Module 07 The Negotiable Instruments Act, 1881 :

1. A negotiable instrument, types, definitions

2. Essential features of negotiable instruments, and type of instrument,
Instruments payable to order or to bearer, payable at specified time or on demand
3. Maturity of an instrument
4. Parties to negotiable instruments, their rights and liabilities
5. Negotiation – Meaning, Requirements, Types of endorsements, Modes of
negotiation, Who can negotiate?, Effect of negotiation by various modes,
Negotiation in particular cases (Sections 57-59), Period of negotiation (Section 60)
6. Presentment - Purposes of presentment, Time for presentment, Place of
presentment, Presented to whom? Effective presentment, Delay in presentment,
When is presentment not necessary? Liability of banker for negligent dealing
7. Payment and Interest, Delivery of instrument, Immunity to bankers
8. Discharge from liability on negotiable instruments, Modes of discharge
9. Dishonour, Modes of dishonor, Notice of dishonor, Noting and protest
10. Acceptance and payment for honour and reference in case of need
11. Compensation
12. Rules of evidence, Presumptions and estoppel
13. Crossed cheques
14. Bills in sets
15. Penalties in case of dishonor, Criminal liability, Procedure

NEGOTIABLE INSTRUMENT ACT, 1881

INTRODUCTION
• The negotiable Instrument Act was originally drafted in the year 1866 and implemented in
the year 1881. This act was implemented during the British rule of India and is still in
function even in modern India.
• The negotiable instrument act which was implemented in 1881, was amended in the year
1988 to include cheque defaulters. Under this act, the people issuing cheques without having
sufficient money in their accounts were considered to be defaulters and were charged a
penalty, considering it as a criminal offense.
• Majority of payments are done in the form of cheques, especially those of high amounts.
Hence, the act of dishonour of cheques was common before 1988 when there was no law
against it. The 1988 amendment of the negotiable instrument act helped to control the
dishonouring of cheques by specifying it as a criminal activity.
• It is a law concerning all the negotiable instruments, i.e., promissory notes, bills of exchange,
and cheques.
• The word instrument states a document transferable from one party to another.
• The legal definition of negotiable is that anything can be transferable from one party to a
different party with the help of delivery so that the title can pass with or without the seal of
approval to the transferee.
• The law concerning negotiable instruments is the law of the industrial world which was
practised to facilitate the activities in trade and commerce, creating provision or giving
holiness to the instruments of credit that can be deemed to be convertible into cash and easily
transferable from one person to another.

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• In the absence of these instruments, trade, and commerce activities were likely to be
negatively affected. It was not practicable for the traders to carry the huge amount of currency
in force.
• The supply of Indian law relating to such instruments is avowedly the English Common Law.
The significant objective of the Act is to legitimise the system by which instruments
contemplated by it could pass from one person to another by negotiation like any other goods.
• The Law in India concerning negotiable instruments is contained in the Negotiable
Instruments Act, 1881. This Act is made to define and change the law relating to Promissory
Notes, Bills of Exchange, and Cheques.
• The Act applies to the whole of India. However, nothing herein contained affects the RBI
(RESERVE BANK OF INDIA) Act, 1934, or affects any usage of any instrument in an
oriental language.
• Some usages may be excluded by any words in the body of the instrument that indicates an
intention that the legitimate relations of the parties thereto shall be ruled or governed by this
Act, and it shall come into force on the 1st of March 1882.
• The provisions of this Act apply to Hundis unless there is a local neighbourhood: Multiple
native instruments like Treasury Bills, Bearer debentures, etc., are also negotiable instruments
either by mercantile custom or under different enactments.
• However, even after this first amendment, there were many loopholes in the act which led to
different interpretations of the act by different high courts. In an effort to close these
loopholes, the negotiable instrument act was amended again in the year 2002 by inserting five
new sections in the act. The new amendment came into force from the year 2003.
• The Act was amended multiple times. Recently three amendments were made. The
Amendment Act 2018 has two significant changes – the introduction of Section 143A and
Section 148 always provide interim compensation during the unconcluded period of the
criminal complaint and the criminal appeal.

MEANING OF NEGOTIABLE INSTRUMENTS

A Negotiable Instrument is a document freely transferable by trade customs from one person to
another by delivery or by endorsement. The property in such a document was transferred to a
bonafide transferee for value.
The Act does not define the term ‘Negotiable Instruments’ but the Section 13 of the Negotiable
Instrument Act states that, “A negotiable instrument means a promissory note, bill of exchange or
cheque payable either to order or to bearer”.
The negotiable instrument act governs the usage of these negotiable instruments between two
parties. However, no section of this act affects the usage of paper currency, which is governed by
the Indian paper currency act of 1871.
According to the Negotiable Instrument Act, there are four main types of negotiable instruments—
inland instruments, foreign instruments, bank and finance companies. All of these are regulated by
the negotiable instrument act.

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 • PROMISSORY NOTE
According to section 4 of the NI Act, 1881, A promissory note is a negotiable instrument in writing
and is not a banknote or a currency note. The person who has to pay is called the Maker. He is the
debtor, and he shall sign on the instrument. The person willing to collect the money is called Payee
or the creditor.
• BILLS OF EXCHANGE
A bill of exchange is an instrument that has an unconditional
order directly signed by the Maker, directing a certain person to pay a certain sum of
money only to, or to the order of, a specific person or the owner of the instrument.
• CHEQUE
A cheque is a bill of exchange on a selected banker and not expressed
to be payable other than on-demand, and it contains a cheque in the electronic form or the
electronic image of a cheque.

PURPOSE OF THE NEGOTIABLE INSTRUMENT ACT

This Act aims to create legitimate provisions for the negotiable instruments system currently in
operation in the whole country. The regulatory laws would systematically organise the system, and
the Act would define a decisive authority to decide any issues relating to negotiable instruments.
• The Act defines every topic concerned to the negotiable instruments for better vision and
understanding.
• The Act provides the penal provisions for effectively implementing the negotiable
instruments process between two parties. If any party breaches its obligation or there is
nonfulfillment of the said duty, it may be charged with offences leading to imprisonment.
• It protects the right of the parties when they discharge their obligations diligently.
• It mentions different conditions about the transaction systems and lays down its specific
provisions.
• The Act discards all types of discrepancies or hurdles between the parties. In case of
disputes, the parties must undergo the established provisions and legally resolve the matter.

SIGNIFICANT CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS ACT

• The instrument holder is assumed to be the owner of the property contained in it. They are
completely transferable.
• A holder in due course gets the instrument free from the defects of title of any previous holder.
• The holder, in due course, is permitted to use the instrument in his name. The instrument is
transferable till it gets matured. Certain equal assumptions apply to all negotiable instruments
unless the contrary is proved.

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CONCLUSION
This Act is a keystone in economic and finance-related matters. It is a warning for all the persons
who would face any wrongs concerning monetary dealings if mentioned in the Act. After getting
a few aspects of the provisions, it is doubtless that the country’s law is highly stringent towards
any kind of discrepancies or any voluntary wrong committed by the people.
The Act was amended from time to time to mitigate the financial cases. The Act also helps the
Indian citizens develop the ease of doing any business as there would be a decrement in case of
any disputes between the two parties, and it can be solved through the legislation and some other
process. Some major provisions added after the amendment are a boon for diligent people.

FURTHER REFERENCE LINK

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