Negotiable Instrument Act 1881

Category: Acts, Banking, Justice, Money
Last Updated: 05 Apr 2021
Pages: 9 Views: 356
Table of contents


The Negotiable Instruments Bill was passed by the Council and received assent on December 9, 1881. The Act came into force from March 1, 1882. Prior to its enactment, the provision of the English Negotiable Instrument were applicable in India. It extends to the whole of India except the State of Jammu and Kashmir. The Act operates subject to the provisions of Sections 31 and 32 of the Reserve Bank of India Act, 1934.

Characteristics Of Negotiable Instrument

Order custom essay Negotiable Instrument Act 1881 with free plagiarism report

feat icon 450+ experts on 30 subjects feat icon Starting from 3 hours delivery
Get Essay Help
  1. Freely transferable from one person to another person.
  2. The holder in due course obtains good title of the instrument notwithstanding any defect in the previous holder.
  3. HDC of a negotiable instrument can sue on the instrument in his own name. Transferable infinite times till its maturity.

Presumptions As To Negotiable Instrument

  • Consideration: Every negotiable instrument was made, accepted, endorsed or drawn for consideration
  • Date: every negotiable instrument bearing a date was made or drawn on that date.
  • Time of acceptance: every bill of exchange was accepted within a reasonable time after the date mentioned on it but before of its maturity.
  • Time of transfer: every transfer of negotiable instrument was made before its maturity.
  •  Stamp: lost promissory note, bill of exchange or cheque was duly stamped.
  •  HDC: that the holder of N/I is a HDC.

Promissory Note

Definition: 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 a certain person; or the Order of a certain person.

Essentials Characteristics of a Promissory Note

  1. Writing: - Promissory note must be in writing. Writing includes print and typewriting. Oral promise can not Constitute a valid promissory note.
  2. Generally consideration, Place and date of making need not be mentioned on the promissory note.
  3. Promise to pay:  Promissory note must contain an undertaking Promise to pay. Examples:- “I promise to pay B Rs. 00, seven days after may marriage with C’’ cannot constitute a promissory note because a condition as to marriage is attached. A writes – “I promise to pay C Rs. 25,000, 7days after the death of B’’. This is a valid promissory note and is not conditional, since only the time of death of B is uncertain, but is sure to happen.
  4. Signed by the maker: promissory note should be signed by the maker himself. Where it is written and the name of the maker appears in the instrument, but is not signed, it shall not constitute a valid promissory note.
  5. Payee to be a certain person: Promissory note should specify the payee in clear terms i. . by name, son of, and resident of, etc. The payment can also be identified by description.
  6. Certain sum of money:  Sum payable must be certain or capable of being made certain. The sum shall be deemed to be certain when the rate of interest is specified. Money may be payable in installments is also a valid promissory note. Examples:- “I promise to pay Balu, Rs. 10,000, and all other sums which shall be due’’ is not valid since the sum is not certain.
  7. Payment of Money only: There must be a promise to pay only money and not other consideration, e. g. “I promise to pay B a sum of Rs. 0,000 and deliver him my Scorpio Car’’ is not valid.
  8. Duly stamped and dated:- Stamps of requisite amount and description must be affixed on the instrument and duly cancelled either before or at the time of its execution. If the promissory note is not dated, it is presumed to have been made on the date of its delivery.

Bill of exchange

Definition: - A ‘bill of exchange’ is an instrument in Writing containing an unconditional order, singed by the maker, directing a certain person to pay a certain a sum of money only to, a certain person; or the order of a certain person; or the bearer of the instrument.

Essentials Characteristics of a Bill of Exchange:

  • It must be in writing
  • It must contain n expresses order to pay
  • The order to pay must be definite and unconditional
  • It must be signed by the drawer
  • The sum contained in the order must be certain
  • The order must be to pay money only
  • Drawer, drawee and payee must be certain (usually, same person is the drawer and payee)
  • It must be stamped. Parties to a Bill of Exchange Drawer:- The person who draws the bill (i. e. , the person who makes the bill) is called a drawer. His liability is secondary and conditional.

His liability is primary and conditional until the bill is accepted.


  • The person on whom the bill is drawn is called as drawee.
  • On acceptance of the bill - He is called as Acceptor, he becomes liable for the payment of the Bill; his liability is primary and unconditional.

Payee: - The person to whom money is to be paid is named in the bill. He is called as payee.


Definition: cheque is a bill of exchange, drawn on a specified banker and not expressed to be payable otherwise than on demand. It includes, the electronic image of a truncated cheque; and a cheque in the electronic form.

Essentials characteristics of a cheque:

  • The definition starts with the “cheque is a bill of exchange” so it must satisfy all the essential features of a valid bill of exchange.
  • It is always drawn on a specified banker. Banker includes any person acting as a banker and any post office saving bank
  • It is always payable on demand and not otherwise.

Other point

  • It is drawn on a banker
  • there are three parties - the drawer, the drawee, and the payee.
  • It is seldom drawn in sets
  • It does not require acceptance by the drawee.
  • Days of grace are not allowed to a banker
  • No stamp duty is payable on checks
  • It is usually drawn on the printed format

Order Instrument

An instrument payable to a specified person or his order. Order instrument can be transferred by endorsement and delivery.

Based on location:

  • Inland Instrument: a negotiable instrument is an inland instrument if, it is drawn or made in India; It is payable in India or is drawn on a person resident in India. An inland instrument remains inland even if it has been endorsed to a foreign country.
  • Foreign Instrument: A negotiable instrument which is not an inland instrument is called as foreign instrument.

Based on payment:

  • Demand Instrument: an instrument which is expressed to be payable on demand. An instrument on which time for payment (i. e. maturity date) is not specified.
  • Time Instrument: an instrument in which time for payment(i. e. maturity date) is specified. A time instrument may be payable- on a specific day; or after a specified period; or certain period after sight; or on happening of an even which is certain to happen.

Incomplete/Inchoate Instrument

Conditions for an inchoate instrument:

  • A person signs a negotiable instrument.
  • The negotiable instrument is stamped
  • The negotiable instrument is either wholly blank or is partially blank.
  • The person signing such negotiable instrument delivers it to another person.

Legal effect: the holder gets a prima facie authority to make or complete the negotiable instrument.

Liability on an inchoate instrument: rights of a person to whom an inchoate instrument is delivered – He can recover only such amount as he was authorized to fill. Rights of holder in due course – He can recover the whole amount stated in the instrument, but not exceeding the amount covered by the stamps.

Accommodation Bills

An accommodation bill means a bill which is drawn, accepted without consideration Provision relating to such bills:

  • The accommodated party cannot, after he has paid the amount of the bill, recover the amount from any person who become a party to the bill for his accommodation.
  • The person who become the holder of such a bill in good faith and for consideration, after maturity, may recover the amount from any prior party.


A holder of a negotiable instrument is a person entitled in his own name to the possession there of and to receive or recover the amount due an negotiable instrument from the parties liable on negotiable instrument.

Holder In Due Course

A ‘holder in due course’ is a person who:

  • must be a holder
  • must have become the holder for consideration
  • must have obtained the possession of negotiable instrument before maturity
  • must have obtained the negotiable instrument in good faith.

Privileges Of A Holder In Due Course

  • Every prior party to a negotiable instrument is liable to a HDC. A holder who derives title from HDC has the same right as that of a HDC.
  • No prior party can set up a defence that the negotiable instrument was drawn, made or endorsed by him without any consideration.
  • No prior party can set up a defence that the negotiable instrument was lost or was obtained from him by offence or fraud or for an unlawful consideration. Thus, HDC gets a valid title to the negotiable instrument even though the title of the transferor was defective.
  • No prior party can allege that negotiable instrument was delivered conditionally or for a special purpose only. HDC can claim full amount of the negotiable instrument (but not exceeding the amount covered by the stamp) even though such amount is in excess of the amount authorized by the person delivering an inchoate negotiable instrument.


Meaning: Negotiation means transfer of a negotiable instrument to any other person so as to constitute that person the holder of such negotiable instrument.

Methods of negotiation

Negotiation by delivery

  • A bearer instrument may be negotiated by delivery.
  • The delivery must be voluntary

Negotiation by Endorsement

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 sign for the same purpose a stamped paper intended to be completed as a negotiable instrument
  • he is said to endorse the same, and is called the ‘Endorse’.

The person in whose favour the endorsement made is called ‘Endorsee’.

Effect of Endorsement

The endorsement of an instrument, followed by delivery, transfers to the endorsee the property in the instrument with right of further negotiation.

Types Of Endorsement

  1. Endorsement in blank. Endorsement in blank means an endorsement made by the endorser without writing the name of the endorsement. The instrument is payable to bearer even though originally payable to order.
  2. Endorsement in full. Special endorsement means an endorsement made by a holder by- (a)Signing his name; and (b)Added a direction to pay the amount to a specified person.
  3. Restrictive endorsement. An endorsement which restricts the right of further negotiation is called as restrictive endorsement.
  4. Partial endorsement. An endorsement which purports to transfer only a part of the amount of the instrument is called as partial endorsement. Partial endorsement is not valid at law.

When an endorser, after he has negotiated an instrument, again becomes a holder before its maturity, the instrument is said to be negotiated back to that holder.


  1. In a negotiation back, none of the intermediate holder / endorsers is liable to the holder.
  2. The general rule, that a holder in due course may sue all prior parties to the instrument does not apply.
  3. However, where a prior party has excluded its liability on the instrument and the negotiable instrument is negotiated back to him, he may sue all intermediate endorsers.

Discharge of a Negotiable Instrument

Payment in due course: A negotiable instrument is discharged if the party primarily liable on the negotiable instrument makes the payment in due course. *When the payment is made, the negotiable instrument must be cancelled or the fact of payment must be recorded negotiable instrument.

Cancellation: Where the holder cancels the name of the party primarily liable on the negotiable instrument, with intent to discharge him, the negotiable instrument is discharged.

Release: Where the holder releases or renounces his right against the party primarily liable on the negotiable instrument, the negotiable instrument is discharge.

Negotiation back: Where a party primarily liable on a negotiable instrument becomes the holders of the negotiable instrument, the negotiable is discharged.

Dischage of a Party

  • Payment: Payment by a party who is secondarily liable on a negotiable instrument discharges the holder and all parties subsequent to the party making payment of the negotiable instrument.
  • Cancellation: Where the holder cancels the name of any party liable on the negotiable instrument (other than the party primarily liable on the negotiable instrument), such a party and all parties subsequent to him are discharged.
  • Release: Where the holder releases any party liable negotiable instrument (other than the party primarily liable on the negotiable instrument), such a party and all parties subsequent to him are discharged.
  • Allowing drawee more than 48 hours to accept: All prior parties not consenting to the same are discharged from liability to such holder.
  • Qualified acceptance: Where a holder of the bill consents to qualified acceptance, all the prior parties who did not consent to qualified acceptance are discharge. Material alteration:- Every party not consenting to a material alteration negotiable instrument is discharged.
  • Negotiation back: Where a party already liable on the negotiable instrument becomes the holder of negotiable instrument, such a party and all intermediate parties to whom such a party was previously liable shall be discharge.

Operation of law:

  • A party is discharged if the negotiable instrument becomes time barred.
  • A party is discharged if he is declared as an insolvent by the court.

Dishonour by Non-Acceptance

A bill is dishonoured by non- acceptance if it is duty presented for acceptance, but the drawee refuses to accept the bill.

Cases in which bill are dishonoured by non- acceptance:

  • When the drawee makes default in acceptance upon being duly required to accept the bill.
  • In case there is two or more drawee who are not partners, if the bills is not accepted by all the drawee.
  • Where the drawee is a fictitious person.
  • When the drawee can not be found even after a reasonable search.
  • When the drawee is incompetent to contract.
  • Where the drawee gives a conditional acceptance and the holder does not give his consent to the conditional acceptance.

Effect: The holder gets an immediate right to sue all the prior parties.

He need not wait till the maturity of the bill for it to be dishonoured on presentment for payment.

Dishonour by Non- Payment. A negotiable instrument is dishonoured by non- payment, when presentment for payment is excused and the instrument remain unpaid after maturity.

Cite this Page

Negotiable Instrument Act 1881. (2017, Apr 11). Retrieved from

Don't let plagiarism ruin your grade

Run a free check or have your essay done for you

plagiarism ruin image

We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

Save time and let our verified experts help you.

Hire writer