Sunday, 18 December 2016

Negotiable Instruments Act, 1881

Negotiable Instruments Act

negotiable instrument Act 1881
Negotiable Instruments Act, 1881:An Act to define and Law relating to negotiable instruments which are Promissory Notes, Bills of Exchange and cheques.The word "Negotiable" means 'Capable of being passed or negotiated','Able to be negotiated or arranged by compromise' or 'Legally transferable to the ownership of another'.

The history of Negotiable Instrument Act 1881


The Act was originally drafted in 1866 by the 3rd India Law Commission and introduced in December, 1867 in the Council and it was referred to a Select Committee. Objections were raised by the mercantile community to the numerous deviations from the English Law which it contained. The Bill had to be redrafted in 1877. After the lapse of a sufficient period for criticism by the Local Governments, the High Courts and the chambers of commerce, the Bill was revised by a Select Committee. In spite of this Bill could not reach the final stage. In 1880 by the Order of the Secretary of State, the Bill had to be referred to a new Law Commission. On the recommendation of the new Law Commission the Bill was re-drafted and again it was sent to a Select Committee which adopted most of the additions recommended by the new Law Commission. The draft thus prepared for the fourth time was introduced in the Council and was passed into law in 1881 being the Negotiable Instruments Act, 1881 (Act No.26 of 1881)

The most important class of Credit Instruments that evolved in India were termed Hundi. Their use was most widespread in the twelfth century, and has continued till today. In a sense, they represent the oldest surviving form of credit instrument. These were used in trade and credit transactions; they were used as remittance instruments for the purpose of transfer of funds from one place to another. In Modern era Hundi served as Travellers Cheques.

According to Section 13 of the Negotiable Instruments Act, "A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.' But in Section 1, it is also described that Local extent, Saving of usage relating to hundis, etc., Commencement. -It extends to the whole of India but nothing herein contained affects the Indian Paper Currency Act, 1871, Section 2, or affects any local usage relating to any instrument in an oriental language. Provided that such usages may be excluded by any words in the body of the instrument, which indicate and intention that the legal relations of the parties thereto shall be governed by this Act; and it shall come into force on the first day of March, 1882.

Important sections of Negotiable Instruments Act, 1881

Important sections of Negotiable Instruments Act, 1881 is briefed below.

Section4:Promissory note 

A " promissory note" is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.

Illustrations 
A signs instruments in the following terms 
(a) "I promise to pay B or order Rs. 500." 
(b) " I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on demand, for value received." 
(c) Mr. B, O U Rs. 1,000." 
(d) I promise to pay B Rs. 500 and all other sums which shall be due to him." 
(e) I promise to pay B Rs. 500, first deducting thereout any money which he may owe me." 
(f) " I promise to pay B Rs. 500 seven days after my marriage with C." 
(g) " I promise to pay B Rs. 500 on D's death, provided D leaves me enough to pay that sum." 
(h) " I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next." 

The instruments respectively marked (a) and (b) are promissory notes. The instruments respectively marked (c), (d), (e), (f), (g) and (h) are not promissory notes. 

Section5:Bill of exchange

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 promise or order to pay is not " conditional ", within the meaning of this section and section 4, by reason of the time for payment of the amount or any instalment thereof being expressed to be on ,the lapse of a certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain. The sum payable may be "certain", within the meaning of this section and section 4, although it includes future interest or is pay- able at an indicated rate of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an instalment, the balance unpaid shall become due. The person to whom it is clear that the direction is given or that payment is to be made may be a "certain I person", within the meaning of this section and section 4, although he is mis-named or designated by description only. 

Section 6:Cheque

A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. 

Section7: Drawer, Drawee.(parties involved in a cheque)

The maker of a bill of exchange or cheque is called the "drawer "; the person thereby directed to pay is called the " drawee" . Drawee in case of need. When in the bill or in any endorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need, such person is called a " drawee in case of need "

Acceptor: After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one of such parts, 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 ".

Acceptor for honour.[When a bill of exchange has been noted or protested for nonacceptance or for better security,] and any person accepts it supra protest for honour of the drawer or of any one of the endorsers , such person is called an " acceptor for honour ".

Payee: The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the "payee".

Section10:Payment in due course.

"Payment in due course" means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.

Section 11 & 12:Inland and Foreign Instrument

Section11: Inland instrument: A promissory note, bill of exchange or cheque drawn or made in 1 [India], and made payable in, or drawn upon any person resident in, 1 [India] shall be deemed to be an inland instrument.
Section 12. Foreign instrument.:Any such instrument not so drawn, made or made payable shall be deemed to be a foreign instrument.

Section13. Negotiable instrument.

13.2[(1)Negotiable instrument. A " negotiable instrument " means a promissory note, bill of exchange or cheque payable either to order or to bearer. 

Explanation (i).-A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable or which is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable.
Explanation (ii).-A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank. Explanation (iii).-Where a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be pay- able to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.] 

3[(2) A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or -some of several payees.]


Section 14. Negotiation: When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.

Section 15:Indorsement.

When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended
Section15 to be completed as a negotiable instrument, he is said to indorse the same, -and is called the " indorser ".

Section 16:Indorsement in "blank" and "in full".
16.1[(1)] Indorsement in "blank" and "in full". If the indorser signs his name only, the indorsement is said to be " in blank," and if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the indorsement is said to be " in full " ; and the person so specified is called the " indorsee " of the instrument. 

16.1[(2)Indorsee. The provisions of this Act relating to a payee shall apply with the necessary modifications to an indorsee.] 

Section 17: Ambiguous instruments.

Where an instrument may be construed either as a promissory note or bill of exchange, the holder may at his election treat it as either, and the instrument shall be thenceforward treated accordingly. 

Section18. Where amount is stated differently in figures and words. 
Where amount is stated differently in figures and words. If the amount undertaken or ordered to be paid is stated differently in figures and in words, the amount stated in words shall be the amount undertaken or ordered to be paid. 

Section19. Instruments payable on demand. A promissory note or bill of exchange, in which no time for payment is specified, and a cheque, are payable on demand.

Section 20. Inchoate stamped instruments.

Where one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments then in force in 2[India], and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as the case may be, upon it a negotiable instrument, for any amount specified therein and not exceeding the amount covered by the stamp. The person so signing shall be liable upon such instrument, in the capacity in which he signed the same, to any holder in due course for such amount: provided that no person other than a holder in due course shall recover from the person delivering the instrument any thing in excess of the amount intended by him to be paid thereunder. 

Section 123 - Cheque Crossed Generally Where a cheque bears across its face an addition of the words and company or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words, not negotiable, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally.

Section 124 - Cheque crossed specially Where a cheque bears across its face an addition of the name of a banker, either with or without the words not negotiable, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker.

Section 126- Cheque crossed specially Where a cheque is crossed generally, the banker, on whom it is drawn shall not pay it otherwise than to a banker.Payment of cheque crossed specially. - Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent, for collection.

Section 130 -Cheque bearing Not Negotiable A person taking a cheque crossed generally or specially, bearing in either case the words not negotiable, shall not have, and shall not be capable of giving, a better title to the cheque than that which the person from whom he took it had.

In this article on "Negotiable Instruments Act, 1881" ,only important sections are discussed.You can download Negotiable Instrument Act 1881 in details from below link

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