Negotiable Instrument Act, 1881 – Summary & Important Sections

Negotiable Instrument Act

Negotiable Instrument Act (NI Act) 1881 came into effect from 1st March 1882. It has 148 sections (Sections 138 to 142 were added in 1988 with effect from 1st April 1989 & Section 143 to 147 during December 2002). The latest amendment came in the form of Negotiable Instruments Amendment Act 2018 notified through Official Gazette on 2nd August 2018. After reading this post you can understand the important section of the Negotiable Instrument Act, 1881 and could easily answer the following types of questions:

What is meant by the Negotiable Instrument Act? What are the four types of negotiable instruments? Which are the Negotiable Instruments? What are the presumptions of a negotiable instrument? What are the two main types of negotiable instruments? What are the 7 requirements for negotiability? etc.

Negotiable Instrument (NI) has been defined under section 13 of Negotiable Instrument Act, which means and include Promissory Note, Bill of Exchange & Cheque payable to order or bearer. So, before going the details of the types of negotiable instruments, let us start with the term Negotiability.

What is Negotiability?

Negotiability is the unique feature that a negotiable instrument posse, which means, the instrument is freely transferable and the title of the transferee is better if he/she took the instrument for value and in good faith under such circumstances having no suspicion about any defect in the title of the transferor. Such a transferee is called holder in due course.

Instruments which are not transferable are not Negotiable Instruments ab-initio such as Motor transport receipt, Dock Warrant, Wharfinger‟s Certificate, LIC Policy, Document of Title to Immovable Property, Airways bill, Time Deposit receipt, Share Certificate etc.

Instruments which are transferable but if the transferee doesn’t get a better title than the transferor is also not a negotiable instrument as per NI Act such as Railway Receipt, Bill of Lading, Warehouse receipts etc which are termed as Quashi Negotiable Instruments.

Types of the Negotiable Instruments

As per Section 13 of Negotiable Instrument Act, 1881, there are three types of Negotiable Instruments: i.e Promissory Note, Bill of Exchange and Cheque payable either to Order or Bearer of the instrument. These are also termed as Negotiable Instruments by Statue.

As per Section 137 of Transfer of Property Act: Documents related to Title of Goods like Railway Receipt, Bill of Lading, Warehouse receipt. (Airway Bills are not treated as Negotiable instruments).
As per Practice: Govt. Promissory Note, Treasury Bills, Certificate of Deposit, Commercial Papers.

Important Sections of Negotiable Instrument Act

NI SectionSection Related to
4Related to Promissory Note
5Related to Bill of Exchange
6Related to Cheque
7Defines Drawer, Drawee, Drawee in case of need, Acceptor, Acceptor for honour, Payee
8Holder
9Holder in due course
10Payment in due course
11Inland Instruments
12Foreign Instruments
13Definition of Negotiable Instrument
14Defines the word Negotiation
15Defines Endorsement
16Indorsement ‘in blank’ and ‘in full’, Indorsee.
17Ambiguous Instruments
18Amount in Words and figures if differs, amount in words should be paid.
19Instruments payable on demand.
20Inchoate Instruments
21At sight, On presentment, After sight
22Maturity and grace period for payment of Bill of Exchange /
Promissory Note
23Calculating maturity of bill or note payable so many months after date or sight.
24Calculating maturity of bill or note payable so many days after date or sight.
25Matters relating to bills maturing on holidays.
26Capacity of Minor to Draw / Endorse Negotiable Instruments
28Defines liability of agent signing.
29Defines liability of legal representative signing.
30Defines liability of drawer.
31Obligation of paying Banker to make payment of genuine instruments.
80Interest rate when no rate is specified in the instrument.
85 (1)Protection to Paying Banker against forged endorsement in Order Cheques
85 (2)Protection to Paying Banker against forged endorsement in Bearer Cheques
85 (A)Protection to Paying Banker against forged endorsement in Demand Drafts
89Protection to Paying Banker against material alteration in a cheque.
99Noting of Bill of Exchange / Promissory Note
100Protesting of Bill of Exchange / Promissory Note
105Reasonable time to be given for presentment.
123General Crossing
124Special Crossing
130Not Negotiable Crossing
131Protection to Collecting Banker
138Dishonour of a cheque due to insufficiency of funds.
148Minimum percentage sum (20% of the compensation awarded) to be deposited by drawer in case of appeal against conviction u/s 138 awarded by the trial court.

Promissory Note (Section 4 of NI Act)

Under section 4 for NI Act, a promissory note is an instrument that contains a written promise (unconditional undertaking) signed by one party to pay another party or his order a definite sum of money, either on-demand or at a specified future date.

A maker/promisor signs Promissory Note as in the following example with the date and stamp:

(a) “I promise to pay Shyam [Name of the payee] or order Rs. 1000 [Amount to be paid with words].”
(b) “I acknowledge myself to be indebted to Shyam [Name of the payee] in Rs. 5,000 [Amount to be paid with words], to be paid on demand, for value received.”
(c) “I promise to Pay Shyam [Name of the payee] Rs. 1000 [Amount to be paid with words] and all other sums which shall be due to him.”
(d) “I promise to Pay Shyam [Name of the payee] Rs. 1000 [Amount to be paid with words], first deducting there out any money which he may owe me.”
(e) “I promise to Pay Shyam [Name of the payee] Rs. 5000 [Amount to be paid with words] seven days after my marriage with C.”

A promissory note typically contains all the terms pertaining to the indebtedness, such as the principal amount, interest rate, maturity date, date and place of issuance, and issuer’s signature.
Promissory notes require stamping as per the Indian Stamp Act.

Parties of a Promissory Note:

There are basically two parties in Promissory Note:
1. Maker (Promisor): Who promises to pay the amount.
2. Payee (Promisee): To whom the amount is payable.

Types of Promissory Note (PN):

There are two types of Promissory Notes:

Demand Promissory Note: A PN which is payable immediately on demand.
Usance Promissory Note: A PN which is payable after a certain pre-decided period.

Promissory Notes payable to bearer: As per Section 31 of RBI Act, Demand Promissory Notes / Demand Bill of Exchange/ Hundis payable to bearer can’t be issued by anybody except RBI and Govt. Of India since that is as good as Currency Notes and governed by Indian Currency Act.

Bill of Exchange (Section 5 of NI Act)

As per Negotiable Instrument Act 1881, a bill of exchange is defined as 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.

The essential features of a bill of exchange are:

 A Bill of Exchange must be in writing.
 It is an unconditional order to make payment a certain sum to a certain person.
 The maker of the bill of exchange must sign it.
 The date on which payment is made must also be certain.
 The amount mentioned in the bill of exchange is payable either on-demand or on the
expiry of a fixed period of time.
 It must be stamped as per the requirement of law.

Parties to a Bill of Exchange:

In the instrument Bill of Exchange there are two parties (i) Drawer & (ii) Drawee.

Drawer: The person who orders to pay. He is the person who is entitled to receive the money (i.e the Creditor or seller). He is required to sign the bill and send it to the drawee for acceptance.

Drawee: Drawee is the person on whom the bill is drawn. He is the person who owes the money and is directed to pay i.e the debtor or buyer of goods. Since a minor can‟t incur any liability, he can‟t be a drawee. The drawee becomes acceptor on acceptance of the Bill of Exchange for payment.

Drawee in case of Need: Another person to whom the bill is to be presented for acceptance/payment if the same is dishonored by drawee. A B/E can‟t be said to have been dishonored unless and until it is also dishonored by drawee in case of need.

Payee: The person to whom the money is payable. In most cases the drawer of the bill is himself the payee.

Drawee in case of need: When the bill mentions the name of the additional person in addition to the drawee it is known as drawee in case of need.

Acceptor for honor: When a BE has been noted or protested for non-acceptance and any person accepts it for honor of the drawer or endorsers, such person is called as acceptor for honor.

Types of Bill of Exchange:

Following two types of Bill of Exchange exists based on their nature, period etc.

Demand Bill: Bill of exchange payable on demand or at sight or on its presentment and if no time is specified.

Usance Bill: A bill of exchange payable after some time at a future date.

Inland Bill of Exchange (Section-11): A Bill of Exchange which is drawn in India and is either payable in India or on a person resident in India. It has two main characteristics:

i) It is always drawn in India i.e the drawer must be in India and ii) Payable in India but not necessarily by resident Indian or it may be payable/accepted/endorsed outside India but by a resident Indian.

Foreign Bill of Exchange (Section-12): A bill that is not an Inland Bill. A bill which is not drawn in India or made payable in India. The following bills may be classified as a foreign bill:

(i) A bill drawn in India but payable outside India by a person other than an Indian resident.

(ii) A bill drawn outside India but payable in India or drawn outside India on a person residing outside India but payable in India.

(iii) A bill drawn in India and payable outside India or drawn on a person residing outside
India and is payable outside India.

Generally, a foreign bill is drawn in more than one set to overcome the loss in transit while sending for acceptance. The accepted copy received first becomes original and after that, the other copies are treated as cancelled. These copies are called VIA.

Documentary Bill: Bill accompanied by a document of Title to Goods like Railway receipt, bill of lading etc.

Clean Bill: Bill which is not accompanied by any document of Title to Goods.
Accommodation Bill: When a bill is drawn for other than a trade transaction and issued without consideration is called accommodation bill and dealing with such bills is termed as Kite Flying.

Hundi: These are a type of Bill of exchange drawn in vernacular language as per the local use. A Hundi which has been paid up and cancelled is called Khokha.

Dishonor of a Bill of Exchange:

A Negotiable Instrument can be dishonoured either due by Non-acceptance or Non-Payment. Upon dishonour, the holder should I) Give notice of dishonour to all prior parties i.e endorsers and II) get the Dishonored bill noted/protested.

Noting: On dishonour of a bill or Promissory Note, the holder may get it noted by a Notary Public as per Section 99 of NI Act. Noting is not applicable for Cheques and it is not compulsory for Inland Bills. Further, the right of a holder is not affected by not getting the dishonoured bill noted by a notary public.

Protest: It is dealt under Section 100 of the NI Act. A protest is a certificate issued by a Notary Public containing the facts of dishonour.

If a bill gets dishonoured by non-acceptance, then the holder can recover the amount from all prior parties except the drawee and the drawer will be the principal debtor. But in case of dishonour due to non-payment, then the holder can recover the amount from all prior parties including the acceptor. In this case, the acceptor (drawee) is the principal debtor.

Ambiguous instrument (Section 17 of NI Act)

The ambiguous instrument is an instrument which is maybe due to faulty drafting is drawn in such a manner that it can be treated as a B/E or Promissory Note.

Inchoate Instrument (Section 20)

The inchoate instrument is an instrument which is incomplete with respect to date, payee and amount. Holder of such instrument has the right to complete it. An instrument without a signature is not valid at all.

Difference between Promissory Note and Bill of Exchange

Following are the main differences between Promissory Note and Bill of Exchange:

Promissory Note (PN)Bill of Exchange (BOE)
PN is defined in Section 4 of NI Act.BOE is defined in Section 5 of NI Act.
Number of parties in PN are 2.Number of in BOE parties are 3.
Acceptance is not required in PN.Acceptance by drawer is required in BOE.

CHEQUES (Section 6 on NI Act)

As per section 6 of the Negotiable Instrument Act, Cheque is a Bill of Exchange, always payable on demand and the drawee is always a Bank. Apart from physical cheque, Electronic cheque and Electronic image of the cheque are also treated as valid instruments. No certain form of Cheque is given in the act. However, RBI has prescribed formats and features as per CTS-2010 Cheque standards, which has been made mandatory w.e.f 01.01.2013. (Banks had been advised to issue only CTS-2010 standard cheques/DD by 31st December 2012).

Parties to a Cheque

Drawer: The person who draws the cheque or the account holder.

Drawee: The Bank on whom the cheque is drawn or where the account is maintained.

Payee: The person named in the cheque or the beneficiary of the payment.

MICR (Magnetic Ink Character Recognition) Cheque

To facilitate Magnetic Ink Character Recognition based Cheque Processing, instruments passing through clearing are required to be issued in standard format and defined size of 8” x 3 2/3”.

MICR Cheques have three sets of numbers at the lower band of the cheque.

Cheque Serial Number: First 6 digits represents the cheque number.

City-Bank-Branch Number: The next 9-digit number convey meaning in three set of three digits. First set of three digits represents City Code, Next three digits represents Bank Code and last three digits represent Branch Code. Allotment of branch codes is by the President of the Clearing House of which the bank is a member; generally, the service branch of a bank is allotted the branch code of ‘001’.

Transaction code field: Comprising of two digits in all instruments except Government cheques drawn on RBI which have a 3-digit transaction code. Control documents – batch and block tickets – have a three-digit representation in the transaction code field.

The transaction code, running from 01-99, out of which, Codes 01- 49 are reserved for debit instruments and codes 50 – 99 for credit instruments.

Account number field: Consisting of six digits followed by a delimiter, is an optional field. In the case of Government Cheques issued by RBI alone, the account number is of seven digits. The Government Account number is 10 digits in length – 7 digits occurring in the Account number field and three in the transaction code field.

Difference between Cheque & Bill of Exchange

See in the following table the main differences between Cheque and Bill of Exchange:

ChequeBill of Exchange (BOE)
Cheques can be crossed.Provisions of Crossing Not Applicable in BOE.
Cheques require no acceptance.Usance bills need to be accepted.
Cheque can be done payable to bearer on demandBOE can’t be drawn payable to bearer on demand
Cheque is payable only on demand or after some time.BOE can be a demand bill or usance bill.
Drawee always is a Bank.Drawee can be any one.