Relevant Provisions under the Negotiable Instruments Act, 1881 (NI Act):

📜 What Is a Negotiable Instrument?

Under 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.”

These instruments are transferable and entitle the holder to claim payment.

🧾 Types of Negotiable Instruments & Their Provisions

Type of Instrument Description Relevant Sections of NI Act

A written promise by one party to
Promissory Note Sections 4, 87–88
pay a certain sum to another.
An order by one party to another to
Bill of Exchange Sections 5, 32–42
pay a third party.
A bill of exchange drawn on a
Cheque Sections 6, 138–147
banker and payable on demand.
A banker’s instrument payable on Covered under Cheque
Demand Draft
demand, often used in banking. Provisions
Banker’s Cheque / Similar to a demand draft, issued by Covered under Cheque
Pay Order a bank for immediate payment. Provisions
A document issued by a company to Not explicitly defined but
Dividend Warrant
pay dividends to shareholders. treated as negotiable by usage
A short-term government security, Not governed directly by NI
Treasury Bill
negotiable by usage. Act
Instruments payable to whoever
Bearer Instruments Section 13 (payable to bearer)
holds them.
Instruments payable to a specific
Order Instruments Section 13 (payable to order)
person or as per their order.

🧠 Additional Concepts Under the NI Act

 Endorsement & Negotiation: Sections 15–18

 Holder & Holder in Due Course: Sections 8–9
 Dishonour & Notice: Sections 91–98
 Presumption as to NI: Section 118
 Penalty for Dishonour of Cheque: Sections 138–142 (criminal liability)

📌 Section 4 – Promissory Note

This section defines what qualifies as a 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.”

Key elements:

 Must be in writing
 Must contain an unconditional promise to pay
 Must be signed by the maker
 Must specify a definite sum
 Must be payable to a specific person or bearer

📝 Illustration:
“I promise to pay B or order ₹500” → Valid promissory note
“I.O.U ₹1000” → Not a promissory note

🛡️Section 87 – Effect of Material Alteration

This section safeguards the sanctity of negotiable instruments:

Any material alteration made to a negotiable instrument without the consent of all
parties renders it void.

Examples of material alteration:

 Changing the date, amount, or payee

 Altering the rate of interest
 Modifying terms of payment

🔍 Exception: If the alteration was made to carry out the common intention of the original
parties, it may not void the instrument.

🔗 Section 88 – Effect of Prior Alteration

This complements Section 87:

An acceptor or indorser of a negotiable instrument is bound by their acceptance or

indorsement, even if the instrument was previously altered.

Implication: If someone accepts or endorses a previously altered instrument knowingly,

they remain liable.
 📘 Section 5 – Bill of Exchange

Sections 5 and 32–42 of the Negotiable Instruments Act, 1881, focusing on the legal
definitions, liabilities, and relationships among parties to negotiable instruments—
especially bills of exchange and promissory notes.

📘 Section 5 – Bill of Exchange

“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.”

Key Features:

 It’s an order, not a promise (unlike a promissory note).

 Must be unconditional.
 Must be signed by the drawer.
 Must specify a definite sum and payee.

🧠 Note: Time-linked conditions (e.g., payable after 30 days) don’t make it conditional in
law.

⚖️Sections 32–42: Liability & Relationships Among Parties

Sectio
Title Summary
n

Liability of
Maker of a note and acceptor of a bill are liable to pay at maturity. If they
32 Maker/Acce
default, they must compensate for loss.
ptor

Who Can Only the drawee (or drawee in case of need or acceptor for honour) can
33
Accept accept a bill.

Several
34 Drawees Not Each drawee can accept for himself, but not for others unless authorized.
Partners

Liability of Indorser is liable to compensate holder if instrument is dishonoured, unless

35
Indorser liability is excluded.

Liability of All prior parties are liable to a holder in due course until the instrument is
36
Prior Parties satisfied.

37 Principals & Maker/drawer/acceptor are principal debtors; others are sureties unless
Sureties contract says otherwise.
Sectio
Title Summary
n

📘 Section 37 – Maker, Drawer and Acceptor as

Principals

“The maker of a promissory note or cheque, the drawer of a bill of

exchange until acceptance, and the acceptor are, in the absence of a
contract to the contrary, respectively liable thereon as principal
debtors, and the other parties thereto are liable thereon as sureties for
the maker, drawer or acceptor, as the case may be.”

🔍 What It Means:

 The primary liability rests with:

o Maker of a promissory note or cheque
o Drawer of a bill of exchange (until it is accepted)
o Acceptor of a bill of exchange (after acceptance)

 All other parties—like indorsers or prior holders—are

considered sureties, unless there’s a contract stating otherwise.

🧠 Practical Example:

Let’s say:

 A draws a bill of exchange on B, payable to A’s own order.

 B accepts the bill.
 A endorses it to C, who endorses it to D, and finally it reaches E.

Now, if E presents the bill and B fails to pay:

 B (the acceptor) is the principal debtor to E.

 A, C, and D are sureties for B.

If E sues A instead of B, A can recover from B because A is only a

surety.

38 Prior Party Each prior party is principal debtor in respect of each subsequent party
as Principal unless agreed otherwise.

 A draws a bill on B, payable to A’s order.

 B accepts the bill.
 A endorses it to C, C to D, and D to E.
Sectio
Title Summary
n

Now:

 As between E and B, B is the principal debtor; A, C, and D are

sureties.
 As between E and A, A is the principal debtor; C and D are
sureties.
 As between E and C, C is the principal debtor; D is the surety.

This cascading liability ensures that each prior party bears full
responsibility to the next holder.

39 Suretyship

40 Discharge of
Indorser
Sectio
Title Summary
n

If the holder, without the indorser’s consent, impairs the indorser’s

remedy against a prior party, the indorser is discharged.

🔍 Example:

 A holds a bill endorsed by B, C, D, and finally E.

 A sues E but strikes out endorsements by C and D without E’s
consent.
 E loses the ability to recover from C and D.
 Hence, E is discharged from liability to A

Acceptor
Bound Acceptor is liable even if indorsement is forged, provided he knew or had
41
Despite reason to believe it.
Forgery

Fictitious Acceptor of a bill drawn in a fictitious name is still liable to a holder in due
42
Drawer course if indorsement matches drawer’s signature.

🧩 Legal Pedagogy Tip

These sections are ideal for illustrating:

 Chain of liability in negotiable instruments.

 Suretyship principles under NI Act vs. Indian Contract Act.
 Holder in due course protections.
 Forgery and fictitious party doctrines.

📘 Definition – Section 9 of the NI Act

A Holder in Due Course is a person who:

 Acquires a negotiable instrument for consideration,

 Before it becomes payable,
 In good faith, and
 Without knowledge of any defect in the title of the transferor.

This status gives the HDC privileged legal protection and enhanced enforceability.

✅ Rights of a Holder in Due Course

Right Description

Can demand payment from any or all prior parties—maker,

1. Right to Enforce Payment
drawer, acceptor, or indorsers.

Presumed to hold the instrument free from defects, even if

2. Right to Assume Clear Title
prior parties had flawed titles.

3. Immunity from Prior Protected from defences like fraud, coercion, or illegality that
Defences may exist between prior parties.

Can sue for payment immediately upon dishonour, without

4. Right to Sue on Presentment
needing to prove prior dealings.

5. Right to Retain Instrument Entitled to retain possession until full payment is made.

6. Right to Recover on Inchoate Under Section 20, can enforce even incomplete instruments if
Instruments they were signed and delivered.

⚖️Liabilities of a Holder in Due Course

While the HDC enjoys strong protections, they also carry responsibilities:
 Liability Description

Must acquire the instrument honestly and without suspicion of

1. Duty of Good Faith
defects.

2. Cannot Claim if Complicit in If the HDC knew of forgery or fraud, they lose their privileged
Fraud status.

3. Subject to Statutory Must follow procedures for presentment, notice of dishonour,

Compliance and limitation periods.

4. Civil & Criminal Liability if Misuse or manipulation of instruments may attract penalties
Misused under Sections 138–142.

🧠 Example Scenario

 A draws a cheque payable to B.

 B endorses it to C, who endorses it to D.
 D acquires it for value, before maturity, and without knowing that B had obtained it by
fraud.

👉 D is a Holder in Due Course.

Even if B’s title was defective, D can recover the full amount from A, B, or C.