accepted by
the bank and the issuer may need to issue a new cheque.
 Dishonour of Cheque
Dishonour of a cheque refers to the refusal by the bank to honour the
payment of the cheque presented by the payee or holder of the
cheque. The Negotiable Instruments Act, 1881 provides for the
following two types of dishonour of a cheque:
 Cheque dishonoured for insufficient funds: This occurs when
the cheque presented for payment is returned by the bank due to
insufficient funds in the account of the drawer. This is also
known as a bounced cheque.
 Cheque dishonoured for other reasons: A cheque can also be
dishonoured for reasons other than insufficient funds, such as a
discrepancy in the signature or date, the cheque being post-dated
or stale, or the account being closed.
Section 138 of the Negotiable Instruments Act, 1881 provides for
the legal consequences of dishonour of a cheque.
If a cheque is dishonoured, the payee or holder of the cheque can send
a notice to the drawer of the cheque within 30 days of the dishonour,
demanding payment of the amount due. The drawer then has 15 days
from the receipt of the notice to make the payment.
If the drawer fails to make the payment within the stipulated time, the
payee or holder of the cheque can file a criminal complaint against the
drawer under Section 138 of the Act. The drawer can be punished
with imprisonment for a term which may extend to two years, or with
a fine which may extend to twice the amount of the cheque, or both.
In summary, dishonour of a cheque can results in legal consequences
for the drawer of the cheque, and the payee or holder of the cheque
can take legal action to recover the amount due.

Crossing of Cheques
(SECTION 123)
Crossing of cheques is a process of marking a cheque with two
parallel lines, either across the cheque or on the top left corner of the
cheque. This process adds an extra layer of security to the cheque,
making it harder to forge or misuse.

Features of crossing of cheques:

 Security: Crossing of cheques provides an additional layer of
security to the cheque by making it harder to forge or misuse.
 Restricted use: A crossed cheque can only be deposited into a
bank account and cannot be cashed over the counter, making it
more difficult for someone to steal or misuse the funds.
 Accountability: Crossing of cheques creates a trail of
accountability and helps to prevent fraud.

Types of crossing of cheques

1.General Crossing: A general crossing is denoted by drawing two
parallel lines across the cheque. When a cheque is marked with a
general crossing, it means that the cheque can only be deposited into a
bank account and cannot be cashed over the counter.
The Effect of general crossing is that the crossed cheque cannot be
paid at the counter of the bank. Its payment can only be deposit into
the payee’s account only.
2.Special Crossing: A special crossing involves adding the name of a
specific bank between the two parallel lines. This means that the
cheque can only be deposited into the account of the bank named in
the crossing. The name of the bank must be written in between the
two parallel lines, and the cheque must be deposited into an account
with that bank.
Effect -Payment will be done to specified banker, and is more safe
than general crossing. The payment can by only be made to the bank
named therein the cheque.

3.Restrictive Crossing: A restrictive crossing involves writing the

words "account payee only" or "not negotiable" between the two
parallel lines. This means that the cheque can only be deposited into
the account of the named payee and cannot be transferred to another
party.
Effect -:
When a cheque is crossed “Account payee only”, payment should be
credited by the bank only to the account of the payee.

In conclusion, crossing of cheques is a simple but effective way to

add an additional layer of security and accountability to cheque
transactions. The types of crossing of cheques include general
crossing, special crossing, and restrictive crossing, each with their
unique restrictions and requirements.
Who may Cross the Cheque?
 THE DRAWER: While issuing a cheque the drawer can cross
the cheque generally or specially.
 THE HOLDER: If the cheque is not crossed, the holder can
cross the cheque generally or specially.
 THE BANKER: If the cheque is not crossed and send to the
bank for collection, banker can cross the cheque generally.
Cancellation of crossing of a cheque
In case the drawer of a cheque wants to cancel the crossing of a
cheque he has crossed, he may do so by cancelling the parallel lines
and writing the words “Payment be made in cash” and signing below
it.
 Dishonour of Negotiable Instrument
A negotiable instrument is a written document that promises to pay a
specific amount of money to the bearer or the person named on the
document. These documents include cheques, promissory notes, bills
of exchange, and other similar documents.
Section 91 to Section 118 of the Act deals with the dishonour of
negotiable instruments such as promissory notes, bills of exchange,
and cheques. These sections define the rights and obligations of the
parties involved in a transaction where the negotiable instrument has
been dishonoured.
When a negotiable instrument is dishonoured, it means that the
payment has not been made by the party responsible for payment.
There are two types of dishonour of negotiable instruments:
 Dishonour by non-acceptance: When a bill of exchange is
presented for acceptance, and the drawee refuses to accept it, the
instrument is said to be dishonoured by non-acceptance. This
typically occurs when the drawee disputes the validity of the
bill, or if there are insufficient funds in the drawee's account.
 Dishonour by non-payment: When a negotiable instrument is
presented for payment, and payment is not made by the drawee,
the instrument is said to be dishonoured by non-payment. This
can occur when the drawee refuses to pay, there are insufficient
 funds in the drawee's account, or the instrument has been forged
or altered.
In both cases, the holder of the negotiable instrument has the right to
take legal action against the party responsible for payment. The holder
can also seek compensation for any damages incurred as a result of
the dishonor.
The procedure to be followed after the dishonour of an instrument under
the Negotiable Instruments Act 1881 is as follows:
 Notice of Dishonour: The holder of the dishonoured instrument should
give notice of dishonour to the drawer of the instrument within a
reasonable time after the dishonour. This notice should state that the
instrument has been dishonoured and demand payment of the amount
due. The notice may be given by post, by hand or in any other manner
providing a written record of the communication.
Section 93 of the Negotiable Instruments Act 1881 states that the notice of
dishonour may be given by any person who has given value for the instrument,
or by the holder or his agent.
 Noting and Protest: If the instrument is not paid upon presentment for the
first time or within the three days grace period, the holder may have the
instrument noted and protested by a notary public or other authorized
person. This serves as evidence of the dishonour of the instrument and
may be used as proof in legal proceedings.
Section 99 of the Negotiable Instruments Act 1881 states that the noting and
protest should be made on the day of dishonour or on the next business day, and
should include the date of dishonour, the reason for dishonour and the signature
of the notary public or other authorized person.
 Suit for Recovery: The holder of the dishonoured instrument may file a
suit for recovery of the amount due against the drawer or other parties
liable for payment. The suit should be filed within three years from the
date of dishonour or from the date on which the notice of dishonour is
given.
Section 118 of the Negotiable Instruments Act 1881 states that the suit should
be filed in a court having jurisdiction over the matter and should include a
statement of the cause of action, the amount claimed and the relief sought.
In summary, the procedure after the dishonour of an instrument under the
Negotiable Instruments Act 1881 includes giving notice of dishonour, noting
and protesting the instrument and filing a suit for recovery. These steps must be
followed within the prescribed time limits and in accordance with the provisions
of the Act to ensure that the holder has the right to take legal action against the
drawer or other parties liable for payment.

Negotiable Instrument Act Amendment Act 2002

The Negotiable Instruments Act (NI Act) is an important law governing the use
and transfer of negotiable instruments such as cheques, promissory notes, and
bills of exchange in India. The Act was first passed in 1881 and has since
undergone several amendments to keep up with the changing business
environment. One such amendment was the Negotiable Instruments Act
Amendment Act 2002, which was enacted to make certain changes to the NI
Act.
The main purpose of the NI Act Amendment Act 2002 was to provide greater
protection to holders of negotiable instruments and to encourage the use of
digital modes of payment. Here are some of the key changes that were made to
the NI Act through this amendment:
 Introduction of electronic cheques: The amendment introduced the
concept of electronic cheques, which are essentially digital images of
physical cheques. This enabled faster processing and reduced the time
taken for clearance of cheques. The Act also provided for the use of
electronic signatures on cheques.
 Enhanced penalty for dishonour of cheques: The amendment increased
the penalty for dishonour of cheques from a maximum of six months
imprisonment to a maximum of two years imprisonment. This was done
to discourage the issuance of cheques without sufficient funds in the
account.
 Introduction of "cheque truncation": The amendment introduced the
concept of "cheque truncation", which refers to the process of stopping
the flow of physical cheques at some point in the clearing cycle, and
instead transmitting electronic images of the cheques to the paying bank.
This helped to speed up the clearing process and reduce the risk of fraud.
  Protection for payees of electronic cheques: The amendment provided
protection to payees of electronic cheques by treating them on par with
physical cheques. This meant that electronic cheques were also covered
under the NI Act and any dishonour of an electronic cheque would be
treated as an offence under the Act.
 Provision for payment of interest: The amendment provided for payment
of interest to holders of dishonoured cheques. If a cheque was
dishonoured due to insufficient funds, the issuer would be liable to pay
interest on the amount of the cheque from the date of dishonour till the
date of actual payment.
These were some of the key changes introduced by the NI Act Amendment Act
2002. The Act has since been further amended to keep up with the changing
business environment and to promote the use of digital modes of payment.