Negotiable instruments act 1881, Nature and Characteristics of

Negotiable instruments
Section 13 of the Negotiable Instruments Act, 1881, defines a negotiable instrument as: “A
negotiable instrument means a promissory note, bill of exchange or Cheques payable either to
order or to bearer.” [Sec.13 (1)].
Negotiable means transferable. Instrument means document. Negotiable instrument, therefore,
means a transferable document. Negotiable instrument entitles holder to the receipt of the money
therein. It also gives him the right to transfer the same by delivery or by endorsement thereof.
The Act deals with only three types of negotiable instrument, i.e., promissory notes, bills of
exchange and Cheques.
The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881.
The Act is based upon the English Common Law relating to promissory notes, bills of ex-change
and Cheques. The Act came into force on 1st March 1882. The Act was enacted with an object to
define and amend the law relating to promissory notes, bills of exchange and Cheques.
The Act extends to the whole of India. It does not affect any local usage relating to any
instruments in an oriental language- for example, a hundi. Local usage applies to instruments in
oriental language. However, such usages may be excluded by contract to the contrary, including
that the legal relationship of the parties shall be governed by this Act (Sec.1). It must be noted
that only when the local usage in the contrary to the provisions of this Act, then the local usage
would override the Act.

CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS:

Property :
The possessor of the instrument is the holder and owner thereof. A negotiable instrument does
not merely give possession of the instrument, but right to property. Whosoever gets possession of
the instrument becomes its owner and is entitled to the sum mentioned therein as the holder. The
complete right of ownership in a negotiable instrument passes by mere delivery where
instrument is payable to ‘bearer’. Where instrument is payable to ‘order’, right of ownership
passes by endorsement and delivery.

Defects in title:
The holder in good faith and for value called the ‘holder in due course’ gets the instrument free
from all defects of any previous holder.
Remedy:
The holder can sue upon the negotiable instrument in his own name. All prior parties are liable to
him. A holder is due course can recover the full amount on the instrument.
Rights:
The holder in due course is not affected by certain de-fenses which might be available against
previous holder, for example, fraud, to which he is not a party.
Payable to order:
A promissory note, bill of exchange or cheque is payable to order which is expressed to be so
payable to a particular person. An instrument which does not restricts its transferability expressly
or impliedly is negotiable whether the word ‘order’ is mentioned or not. The word ‘Order’ or
‘Bearer’ is no longer necessary to render an instrument negotiable. Where the instrument
prohibits transfer or indicates that it shall not be transferrable is nevertheless valid as between the
parties thereto, but it is not a negotiable instrument.
It must be noted that 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 him or his
order, it is nevertheless payable to him or his order at his option.
Payable to bearer:
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 [Sec.13]. It
specifies that the person in possession of the bill or note is a bearer of the instrument which is so
expressed payable to bearer.
Payment:
A negotiable instrument may be made payable to two or more payees jointly, or it may be made
payable in the alternative to one or two, or some of several payees [Sec.13 (2)].
Consideration:
Consideration in the case of a negotiable instrument is presumed.
Presumption:
Certain presumptions apply to all negotiable instruments.

Kinds of Negotiable instruments: Promissory notes, Bills of

exchange and Cheques
Negotiable Instruments are written contracts whose benefit could be passed on from its original
holder to a new holder. In other words, negotiable instruments are documents which promise
payment to the assignee (the person whom it is assigned to/given to) or a specified person. These
instruments are transferable signed documents which promises to pay the bearer/holder the sum
of money when demanded or at any time in the future.

Promissory notes
A promissory note refers to a written promise to its holder by an entity or an individual to pay a
certain sum of money by a pre-decided date. In other words, Promissory notes show the amount
which someone owes to you or you owe to someone together with the interest rate and also the
date of payment.
For example, A purchases from B INR 10,000 worth of goods. In case A is not able to pay for
the purchases in cash, or doesn’t want to do so, he could give B a promissory note. It is A’s
promise to pay B either on a specified date or on demand. In another possibility, A might have a
promissory note which is issued by C. He could endorse this note and give it to B and clear of his
dues this way.

Bill of exchange
Bills of exchange refer to a legally binding, written document which instructs a party to pay a
predetermined sum of money to the second(another) party. Some of the bills might state that
money is due on a specified date in the future, or they might state that the payment is due on
demand.
A bill of exchange is used in transactions pertaining to goods as well as services. It is signed by a
party who owes money (called the payer) and given to a party entitled to receive money (called
the payee or seller), and thus, this could be used for fulfilling the contract for payment. However,
a seller could also endorse a bill of exchange and give it to someone else, thus passing such
payment to some other party.
It is to be noted that when the bill of exchange is issued by the financial institutions, it’s usually
referred to as a bank draft. And if it is issued by an individual, it is usually referred to as a trade
draft.
A bill of exchange primarily acts as a promissory note in the international trade; the exporter or
seller, in the transaction addresses a bill of exchange to an importer or buyer. A third party,
usually the banks, is a party to several bills of exchange acting as a guarantee for these payments.
It helps in reducing any risk which is part and parcel of any transaction.

Cheques
A cheque refers to an instrument in writing which contains an unconditional order, addressed to a
banker and is signed by a person who has deposited his money with the banker. This order,
requires the banker to pay a certain sum of money on demand only to to the bearer of cheque
(person holding the cheque) or to any other person who is specifically to be paid as per
instructions given.
Cheques could be a good way of paying different kinds of bills. Although the usage of cheques is
declining over the years due to online banking, individuals still use cheques for paying for loans,
college fees, car EMIs, etc. Cheques are also a good way of keeping track of all the transactions
on paper. On the other side, cheques are comparatively a slow method of payment and might
take some time to be processed.

The Negotiable Instruments (Amendment) Bill, 2017

The Negotiable Instruments (Amendment) Bill, 2017 has been introduced in the Lok Sabha
earlier this year on Jan 2nd, 2018. The bill seeks for amending the existing Act. The bill defines
the promissory note, bill of exchange, and cheques. The bill also specifies the penalties for
dishonor of cheques and various other violations related to negotiable instruments.
As per a recent circular, up to INR 10,000 along with interest at the rate of 6%-9% would have to
be paid by an individual for cheques being dishonored.
The Bill also inserts a provision for allowing the court to order for an interim compensation to
people whose cheques have bounced due to a dishonouring party (individuals/entities at fault).
Such interim compensation won’t exceed 20 percent of the total cheque value.

Bouncing of Cheques
Where any cheque drawn by a person on an account maintained by him with a banker for
payment of any amount of money to another person from out of that account for the discharge, in
whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of
the amount of money standing to the credit of that account is insufficient to honour the cheque or
that it exceeds the amount arranged to be paid from that account by an agreement made with that
bank, such person shall be deemed to have committed an offence and shall, without prejudice to
any other provisions of this Act, be punished with imprisonment for [a term which may be
extended to two years], or with fine which may extend to twice the amount of the cheque, or with
both: Provided that nothing contained in this section shall apply unless:
 (a) The cheque has been presented to the bank within a period of six months from the date on
which it is drawn or within the period of its validity, whichever is earlier;
(b) The payee or the holder in due course of the cheque, as the case may be, makes a demand for
the payment of the said amount of money by giving a notice in writing, to the drawer of the
cheque, [within thirty days] of the receipt of information by him from the bank regarding the
return of the cheque as unpaid; and
(c) The drawer of such cheque fails to make the payment of the said amount of money to the
payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the
receipt of the said notice.
Explanation: For the purposes of this section, “debt or other liability” means a legally
enforceable debt or other liability.

Parties to Negotiable Instruments, Negotiation

The parties to a negotiable instrument (bill of exchange, promissory note and a Cheques) are
discussed in detail:
Parties to a bill of exchange

1. The Drawer: The person who draws a bill of exchange is called the drawer.
2. The Drawee: The party on whom such bill of exchange is drawn and who is directed to
pay is called the drawee.
3. The Acceptor: The person who accepts the bill is known as the acceptor. Normally the
drawee is the acceptor. But a stranger can also accept a bill on behalf of the drawee.
4. The Payee: The person to whom the amount of the bill is payable is called the payee.
5. The Endorser: When the holder transfers or endorses the instrument to any other person
the holder becomes the Endorser.
6. The Endorsee: The person to whom the bill is endorsed is called the endorsee.
7. The Holder: Holder of bill of exchange means any person who is legally entitled to the
possession of it and to receive or recover the amount due thereon form the parties. He is either
the payee or the endorsee. The finder of a lost bill payable to bearer or a person in wrongful
possession of such instrument is not a holder.
8. Drawee in case of need: The drawer of a bill or even an endorser may write in the
instrument the name of a person directing the holder to resort to such person in case of need.
Such a person is called a drawee in case of need. He is merely in the position of a drawee who
has not accepted the bill. The bill cannot be presented to him for acceptance but only for
payment.
Where a drawee in case of need is mentioned in the bill such a bill is not dishonored until it has
been dishonored by such a drawee in case of need. The effect of this provision is to make the
presentment to the drawee in case of need obligatory on the part of the holder.

9. Acceptor for Honour: Any person may voluntarily become a party to a bill as an

acceptor by accepting it for the honour of the drawer or of any person. When the original drawee
refuses to accept or refuses to furnish better security when demanded by a notary, any person
may step in to safeguard the honor of the drawer or any endorser and bind himself by an
acceptance. The effect of such acceptance is that the bill is treated as alive and is not considered
to be dishonored till it is dishonored by the acceptor for honor.
 Parties to a promissory note

1. The Maker: He is the person who promises to pay the amount stated in the promissory
note.
2. The Payee: The person named in the promissory note to whom the money is payable.
3. The Holder: He may be either the payee or someone else to whom the promissory note
has been endorsed.
4. The Endorser: When the holder transfers or endorses the instrument to any other person
the holder becomes the Endorser.
5. The Endorse: The person to whom the bill is endorsed is called the endorsee.
Parties to a cheque

1. The Drawee: He is the person who draws the cheque.

2. The Drawee: The banker on whom the cheque is drawn.
3. The Payee: The person to whom the amount of the bill is payable is called the payee.
4. The Holder: Holder of bill of exchange means any person who is legally entitled to the
possession of it and to receive or recover the amount due thereon form the parties. He is either
the payee or the endorsee. The finder of a lost bill payable to bearer or a person in wrongful
possession of such instrument is not a holder.
5. The Endorser: When the holder transfers or endorses the instrument to any other person
the holder becomes the Endorser.
6. The Endorsee: The person to whom the bill is endorsed is called the endorsee.

Negotiation
When a promissory note, bill of exchange or cheque is transferred to any person, so as to
constitute the person the holder thereof, the instrument is said to be negotiated.
Section 46 of Negotiable Instruments Act 1881: “Delivery”
The making, acceptance or indorsement of a promissory note, bill of exchange or cheque is
completed by delivery, actual or constructive.
As between parties standing in immediate relation, delivery to be effectual must be made by the
party making, accepting or indorsing the instrument, or by a person authorized by him in that
behalf.
As between such parties and any holder of the instrument other than a holder in due course, it
may be shown that the instrument was delivered conditionally or for a special purpose only, and
not for the purpose of transferring absolutely the property therein.
A promissory note, bill of exchange or cheque payable to bearer is negotiable by the delivery
thereof.
A promissory note, bill of exchange or cheque payable to order is negotiable by the holder by
indorsement and delivery thereof.
Section 47 of Negotiable Instruments Act 1881: “Negotiation by delivery”
Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to
bearer is negotiable by delivery thereof.
Exception : A promissory note, bill of exchange or cheque delivered on condition that it is not to
take effect except in a certain event is not negotiable (except in the hands of a holder for value
without notice of the condition) unless such event happens.
Section 48 of Negotiable Instruments Act 1881: “Negotiation by indorsement”
 Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to
order, is negotiable by the holder by indorsement and delivery thereof.

Negotiable Instruments (NI) Act 1881: Endorsement

 Endorsement
Section 15 defines endorsement as follows: “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 completed as negotiable instrument, he is said to indorse the same,
and is called the endorser.”
Thus, an endorsement consists of the signature of the holder usually made on the back of the
negotiable instrument with the object of transferring the instrument. If no space is left on the
back of the instrument for the purpose of endorsement, further endorsements are signed on a slip
of paper attached to the instrument. Such a slip is called ‘along’ and becomes part of the
instrument. The person making the endorsement is called an ‘endorser’ and the person to whom
the instrument is endorsed is called an ‘endorse.’
Kinds of Endorsements: Endorsements may be of the following kinds:

1. Blank or general endorsement: If the endorser signs his name only and does not specify
the name of the indorse, the endorsement is said to be in blank. The effect of a blank
endorsement is to convert the order instrument into bearer instrument which may be transferred
merely by delivery.
2. Endorsement in full or special endorsement: If the endorser, in addition to his
signature, also 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.
3. Partial endorsement: Section 56 provides that a negotiable instrument cannot be
indorsed for a part of the amount appearing to be due on the instrument. In other words, a partial
endorsement which transfers the right to receive only a part payment of the amount due on the
instrument is invalid.
4. Restrictive endorsement: An endorsement which, by express words, prohibits the
indorse from further negotiating the instrument or restricts the indorse to deal with the instrument
as directed by the endorser is called ‘restrictive’ endorsement. The indorse under a restrictive
endorsement gets all the rights of an endorser except the right of further negotiation.
5. Conditional endorsement: If the endorser of a negotiable instrument, by express words
in the endorsement, makes his liability, dependent on the happening of a specified event,
although such event may never happen, such endorsement is called a ‘conditional’ endorsement.
In the case of a conditional endorsement the liability of the endorser would arise only upon the
happening of the event specified. But the endorse can sue other prior parties, e.g., the maker,
acceptor etc., if the instrument is not duly met at maturity, even though the specified event did
not happen.

Liabilities of Banker and Dishonor of Negotiable Instruments like

Hundis etc.
 Dishonor by non-acceptance (Section 91)
A little kind of negotiable tools, i.e., bill of exchange, promissory note, or cheque may be
desecrated by non-payment by the acceptor thereof. But a bill may also be despoiled by non-
acceptance because bill of disagreement is the only negotiable instrument which supplies its
presentment for acceptance and non-acceptance thereof, can sum to disgrace.
Dishonor means failure to honor a negotiable instrument. This may be by non-acceptance, when
a bill of argument is accessible for receipt and this is declined or cannot be obtained or by non-
payment, when the bill is presented for payment and payment is refused or cannot be obtained.
A negotiable tool is made-up to be violated any by non-acceptance or non-payment.

Dishonor by non-payment (section 92)

An instrument is dishonored by non-payment when the party mainly answerable e.g., the
acceptor of a bill, the maker of a not or the drawee of a cheque, make default in sum. A tool is
also violated for non-payment when a formal presentation of information to a court for payment
relieved and the instrument, when overdue, remains unpaid, under section 76 of the Act.
Distinction between dishonor by non-acceptance and by non-payment. If a bill is dishonored by
non-acceptance, there is no right of action against the drawee as he is not a party to the bill. The
holder of the bill can proceed only against the drawer or endorser, if any, on Dishonor by non-
payment the drawee can be sued.

LEGAL ACTION IF CHEQUE DISHONORED

A cheque is a negotiable tool. Crossed and account payee cheques are not accessible by any
individual other than the recipient. The cheques have to be placed into the recipient’s bank
account.
Lawfully, the writer of the cheque is called ‘drawer’, the individual in whose service, the cheque
is drawn is called ‘payee’, and the bank who is focused to compensation the amount is
recognized as ‘drawee’.
However, cases of cheque spring back are common these times. Rarely cheques bearing big
amounts continue unpaid and are repaid by the bank on which they are drawn.
As presently as a cheque is violated, the drawee bank straight queries a ‘Cheque Return Memo’
to the banker of the payee upholding the purpose for non-payment. The payee’s banker then
gives the violated cheque and the memo to the payee. The holder or payee can resubmit the
cheque in three months of the date on it, if he faiths it will be delighted the second time. Though,
if the cheque issuer flops to make an amount, then the payee has the exact to prosecute the
drawer lawfully.
The payee may legally litigate the nonpayer/drawer for discredit of cheque only if the sum
specified in the cheque is towards release of an obligation or any other responsibility of the
nonpayer towards recipient.
If the cheque was delivered as a skill, towards advancing a loan or for illegal drives, then the
drawer cannot be impeached in such cases.

Lawful act
As per Section 138 of the Act, the disgrace of cheque is an illegal crime and is disciplinary by
custody up to two years or with financial forfeit or with both.
If payee chooses to continue lawfully, then the drawer should be given a chance of recompensing
the cheque sum directly. Such a chance must be given only in the form of notice in writing.
The recipient must show the sign to the drawer with 30 days from the date of in receipt of
“Cheque Return Memo” from the bank. The notice must be positioning that the cheque sum must
be remunerated to the recipient within 15 days from the date of receiving of the notice by the
drawer. If the cheque issuer discontents to make a new sum within 30 days of receiving the sign,
the payee has the exact to file a banned grievance under Section 138 of the Negotiable
Instruments Act.
Though, the grievance should be listed in a judge’s court within a month of the termination of the
notice period. It is vital in this case to refer a supporter who is well experienced and
accomplished in this area of practice to proceed additional in the stuff. It’s very important to
follow the rules and regulations as per the act.
The cheque should have been reimbursed or despoiled because of inadequate assets in the
drawer’s account.
After in receipt of the notice, if the drawer doesn’t make the sum within 15 days from the day of
in receipt of the notice, then he obligates a wrongdoing disciplinary under Section 138 of the
Negotiable Instruments Act.

Penalty & forfeit

On getting the complaint, along with an affirmation and relevant paper track, the court will
matter order and get the substance. If found mortified, the debtor can be disciplined with
financial consequence which may be double the quantity of the cheque or custody for a term
which may be long to two years or both. The bank also has the correct to stop the cheque book
ability and close the explanation for replication crimes of bounced cheques.
If the drawer makes sum of the cheque quantity within 15 days from the date of receiving of the
sign, then drawer does not obligate any crime. Then, the payee may continue to file a grievance
in the court of the jurisdictional judge within one month from the date of finish of 15 days agreed
in the sign.
In the case of Dalmia Cement(Bharat) Ltd. V Galaxy Traders and Agencies Ltd.5, the Apex
Court referred to the article of Section 138 of the Act. The court detected that the Act was
passed and section 138 thereof combined with a stated object of making a distinct capability by
counting a strict responsibility so far as the cheque, a negotiable instrument, is concerned. The
law connecting to the negotiable instruments is the law of commercial world passed to ease the
actions in trade and commerce making founding of giving sanctity to the instruments of credit
which could be estimated to be redeemable into cash and effortlessly drivable from one person to
one more.
The wrongdoing under section 138 is not a usual crime like offended or killing. It is an offence
shaped by a lawful fiction in the law. It is a public obligation altered into an illegal obligation,
under limited circumstances by way of an alteration to the Act, which is carried into force only in
1989. Till then, the criminal acts mentioned to in section 138 established only a pure civil
obligation. Legally, the legislature thought it fit to deliver for passable protections in the Act to
defend truthful drawers from unnecessary annoyance.
Though, the sections 138 to 142 of the alleged Act were, originally missing in dealing with
disgrace of cheques. According to this, the Negotiable Instruments Act, 2002, put in the ground,
modified sections 138, 141 and 142 and offered new segments 143 to 147 in the said Act.

HUNDIES & TYPES

A hundi is a negotiable instrument. But it is not necessary to be a bill of exchange as given in the Act.
Hundis are famous among Indian traders. Specifically, it is famous amongst those operating in
suburban areas. These are under control of the Negotiable Instrument Act,1881 unless there is a local
usage to the contrary. Official hundi forms were produced putting revenue stamps bearing the image
of British monarchs like Queen Victoria. Courts were the source of dispute solution in case of
conflicts between the merchants. Hence, it was not at all an underground means of trade though it was
taking place without banks.

Types of Hundis
1. Darshani
Darshani is a hundi which is payable at sight. It is like a demand bill. Moreover, it is negotiable. The
party can sell them at par, premium, and discount. The holder has to present the darshani for
payment within a reasonable time of its receipt. If the drawer faces any loss due to delay in
presentation, the holder shall be responsible for it.
2. Miadi
Also called as muddati, miadi is something which is payable after a certain time period like a ‘time
bill’. Banks generally provide loans for the security of such hundis.
3. Shahjog
This is a hundi made payable only to a Shah (a respectable person of financial worth and substance
in the market). It is freely transferrable. But it is not payable to bearer. In general, it is similar to a
crossed cheque.
4. Namjog
Under this hundi, the amount is payable to the party whose name is on it. Such an instrument is
similar to a bill of exchange payable on order.
5. Dhanijog
‘Dhani’ in local terms means owner. It is generally like a bearer cheque as the holder of it becomes
a holder in due course if he takes it for value.
6. Jokhmi Hundi
The term ‘Jokhmi’ has come from the Hindi word ‘jokhim’ meaning ‘risk’. It is generally drawn
against goods shipped on a vessel and shows a certain risk involved in the shipment of goods.
Jokhmi hundi is a combination of a bill of exchange and an insurance policy and payable only when
the goods reach in safe and secure condition.
If anything wrong happens to the goods during transit then the consignor cannot claim payment of
the hundi from the consignee. Thus, a jokhmi hundi safeguards the interests of both the parties. It
acts as a bill of exchange if the goods arrive securely and if the goods are lost or destroyed in transit,
such a bill acts as an insurance cover.