NEGOTIABLE INSTRUMENT ACT,1881
AMIT BANSAL; MA in Economics
Faculty Member of G.S Lohia College
MEANING OF NEGOTIABLE INSTRUMENTS
According to Section 13 (a) of the Act, “Negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer, whether the word “order” or “ bearer” appear on the instrument or not.”
Thus, the term, negotiable instrument means a written document which creates a right in favour of some person and which is freely transferable.
CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT
The possessor of the negotiable instrument is presumed to be the owner of the property contained therein. The property in a negotiable instrument can be transferred without any formality. In the case of bearer instrument, the property passes by mere delivery to the transferee.
The transferee of a negotiable instrument is known as ‘holder in due course.’ A bona fide transferee for value is not affected by any defect of title on the part of the transferor or of any of the previous holders of the instrument.
The transferee of the negotiable instrument can sue in his own name, in case of dishonour. A negotiable instrument can be transferred any number of times till it is at maturity. The holder of the instrument need not give notice of transfer to the party liable on the instrument to pay.
Certain presumptions apply to all negotiable instruments e.g., a presumption that consideration has been paid under it. It is not necessary to write in a promissory note the words ‘for value received’ or similar expressions because the payment of consideration is presumed. The words are usually included to create additional evidence of consideration.
- Prompt payment
A negotiable instrument enables the holder to expect prompt payment because a dishonour means the ruin of the credit of all persons who are parties to the instrument.
CONDITIONS TO BE A NEGOTIABLE INSTRUMENT
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. The presumption of consideration,however may be rebutted by proof that the instrument had been obtained from, its lawful owner by means of fraud or undue influence.
Where a negotiable instrument is dated, the presumption is that it has been made or drawn on such date, unless the contrary is proved.
- 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.
- Time of transfer
Unless the contrary is presumed it shall be presumed that every transfer of a negotiable instrument was made before its maturity.
- 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.
Unless the contrary is proved, it shall be presumed that a lost promissory note, bill of exchange or cheque was duly stamped.
- 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.
TYPES OF NEGOTIABLE INSTRUMENT
Section 13 of the Negotiable Instruments Act states that a negotiable instrument is a promissory note, bill of exchange or a cheque payable either to order or to bearer. Negotiable instruments recognised by statute are: (i) Promissory notes (ii) Bills of exchange (iii) Cheques
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.”
- It must be in writing
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.
3. Promise to pay must be unconditional.
4. It should be signed by the maker.
5. The payee must be certain.
6. The promise should be to pay money and money only: Money means legal tender money and not old and rare coins.
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.
Essential conditions of a bill of exchange
- It must be in writing.
- It must be signed by the drawer.
- The drawer, drawee and payee must be certain.
- The sum payable must also be certain.
- It should be properly stamped.
- It must contain an express order to pay money and money alone.
- The order must be unconditional.
Distinction Between Bill of Exchange and Promissory Note
- 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.
- 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.
- 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.
- 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.
- 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.
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.
- 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.
- Notice of dishonour
When a bill is dishonoured, due notice of dishonour is to be given by the holder to the drawer and the intermediate indorsers, but no such notice need be given in the case of a note.
CLASSIFICATION OF BILL
Bills can be classified as: (1) Inland and foreign bills. (2) Time and demand bills. (3) Trade and accommodation bills.
A bill is, named as an inland bill if:
- it is drawn in India on a person residing in India, whether payable in or outside India.
- it is drawn in India on a person residing outside India but payable in India.
The following are the Inland bills
- A bill is drawn by a merchant in Delhi on a merchant in Madras. It is payable in Bombay. The bill is an inland bill.
- A bill is drawn by a Delhi merchant on a person in London, but is made payable in India. This is an inland bill.
- A bill is drawn by a merchant in Delhi on a merchant in Madras. It is accepted for payment in Japan. The bill is an inland bill.
A bill which is not an inland bill is a foreign bill.
The following are the foreign bills:
1. A bill drawn outside India and made payable in India.
2. A bill drawn outside India on any person residing outside India.
3. A bill drawn in India on a person residing outside India and made payable outside India.
4. A bill drawn outside India on a person residing in India.
5. A bill drawn outside India and made payable outside India.
Time and Demand Bill
A bill payable after a fixed time is termed as a time bill. In other words, bill payable “after date” is a time bill.
A bill payable at sight or on demand is termed as a demand bill.
Trade and Accommodation Bill
A bill drawn and accepted for a genuine trade transaction is termed as a “trade bill”.
A bill drawn and accepted not for a genuine trade transaction but only to provide financial help to some party is termed as an “accommodation bill”.
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,
- it is always drawn on a specified banker, and
- it is always payable on demand. Consequently, all cheque are bill of exchange, but all bills are not cheque.
Distinction Between Bills of Exchange and Cheque
- A bill of exchange is usually drawn on some person or firm, while a cheque is always drawn on a bank.
- 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.
- 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.
- A grace of three days is allowed in the case of time bills while no grace is given in the case of a cheque.
- 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.
- Notice of dishonour of a bill is necessary, but no such notice is necessary in the case of cheque.
- A cheque may be crossed, but not needed in the case of bill.
- A bill of exchange must be properly stamped, while a cheque does not require any stamp.
- A cheque drawn to bearer payable on demand shall be valid but a bill payable on demand can never be drawn to bearer.
- Unlike cheques, the payment of a bill cannot be countermanded by the drawer.
Parties to Bill of Exchange
1. Drawer: The maker of a bill of exchange is called the ‘drawer’.
2. Drawee: The person directed to pay the money by the drawer is called the ‘drawee’,
3. Acceptor: After a drawee of a bill has signed his assent upon the bill, or if there are more parts than one, upon one of such pares and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the ‘ acceptor’.
The person named in the instrument, to whom or to whose order the money is directed to be paid by the instrument is called the ‘payee’.
He is the real beneficiary under the instrument. Where he signs his name and makes the instrument payable to some other person, that other person does not become the payee.
When the holder transfers or indorses the instrument to anyone else, the holder becomes the ‘indorser’.
The person to whom the bill is indorsed is called an ‘endorsee’.
A person who is legally entitled to the possession of the negotiable instrument in his own name and to receive the amount thereof, is called a ‘holder’. He is either the original payee, or the indorse. In case the bill is payable to the bearer, the person in possession of the negotiable instrument is called the ‘holder’.
Drawee in case of need
When in the bill or in any endorsement, the name of any person is given, in addition to the drawee, to be resorted to in case of need, such a person is called ‘drawee in case of need’. In such a case it is obligatory on the part of the holder to present the bill to such a drawee in case the original drawee refuses to accept the bill. The bill is taken to be dishonoured by non-acceptance or for non-payment, only when such a drawee refuses to accept or pay the bill.
Acceptor for honour
In case the original drawee refuses to accept the bill or to furnish better security when demanded by the notary, any person who is not liable on the bill, may accept it with the consent of the holder, for the honour of any party liable on the bill. Such an acceptor is called ‘acceptor for honour’.
(Statutory declaration: The above notes have been compiled referring to Indian Contact Act, 1872 – Bare Act, elements of Mercantile Law by N.D.Kapoor and various websites. The above notes are reference and not exhaustive and students are advised to refer to the reference books to get a complete idea of the topic.)