Negotiable Instruments Act, 1981

Negotiable
Instruments Act, 1981

Introduction
• The Negotiable Instruments Act us described as saving of usage
relating to Hindis, etc.
• It’s a new method of exchanging currency and documents.
• It extends to the whole of India but nothing herein contained affects
the Indian Paper Currency Act, 1871.
• The Act operates subject to the provisions of Section 31 and Section
32 of the Reserve Bank of India, 1934.
Important Terms
• Fictitious bill
• Escrow
• Truncated Cheque
• Electronic Cheque
Meaning of Negotiable Instrument
• The term negotiable means transferable and instrument means a
document.
• Negotiable instrument means a written promise or order to pay
money which may be transferred from one person to another.
Section 13 – “A Negotiable instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer”.
Characteristics of a Negotiable
Instrument
• In Writing
• Payable by money
• Unconditional promise or order
• Freely transferable
• Property rights
• Presumptions
• Essentials of contract
Classification of Negotiable
Instruments
• Bearer Instruments
• Order Instruments
• Inland Instruments
• Foreign Instruments
• Instrument payable on demand
• Time Instruments
• Ambiguous Instruments
• Inchoate Instruments
Meaning
Promissory Note Bill of Exchange Cheques

Section 4, which reads as “A Section 5 reads as “An instrument in Section 6 defines Cheque as “a bill
Promissory note is an instrument in writing containing an unconditional of exchange drawn on a specified
writing containing an unconditional order, signed by the maker, directing banker and not expressed to be
undertaking signed by the maker to a certain person to pay certain sum payable otherwise than on demand
pay a certain sum of money only to, or money only to or to the order of a and it includes the electronic
to the order of a certain person, or to certain person or to the bearer of the image of a truncated cheque and a
the bearer of the instrument”. instrument.” cheque in the electronic form”.
Essential
Promissory Note Bill of Exchange Cheque
1. Inwriting 1. No of parties – Drawer, Drawee 1. Drawn on a specified banker
2. Express promise to pay & payee 2. Payable on demand
3. The Promise to pay must be 2. It must be in writing 3. No Stamp
unconditional 3. Express order to pay 4. Acceptance
4. Must contain promise to pay in 4. Order must be unconditional 5. Payable to bearer
terms of money only 5. Order to pay money only
5. The sum payable to be certain 6. The sum payable must be
6. Parties certain certain
7. Must be signed 7. Instrument must be signed
8. Must bear the stamp 8. Instrument must bear the
9. Other formalities stamp
10. Intention and delivery 9. Other formalities may be
11. Requisites of a contract to be complied with
complied with 10. Intention and delivery must be
satisfied
11. Requisites of a contract to be
adhered to.
Kinds
Promissory Notes Bill of Exchange Cheques
1. Promissory note payable on 1. Bill of Exchange payable on 1. Bearer Cheque
demand demand 2. Crossed Cheque
2. Promissory note payable after 2. Bill of Exchange payable after 2.a. General Crossing
date date. 2.b. Special Crossing
3. Joint Promissory note 3. Inland bill of Exchnage 2.c. Restrictive Crossing
4. Joint and several promissory 4. Foreign bill of Exchange
note 5. Accommodation bill of
Exchange
6. Bills in sets
7. Drawee in case of need
Acceptor and Acceptance
Definition Meaning
Section 7 “ After the drawer of a bill signed his assent • The drawer or the payee, whom so ever holds the
upon the bill, or if there are more parts thereof than bill of exchange, must present it to the drawee.
one, upon one such parts, and delivered the same, or • The drawee once accepts, it, it would be termed as
given notice of such signing to the holder or to some acceptance of bill of exchange,
person on his behalf, he is called the acceptor”. • The drawee after acceptance is the acceptor of the
bill of exchange.
Various Common Parties to the
Negotiable Instruments
Promissory Notes
Parties of Negotiable
The maker (Debtor)
The Payee (Creditor)
Instruments
Bill of Exchange
Drawer
Drawee
Payee
Cheque
Drawer
Banker
Payee
Holder (Section 8)
A person is called holder of a negotiable instrument if he satisfies the
following two conditions:
• He must entitled to the possession of the instrument in his own name
and
• He must be entitled to receive/recover the amount due on the
instrument from the parties liable under the instrument.
Holder in Due Course (Section 9)
• He must be a holder.
• He must have become, for consideration. Such consideration must not
be unlawful and need not be adequate.
• He must have obtained the instrument before its maturity.
• He must have obtained the instrument in good faith, i.e. without
having sufficient cause to believe that any defect existed in the title of
the person from whom he derived his title.
• He must receive the instrument complete and regular on the face of
it.
Privileges of a Holder in Due Course
• He gets a better title than that of the transferor
• Privilege in case of inchoate (incomplete) Stamped instruments.
• Liability of Prior parties
• Privilege in case of fictitious bills
• Privilege when an instrument delivered conditionally is negotiated
• Estoppel against denying original validity of instrument
• Estoppel against denying capacity of payee to endorse
Methods/ Modes of negotiation of
instrument
• Negotiation by Delivery
• Negotiation by endorsement and delivery
Kinds of Endorsement
• Blank or General Endorsement: put the signature, no endorsee name
• Special or Full endorsement: endorser and endorsee name are
mentioned.
• Partial Endorsement: part of its value
• Restrictive Endorsement: Restrictive the ownership
• Conditional or Qualified Endorsement
• Sans Recourse Endorsement: Endorser expressly excludes his own
liability in case of dishonour of the instrument.
• Facultative Endorsement: Give up some of his rights
negotiation by unauthorized parties
• Negotiation by unauthorized parties refers to situations where
individuals or entities attempt to transfer or negotiate negotiable
instruments without proper authorization. This can occur through
forged signatures, unauthorized endorsements, or other fraudulent
means.
Dishonor of Negotiable Instrument
• Dishonor of Negotiable Instrument refers to the state when the party
who has to pay the sum in an instrument fails to honor it. In other
words, it implies the loss of honor for the instrument indicating the
unsuitability of the instrument to realize funds.
Types of Dishonour
• Dishonor by Non – Acceptance
• Dishonor by Non – Payment
Dishnonor by Non – Acceptance
When a bill is duly presented for acceptance, however, it is not accepted by the party concerned, it
is called Dishonour by non-acceptance. It can take place in the following ways:
• When a bill of exchange is presented before the drawee for acceptance, but it is not accepted
within 48 hours from the presentment for acceptance.
• In case there is more than one drawee, acceptance by all is a must. So, even if one of them
defaults in acceptance, the bill of exchange is regarded as dishonored. However, if the drawees
are partners, then one partner can accept the same on behalf of all.
• In case the drawee is a fictitious person
• When the drawee is untraceable after a normal search.
• If the drawee to the instrument is not competent to contract, the bill is considered dishonored.
• Qualified or Conditional acceptance of the bill, the holder may deem it as dishonored.
• Insolvency or death of the drawee also results in dishonor by non-acceptance.
• When presentment is excused and the instrument is not accepted.
Dishonor by Non – Payment
• Dishonor by non-payment arises when the maker of the promissory
note, acceptor of the bill of exchange, and the drawee of the cheque
defaults in the payment or refuses to pay the sum due on the
instrument when it is being presented for payment. Dishonor of bill and
note can also take place in case the instrument is expressly excused by
its acceptor or maker or when it remains unpaid at or after maturity.
• Effect of Dishonour: In case the negotiable instrument is dishonored,

by any of the reasons mentioned above, the other parties to it are
charged with liability.
Notice of Dishonour
• The notice must be given immediately to the parties whom the holder
wants to make liable, regarding the refusal to make a payment or
accept the instrument.
• Except for the maker and acceptor of the instrument, all the parties
will be discharged if the holder fails to give notice. Notice must be
given within a reasonable time after dishonor.
• The main objective behind giving notice of dishonor is to inform or
warn the party or the person liable. The doctrine is based on the
principle of just and equity.
Different Modes of Discharge of an
instrument
• By payment in due course
• Any party primarily liable becoming holder
• By express waiver
• By Cancellation
• By Discharge as a simple Contract
• By Material Alteration

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Negotiable

Instruments Act, 1981

Promissory Note Bill of Exchange Cheques

• Effect of Dishonour: In case the negotiable instrument is dishonored,

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