Negotiable Instruments Act, 1882

The history of the present Act is a long one. The Act was originally drafted in 1866 by the 3rd
India Law Commission and introduced in December, 1867 in the Council and it was referred to a
Select Committee. Objections were raised by the mercantile community to the numerous
deviations from the English Law which it contained. The Bill had to be redrafted in 1877. After the
lapse of a sufficient period for criticism by the Local Governments, the High Courts and the
chambers of commerce, the Bill was revised by a Select Committee. In spite of this Bill could not
reach the final stage. In 1880 by the Order of the Secretary of State, the Bill had to be referred to
a new Law Commission. On the recommendation of the new Law Commission the Bill was re-
drafted and again it was sent to a Select Committee which adopted most of the additions
recommended by the new Law Commission. The draft thus prepared for the fourth time was
introduced in the Council and was passed into law in 1881 being the Negotiable Instruments Act,
1881 (Act No.26 of 1881)[1]
The most important class of Credit Instruments that evolved in India were termed Hundi. Their
use was most widespread in the twelfth century, and has continued till today. In a sense, they
represent the oldest surviving form of credit instrument. These were used in trade and credit
transactions; they were used as remittance instruments for the purpose of transfer of funds from
one place to another
According to Section 13 of the Negotiable Instruments Act, "A negotiable
instrument means a promissory note, bill of exchange or cheque payable either to order
or to bearer.

Includes:

1) Promissory note,
2) Bill of exchange
3) Cheque

Excludes:

1) Treasury Bills
2) Hundi
3) Post Office Money Orders
4) Currency Notes

Features

 Transferability

 Title of the holder free from all defects

 Recovery

 Consideration

Section 4 - Promissory note

A "promissory note" is an instrument in writing (not being a bank-note or a currency-note)
containing an unconditional undertaking, signed by the maker, to pay a certain sum of money
only to, or to the order of, a certain person, or to the bearer of the instrument.

Essential of Promissory note

 In Writing
 Promise to pay
  Definite and unconditional
 Signed by the maker
 Certain parties
 Certain sum of money
 Promise to pay money only
 Currency notes are not promissory notes
 May be payable on demand or after definite period of time

Section 5 - Bill of exchange[7]

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.

Three parties: The Drawer, The Drawee & The Payee

Essential of Promissory note

 In Writing
 Order to pay
 Definite and unconditional
 Accepted by the drawee
 Certain parties
 Certain sum of money
 Order to pay money only
 May be payable on demand or after definite period of time

Section 6 - Cheque[8]
A cheque is bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand

Types of Cheque

A) Open Cheques`

An open cheque is a cheque that is not crossed on the left corner and payable at the
counter of the drawee bank on presentation of the cheque.

1) Order Cheque

2) Bearer Cheque

B) Crossed Cheques

A crossed cheque is a cheque that is payable only through a collecting banker and not
directly at the counter of the bank. Crossing ensures security to the holder of the cheque
as only the collecting banker credits the proceeds to the account of the payee of the
cheque.
 When two parallel transverse lines, with or without any words, are drawn generally, on
the left hand top corner of the cheque. A crossed cheque does not affect the negotiability
of the instrument.

1. General crossing: Section 123 of the Act refers to general crossing.

Where a cheque bears across its face two traverse lines with or without the words or the words
‘not negotiable, the cheque is said to have been crossed generally. Where a cheque is crossed
generally, the banker shall not pay it, otherwise than to the banker” (Section 126).

Generally, cheques are crossed when

1. There are two transverse parallel lines, marked across its face or
2. The cheque bears an abbreviation "& Co. "between the two parallel lines or
3. The cheque bears the words "Not Negotiable" between the two parallel lines or
4. The cheque bears the words "A/c. Payee" between the two parallel lines.

A crossed cheque can be made bearer cheque by cancelling the crossing and writing that the
crossing is cancelled and affixing the full signature of drawer.
Specimen of General Crossing ↓

2. Special crossing: Section 124 of the Act refers to Special crossing.

Where a cheque bears across its face in addition to the name of the banker either with or without
the words or the words ‘not negotiable, then the cheque is said to have been crossed specially.
The object of special crossing is to direct the banker to pay the cheque only if it is presented
through the particular bank mentioned.
When a particular bank's name is written in between the two parallel lines the cheque is said to
be specially crossed.

Specimen of Special or Restrictive Crossing ↓

In addition to the word bank, the words "A/c. Payee Only", "Not Negotiable" may also be written.
The payment of such cheque is not made unless the bank named in crossing is presenting the
cheque. The effect of special crossing is that the bank makes payment only to the banker whose
name is written in the crossing. Specially crossed cheques are more safe than a generally
crossed cheques.
In short Section 138

Dishonour of cheque is an offence.

Section 138 of the Negotiable Instruments Act states that, A banker shall return the cheque when
the money standing to the credit of the account holder is insufficient to honour the cheque.
Dishonour of cheque is a criminal offence. The drawer shall be deemed to have committed an
offence and such offence will be punishable with imprisonment and with fine.(imprisonment shall
be extend 2 years or fine twice the amount of the cheque or both).
Provisions of section 138 of the Act are applicable only if –
(a) The cheque is issued for discharge of a liability only. A cheque given as gift will not fall in this
category.
(b) The cheque is presented to the bank for payment within 3 months or its specific validity
period, whichever is earlier.
(c)The payee or holder in due course has given notice demanding payment within 30 days of the
receiving information of dishonour as regarding the insufficiency of funds.
(d) The drawer does not make payment within 30 days of the receipt of the notice. The complaint
can be made only by the payee/holder in due course, within 1 month.

BASIS FOR
CHEQUE BILL OF EXCHANGE
COMPARISON

Meaning A document used to make easy A written document that

payments on demand and can be shows the indebtedness of
transferred through hand delivery is the debtor towards the
known as cheque. creditor.

Defined in Section 6 of The Negotiable Section 5 of The Negotiable

Instrument Act, 1881 Instrument Act, 1881

Validity Period 3 months Not Applicable

Acceptance A cheque does not require Bill of exchange needs to be

acceptance. accepted.

Stamping No such requirement. Must be stamped.

Crossing Yes No

Drawee Bank Person or Bank