The Negotiable Instruments Act, 1881
1. The word “Negotiable’’ means Transferable. Transfer from transferor to transferee.
2. The Act deals with the law relating to 3 specific classes of Negotiable Instruments viz.:
Promissory Notes
Bills of Exchange
Cheques
So, when the term Negotiable Instruments is used; we are referring to Promissory Notes;
Bills of Exchange & Cheques.
‘Negotiable’ means Transferable
‘Negotiable Instruments’ means Promissory Notes; Bills of Exchange & Cheques.
Why currency notes are not considered as Negotiable Instruments?
The NIA doesn’t apply to Indian Paper Currency Act, 1871 (People often ask that why Currency
notes are not considered a part of Negotiable Instruments, it’s because NIA doesn’t affect the
Indian Paper Currency Act, 1871.
NIA doesn’t apply to Currency Notes.
Non-Applicability of NIA
Currency Notes (NIA doesn’t affect the Indian Paper Currency Act, 1871)
Doesn’t affect any local usage relating to any instrument in an oriental language (e.g.
Hundis). Exception: But where no custom is established, the Act will apply to Hundis.
Essential Features of Negotiable Instruments:
1. Transferability
a) Endorsement (Written):
If the name of the person to whom the negotiable instrument is to be transferred is
mentioned or written, then the transfer of such Negotiable Instrument can only be made by
endorsement to that Specified person only.
b) Delivery (Bearer Instrument)
Here, the person who holds/bears the instrument, can transfer the Negotiable Instruments
to another person by delivery
*Bearer Instrument: Means if you are holding it & no name is written on it, you can transfer
it to another person.
How many times can it be transferred?
Depends on the Maturity Period of the instrument.
2. Independent Title (Transferor to Transferee):
If a transferor has received any Negotiable Instrument such as Bill of exchange etc & he
transfers it to the transferee, even if he didn’t have the title, he can transfer the same. The
negotiable instrument so transferred can be claimed by the transferee.
So even if the transferor doesn’t have a proper title of the Negotiable Instrument, he can
transfer the same.
3. Certainty:
Certainty with regard to Who will pay? Amount? Time when the payment shall be made?
4. Right to Sue (By Holder/HDC):
Suppose u have a cheque, which gives you the right to withdraw the stated amount of
money from your account. By virtue of holding that cheque, you shall also have the right
to sue the other party, in case the cheque is dishonoured.
Meaning of Negotiable Instrument as per NIA Act
Section 13. “Negotiable instrument”—
[(1) A “negotiable instrument” means a Promissory Note, Bill of Exchange or Cheque payable
either to ORDER or TO BEARER.
Explanation (i)—A promissory note, bill of exchange or cheque is payable to order which is
expressed to be so payable or which is expressed to be payable to a particular person, and does
not contain words prohibiting transfer or indicating an intention that it shall not be transferable.
TO ORDER – ORDERED TO BE PAID TO A PARTICULAR PERSON ONLY.
Explanation (ii)—A promissory note, bill of exchange or cheque is payable to bearer which is
expressed to be so payable or on which the only or last indorsement is an indorsement in blank.
WHOEVER IS HOLDING THE INSTRUMENT, MAY CLAIM THE PAYMENT FROM
THAT.
PROMISSORY NOTE (SECTION 4)
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.
Essentials of a Promissory Note:-
1. It must be in writing
2. It must contain a promise or undertaking to pay
3. Such promise to pay must be Unconditional.
4. It must be signed by the maker.
5. The maker and the payee must be certain persons.
6. The sum payable must be certain.
7. The amount payable must be in legal tender of Indian Money.
Note:
There is no particular form prescribed for a Promissory Note. But in every case it must
satisfy the requirement of the Act.
An instrument which satisfies the requirement of the definition given in Section 4 must be
held to be a promissory note irrespective of whether it is negotiable or not. (Chhabildas
Mangaldas V. Luthar Kohan Aija).
ILLUSTRATIONS:
What is a Promissory Note? What is NOT a Promissory Note?
A signs instruments in the following terms:
A mere acknowledgement of indebtedness
I acknowledge myself to be indebted to B in without specific promise to pay will not be
Rs. 1,000, to be paid on demand, for value a Valid promissory note.
received.
Here, he is Acknowledging the debt as well E.g:
as certainty of Amount to be paid & when
it shall be payable. I promise to pay B Rs.500 and all other sums
which shall be due to him.
Mr B, I owe you Rs 500.
There is no certainty – How much money?
Who is the maker? When is it due?
Note: There shouldn’t be any condition
attached to the payment of the amount due.
(Unacademy Video 3)
Requirements of a valid Promissory Note:
Bills of Exchange
Section 5 of the NIA defines “Bill of exchange” as—
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.
MAKER (Party 1)
Drawer
CERTAIN PERSON
(Say Mr. X) (Party 2)
Drawee
CERTAIN PERSON
(Say Mr. Y) (Party 3)
Payee
There are three parties involved in a bill of exchange-
Drawer
Drawee
Payee
The bill in which time is mentioned is a Time Bill, and that in which the same is not mentioned is
a Demand Bill.
5.1. Essentials of Bill of Exchange-
1. It must be in writing.
2. It must contain an order to pay.
3. Such order must be unconditional.
4. It must be signed by the drawer.
5. The drawer, drawee, and payee must be certain.
6. The sum payable must be certain.
7. The bill must contain an order to pay.
8. It must comply with the formalities.
S.NO Basis of Distinction OR Bill of Exchange Promissory Note
Common Ground
1. Mode of Instrument In Writing In Writing
2. Order/Promise It contains an Unconditional It is a Promise to pay,
order to pay the money. unconditionally.
3. No of parties. 3 parties: 2 parties: -
Here the Drawer/Maker (Party One was promising to
1) is giving an order to the pay to the Second
Drawee (Party 2) to pay some Party.
money to the Payee (Party 3).
Drawer gives an order or directs
the Drawee to pay the stated
amount to a Certain Person
(Payee).
CHEQUES
Section 6. “Cheque”:
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.
Governed by Sec 6 of NIA.
Cheque is a special type of Bill of Exchange, which is drawn on a Specified Banker.
A cheque is Payable on Demand.
After the introduction of the IT Act, the definition of cheque has been broadened to include:
i. electronic image of a truncated cheque and
ii. a **cheque in the electronic form.
*“a Truncated Cheque” means a cheque which is truncated during the course of a clearing cycle,
either by the clearing house or by the bank whether paying or receiving payment, immediately on
generation of an electronic image for transmission, substituting the further physical movement of the
cheque in writing.
** “a Cheque In The Electronic Form” means a cheque drawn in electronic form by using any
computer resource and signed in a secure system with digital signature (with or without
biometrics signature) and asymmetric crypto system or with electronic signature, as the case may be;
Essential Elements of Cheques-
1. It must be in writing.
2. It must contain an order to pay certain sum (Money)
3. Such order must be unconditional & definite.
4. It must be signed by the drawer.
5. The drawer, drawee, and payee must be certain.
6. Drawn upon a Specified Banker.
7. Payees Name or Self
8. Payable on Demand
9. Date of the Cheque
Types of Cheques
1. Explain the following :-
Bearer Cheque: Name of the Payee is not given. It is a Blank endorsement. Here, you
strike out the Order to Pay & tick on the Bearer Option.
Order Cheque: Can be Negotiated further on the order of the payee. This means that
the money is paid to the Specified person only, whose name is mentioned. Here you
need to strike out the ‘Bearer Option’.
Uncrossed Cheque
Crossed Cheque: Two Lines on cheque on the top left corner. In this case the
payment can only be received in the account, cant withdraw cash.
Post Dated Cheque
Stale Cheque
Parties Involved
DRAWER, DRAWEE AND PAYEE (SECTION 7)
DRAWER: The maker of a bill of exchange or cheque is called the "drawer"; (Person who is
writing the cheque.)
DRAWEE: The person thereby directed to pay is called the "drawee". (Drawer’s Banker)
"Drawee in case of need": When the bill or in any endorsement thereon the name of any person
is given in addition to the drawee to be resorted to in case of need, such person is called a
"drawee in case of need". That is, in case, Drawee is not available, you can contact the
additional drawee.
"Payee": The person named in the instrument, to whom or to whose order the money is by the
instrument directed to be paid, is called the "payee".
