NEGOTIABLE

INSTRUMENTS ACT,
1881
DEFINITION
• According to Section 13 of the Act, “ a negotiable instrument means a
promissory note, bill of exchange or cheque payable either to order or
to bearer”

• The term “negotiable instrument” literally means ‘a written document

transferable by delivery’
Characteristics of a negotiable
instrument
1. Easy negotiability
2. Transferee can sue in his own name without giving notice to the
debtor
3.Better title to a bona fide transferee for value
4. Presumptions: Sections 118 and 119 of the Negotiable Instrument Act lay down certain
presumptions which the court presumes in regard to negotiable instruments
 Presumptions that apply to negotiable
instruments
1. Consideration: It shall be presumed that every negotiable instrument was made drawn, accepted or endorsed
for consideration. It is presumed that, consideration is present in every negotiable instrument until the
contrary is presumed.
2. Date: Where a negotiable instrument is dated, the presumption is that it has been made or drawn on such
date, unless the contrary is proved.
3. Time of acceptance: Unless the contrary is proved, every accepted bill of exchange is presumed to have been
accepted within a reasonable time after its issue and before its maturity. This presumption only applies when
the acceptance is not dated; if the acceptance bears a date, it will prima facie be taken as evidence of the date
on which it was made.
4. Time of transfer: Unless the contrary is presumed it shall be presumed that every transfer of a negotiable
instrument was made before its maturity.
5. Order of endorsement: Until the contrary is proved it shall be presumed that the endorsements appearing
upon a negotiable instrument were made in the order in which they appear thereon.
6. Stamp: Unless the contrary is proved, it shall be presumed that a lost promissory note, bill of exchange or cheque was duly
stamped.
7. Holder in due course: Until the contrary is proved, it shall be presumed that the holder of a negotiable instrument is the
holder in due course. Every holder of a negotiable instrument is presumed to have paid consideration for it and to have taken it
in good faith. But if the instrument was obtained from its lawful owner by means of an offence or fraud, the holder has to
prove that he is a holder in due course.
8. Proof of protest: Section 119 lays down that in a suit upon an instrument which has been dishonoured, the court shall on
proof of the protest, presume the fact of dishonour, unless and until such fact is disproved.
PROMISSORY NOTE
Section 4 of the Act defines, “A promissory note is an instrument in writing (note 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.”
Essential elements of a promissory
note
1. It must be in writing: A mere verbal promise to pay is not a promissory note. The method of
writing (either in ink or pencil or printing, etc.) is unimportant, but it must be in any form that cannot
be altered easily.
2. It must certainly an express promise or clear understanding to pay: There must be an express
undertaking to pay. A mere acknowledgment is not enough. The following are not promissory notes
as there is no promise to pay.
(3) Promise to pay must be unconditional: A conditional undertaking destroys the negotiable
character of an otherwise negotiable instrument. Therefore, the promise to pay must not depend upon
the happening of some outside contingency or event. It must be payable absolutely.
(4) It should be signed by the maker: The person who promise to pay must sign the instrument even
though it might have been written by the promisor himself
(5) The maker must be certain: The note self must show clearly who is the person agreeing to
undertake the liability to pay the amount.
6. The payee must be certain: The instrument must point out with certainty the person to whom
the promise has been made.
• (7) The promise should be to pay money and money only: Money means legal tender money and
not old and rare coins
• (8) The amount should be certain: One of the important characteristics of a promissory note is
certainty—not only regarding the person to whom or by whom payment is to be made but also
regarding the amount.
• (9) Other formalities: The other formalities regarding number, place, date, consideration etc.
though usually found given in the promissory notes but are not essential in law. The date of
instrument is not material unless the amount is made payable at a certain time after date. Even in
such a case, omission of date does not invalidate the instrument and the date of execution can be
independently ascertained and proved.
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”.
• A bill of exchange, therefore, is a written acknowledgement of the debt, written by the creditor
and accepted by the debtor.
• There are usually three parties to a bill of exchange drawer, acceptor or drawee and payee. Drawer
himself may be the payee.
Essentials of a Bill of exchange
• (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.
• (7) The order must be unconditional.
Example:
• For example, In the following cases, there is no order to pay, but only a request to pay. Therefore,
none can be considered as a bill of exchange:
• (a) “I shall be highly obliged if you make it convenient to pay Rs. 1000 to Suresh”.
• (b) “Mr. Ramesh, please let the bearer have one thousand rupees, and place it to my account and
oblige”
• However, there is an order to pay, though it is politely made, in the following examples:
• (a) “Please pay Rs. 500 to the order of ‘A’.
• (b) ‘Mr. A will oblige Mr. C, by paying to the order of’ P”.
Distinction between a Promissory note and a bill of
exchange
• 1. Number of parties: In a promissory note there are only two parties – the maker (debtor) and the payee
(creditor). In a bill of exchange, there are three parties; drawer, drawee and payee; although any two out of the
three may be filled by one and the same person,
• 2. Payment to the maker: A promissory note cannot be made payable the maker himself, while in a bill of
exchange to the drawer and payee or drawee and payee may be same person.
• 3. Unconditional promise: A promissory note contains an unconditional promise by the maker to pay to the payee
or his order, whereas in a bill of exchange, there is an unconditional order to the drawee to pay according to the
direction of the drawer.
• 4. Prior acceptance: A note is presented for payment without any prior acceptance by the maker. A bill of
exchange is payable after sight must be accepted by the drawee or someone else on his behalf, before it can be
presented for payment.
• 5. Primary or absolute liability: The liability of the maker of a promissory note is primary and absolute, but the
liability of the drawer of a bill of exchange is secondary and conditional.
• 6. Relation: The maker of the promissory note stands in immediate relation with the payee, while the maker or
drawer of an accepted bill stands in immediate relations with the acceptor and not the payee.
• 7. Protest for dishonour: Foreign bill of exchange must be protested for dishonour when such protest is required to
be made by the law of the country where they are drawn, but no such protest is needed in the case of a promissory
note.
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, (i) it is always
drawn on a specified banker, and (ii) it is always payable on demand.
• Consequently, all cheque are bill of exchange, but all bills are not cheque. A
cheque must satisfy all the requirements of a bill of exchange; that is, it must be
signed by the drawer, and must contain an unconditional order on a specified
banker to pay a certain sum of money to or to the order of a certain person or to
the bearer of the cheque. It does not require acceptance.
Characteristics of a Cheque:
• A cheque is always drawn on a bank
• A cheque is always payable on demand
• A cheque may be written on a paper or it may be in the electric form
• A cheque may be authenticated by the hand written signature or by
the digital signature
Distinction Between Bills of Exchange and
Cheque
• 1. A bill of exchange is usually drawn on some person or firm, while a cheque is always drawn on a bank.
• 2. It is essential that a bill of exchange must be accepted before its payment can be claimed A cheque does
not require any such acceptance.
• 3. A cheque can only be drawn payable on demand, a bill may be also drawn payable on demand, or on the
expiry of a certain period after date or sight.
• 4. A grace of three days is allowed in the case of time bills while no grace is given in the case of a cheque.
• 5. The drawer of the bill is discharged from his liability, if it is not presented for payment, but the drawer of
a cheque is discharged only if he suffers any damage by delay in presenting the cheque for payment.
• 6. Notice of dishonour of a bill is necessary, but no such notice is necessary in the case of cheque.
• 7. A cheque may be crossed, but not needed in the case of bill.
• 8. A bill of exchange must be properly stamped, while a cheque does not require any stamp.
• 9. A cheque drawn to bearer payable on demand shall be valid but a bill payable on demand can never be
drawn to bearer.
• 10. Unlike cheques, the payment of a bill cannot be countermanded by the drawer.
HUNDIS
• A “Hundi” is a negotiable instrument written in an oriental language. The term hundi includes all
indigenous negotiable instrument whether they be in the form of notes or bills.
• The word ‘hundi’ is said to be derived from the Sanskrit word ‘hundi’, which means “to collect”.
They are quite popular among the Indian merchants from very old days. They are used to finance
trade and commerce and provide a fascile and sound medium of currency and credit.
• Hundis are governed by the custom and usage of the locality in which they are intended to be
used and not by the provision of the Negotiable Instruments Act. In case there is no customary rule
known as to a certain point, the court may apply the provisions of the Negotiable Instruments Act.
It is also open to the parties to expressly exclude the applicability of any custom relating to hundis
by agreement (lndur Chandra vs. Lachhmi Bibi, 7 B.I.R. 682)