Negotiable Instrument Act, 1881

Negotiable Instrument Act 1881

Negotiable means transferable.

The negotiation that goes on refers to
the transfer of the instrument between
two people, or from one bank to
another or even from one country to
another.
 Definition and Meaning
What is an instrument?
In the broadest sense, almost any agreed upon
medium of exchange could be considered a
negotiable instrument.
In day to day banking, a negotiable instrument
usually refers to checks, drafts, bills of
exchange, and some types of promissory notes.
Nature of negotiable instrument are:

•Be in writing
•Be signed by the maker or drawer
•Be an unconditional promise or order to pay
•State a fixed amount of money
•Be freely transferable from one to another person
•Be payable on demand or at a definite time
•Be payable to order or to bearer.
Types of Negotiable Instruments
There are 3 main types of negotiable instruments.
They are as follows:
1. Promissory Notes
2. Bill of Exchange
3. Cheque
 Promissory Notes
Section 4 of the Act defines, “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 to or
to the order of a certain person, or to the bearer of the
instruments.” An instrument to be a promissory note
must possess the following elements.
It must be in writing
It must understand promise or clear understanding to pay
Promise to pay must be unconditional
 Bill of Exchange
Section 5 of the Act defines, “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”
(1) It must be in writing.
(2) It must be signed by the drawer.
(3) The drawer, drawee and payee must be certain.
(4) The sum payable must also be certain.
(5) It should be properly stamped.
(6) It must contain an express order to pay money and
money alone.
 Classification of Bills
1. Inland and foreign bills.
(2) Time and demand bills.
(3) Trade and accommodation bills.
 Cheque
Section 6 of the Act defines “A cheque is a bill of
exchange drawn on a specified banker, and not
expressed to be payable otherwise than on demand”.
A cheque is bill of exchange with two more
qualifications, namely,
 It is always drawn on a specified banker, and
 It is always payable on demand
Distinction between Bills of Exchange and Cheque
 Dishonor of Cheque
What is a cheque?
A cheque is one form of a bill of exchange. However,
all bills of exchange are not cheques. A cheque is
always drawn on a bank or a banker.
What do we mean by dishonor of cheque?
Case number one: When any cheque, drawn by a
person for the discharge of any liability is returned by
the bank unpaid, because of insufficiency of the
amount of money, the cheque is said to have been
dishonored
Case number two: The cheque amount exceeds the
amount that can be paid by the bank under an
arrangement entered into between the bank and the
drawer of the cheque
Compensation payable in case of
dishonour.
Certain rules must be followed in case of dishonour of
promissory note, bill of exchange or cheque.

○The holder is entitled to the amount due upon the

instrument together with the expenses properly incurred
in presenting, noting and protesting it.
Continued…
○ Receive the sum at current rate of exchange between
the two places.

○An endorser who has paid the amount is entitled to that

amount plus interest on that amount at a particular
percent per annum until realization is made.

○ A bill by the party dishonoured might be drawn on the

party liable to compensate him inclusive of all taxes and
expenses incurred during the whole process.
 Punishment on Bouncing of Cheques

A dishonored cheque is one, which when presented is

refused payment by the bank because of insufficient
funds or because it is not in order, dishonestly issuing a
cheque is a criminal offence in India.
489-F Dishonestly issuing a cheque: Whoever
dishonestly issues a cheque towards re-payment of a loan
or fulfillment of an obligation which is dishonored on
presentation shall be punishable with imprisonment
which may extend to three years and with fine unless he
can establish, for which the burden of proof shall rest on
him, that he had made arrangements with his bank to
ensure that the cheque would be honored and that the
bank was at fault in not honoring the cheque.
 Types of Cheque Fraud
There are Four main types of cheque fraud:
Counterfeit – cheques not written or authorized by legitimate
account holder.
Forged – Stolen cheque not signed by account holder.
Altered – an item that has been properly issued by the account
holder but has been intercepted and the payee and/or the
amount of the item have been altered.
Dishonestly  issuing  a  cheque. – Whoever dishonestly
issues a cheque towards re-payment of a loan or fulfillment of
an obligation which  is  dishonored  on  presentation,  shall  be
punishable with imprisonment which may extend to  three
years, or with  fine, or with both.
Continued...
The offence under this section is cognizable by police,
non-bailable and compoundable.
“ Whoever dishonestly issues a cheque towards re-
payment of a finance or fulfillment of an obligation
which is dishonored on presentation, shall be
punishable with imprisonment which may extend to
one year, or with fine or with both, unless he can
establish, for which the burden of proof shall rest on
him, that he had made arrangements with his bank to
ensure that the cheque would be honored and that the
bank was at fault in not honoring the cheque”.
And…
Issuance of cheque dishonestly is an offence under the
statute both civil and criminal remedies could be
availed simultaneously in such matters. 
You can lodge First Information Report against the
signatory and at the same time can also file a civil suit,
there is no legal bar if criminal and civil proceedings
continue simultaneously. Before lodging F.I.R. notice
of dishonur of cheque should also be given.
 Case Study
Case
By means of false preference A has obtain from B a
cheque crossed “not negotiable” he took that cheque to
a bank (other than drawee bank) which paid it. B sues
the bank for conversion.
Has A committed any offence or irregularity. Under the
negotiable instrument act.
Is B entitled to get any relief?
How will you decide the case
 Answer
The given case is under the chapter of negotiable instrument
which means promissory notes, bills of exchange or cheque
payable either to order or to bearer.
In this set case because of false preference A obtain a cheque
from B a crossed cheque saying not negotiable. He took the
cheque to bank (collecting banker) which paid it. Here the not
negotiable word came on crossing because of this crossing the
cheque becomes made available to pay to bearer that is to anyone
who holds it therefore here A did a lawful negotiation as he got a
cheque and went to the collecting banker who collects the cross
checks on behalf of their customer, Because of not negotiable
tittle bank paying in good faith and without negligence to their
regular customer to ensure the interest of customers.
 Judgement

Here the cheque is crossed with the the label “not negotiable” which means the
transferee cannot get a better title than that of transferor. It also means that it
can be paid only to a certain person. A negotiable cheque is one which is made
payable to bearer that is to anyone who “holds it. Here because of fall
preference A has obtain a cheque because of that “not negotiable” cross cheque
gives authority to receive the payment of check therefore A followed the rules
and regulations covered under negotiable instrument hence A  the did not
committed any offence or irregularity under the Negotiation instrument.
 
Here because of fall preference A obtain a cheque from B with the cross cheque
“not negotiable” because of this crossing the cheque becomes made available
to pay to bearer that is to anyone who holds it. Hence here B will not get any
relif as the transaction is lawful under the negotiable instrument act, 1881.
Thank You 