Negotiable Instruments Act

1881

Types Of Negotiable
Instruments
1. Promissory Note
An instrument in writing containing
unconditional undertaking
Signed by the maker
To pay a definite sum to or to the order of
certain person or bearer

2. Bill of Exchange
An instrumental writing
Contains unconditional order
Signed by the maker
Directing a certain person to pay
Certain sum of money
Only to or the order of certain person or to the
bearer

3. Cheque
A bill of a change drawn on a specified
banker
Expressed to be payable on demand
Includes electronic image of a truncated
cheque and cheque in an electronic form

Characteristics of a Negotiable
Instrument
Freely transferable either by delivery or by
indorsement and delivery.
Title of the holder in due course free from
all defects
The holder in due course can sue in his own
name for recovery of the amount. No notice
of transfer required

Presumptions (Secs. 118 & 119)

Existence of consideration is presumed
Acceptance is within a reasonable time of its
date and before maturity
Transfer is made before maturity
Indorsements are made in the order in which
they appear thereon
Lost instrument was duly stamped
Holder is holder in due course
On proof of protest dishonour is presumed in a
suit on dishonour

Capacity of Parties
Minor may draw, indorse, deliver and
negotiate so as to bind all parties except
himself, i.e., he may operate as a channel to
convey title and liability but not to originate
it
Persons of unsound mind: bills and notes
drawn or made are void against
Corporation: a trading has implied power
and a non trading company must have
express power

Parties to Negotiable
Instruments
Promissory Note
Maker; Payee; Holder; Indorsee; Indorser

Bill of Exchange
Drawer; Drawee; Acceptor; Payee; Holder;
Indorser; Indorsee; Drawee in case of need;
Acceptor for honour

Cheque
Drawer; Drawee; Payee; Holder; Indorser;
Indorsee.

Holder in Due Course

Became holder for consideration before its
maturity.
In good faith, i.e., without sufficient cause
to believe that any defect existed in the title
of the person from whom he derived his
title.

Privileges of Holder in Due

Course
He can fill in an inchoate stamped
instrument for any amount subject to
adequacy of stamping.
Every prior party is liable to a holder in due
course.
Other parties cannot avoid liability on the
ground that the delivery of the instrument
was conditional or for a specific purpose
only.

The instrument gets cleansed of all defects

once it passes though the hands of holder in
due course.
No defense based on fraud or unlawful
consideration can be setup.
Every holder is a holder in due course.
In a suit the validity of the instrument as
originally made or drawn cannot be denied
No indorser is permitted to deny the signature
or the capacity of any prior party to the
instrument.

LIABILITY OF PARTIES [Secs

30-32 & 35-42]
Drawer liable to the holder in case of dishonour of
bill or cheque provided notice given.
Drawee of a cheque(banker) must compensate the
drawer for any loss or damage caused by improper
disorder.
The maker of a promissory note and the acceptor
of a bill liable to pay primarily to the holder on
demand. In default to compensate any party for
loss or damage.

The indorser before maturity is liable to all

subsequent holders in case of dishonour.
Every prior party is liable to a holder in due
course until the instrument is duly satisfied.
An acceptor of a bill already indorsed not
relieved by reason of forgery, if he knew or
had reason to believe.
An acceptor of a bill drawn in a fictitious
name, payable to the drawers order, is not
relieved from liability to any holder in due
course.

Maker of a note or cheque, acceptor of a bill

and the drawer of a bill until acceptance
liable as principle debtors.
Other parties to the instruments are liable as
sureties for maker, drawer or acceptor i.e.,
their liability is secondary and arises only on
a default by the parties primarily liable.
As between parties liable as sureties each
prior party is a principle debtor in respect of
each subsequent party.

NEGOTIATION
When a negotiable instrument is transferred
to any person, the instrument is said to be
negotiated [sec 14].
Negotiation maybe by delivery or
indorsement and delivery.

TYPES OF INDORSEMENT
Blank or general indorsement.
Full or special indorsement.
Restrictive indorsement.
Partial indorsement.
Conditional or qualified indorsement.
Negotiation back.

PRESENTMENT FOR
ACCEPTANCE.
Only bill of exchange needs to presented for
acceptance.
A bill payable on demand or at site or on a
fixed date need not be presented for
acceptance unless otherwise agreed.
An acceptance maybe general or qualified.

Presentment for acceptance maybe made to:The drawee or his agent.

Legal representative, if the drawee is dead.
Assignee if the drawee becomes insolvent.
To all drawees if there are several unless
they are partners or agents of one another.
Drawee in case of need.

Presentment for acceptance is excused

where:The drawee is fictitious or incompetent
person.
Drawee cannot be found.
Drawee is dead or insolvent.
Acceptance refused on ground other than
irregular presentment.
Acceptor for honour of some party liable on
the bill.

PRESENTMENT FOR SIGHT

AND PAYMENT.
A promissory note payable after sight must
be presented to the maker for sight to
determine maturity.
All negotiable instruments must be
presented for payment to the maker,
acceptor or drawee as the case maybe. If
default is made all parties other than
primarily liable parties are discharged.

Presentment for payment is not necessary

where it is prevented by maker,drawee or
acceptor or their business is closed or
cannot be found or waived or where the bill
is dishonoured by non acceptance etc
Payment for honour like acceptance for
honour maybe by third party for the honour
of a party liable to pay the bill

DISHONOUR
A bill may be dishonoured by non-acceptance or
non payment
A promissory note or cheque can be dishonoured
only by non payment
Notice of dishonour must be given to all parties by
the holder
Notice not necessary in certain circumstances like
waiver,drawer countermanding payment,party not
found,non negotiable promissory note etc

DISCHARGE OF AN
INSTRUMENT
o
o
o
o
o

An instrument may be discharged

By payment in due course
By maker or acceptor becoming holder
By express waiver
By cancellation
By a contract for payment of money

DISCHARGE OF PARTY OR
PARTIES
o
o
o
o
o
o
o

A party to a negotiable instrument may be

discharged by
Cancellation
Release
By allowing drawee more than 48hours
By delay in presentment of a cheque
By material alteration
By operation of law
By payment of altered instrument

SPECIAL RULES FOR

CHEQUES AND DRAFTS
These rules are contained in chapter 14 of the Act
containing sections 123-131A
Crossed cheques
o General crossing is to direct the drawee to pay the
amount only to a banker
o Special crossing is always to the banker whose
name appears across a cheque
o A cheque can be crossed after issue also by the
holder

o Holder may change the crossing from one form to

another
o A banker to whom it is crossed may again cross it
specially to another banker for collection
o If a cheque is crossed generally payment shall be
made only to a banker
o When it is crossed specially the banker on whom
it is drawn shall not pay to anybody other than the
banker to whom it is crossed or his agent for
collection.
o When a cheque is crossed to more than one
banker, the banker on whom it is drawn shall
refuse payment except when it is crossed to an
agent for purpose of collection.

Payment in due course of crossed cheque:When the drawee banker pays it in due course it
is presumed that he has made payment to true
owner of the cheque even though the amount
may not reach the true owner.

Payment out of due course:Any banker paying a crossed cheque otherwise

than in due course, i.e., to the banker to whom
it is crossed shall be liable to the true owner for
any loss he may have sustained

Cheque marked not negotiable:A person taking a cheque crossed not

negotiable, shall not have better title than the
one which the person from whom he took had.

Cheque marked account payee:Its a form of restrictive crossing. Its a warning

to the collecting banker that the proceeds have
to be credited only to the account of the payee,
the failure of which will make the collecting
banker liable for losses.

Banker receiving payment of cheque in

good faith and without negligence for a
customer of a cheque crossed generally or
specially to himself shall not incur any
liability to the true owner if the title of the
cheque is proved defective
The provisions applicable to cheques are
also applicable to draft issued by a bank.

Thank You