Negotiable Instruments (NI)
The Law of Negotiable Instrument is regulated by The Negotiable Instruments Act
( Hereinafter referred to as NI Act ) 1881, subject to s.31 and 32 of RBI Act.
The S.31 of RBI Act lays down that only the RBI and The Central Govt of India
has the power to issue promissory notes payable to the bearer (both demand and
order instruments). Also with respect to Bills of Exchange a Bill can be drawn
payable to the bearer (but not on demand).
S.32 prescribes punishment for the violation of any provisions of s. 31.
Definition of a Negotiable Instrument by Thomas:
A negotiable instrument is one which is, by law, transferable by delivery or
indorsement and delivery such that:
Definition under NI Act
- The holder of the instrument becomes entitled to sue in his own name in
matters related to that instrument.
- The property passes to the transferee for value, notwithstainding any defect
in the title of the transferor.
S. 13(1) NI Act : A negotiable instrument under the act means a promissory note,
a bill of exchange or a cheque payable either to order or to bearer.
Features of a Negotiable Instrument: By thomas and willis
Instruments which are not negotiable instruments:
The first characteristic of a negotiable instrument is that it is transferable
from one person to another any number of times. Transfer of a negotiable
instrument operates through two modes: Transfer to the bearer or Transfer to a
specific person ( called transfer to order)
- A negotiable instrument can be payable to the bearer which means that
anyone who has the hold of the instrument is the owner of it.
- Or it can be transferred to order meaning that the instrument can be
transferred to a specific person by writing his name on the instrument
According to S.13(2) A negotiable instrument can be made payable to two or more
persons collectively or alternatively.
- Right to Sue:
The transferee of a negotiable instrument gets the right to sue in his own name.
This is different from the transfer of an actionable claim under TPA, where the
right to sue of a transferee accrues only after giving a notice to the original
debtor or Alternatively, a transferee of a negotiable instrument has to join the
original creditor in the recovery action. This is not the case in NIA, and the
transferee is need not to join his indorser and can can maintain a suit in his
- Independent Title:
The general rule of transfer of property is that (nemo dat quod non habet) I.e a
person cannot transfer a better title than the one he has himself. However, in
NIA, a transfer made in a bona fide manner shall create complete title in favour
of the transferee and he will be deemed to be a holder in due course ( provided
that the transferee recieved it in a bonafide manner and was unaware of the
- Presumptions in favour of Negotiable Instruments: S.118 of NI Act 1881.
Its is presumed by law that every Negotiable instrument was drawn for a
consideration and in case it was accepted, transferred or indorsed, the same
was done for a consideration as well. While in the Indian Contract Act, the
burden of proving the consideration lies on the plaintiff, the NI act shifts
the burden of disproving the consideration lies on the defendant.
- Date: it is presumed that every N.Instrument bearing a date was drawn on
- Time of acceptance:
It shall be presumed that every accepted bill of
Exchange was accepted within a reasonable time after its draw date and it and
- Time of Transfer: Unless, the contrary is proven, it shall be presumed
that every transfer of negotiable instrument was made before its maturity.
- With regard to the endorsements appearing on a negotiable instruments
appearing on a negotiable instrument, it shall be presumed that they were
made in the order in which they appear on the instrument.
- In case a negotiable instrument is lost, it shall be presumed that the
instrument was duly stamped.
- Holder is a holder in due course:
In bona fide transactions, the holder of a negotiable instrument is presumed
to be a holder in due course. However in cases of an instrument obtained
through fraud or other unlawful means, the burden of proving that the holder
is a holder in due course shall lie on the defendant.
- Money orders and postal orders, Deposit receipts.
- Share certificates;
- Dock warrants
- Bills of lading, etc
Some of these instruments are negotiable by indorsement but they do not confer a
better title on the transferee than what the transferor has, thus they are
called quasi-negotiable instruments.
Three types of Negotiable Instruments:
S.4- Promissory note:
Section 1 of the Act saves from application of this act to other customary
negotiable instruments (e.g hundis) drawn according to their prevalent usages
and bars the application of this act to such instruments (unless the instrument
by explicit declaration suggests otherwise)
A promissory note is an instrument in writing (not being a bank note or currency
note) containing an unconditional undertaking signed by the maker, to pay
certain sum of money only to a certain person, or to the order of a certain
person or to the bearer of the instrument.
Parties in a promissory note:
- Maker of the promissory note I.e the person who promises to pay.
- Payee- in favour whom the note is drawn. I.e the person who is to receive the
Essentials of a Promissory Note:
- The promissory note must be in writing.
- The promissory note must contain an express promise to pay: A mere
acknowledgement of debt without any promise to pay does not constitute a
promissory note. In this case the usage of the words �promise to pay� is not
important. However the document must indicate an intention of payment.
Intention is the most important factor in such a determination. (case:
Mohammad Akbar Khan
v. Attar Singh)
According to Illus (b) to s. 4: A promissory note wherein a debt is acknowledged
and specified to be payable on demand constitutes a valid promissory note.
In Mohammad Akbar Khan v. Attar Singh, Lord Atkin observed that the said
illustration had been taken from an early English Case (casborne v. Dutton)
wherein the words �to be paid� amounted to a promise to pay. And hence the usage
of words �to be paid� or �payable on demand� is valid.
- The promise to pay must be un-conditional. A promissory note should not
be conditional or should only contain a condition that is bound to happen (e.g
death). An instrument payable on death is valid since the happening of death is
certain although the time is uncertain.
- The Promissory Note must be Signed by the Maker.
- The Maker and the Payee must be certain. S.5 (para 4) states that The payee
within the meaning of s.4 and s.5 must be a certain person, although may be
misnamed or designated by despcription only.
Case: Lala jelhaji v. bhagu: it was held that where a payee is misnamed but it
is possible to identify him, the instrument would be valid promissory note. But
where the payee cannot be identified, the instrument would be invalid.
- The sum payable must be in terms on money only and must be certain.
Section 5 lays down that the sum payable in s.4 and 5 must be certain.
However charging of future interest at an indicated rate is allowed.
- Other Essentials:
- Date and place on which the pronote was drawn is generally mentioned although
not essential in law.
- Stamping of promissory note is necessary as per the provisions of the
Indian Stamp Act in order to be admissible in Evidence.
S.5 Bill of exchange (BoE):
Definition: S.5 defines bill of Exchange 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 certain other person or the
bearer of the instrument.
Parties to a bill of Exchange:
- Drawer: The person who is the maker of the bill.
- Drawee: On whom the bill is drawn I.e the person who is directed to make a
- Payee: The person to whom the payment is to be made.
Essentials of Bill of Exchange:
Difference between Promissory Note and Bill of Exchange:
- Must be in writing.
- Must contain an order to pay. The order is in an imperative sense
suggesting a command or direction unlike a promissory note which is only a
Case: Ruff v. Webb: The order must be an imperative and not a mere request
although it may be politely worded.
- The order must be unconditional.
Case: Dankes v. Deloraine: It was held that a promissory note payable out of a
particular fund is conditional and invalid, since it is not certain that the
fund will be in existence or sufficient when the Bill of Exchange becomes
- The Bill must be signed by the drawer.
- The parties (Drawer, Drawee, Payee) must be certain. One person can assume
the role of two parties ( Drawer/Drawee can be a same person, Drawer/Payee can
be the same person)
- The Sum payable must be certain and in terms of Money Only.
- Number of Parties: A promissory note involves only two parties.
Maker (debtor) and Payee (creditor)
While a bill of Exchange involves three parties: Drawer, Drawee and Payee.
- A promissory note involves a promise.
While a BoE involves an order/direction.
- Acceptance: Acceptance is not required in a promissory note while
a Bill of Exchange needs to be accepted by the drawer.
- Position of the Maker: The maker of a promissory note stands in an immediate
relation with the payee, whereas the drawer of a bill of exchange stands in an
immediate relation with the drawee and not the payee.
- Payable to bearer: A promissory note cannot be made payable to the bearer
while a BoE can be issued to a bearer (provided that it is not payable on
demand: S.31 RBI Act)
- Notice of Dishonour is required in a BoE but not in a promissory Note.
Acc to S. 6: A cheque is a bill of exchange drawn on a specified Banker and not
expressed to be payable otherwise than on demand. It includes electronic image
of a truncated cheque and a cheque in electronic form.
A cheque being a qualified bill of exchange has to to fulfill all the essentials
of s.5 along with two more qualifications:
- A cheque is always drawn on a bank. I.e the drawee of a cheque is always a
- A cheque is always payable on Demand.
A cheque remains valid even if its post dated or ante-dated.
Ante dated Cheque:
When the cheque is drawn after the date Mentioned on the
cheque. (I.e the cheque becomes payable in the past)
Post Dated Cheque:
When the cheque is drawn before the date mentioned on the
cheque. (the cheque becomes payable in the future.
Case: Anil Kumar Sawhney v. Gulshan Rai:
It was held that a post dated cheque
remains a bill of exchange till the date shown on its face, it is only from that
date it becomes payable on demand and hence a cheque.
The Negotiable Instrument Amendment act 2015, substituted Explanation 1 to S.6
and included an electronic cheque and a truncated cheque within the meaning of
S.6 to bring it in conformity with IT Act 2000.
Difference between A Cheque and a Bill of Exchange:
- A cheque is always payable on demand but a Bill of Exchange Payable on demand
is Prohibited by the RBI Act.
- A cheque is always drawn on a Banker but a Bill of exchange can be drawn on
- A cheque does not require acceptance while a bill of exchange does.
- A cheque is not required to be stamped while a Bill of Exchange is necessary
to be stamped.
- A cheque can be crossed to curtail its negotiability while a Bill cannot be
Liabilities of Parties in a Negotiable Instrument:
- Sec 30 Liability of Drawer of Bill
According to this section, In case of Dishonour of the Bill by the drawee or the
acceptor, the drawer is bound to compensate the holder/payee the due amount.
However, this liability arises only when a notice of dishonour is received by
S.98 lays down cases in which notice of dishonour to the drawer/maker is not
- When the requirement of notice is expressly waived by the drawer.
- When the drawer has countermanded (prohibited) payment on the Bill.
- Notice is not necessary when the drawer could suffer no damage for the
want of notice.
- When the drawer cannot be found or located.
- Notice is not necessary when the acceptor(drawee) and the drawer are the same
- Notice is not required in a promissory note which is non-negotiable.
- Notice is not required if the drawee/maker has promised to pay
unconditionally the amount due.
- Liability of Drawee of a Cheque: s.31
In cases of Cheques, the drawee is always a bank and the section states that, a
drawee bank who has sufficient funds of the drawer in its custody, and the funds
are proper for a payment against a cheque, such drawee bank is is bound to pay
the cheque when required to do so. A failure/default of this obligation would
entitle the drawer to compensation for any loss suffered consequentially.
The relationship between a bank and its customer is that of a creditor and
debtor with an obligation on the bank to honour the customer�s cheques as long
within the account balance or overdraft limits. Therefore in cases of wilful
dishonour by the drawee bank, the drawer-customer is entitled to substantial
damages without proving actual damage. The holder of the cheque has no remedy
against the drawee-banker, as there is no privity of contract between the payee
and the drawee-banker.- Case: Prebn v. Royal Bank of Liverpool.
- Liability of Acceptor of Bill and Maker of Note: S. 32
The maker of a promissory note and the acceptor of a Bill Before Maturity is
bound to pay the amount at the maturity according to the tenor of the note or
Also, in case of a bill presented to the drawee for acceptance after maturity,
the drawee is bound to pay the amount on demand.
In case of default, the drawee or maker is liable to pay compensation to the
holder. Thus the liability of the maker/drawee is primary in nature. But the
section lays down that the liability can be avoided by making a contract against
- Liability of Indorser. S35 provides that:
An indorser of a negotiable instrument who has indorsed and delivered the same
before maturity is bound to compensate the subsequent holder in case of dishonor
by the drawee, acceptor or maker(in cases of pronotes). In case the instrument
has been negotiated multiple times, the indorser is laible to every subsequent
However, this liability of Indorser is subject to the following
- There must be no contract curtailing the liability of the indorser.
- The indorsement should not in itself contain words excluding or limiting the
- A notice of dishonour is required to be received by the indorser.
5. Liability of Intervening Parties:
S.36 provides that every until satisfaction of the negotiable instrument, every
prior party is liable to the holder in due course. All parties include the
maker/drawer/drawee-acceptor and all the indorsers.
The maker of a note and the drawer of a cheque are liable to the holder as
principal debtors and all other parties are liable as sureties.
In case of a bill of exchange:
- Before acceptance, the drawer is liable as the principal debtor and all
other parties are liable as sureties.
- After acceptance, the drawee-acceptor is liable as the principal debtor and
other parties are liable as sureties.
Dishonour of Negotiable Instrument:
A negotiable instrument can be dishonoured two ways:
- By non-acceptance in case of a Bill: s. 91
- By non-payment in cases of all three instruments: s.92
Effect of Dishonour:
Dishonour by Non acceptance: s. 91
A bill is said to be dishonoured by non-acceptance:
- When a bill is properly presented for acceptance, and the drawee does not
- When presentment for acceptance is excused and the bill is not accepted.
- When the drawee is incompetent to contract, the bill may be treated as
- When the drawee gives qualified/conditional accpetance, the bill may be
treated as dishonoured.
- Dishonour by Non Payment : s.92
When a promissory note, bill of exchange or a cheque is duly presented for
payment, and the payment is subsequently denied by the maker or the drawee, the
Instrument is said to be dishooured by non-payment.
The dishonour of a negotiable instrument entitles the holder/payee to bring a
suit for the recovery of money.
Requirements to initiate a suit:
- Notice of Dishonour: S.93
According to the section, when a negotiable instrument is dishonoured, the
holder must notify the party/parties to which the holder seeks to make liable.
However, the same section states that a notice is not requires to be given to
the maker of promissory note and the drawee/acceptor of a bill. This is because,
these are Principal Debtors with primary liability and they are presumed to have
the knowledge of such dishonour.
- Mode of Notice:
Acc to s. 94 the notice may be in oral/written form, may be
sent by post or any other form provided that it conveys the fact of dishonour
explicitly or by reasonable implication.
- When Notice of Dishonour is Not- Required: S. 98
Notice Of Dishonour Is Not Required In The Following Cases:
- Waiver: When the requirement of notice is waived by the party entitled
- When the drawer has countermanded payment, a notice is not required to
make the drawer liable.
- When the party entitled to notice could not suffer damage for want of
- When the entitled party cannot be found.
- When the drawer and acceptor are the same.
- In case of a non-negotiable promissory note.
- When the party liable, knowing the facts, agrees to pay the due amount.
DISHONOUR OF CHEQUES DUE TO INSUFFICENCY OF FUNDS
The law on the Dishonour of Cheques is contained in s.138 to s.147.
S.138 to 142 were inserted by the Banking, Financial Institutions and Negotiable
Instruments Amendment Act of 1988. Ans s. 143 to 147 were added by the amendment
act of 2002.
Sec 138 provides that:
-when a cheque is drawn by a person for any amount of money on an account
maintained by him with a banker-
For the payment of such amount to any person for the discharge of any debt or
And if such cheque is returned by the bank unpaid due to:
Insufficiency of Funds
Or Exceeding the overdraft limit.
In such a case, the drawer shall be deemed to have committed an offence.
And the Punishment for such offence shall be an imprisonment of upto two years
or with a fine (2x of the cheque) or both.
Case: Modi cements v Kuchil Kumar:
Countermanding payment by the drawer shall
also amount to dishonour by non-payment under s.138.
However, the Proviso to s.138 lays down certain qualifications in order to make
the drawer liable under the offence. These are:
Sec 142: Procedure for Initiating Prosecution under S. 138
S.142 (clause 1) lays down the procedural requirements for prosecution. They
- The cheque must be presented by the holder to the drawee bank within 6
months or within the validity of the cheque.
Case: Anil Kumar Sawhney v. Gulshan Rai: It was held that a post dated cheque is
just a bill of exchange untill its maturity and therefore it dosent attract the
provisions of 138 untill its maturity.
- Notice of Dishonour/Demand Notice: The payee or holder of the cheque must
make a demand for payment to the drawer thorough a written notice. This notice
should be given within 30 days of the receipt of information of dishonor.
Case: Alavi Haji v. Palapetty Muhammed: when the payee dispatches the notice by
registered post with correct address, the service is deemed to be complete
according to s.27 of the General Clauses Act. Thus the requirement of notice
under 138 shall stand fulfilled.
- The drawer of the cheque fails to make payment of the said amount of money to
the payee/holder within 15 days of the receipt of the notice.
S.139- presumption in favour of the holder:
When a cheque is dishonoured, it
shall be presumed by a rebuttable presumption that the cheque was recieved in
discharge of a debt or laibility.
S.140-Mens Rea not required.
S.140 provides that it shall not be a defence available to the the drawer that
he had no reason to believe that the cheque issued by him would be dishonoured.
This section disposes off with the requirement of mens rea for prosecution under
Territorial Jurisdiction In Cheque Bounce Cases:
- A written complaint needs to be filed by the payee/holder.
- The complaint must be made within 30 days from the arising of cause of
action (under 138 proviso c- after the non-payment upon notice).
- The complaint must be made to the Court of a Metropolitan Magistrate or
JM Class 1. Courts lower than this do not have the power to take cognizance
of offences under 138.
The first case on territorial jurisdiction aspect of cheque bounce cases was K. Bhaskaran v. Sankaran Vaidhyan Balan
. The Court held that the complainant can
file case in any of court having jurisdiction over any of those local areas
within the territorial limits of which any one of the following five acts was
- Drawing Of Cheque;
- Presentation Of Cheque To The Bank;
- Dishonour By The Drawee Bank;
- Giving Notice To Drawer By Demanding Payment; And
- Failure Of Drawer To Make Payment Within 15 Days Of Receipt Of Notice.
However, a superior bench in Dasharath Rathore v. State of Maharashtra overruled
this and held that only the court in whose local jurisdiction the cheque is
dishonoured by the drawee bank/branch has jurisdiction.
This decision created a lot of problems with jurisdiction and Vide 2015
amendment to Negotiable Instruments Act, the above judicial dictum was nullified
and clause 2 to s.142 was inserted.
According to s 142(2); the offence under section 138 shall be inquired
into and tried only by a court within whose local jurisdiction:
Sec 143: Summary Provisions:
- In case where the cheque is delivered for collection through an account,
the branch of the bank where the payee or holder in due course, maintains
the account, is situated; or
- Where the cheque is presented for payment by the payee or holder in due
course, otherwise through an account, the branch of the drawee bank where
the drawer maintains the account, is situated.
This section provides that the criminal proceedings under this act shall be
conducted summarily as per the Summary Provisions of The CRPC (s262 to 265)
According to s 147 every offence under NI Act is compoundable upon the
compromise and consent of the parties.
Case: Meters and Instruments P.LTD v . Kanchan Mehta:
Generally compounding requires the consent of both parties, but where it
appears to the court that the complainant has been duly compensated, it in the
interests of justice can close the proceedings and discharge the accused.