Negotiable Instrument

The Negotiable Instrument Act, 1881 deals with three kinds of negotiable instruments i.e.
Promissory Note, Bills of Exchange and Cheque.

The word negotiable means “transferable by delivery” and the word instrument means “a written
document” by which a right is created in favor of some person. Thus the term negotiable
instrument literally means a written document transferable by delivery.

According to section 13 of the NI Act, “A negotiable instrument means a Promissory Note, Bill
of Exchange or Cheque payable either to order or to bearer.

Characteristic of Negotiable Instruments:

1.Easy Negotiability:

They are transferable from one person to another without any formality.

2. Transferee can sue in his own name without giving notice to the debtor:

A bill, note or a cheque represents a debt i.e. an “actionable claim” and implies the right of the
creditor to recover something from his debtor.

3. Better title to a bonafide transferee for value

The general rule of the law of transfer of title is applicable in the case of ordinary chattels that
“nobody can transfer a better title that of his own”. But this general rule does not apply in the
case of negotiable instrument.

4.Presumption

Certain presumption may apply to all negotiable instruments….

*Every Negotiable Instrument is made for consideration.

*Every Negotiable instrument bearing a date was made or drawn on such date.

*Every bill of exchange was accepted within a reasonable time after its date and before its
maturity.

*Every transfer of Negotiable Instrument was made before its maturity

*A lost Negotiable Instrument was duly stamped

*The holder of Negotiable Instrument is a holder in due course.

 Promissory Note

According to section 4 of The Negotiable Instrument Act,1881 “a promissory note is an

instrument in writing containing an unconditional undertaking signed by the maker to pay certain
sum of money only to the order of or to a certain person or to the bearer of the instrument.

Essentials of Promissory Note:

 It must be in writing.
 It must contain a promise or undertaking to pay.
 The promise to pay must be unconditional.
 It must be signed by the maker.
 The maker must be a certain person.
 The payee must be certain.
 The sum payable must be certain.
 Other formalities such as date, place where it is made etc.

Bill of Exchange

Section 5 of The Negotiable Instrument Act, 1881 defines a bill of exchange as follows…

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 the order or to a certain
person or to the bearer of the instrument.

Essentials of a Bill of Exchange :

 It must be in writing
 It must contain an order to pay
 The order to ay must be unconditional
 It must be signed by the drawer
 The drawer drawee and payee must be certain
 The sum payable must be certain
 The must contain an order to pay money only
 It must comply with formalities as regards date, consideration, stamps etc.
Distinction between Promissory Note and Bill of Exchange:

Promissory Note Bill of Exchange

There are two parties. They are maker and
payee.
The maker cannot be the payee.
There is a promise to make the payment.
The liability of the maker is primary and
absolute.
There are three parties. They are drawer,
drawee and payee
The drawer and payee may be the same
person.
There is an order for making the payment.
The liability of the drawer is secondary and
conditional.

In case of dishonor ,a notice is not In case of dishonor a notice must be given

necessary to be sent to the maker. to the parties who are liable to pay.

Cheque
Section 6 of The Negotiable Instrument Act,1881 defines cheque as-
A cheque is a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand and it includes the electronic image of a truncated
cheque and a cheque in the electronic form

Distinction between Cheque and Bill of Exchange:

Cheque Bill of exchange

It is always drawn on a banker A bill may be drawn on any person including
banker

A cheque can only be drawn payable on A bill may be drawn payable on demand or
demand on the expiry of a certain period

A cheque doesn’t require any stamp. A bill must be properly stamped.

A cheque can be crossed A bill cannot be crossed
 There is no system of Noting or Protest in There is a system of Noting and protest in
the case of cheque the case of Bill

Notice of dishonor of a Cheque is not Notice of dishonor of a bill of exchange is

necessary, necessary,

There is no grace is given in case of a cheque. A grace of three days is allowed in the case of
payment of a time of bill of exchange.

Maturity of Negotiable Instruments:

“Maturity” means the date on which the payment of an instrument falls due. a cheque
becomes payable immediately on the date of its execution and there is no question of its
maturity. The question of maturity therefore arises only in the case of a promissory note
or a bill of exchange which is expressed to be payable otherwise than on demand.
Every promissory note and bill expressed to be payable on a specified day at a certain
period after date or at a certain period after the happening of an event.

Bouncing /dishonor of Cheque

A cheque is said to be bounced or dishonored by non-payment when the drawee of the
cheque makes default in payment.
The salient features of the provisions of sections 138 to 147 are discussed below
A drawer of dishonored cheque shall be deemed to have committed an offence and shall
be punishable with imprisonment for a term which may extend to one(01) year or with
fine which may extend to three (03) times of the amount of the cheque or with both.

Before the penal provisions can be invoked against the drawer of the cheque which has
bounced, the following requirements should be satisfied-
1. The cheque should have been dishonored due to insufficiency f funds or any other
reason.
2. The cheque should have been issued by the drawer in favor of another person for the
discharge of legally enforceable debt or other liability in whole or in part.
3. The cheque should have been presented to the bank within a period of six(06) months
from the date on which it is drawn or within the period of its validity ,whichever is
earlier.
4. The payee or the holder of the cheque should have made a demand for the payment of
money by giving a notice in writing to the drawer of the cheque within 30 days of the
receipt of information from the bank regarding the return f cheque as unpaid or bounced.
5. If the drawer of such cheque should have failed to make the payment of the said
amount of money to the payee or the holder of the cheque within 30 days of the receipt of
the said notice of demand, the cause of action arises.
6. The payee or the holder of the cheque dishonored should have made a written
complaint of the offence to a court within one month of the date on which the cause of
action arises.