The Negotiable Instruments Act, 1881 - Study Notes

Lesson summary

'Negotiable' means transferable from one person to another in return for consideration, and 'instrument' means a written document creating a right in favour of a person. A negotiable instrument entitles a person to a certain sum of money and is transferable by mere delivery or by endorsement and delivery. The law is contained in the Negotiable Instruments Act 1881, which deals with promissory notes, bills of exchange and cheques.

22.01 Meaning, characteristics and presumptions

• Justice K.C. Wills: property in a negotiable instrument is acquired by anyone who takes it bonafide and for value, notwithstanding any defect of title in the person from whom he took it.
• Transferability: without formality such as stamp or registration; by delivery (bearer) or endorsement and delivery (order).
• Title of holder free from defects: a person taking the instrument in good faith and for value is a holder in due course; his title is superior.
• Right to sue: the transferee can sue in his own name without notice to the debtor.

Presumptions: consideration; acceptance; made on the date it bears; accepted within reasonable time and before maturity; transfer before maturity; endorsements in the order they appear; a lost instrument duly stamped; the holder is a holder in due course.

22.02 Negotiability and assignability

22.03 Bill, cheque and promissory note

• Bill of exchange (Section 5): written, unconditional order, signed by the maker, directing a certain person to pay a certain sum of money to a certain person or to bearer. Payable on demand or after a period, but not to bearer on demand.
• Cheque (Section 6): a bill of exchange drawn on a specified banker and payable only on demand. Features: in writing, unconditional order (the word 'please' does not spoil it), drawn on a specified banker, certain sum of money, certain payee, signed by the drawer, always payable on demand.
• Promissory note (Section 4): written, unconditional undertaking signed by the maker to pay a certain sum of money. It must be in writing, payable in Indian legal tender, sufficiently stamped and not payable to bearer; a bank note or currency note is not a promissory note.

Foreign bills are drawn in sets of three. A cheque is payable only in home currency; notice of dishonour is needed for a bill but not for a cheque.

22.04 Crossing of cheque

• General crossing (Section 123): two parallel transverse lines across the face, with or without 'and Co.' or 'not negotiable'. An 'X' mark is not a crossing. Payment only through a banker.
• Special crossing (Section 124): the name of a banker is essential; lines are not. Payment only to that banker, so it is safer.

22.05 Endorsements

Section 15 defines endorsement: signing on the face or back of the instrument for the purpose of negotiation. A slip of paper attached when space runs out is an allonge.

• Endorsement for part of the amount is invalid; after part payment it may be made for the balance.
• Endorsement is complete only on delivery.
• Signing in block letters is not a regular endorsement; an illiterate payee may use an attested thumb impression.
• An agent signs with words such as 'for', 'on behalf of' or 'per pro'.

Boxes

• MICR: Magnetic Ink Character Recognition code at the bottom of a cheque.
• IFSC: 11-character code for RTGS and NEFT; 4 letters for bank, fifth character 0, last 6 for branch.
• Emergency holiday: instruments maturing on it are paid on the next working day; on a notified public holiday, on the preceding working day.