The Negotiable Instruments Act

1881
Introduction
• Negotiable Instrument Act (NI Act) 1881 came
into effect from 1st March 1882.
• It has 148 sections.
• The latest amendment came in the form of
Negotiable Instruments Amendment Act 2018
notified through Official Gazette on 2nd
August 2018.
 Meaning of Negotiable
Instruments
• The word ‘negotiable’ means can be transferred and the word
‘instrument’ means a written document by which a right is
created in favour of some person.
• Thus, the term ‘negotiable instruments’ means a written
document transferable by delivery or by endorsement, passes
to the transferee a bona fide title to payment according to its
tenor.
• It should be in the form of writing, signed by the maker or
drawer, an unconditional promise or order to pay, fixed amount
of money to be stated, transferrable from one person to
another person, be payable to order or to bearer or on demand
at a definite time.
What is Negotiability?
• Negotiability is the unique feature that a
negotiable instrument posse, which means,
the instrument is freely transferable and the
title of the transferee is better if he/she took
the instrument for value and in good faith
under such circumstances having no suspicion
about any defect in the title of the transferor.
Such a transferee is called holder in due
course.
 Negotiable Instrument Act
• Negotiable Instrument (NI) has been defined
under section 13 of Negotiable Instrument
Act, which include
• Promissory Note,
• Bill of Exchange &
• Cheque
 Types of Negotiable Instruments
• 1. Negotiable instruments by custom or usage
• There are certain instruments which have
acquired the character of negotiability by the
usage or custom of trade.
• For example: Bill of Lading etc.
 Types of Negotiable Instruments
• 2. Negotiable instruments by Statute
• The Act mentions only three types of
negotiable Instruments (Section 13).These are:
• Promissory Note
• Bill of Exchange
• Cheque
 Promissory Note (Section 4 of NI Act)
• A Promissory note is an instrument in writing that contains a
written promise,an unconditional undertaking, signed by the
maker, to pay a certain sum of money on a specific date or
whenever demanded.
• Example
• A signs instruments in the following terms:
• (a ) “I promise to pay B or order Rs. 500.”
• (b) “I acknowledge myself to be indebted to B in Rs. 1,000, to be paid on
demand, for value received.”
• (c) “I promise to Pay B Rs. 500 and all other sums which shall be due to
him.”
• (d) “I promise to Pay B Rs. 500, first deducting thereout any money
which he may owe me.”
• (e) “I promise to Pay B Rs. 500 seven days after my marriage with C.”
• (f) “I, promise to Pay B Rs. 500 on D's death, provided D leaves me
enough to pay that sum.”
Essential Ingredients for Promissory Note

• 1. UNCONDITIONAL: There cannot be any

conditions precedent to payment.
• 2. PROMISE OR ORDER TO PAY: There must be a
written undertaking to pay money that is signed by
the person promising to pay. For example, “I, John
Smith, promise to pay to the order of Jan Smith
two hundred dollars” would satisfy this
requirement.
• 3. A FIXED AMOUNT OF MONEY: The principal
amount due under the promissory note must be
absolute and not subject to change.
 Essential Ingredients for Promissory Note
• 4. PAYABLE TO ORDER OR BEARER: The promissory note must be payable
to order or to bearer by using language such as “Pay to the order of Jan
Smith”—or “I promise to pay to the order of bearer”.

• 5. PAYABLE ON DEMAND OR AT A DEFINITE TIME: The note is payable on

demand if it states that it is payable “on demand” or “at sight” or if it
does not dictate a specific time for payment. This makes the note payable
at the will of the note’s holder. The note is payable at a definite time if it
specifies a specific date for payment, or if it states a specific period of
time after sight, such as “120 days after presentment for payment.”

• 6. DOES NOT STATE ANY UNAUTHORIZED UNDERTAKING OR

INSTRUCTIONS: Finally, promissory notes prohibits from stating any other
undertaking or instruction by the person promising or ordering payment
to do any act beyond the payment of money.
 What to Include in a Promissory Note

• A promissory note typically contains all the

terms pertaining to the indebtedness, such as
the principal amount, interest rate, maturity
date, date and place of issuance, and issuer’s
signature.
• Promissory notes require stamping as per the
Indian Stamp Act.
 Parties of a Promissory Note
• There are basically two parties in Promissory
Note:
• 1. Maker (Promisor): Who promises to pay the
amount.
• 2. Payee (Promisee): To whom the amount is
payable.
 Bills of Exchange
• 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.
• A Bill of Exchange is an instrument in writing, in
the nature of an unconditional order, showing the
indebtedness of a buyer towards the seller of
goods.
 Features of Bill of Exchange
• Bills of exchange is a written document. This is
written by a creditor.
• It is a document of order but the order is
unconditional.
• This document is written for a certain sum of
money due to creditors by Debtors.
• It is signed by the maker or creditor.
• Certain period and the date of payment are
mentioned in it.
 Features of Bill of Exchange
• It bears the Drawees signature also. The debtor is known
as drawee.
• The amount, written on it is either paid on demand or
after a stipulated period.
• The payment is made to the maker or the person directed
by the maker or to the bearer of the instrument.
• The acceptance of debtor is mandatory on Bill of
Exchange.
• This is stamped for a certain amount i.e., it is prepared on
stamp paper of court.
Parties of a bill of exchange: The bill of
exchange generally has three parties:
• Drawer: He is the person, who writes the bill of exchange.
Hence, he called the writer the bill. He signs the bill of
exchange. He is the creditor.
• Drawee: He is a buyer or debtor. He is the person, the bill is
written for. He accepts the bill and makes the payment on the
due date.
• Payee: He is the person, who finally receives the payment on
the due date. If there is no transfer of the bill of exchange,
then the drawer and the payee is the same.
• Acceptance: As soon as the drawer writes the bill of exchange,
it is to be accepted by the drawee. It has no value without the
acceptance of drawee.
 Bill of Exchange
• Example: Let us assume that Dave issued a bill of
exchange for Jim after selling him goods worth Rs.
50,000 and it was payable after two months. In this
case, Dave is the drawer of the bill and Jim is the
drawee. Now, if Dave retained the bill for the two
months and receives the full amount on the due date,
then Dave is the payee. On the other hand, if Dave got
the bill of exchange discounted from a bank, then the
bank is the payee. This example shows how bill of
exchange can be transferred from one party to
another.
Example:
• On 1.5.2021, Ram sold goods to Hari on credit
for Rs. 80,000. Ram drew a bill for the same
amount for two months and sent it to Hari for
his acceptance on the same day. On 5.5.2021
Ram got the acceptance of Hari. In this case,
before 5.5.2021 it is known as mere draft. It
becomes a bill of exchange only on 5.5.2021
when Hari accepted the bill.
Specimen of Bills of Exchange

ABC & Bros. is the drawer and M/s XYZ Co. is the drawee.
 Contents of Bills of Exchange
• (i) Date: The date of the bill on which it is drawn should be
written on the top right corner of the bill. This determines
the maturity date of the bill.
• (ii) Term: This is the tenure of the bill and runs from the date
of the bill. This should be specified in the body of the bill.
Grace period of three days should be given after the expiry of
the term from the date of the bill.
• (iii) Amount: Amount of the bill should be given both in
figures and words. Amount in figures should be mentioned
on the top left corner of the bill and amount in words should
be mentioned in the body of the bill.
 Contents of Bill of Exchange
• (iv) Stamp: Stamp of proper value which depends on the amount of
bill shall be affixed on the bills of exchange.

• (v) Parties: There may be three parties to the bills of exchange,

drawer, drawee and payee. However, in some cases drawer and
payee may be the same person. All the names of the parties and
their addresses should also be invariably mentioned in the bills of
exchange.

• (vi) For Value Received: This aspect is most important in the sense
that law does not consider those agreements which have been made
without consideration. Consideration means in lieu of and in the
context of bills of exchange, it means that the bill has been issued in
exchange of some consideration i.e., benefit has already been
received.
Difference between Promissory Notes and
Bills of Exchange
Promissory Note Bill of Exchange
Bill of Exchange is unconditional order to pay.
It is an unconditional promise to pay

Bill of Exchange drawn by a seller of goods or

services and he makes an order to debtor to
Debtor make the promise to pay to the creditor make the payment.

Foreign promissory note make in a set of one only Foreign Bills of Exchange drawn in a set of
three.
Promissory note payable on demand, requires Bill of Exchange payable on demand does not
stamp duty require stamp duty.

Bill of exchange may have three parties,

Promissory note has only two parties i.e. drawer drawer, drawee and may be payee.
and payee

Since debtor himself makes the promise to make

the payment, hence no acceptance required in
this case To be a legal document, it must be accepted
by Drawee.
 Cheque
• As per the Negotiable Instruments Act, 1881, a Cheque
is a form of bill of exchange drawn on a specified
banker and payable only on demand. The maker of the
cheque is called a ‘drawer’ and the person directed to
pay is called the ‘drawee’. 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’.

• A cheque is the most popular form of mode of financial

transaction. Its ease of use had made it widely
accepted and relied upon method of making and
accepting payments on the global level.
 Cheque
• A cheque is a kind of bill of exchange but it has
additional qualifications also, such as-

• 1. It is always drawn on a specified banker and

• 2. It is always payable on demand without any

days of grace
 Parties to a cheque
• Drawer: Drawer is the person who draws or makes
the cheque.

• Drawee: Drawee is the drawer’s banker on whom

the cheque has been drawn and is ordered to pay
the amount of cheque.

• Payee: Payee is the person who is entitled to receive

the payment of a cheque. ( In many cases, drawer
and payee can be the same person.)
 The common things mentioned on a
cheque :
• Bank name: Bank name is mentioned on the top left corner of the bank
which means that the person has the account with the mentioned bank.
• Date: Date section is mentioned on the top right corner of the cheque. A
cheque will remain valid for 3 months from the date written on the
cheque.
• Pay: Name of the person, to whom the cheque is concerned, is written
in this section.
• Rupees: Write the amount of money in words in this section and also
write the amount of money in numbers right next to it.
• Name or account number: account number of the payer is mentioned in
this section.
• Signature: In this section, payer marks his/ her signature to validate the
cheque.
Sample
 Crossing of Cheque
• The crossing of Cheque is a direction to the drawee bank
to pay the amount of the Cheque to a bank. Therefore, a
crossed Cheque is not payable to the payee or holder at
the counter of the bank.
• A Crossed Cheque is one
which bears, across its
face, two parallel transverse
lines with or without certain
words. Such lines are usually
drawn on the left side top
corner of the face of the
Cheque.
 Types of Cheques
• 1. Open Cheque - It is an uncrossed cheque which is
payable at counter of the bank.
• It can be Bearer Cheque or Order Cheque .
• Bearer Cheque - When a cheque is payable to a person
whose name appears on the cheque or to the bearer i.e.
to the person who presents the cheque to the bank for
encashment, is called bearer cheque. It can be transferred
by mere delivery and do not need endorsement.
• Order Cheque - When a cheque is payable to person
named in the cheque or to his order, is called Order
Cheque. When the word Bearer is cancelled , the cheque
becomes the order cheque. It can be transferred only by
endorsement and delivery.
 Types of Cheques
• 2. Crossed Cheque - It is the cheque on which two
parallel transverse lines are drawn across the top left ,
with or without the word :

• (i) ' & Co.'

• (ii) Not Negotiable
• (iii) A/c Payee

• It can not be encashed at the counter of the bank , can

only be credited to the account of the payee.
 Modes of Crossing
• General Crossing - When a cheque bears two transverse
parallel lines at the left hand of its top corner. Words such
as 'and company' or any other abbreviation (such as & co.)
may be written between these two parallel lines, either
with or without words 'not negotiable', is called General
Crossing.

Effect - Payment can be paid

through bank account only,
and should not be made at
counter of paying bank.
 Modes of Crossing
• Special Crossing - When a cheque bears the
name of the bank in between the two parallel
lines, with or without the words 'not negotiable'
is called Special Crossing.

Effect - The bank will pay to

the banker whose name is
written in between the
crossing lines.
 Modes of Crossing
• Account Payee Crossing / Restrictive Crossing -
In this, crossing of cheques is done by writing
Account Payee or Account Payee only in between
the crossing lines.

Effect - Payment will be

credited to the account
of payee named in the
cheque.
Sample
 Dishonour of Cheque
• During the course of a transaction, there
might occur such an event that where the
cheque was drawn by a person for the
payment of a sum to another, upon being
presented to the banker, is returned unpaid.
 Dishonour of Cheque
Reasons
• Insufficient funds in the account maintained with the
banker;
• Expired, incorrect, unreadable or scribbled date on
the cheque;
• Signature mismatch;
• Damaged, disfigured or stained cheque;
• A difference in the amount mentioned in words and in
figures;
• Overwriting on cheques.
 Dishonour of Cheque
Penalties
• As per Section 138 of the Negotiable instruments Act, 1991, dishonor of
cheque or cheque bounce is an offense punishable with:
• Imprisonment for a maximum term of two years, or
• Fine which may be twice the amount payable, or
• Both.

It must be noted that the act provides that the legal remedy shall be available
to the payee only if:
• The cheque is presented within the period of its validity;
• The payee or the holder of the cheque, has mandatorily made a demand for
the payment by giving a written notice to the drawer of the cheque within
30 days of the receipt of information of the return of check as unpaid by
the bank, and
• The drawer has failed to make the payment of the said amount to the
payee or the holder in due course, within a period of 15 days of the receipt
 Dishonour of Cheque
• If the payor fails to pay within the stipulated
time, then criminal complaint under section
138 filed within 30 days from the expiry of 15
days time period given under notice.
 Endorsement

• Endorsement means the writing of one’s name

on the back of the instrument or any paper
attached to it with the intention of
transferring the rights therein.
 Endorsement

• The act of a person who is a holder of a negotiable

instrument in signing his or her name on the back of that
instrument, thereby transferring title or ownership is an
endorsement.
• An endorsement may be in favour of another individual
or legal entity.
• An endorsement provides a transfer of the property to
that other individual or legal entity. The person to whom
the instrument is endorsed is called the endorsee.
• The person making the endorsement is the endorser.
 Endorsement
• Cheque, Bill of Exchange and promissory note
can be endorsed and an endorsement is
made by maker or holder of an Negotiable
Instrument. A minor (defined under section 3
of Majority Act, 1875) can endorse a
negotiable instrument under section 26 of
negotiable instrument act but he will not be
liable as an endorser.
 Different Types of Endorsements
• Blank Endorsement

• It is a type of endorsement when the endorser just signs on the

instrument without mentioning the name of the person in whose
favour the endorsement is made.
• Endorsement in blank specifies no endorsee. It simply consists of the
signature of the endorser on the endorsement.

• Example: A bill is payable to X. X endorses the bill by simply affixing

his signature. This is an endorsement in blank by X. In this case the
bill becomes payable to bearer.
• There is no difference between a bill or note endorsed in blank and
one payable to bearer.
 Different Types of Endorsements:
• Special or Full Endorsement:

• In this type of endorsement contains not only the signature of

the endorser but also the name of the person in whose favour
the endorsement is made, then it is an endorsement in full.

• In Special or Full Endorsement an endorsement, it is only the

endorsee who can transfer the instrument.

• e.g. If a cheque is payable to “Z” or order and “Z” adds the words
Pay to “X” or pay to “X or order”, such endorsement is known as
an endorsement in full.
 Different Types of Endorsements:
• Partial Endorsement

• It is defined under Section 56 which explains that an

instrument cant indorsed for a part of its amount.
• Example:- If the endorsement is for Rs. 200, it
cannot be endorsed for Rs. 100 only. But if the
amount due has already been partly paid, a note to
that effect may be endorsed on the instrument and
it may then be negotiated for the balance.
 Different Types of Endorsements
• Restrictive Endorsement

• A restrictive endorsement is one which either by express words

restricts or prohibits the further negotiation of a bill or which
expresses that it is not a complete and unconditional transfer of the
instrument but is a mere authority to the endorsee to deal with bill as
directed by such endorsement.

• An endorsement is restrictive which restricts the further negotiation

of an instrument.

• Example of restrictive endorsement: “Pay to Mrs. Geeta only” or or

“Pay to Mrs Geeta on account of Reeta”.
 Different Types of Endorsements
• Conditional Endorsement

• Where the endorser puts his signature under such writing

which makes the transfer of title subject to fulfilment of some
conditions of the happening of some events, it is a conditional
endorsement.
• A conditional endorsement, unlike the restrictive
endorsement, does not affect the negotiability of the
instrument. It is also sometimes called a qualified
endorsement.
• e.g. “Pay Z if he returns from America.” Thus, Z will receive the
payment only if he returns from America. If the event does
not take place, the endorsee cannot sue any of the parties.
 Holiday under the Act

• The Act by itself has nothing to do with holidays or declaration of

holidays but it is to be done by official announcement by the
government.
• As per section 25 of the Act, if the due date of maturity of any
negotiable instrument falls on a holiday the same has to be
extended to the next working day.
• The declaration of holidays has to be looked in conjunction with
section 25 of the NI Act.
• Holidays declared under NI Act is meant for financial institutions
and not for factories and other establishments.
• The declaration of a holiday by government under the Negotiable
Instruments Act 1881 will not be applicable to private companies
falling under the Factories Act ,1948 will not be entitled to wages if
they fail to turn up for work on those days.
 Holiday under the Act

• Every employee shall be allowed in each calendar year a

holiday of one whole day on 26th January, 1st May, 15th
August and 2nd October and other days for such
festivals as the Inspector in consultation with the
employer and employees in respect of any industrial
establishment.
• The Government may having due regard to any
emergency or special circumstances prevailing in the
state or any part thereof by notification, declare any
other day as special holiday to the employees of the
industrial establishments.