THE NEGOTIABLE INSTRUMENTS ACT, 1881

A negotiable instrument simply means a promissory

note, bill of exchange, or cheque, payable either to
order or to bearer. Hence a negotiable instrument is
the property acquired by anyone who takes it
bonafide & for value notwithstanding any defect on
title in the person from whom he took it.

Thus, a negotiable instrument:

(1)entitles a person to a sum of money,
(2)is transferable (by customs of trade) by
delivery, like cash, or by Endorsement and
delivery and delivery, and (3) is capable of
being used upon by the person holding for
the time being i.e. the person to whom it is
transferred becomes entitled to money and
also a right to further transfer it.

Act, 1881, there are just three types of

negotiable instruments i.e.,
Promissory note,
Bill of exchange and
Cheque.
However many other documents are also
recognized as negotiable instruments on
the basis of custom and usage, like
hundis, Negotiable Instruments, treasury
bills, share warrants, etc., provided they
possess the features of negotiability. In
the following sections, we shall study
about Promissory Notes (popularly called
pronotes), Bills of Exchange (popularly
called bills), Cheques and Hundis (a
popular indigenous document prevalent in

i. Promissory Note
Suppose you take a loan of Rupeess Five
Thousand from your friend Ramesh. You
can make a document stating that you will
pay the money to Ramesh or the bearer
on demand. Or you can mention in the
document that you would like to pay the
amount
after
three
months.
This
document, once signed by you, duly
stamped and handed over to Ramesh,
becomes a negotiable instrument.
Now Ramesh can personally present it
before you for payment or give this
document to some other person to collect
money on his behalf. He can endorse it in
somebody elses name who in turn can

Section 4 of the Negotiable Instruments

Act, 1881 defines a promissory note as
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.
The Negotiable Instruments Act was passed in
1881. Some provisions of the Act have become
redundant due to passage of time, change in
methods of doing business and technology
changes.

The instrument is mainly an instrument of

credit readily convertible into money and
easily passable from one hand to another.
The Negotiable Instruments Act was
passed in 1881. Some provisions of the
Act have become redundant due to
passage of time, change in methods of
doing business and technology changes.

The instrument is mainly an instrument of

credit readily convertible into money and
easily passable from one hand to another.

Specimen of a Promissory Note

LOCAL
USAGE
PREVAILS
UNLESS
EXCLUDED
The Act does not affect any local usage
relating to any instrument in an oriental
language.
However, the local usage can be excluded
by any words in the body of the
instrument, which indicate an intention
that the legal relations of the parties will
be governed by provisions of Negotiable
Instruments Act and not by local usage.
[section 1].
Thus, unless specifically excluded, local

There are primarily two parties involved in a

promissory note. They are,
i. The Maker or Drawer the person who makes the
note and promises to pay the amount stated therein.
In the above specimen, Sanjeev is the maker or
drawer.
ii. The Payee the person to whom the amount is
payable. In the above specimen it is Ramesh.
In course of transfer of a promissory note by payee
and others, the parties involved may be a. The Endorser the person who endorses the note
in
favour of another person.
In the above specimen, if Ramesh endorses it in
favour of
Ranjan and Ranjan also endorses it in favour of
Puneet,
then Ramesh and Ranjan both are endorsers.
b. The Endorsee the person in whose favour the

Endorsement means, transfer of any document

or instrument to another person by signing on its
back or face or on a slip of paper attached to it.
FEATURES OF A PROMISSORY NOTE

i.

A promissory note must be in writing, duly signed

by its maker and properly stamped as per Indian
Stamp Act.

ii. It must contain an undertaking or promise to pay.

Mere
acknowledgement of indebtedness is not
enough.
For example, if someone writes I owe Rs. 5000/- to
Satya Prakash, it is not a promissory note.
iii. The promise to pay must not be conditional.

iv. It must contain a promise to pay money

only. For example, if someone writes I promise
to give Suresh a Maruti car it is not a
promissory note.
v. The parties to a promissory note, i.e. the
maker and the payee must be certain.
vi. A promissory note may be payable on
demand or after a certain date. For example, if
it is written
three months after date I
promise to pay Satinder or order a sum of
rupees Five Thousand only it is a promissory
note.
vii. The sum payable mentioned must be
certain or capable of being made certain. It

Suppose Rajiv has given a loan of Rupees

Ten Thousand to Sameer, which Sameer has
to return.
Now, Rajiv also has to give some money to
Tarun. In this case, Rajiv can make a
document
directing
Sameer
to
make
payment up to Rupees Ten Thousand to
Tarun on demand or after expiry of a
specified period. This document is called a
Bill of Exchange, which can be transferred to
some other persons name by Tarun.
Section 5 of the Negotiable Instruments Act,
1881 defines a bill of exchange as 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

cimen of a Bill of Exchange:

exchange.
i. The Drawer The person who makes the
order for making payment. In the above
specimen, Rajiv is the drawer.
ii. The Drawee The person to whom the order
to pay is made.He is generally a debtor of the
drawer. It is Sameer in this case.
iii. The Payee The person to whom the
payment is to be made. In this case it is Tarun.
The drawer can also draw a bill in his own name
thereby he himself becomes the payee. Here
the words in the bill would be Pay to us or
order. In a bill where a time period is
mentioned, just like the above specimen, is
called a Time Bill. But a bill may be made

Features of a bill of exchange:

i. A bill must be in writing, duly signed by its
drawer, accepted by its drawee and
properly stamped as per Indian Stamp Act.

ii.
It must contain an order to pay. Words
like please pay Rs
5,000/- on demand and oblige are not
used.
iii.

The order must be unconditional.

iv.
The order must be to pay money and
money alone.
v. The sum payable mentioned
certain or capable of

must

be

Cheque is a very common form of negotiable

instrument. If you have a savings bank
account or current account in a bank, you can
issue a cheque in your own name or in favour
of others, thereby directing the bank to pay
the specified amount to the person named in
the cheque.
Therefore, a cheque may be regarded as a bill
of exchange; the only difference is that the
bank is always the drawee in case of a
cheque.
The Negotiable Instruments Act, 1881 defines
a cheque as a bill of exchange drawn on a
specified banker and not expressed to be
payable otherwise than on demand. Actually,
a cheque is an order by the account holder of
the bank directing his banker to pay on
demand, the specified amount, to or to the

i.
ii.

A cheque must be in writing

signed by the drawer.

& duly

It should contain an unconditional order.

iii. It is issued on a specified banker only.

iv. The amount specified is always certain
and must be clearly
mentioned both in figures and words.
v. The payee is always certain.
vi. It is always payable on demand.
vii. The cheque must bear a date otherwise it
is invalid and

Types of Cheques
Broadly speaking, cheques are of four types.
a) Open cheque,
b) Crossed cheque,
c) Bearer cheque,
d) Order cheque.

a) Open cheque:
A cheque is called Open when it is
possible to get cash over the counter at
the bank.
The holder of an open cheque can do the
following:
i. Receive its payment over the counter
at the bank,
ii. Deposit the cheque in his own account,
iii. Pass it to some one else by signing on
the back of a

b) Crossed cheque:
Since open cheque is subject to risk of
theft, it is dangerous
to issue such cheques.
This risk can be avoided by issuing
another types of cheque
called Crossed cheque.
The payment of such cheque is not made
over the counter
at the bank. It is only credited to the bank
account of the
payee.
A cheque can be crossed by drawing two

The various types of negotiable instruments and

their features are,
i. A negotiable instrument is freely
transferable. Usually, when we transfer any
property to somebody, we are required to
make a transfer deed, get it registered, pay
stamp duty, etc. But, such formalities are not
required while transferring a negotiable
instrument.
The ownership is changed by mere delivery
(when payable to the bearer) or by valid
endorsement and delivery (when payable to
order).
Further, while transferring it is also not
required to

ii. Negotiability confers absolute and good title

on the transferee. It means that a person who
receives a negotiable instrument has a clear
and undisputable title to the instrument.
However, the title of the receiver will be
absolute, only if he has got the instrument in
good faith and for a consideration. Also the
receiver should have no knowledge of the
previous holder having any defect in his title.
Such a person is known as holder in due
course.
For example, suppose Rajiv issued a bearer
cheque payable to Sanjay. It was stolen from
Sanjay by a person, who passed it on to Girish.
If Girish received it in good faith and for value
and

iii. A negotiable instrument must be in

writing. This includes handwriting, typing,
computer print out and engraving, etc.
iv. In every negotiable instrument there
must be an unconditional order or promise
for payment.
v. The instrument must involve payment of
a certain sum of money only and nothing
else. For example, one cannot make a
promissory note on assets, securities, or
goods.
vi. The time of payment must be certain. It
means that the instrument must be payable
at a time which is certain to arrive. If the
time is mentioned as when convenient it is
not a negotiable instrument.

vii. The payee must be a certain person. It

means that the person in whose favour the
instrument is made must be named or
described with reasonable certainty. The
term person includes individual, body
corporate, trade unions, even secretary,
director or chairman of an institution. The
payee can also be more than one person.
viii. A negotiable instrument must bear the
signature of its maker. Without the
signature of the drawer or the maker, the
instrument shall not be a valid one.
ix. Delivery of the instrument is essential.
Any negotiable instrument like a cheque or
a promissory note is not complete till it is
delivered to its payee.

x. Stamping of Bills of Exchange and

Promissory Notes is mandatory.
This is required as per the Indian Stamp
Act, 1899. The value of stamp depends
upon the value of the pronote or
bill and the time of their payment.

IMPORTANT RELEVANT TERMINOLOGY

Drawer, Drawee:
The maker of a bill of exchange or cheque is
called the drawer; the person thereby directed
to pay is called the "drawee" .
Drawee in case of need: When in the bill or
in any endorsement thereon the name of any
person is given in addition to the drawee to be
resorted to in case of need, such person is called
a "drawee in case of need ".
Acceptor: After the drawee of a bill has
signed his assent upon
the bill, or, if there are more parts thereof than
one, upon one of
such parts delivered the same, or given notice
of such signing to

Acceptor for honour

When a bill of exchange has been noted
or
protested
for non acceptance or for better
security, and any person accepts it supra protest
for honour of the drawer or of any one of the
endorsers, such person is called an acceptor for
honour".
Payee
The person named in the instrument, to whom or
to whose order the money is by the instrument
directed to be paid, is called the "payee".
Holder
The "holder" of a promissory note, bill of
exchange or cheque means any person entitled in
his own name to the possession thereof and to
receive or recover the amount due thereon from
the parties thereto. Where the note, bill or

"Holder in due course".

Holder in due course" means any person who
for consideration became the possessor of a
promissory note, bill of exchange or cheque if
payable to bearer, or the payee or Endorsee
thereof, if [payable to order,] before
the
amount mentioned in it became payable, and
without having sufficient cause to believe that
any defect existed in the title of the person from
whom he derived his title.
"Payment in due course"
"Payment in due course" means payment in
accordance with the apparent tenor of the
instrument in good faith and without negligence
to any person in possession thereof under
circumstances which do not afford a reasonable
ground for believing that he is not entitled to
receive payment of the amount
therein

Inland instrument
A promissory note, bill of exchange or cheque
drawn or made in 1 [India], and made payable in,
or drawn upon any person resident in, [India]
shall be deemed to be an inland instrument.
Foreign instrument
Foreign instrument. Any such instrument not so
drawn, made or
made payable shall be deemed to be a foreign
instrument.
Negotiable instrument
A "negotiable instrument means a promissory
note, bill of exchange or cheque payable either
to order or to bearer.

EXPLANATIONs OF OPERATION
(i)- A promissory note, bill of exchange or cheque is
payable to order which is expressed to be so payable
or

which

is expressed

person, and does not

to be payable to a particular
contain words

prohibiting

transfer or indicating an intention that it shall not be

transferable.
(ii)- 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 endorsement is an
endorsement in blank.
(iii)- Where a promissory note, bill of exchange or cheque,
either originally or by endorsement, is expressed to be
payable to the order of a specified person, and not to

(IV) 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 one or some of several payees.
(V) Negotiation: When a promissory note, bill of
exchange or cheque is
transferred
to any
person, so as to constitute that person the
holder thereof, the instrument is said to be
negotiated.
(VI) Endorsement: When the maker or holder
of a negotiable
instrument signs the same, otherwise than as
such maker, for the purpose of negotiation, on
the back or face thereof or on a slip of paper
annexed thereto, or so signs for the same
purpose a
stamped paper intended to be

Endorsement in "blank" and "in full:

If the
endorser signs his name only, the endorsement
is said to be " in blank," and if he adds a
direction to pay the amount mentioned in the
instrument to, or to the order of, a specified
person, the endorsement is said to be in full,
and the person so specified is called the
Endorsee of the instrument.
Endorsee: The provisions of this Act relating to
a
payee shall apply with the necessary
modifications to an endorsee.
Where amount is stated differently in figures and
words:
If the amount undertaken or ordered to be paid

"At sight, "On presentment:

In a promissory note or bill of exchange the
expressions at sight" and "on presentment"
mean on demand.
The expression "after sight" means, in a
promissory note, after presentment for sight,
and, in a bill of exchange, after acceptance, or
noting for non acceptance, or protest for non"Maturity"
acceptance.
The maturity of a promissory note or bill of
exchange is the date at which it falls due.
Days of Grace: Every promissory note or bill of
exchange which is
not expressed to be payable on demand, at
sight or on presentment is at maturity on the
third day after the day on which it is expressed
to be payable.

Calculating maturity of bill or note payable

so
many months after
date or sight. In
calculating the date at which a promissory note
or bill of exchange, made payable a stated
number of months after date or after sight, or
after a certain event, is at maturity, the period
stated shall be held to terminate on the day of
the month which corresponds with the day on
which the instrument is dated, or presented
for acceptance or sight, or noted for nonacceptance, or protested for non acceptance,
or the event happens, or, where the instrument
is a bill of exchange made payable a stated
number of months after sight and has been
accepted for honour, with the day on which it
was so accepted.
If the month in which the period would

(a)
A
negotiable instrument, dated 29th
January 1878, is made payable at one month
after date. The instrument is at maturity on
the third day after the 28th February 1878.
(b) A negotiable instrument, dated 30th
August 1878, is made payable three months
after date. The instrument is at maturity on
the 3rd December 1878.
(c) A promissory note or bill of exchange,
dated 31st August
1878, is made payable three months after
date. The instrument is at maturity on the

Calculating maturity of bill or note payable

so many days after date or sight:
In calculating the date at which
a
promissory note or bill of exchange made
payable a certain number of days after date
or after sight or after a certain event is at
maturity, the day of the date, or of
presentment for acceptance or sight, or of
protest for non-acceptance, or on which the
event happens, shall be excluded.
When day of maturity is a holiday:
When the day on which a promissory note or
bill of exchange is at maturity is a public
holiday, the instrument shall be deemed to
be due on the next preceding business day.

Public holiday" includes Sundays and any

When notice of dishonour is unnecessary.

No notice of dishonour is necessary(a) when it is dispensed with by the
party entitled
thereto;
(b) in order to charge the drawer when he
has countermanded
payment;
(c) when the party charged could not suffer
damage for want
of notice;
(d) when the party entitled to notice
cannot after due
search be found; or the party bound to give
notice is, for any
other reason, unable without any fault of his
own to give it;
(e) to charge the drawers, when the

Noting:
When a promissory note or bill of exchange
has been dishonoured by non-acceptance or
non-payment, the holder may cause such
dishonour to be noted by a notary public
upon the instrument,
or
upon a paper
attached thereto, or partly upon each.
Such note must be made within a reasonable
time after dishonour, and must specify the
date of dishonour, the reason, if any,
assigned for such dishonour, or, if the
instrument has
not
been
expressly
dishonoured, the reason why the holder
treats it as dishonoured, and the notary's

Protest:

When a promissory note or bill of

exchange has been dishonoured by nonacceptance or non-payment, the holder
may, within a reasonable time, cause
such dishonour to be noted and certified
by a notary public.
Such certificate is
called a protest.

Acceptance for honour:

When a bill of exchange has been noted
or protested for non acceptance or for
better security, any person not being a
party already liable thereon may, with
the consent of the holder, by writing on