MODULE 1[B]: AN OVERVIEW TO THE

NEGOTIABLE INSTRUMENTS ACT,

1881
1. MEANING OF NEGOTIABLE INSTRUMENTS

Transaction is a very important aspect of any business. Each day a business has to perform
hundreds or thousands of transactions. Many of these transactions are credit in nature which
means that the payment would be made in the future while the goods/services are obtained
immediately. Negotiable instruments are the tools which made these credit transactions
smooth and easy for the corporate world. As per the definition of Cambridge dictionary,
negotiable instrument is “a written order or promise to pay a fixed amount of money on
demand or at a particular time”. Negotiable instruments are transferable in nature which
means the ownership of these instruments can be transferred easily. In simple language
negotiable instrument is a signed document that promises a certain amount of money to
be paid to a specified person or the owner of the instrument either on demand or at a set
time. The instrument only provides for a specific amount of money and no other condition
can be imposed on the bearer of the instrument to receive money. In India, the law that
governs the use of negotiable instruments was introduced in the year 1881 by the British and
was called “The Negotiable Instruments Act, 1881”. This act has been governing the use of
negotiable instruments since 1881 with only few amendments throughout this time.

2. OBJECTIVES OF NEGOTIABLE INSTRUMENTS ACT,

1881

·Negotiable instrument act was formulated to provide legal protection to the various
negotiable instruments.

Negotiable Instruments Act (Module 1B)

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 ·It regulates the use and application of various negotiable instruments i.e. promissory
note, bill of exchange, etc.

·It provides different guidelines and rules regarding the use of these instruments. For
example, days of grace1 in case of bills of exchange.

·It also provides meaning to the different terms used in the transactions relating to
negotiable instruments i.e. holder, drawer, payee, etc.

·It also provides for liabilities for a party in case the party fails to pay on time, for
example penalty on dishonoring the cheque 2.

3. NEGOTIABLE INSTRUMENTS

Section 133 of the Negotiable Instruments Act defines negotiable instruments. As per the
Negotiable Instrument Act, there are three negotiable instruments.

PROMISSORY NOTE4

1
The Negotiable Instruments Act, 1881 § 22
2
The Negotiable Instruments (Amendment) Act, 2017
3
The Negotiable Instruments Act, 1881 § 13
4
The Negotiable Instruments Act, 1881 § 4
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As per the definition by oxford dictionary promissory note is “a signed document
containing a written promise to pay a stated sum to a specified person or the bearer at a
specified date or on demand.” A promissory note is a document containing a written
promise of one party (the maker of the instrument) to pay another party a specific sum of
money on demand or at a future date. In simple words a promissory note is a “promise to pay
in future”.

For example- Mr. X purchased from Mr. Y furniture worth Rs. 45,000, but he did not have
enough money at that time. So, Mr. X issued a promissory note, promising to pay Rs. 45,000
on demand of Mr. Y or at any date agreed by both of the parties. As negotiable instruments
are transferable in nature, so, if Mr. X have any promissory note of other person, he can also
endorse it in the name of Mr. Y and clear his dues.

BILL OF EXCHANGE5

5
The Negotiable Instruments Act, 1881 § 5
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A Bill of Exchange is a written order for one party to pay another party a specific amount of
money on a predetermined date. In Bill of Exchange a drawer is the person who draws or
issues the bill. Drawee is the person who pays the amount. And payee is the person who
receives the amount. Generally, the Drawer and payee are the same.

For example- Mr. X sold to Mr. Y goods worth 10,000. He then drew a bill of exchange
ordering Mr. Y to pay the same amount to Mr. X after 90 days.

CHEQUE 6

6
The Negotiable Instruments Act, 1881 § 6
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Cheque is the negotiable instrument which orders a bank to pay a specific amount from the
drawer`s account to the bearer of the cheque or to the person to whom it is issued.

For example- Mr. A purchased goods worth Rs. 20000 from Mr. B. Then He issued a cheque
with the same amount to Mr. B. Mr. B goes to his bank of deposited the cheque. The amount
specified in the cheque would be transferred to Mr. B`s account from Mr. A`s account after
he deposited the cheque. Though the use of cheques is decreasing day-by-day because of
increase in online transactions.

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