Unit 2: The Negotiable Instruments Act, 1881

A negotiable instrument (Section 13) means a promissory note, bill of exchange or cheque payable either to order or to bearer.

Classification

• Inland and foreign instruments (Sections 11–12).
• Bearer and order instruments.
• Demand and time (usance) instruments.
• Ambiguous instrument (may be treated as a note or bill — Section 17) and inchoate (incomplete, signed blank stamped paper — Section 20).
• Instruments negotiable by custom — hundis, government promissory notes, share warrants, dividend warrants.

• A promissory note cannot be made payable to bearer (RBI Act, Section 31) except by RBI/Central Government.

• Capacity (Section 26): every person capable of contracting can make, draw, accept, endorse or negotiate an instrument; a minor may draw or endorse but is not liable (binds all other parties); companies per their MOA; agents within authority (Section 27).

• Dishonour by non-acceptance (bills) or non-payment; notice of dishonour (Section 93) must be given to all prior parties to make them liable — exceptions: waiver, drawer countermanded payment, impossibility.
• Noting (Section 99): a notary public records the fact, date and reason of dishonour on the instrument within a reasonable time.
• Protest (Section 100): a formal notarial certificate attesting dishonour — compulsory for foreign bills.

• Holder (Section 8): a person entitled in their own name to possession of the instrument and to receive or recover the amount due. A finder or thief is not a holder.
• Holder in due course (Section 9): a holder who obtained the instrument for consideration, before maturity, and in good faith without sufficient cause to believe any defect existed in the title of the transferor.

Privileges of a holder in due course

• Gets a title free from defects of prior parties.
• Inchoate instrument: prior party cannot plead that it was filled in excess of authority.
• Every prior party is liable to them until the instrument is satisfied.
• Drawer and endorsers cannot deny the payee's capacity to endorse.
• Fictitious payee bill is payable to bearer.

Maturity (Sections 22–25)

• Maturity: the date on which the instrument falls due.
• Three days of grace are added to time instruments (not to demand instruments or cheques).
• Where the date falls on a public holiday, the instrument is payable on the preceding business day.

• Negotiation (Section 14): transfer of an instrument so as to constitute the transferee its holder — bearer instruments by delivery; order instruments by endorsement and delivery.

Rules regarding endorsement

• Endorsement must be on the instrument itself or an allonge (attached slip); signed by the holder; for the entire amount; spelling as in the instrument; by all joint payees; an order instrument once endorsed in blank becomes payable to bearer.

A cheque (Section 6) is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand; includes the electronic image of a truncated cheque and a cheque in electronic form.

• Crossing: general (two parallel lines — pay only through a bank), special (bank named), account payee (credit only to the payee's account), not negotiable (transferee gets no better title).
• Validity: 3 months from the date of issue (RBI direction).

Dishonour of cheque — Section 138

• Section 143A: court may order interim compensation up to 20% of the cheque amount.
• Section 148: in appeal, the appellant may be directed to deposit at least 20% of the fine or compensation.
• Offence is compoundable (Section 147).