The Negotiable Instruments Act, 1881: Notes (Part - 1) | Corporate & Other Laws for CA Intermediate PDF Download

 Page 1


 
 
LEARNING OUTCOMES 
THE NEGOTIABLE 
INSTRUMENTS 
ACT, 1881 
 
At the end of this chapter, you will be able to: 
? Understand the meaning, characteristics and elements of 
different kinds of negotiable instruments. 
? Know the parties to notes, bills and cheques, various ways 
of negotiation of the instruments and their presentment. 
? Know the concepts of noting and protest, and of dishonour 
of instrument. 
CHAPTER 
2 
Page 2


 
 
LEARNING OUTCOMES 
THE NEGOTIABLE 
INSTRUMENTS 
ACT, 1881 
 
At the end of this chapter, you will be able to: 
? Understand the meaning, characteristics and elements of 
different kinds of negotiable instruments. 
? Know the parties to notes, bills and cheques, various ways 
of negotiation of the instruments and their presentment. 
? Know the concepts of noting and protest, and of dishonour 
of instrument. 
CHAPTER 
2 
 
 
2.2 CORPORATE AND OTHER LAWS 
 
 
 1. INTRODUCTION 
The law relating to negotiable instruments is the law of the commercial world 
which was enacted to facilitate the activities in trade and commerce making 
provision for giving sanctity to the instruments of credit which could be deemed 
to be convertible into money and easily passable from one person to another. In 
the absence of such instruments, the trade and commerce activities were likely to 
be adversely affected as it was not practicable for the trading community to carry 
with it the bulk of the currency in force. The source of Indian law relating to such 
instruments is admittedly the English Common Law.  
The main objective of the Act is to legalise the system by which instruments 
contemplated by it could pass from hand to hand by negotiation like any other 
goods.  
Notes, Bills & Cheques (Section 4-25)
Parties to Notes, bills & Cheques (Section 
26-45A)
Negotiation (Section 46-60)
Presentment (Section 61-77)
Payment and Interest (Section 78- 81)
Discharge from liability on instruments 
(Section 82-90)
Notice of dishonour (Section 91- 98)
Noting and protest (Section 99-104A)
Compensation (Section 117)
Special Rules  of evidence (Section 118-122)
International law (Section 134-137)
Penalties (Section 138-147)
 
Negotiable 
Instruments Act can 
be broadly covered 
under following 
headings 
Page 3


 
 
LEARNING OUTCOMES 
THE NEGOTIABLE 
INSTRUMENTS 
ACT, 1881 
 
At the end of this chapter, you will be able to: 
? Understand the meaning, characteristics and elements of 
different kinds of negotiable instruments. 
? Know the parties to notes, bills and cheques, various ways 
of negotiation of the instruments and their presentment. 
? Know the concepts of noting and protest, and of dishonour 
of instrument. 
CHAPTER 
2 
 
 
2.2 CORPORATE AND OTHER LAWS 
 
 
 1. INTRODUCTION 
The law relating to negotiable instruments is the law of the commercial world 
which was enacted to facilitate the activities in trade and commerce making 
provision for giving sanctity to the instruments of credit which could be deemed 
to be convertible into money and easily passable from one person to another. In 
the absence of such instruments, the trade and commerce activities were likely to 
be adversely affected as it was not practicable for the trading community to carry 
with it the bulk of the currency in force. The source of Indian law relating to such 
instruments is admittedly the English Common Law.  
The main objective of the Act is to legalise the system by which instruments 
contemplated by it could pass from hand to hand by negotiation like any other 
goods.  
Notes, Bills & Cheques (Section 4-25)
Parties to Notes, bills & Cheques (Section 
26-45A)
Negotiation (Section 46-60)
Presentment (Section 61-77)
Payment and Interest (Section 78- 81)
Discharge from liability on instruments 
(Section 82-90)
Notice of dishonour (Section 91- 98)
Noting and protest (Section 99-104A)
Compensation (Section 117)
Special Rules  of evidence (Section 118-122)
International law (Section 134-137)
Penalties (Section 138-147)
 
Negotiable 
Instruments Act can 
be broadly covered 
under following 
headings 
2.3 
THE NEGOTIABLE INSTRUMENTS ACT, 1881 
 
The Law in India relating to negotiable instruments is contained in the Negotiable 
Instruments Act, 1881. This is an Act to define and amend the law relating to 
promissory notes, bills of exchange and cheques. The Act applies to the whole of 
India, but nothing herein contained affects the Reserve Bank of India Act, 1934, 
(section 21 which provides the Bank to have the right to transact Government 
business in India), 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 an 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. 
The provisions of this Act are also applicable to Hundis, unless there is a local 
usage to the contrary. Other native instruments like Treasury Bills, Bearer 
Debentures etc. are also considered as negotiable instruments either by 
mercantile custom or under other enactments. 
Recent developments: The Act was amended several times. Recent three 
amendments made in the N.I. Act were the Negotiable Instruments (Amendment 
and Miscellaneous Provisions) Act, 2002 and the Negotiable Instruments 
(Amendment) Act, 2015 and Negotiable Instruments (Amendment) Act, 2018. 
The Negotiable Instruments (Amendment) Act, 2018 received the assent of the 
President and was notified in the Official Gazette on 2
nd
 August, 2018 and came 
into effect from September 1, 2018. 
The Amendment Act 2018 contains two significant changes – the introduction of 
Section 143A and Section 148. These sections provide for interim compensation 
during the pendency of the criminal complaint and the criminal appeal. 
 2. MEANING OF NEGOTIABLE INSTRUMENTS 
Negotiable Instruments is an instrument (the word instrument means a 
document) which is freely transferable (by customs of trade) from one person to 
another by mere delivery or by indorsement and delivery. The property in such an 
instrument passes to a bonafide transferee for value.  
The Act does not define the term ‘Negotiable Instruments’. However, Section 13 
of the Act provides for only three kinds of negotiable instruments namely, bills 
of exchange, promissory notes and cheques, payable either to order or 
bearer. 
Page 4


 
 
LEARNING OUTCOMES 
THE NEGOTIABLE 
INSTRUMENTS 
ACT, 1881 
 
At the end of this chapter, you will be able to: 
? Understand the meaning, characteristics and elements of 
different kinds of negotiable instruments. 
? Know the parties to notes, bills and cheques, various ways 
of negotiation of the instruments and their presentment. 
? Know the concepts of noting and protest, and of dishonour 
of instrument. 
CHAPTER 
2 
 
 
2.2 CORPORATE AND OTHER LAWS 
 
 
 1. INTRODUCTION 
The law relating to negotiable instruments is the law of the commercial world 
which was enacted to facilitate the activities in trade and commerce making 
provision for giving sanctity to the instruments of credit which could be deemed 
to be convertible into money and easily passable from one person to another. In 
the absence of such instruments, the trade and commerce activities were likely to 
be adversely affected as it was not practicable for the trading community to carry 
with it the bulk of the currency in force. The source of Indian law relating to such 
instruments is admittedly the English Common Law.  
The main objective of the Act is to legalise the system by which instruments 
contemplated by it could pass from hand to hand by negotiation like any other 
goods.  
Notes, Bills & Cheques (Section 4-25)
Parties to Notes, bills & Cheques (Section 
26-45A)
Negotiation (Section 46-60)
Presentment (Section 61-77)
Payment and Interest (Section 78- 81)
Discharge from liability on instruments 
(Section 82-90)
Notice of dishonour (Section 91- 98)
Noting and protest (Section 99-104A)
Compensation (Section 117)
Special Rules  of evidence (Section 118-122)
International law (Section 134-137)
Penalties (Section 138-147)
 
Negotiable 
Instruments Act can 
be broadly covered 
under following 
headings 
2.3 
THE NEGOTIABLE INSTRUMENTS ACT, 1881 
 
The Law in India relating to negotiable instruments is contained in the Negotiable 
Instruments Act, 1881. This is an Act to define and amend the law relating to 
promissory notes, bills of exchange and cheques. The Act applies to the whole of 
India, but nothing herein contained affects the Reserve Bank of India Act, 1934, 
(section 21 which provides the Bank to have the right to transact Government 
business in India), 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 an 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. 
The provisions of this Act are also applicable to Hundis, unless there is a local 
usage to the contrary. Other native instruments like Treasury Bills, Bearer 
Debentures etc. are also considered as negotiable instruments either by 
mercantile custom or under other enactments. 
Recent developments: The Act was amended several times. Recent three 
amendments made in the N.I. Act were the Negotiable Instruments (Amendment 
and Miscellaneous Provisions) Act, 2002 and the Negotiable Instruments 
(Amendment) Act, 2015 and Negotiable Instruments (Amendment) Act, 2018. 
The Negotiable Instruments (Amendment) Act, 2018 received the assent of the 
President and was notified in the Official Gazette on 2
nd
 August, 2018 and came 
into effect from September 1, 2018. 
The Amendment Act 2018 contains two significant changes – the introduction of 
Section 143A and Section 148. These sections provide for interim compensation 
during the pendency of the criminal complaint and the criminal appeal. 
 2. MEANING OF NEGOTIABLE INSTRUMENTS 
Negotiable Instruments is an instrument (the word instrument means a 
document) which is freely transferable (by customs of trade) from one person to 
another by mere delivery or by indorsement and delivery. The property in such an 
instrument passes to a bonafide transferee for value.  
The Act does not define the term ‘Negotiable Instruments’. However, Section 13 
of the Act provides for only three kinds of negotiable instruments namely, bills 
of exchange, promissory notes and cheques, payable either to order or 
bearer. 
 
 
2.4 
 
CORPORATE AND OTHER LAWS 
 
A negotiable instrument is payable to order when 
a. It is expressed to be so payable 
b. When it is expressed to be payable to a specified person and does not 
contain words prohibiting its transfer. (i.e. it is transferrable by indorsement 
and delivery) 
A negotiable instrument is payable to bearer when 
a. When it is expressed to be so payable e.g. pay bearer 
b. When the only or last indorsement (indorsement means signing of the 
instrument) on the instrument is an indorsement in blank 
Essential Characteristics of Negotiable Instruments 
1. It is necessarily in writing. 
2. It should be signed. 
3. It is free transferable from one person to another. 
4. Holders title is free from defects. 
5. It can be transferred any number of times till its satisfaction. 
6. Every negotiable instrument must contain an unconditional promise or 
order to pay money. The promise or order to pay must consist of money 
only. 
7. The sum payable, the time of payment, the payee, must be certain. 
8. The instrument should be delivered. Mere drawing of instrument does not 
create liability. 
Type of Negotiable Instrument
Promissory Note
Bill of Exchange
Cheque
Page 5


 
 
LEARNING OUTCOMES 
THE NEGOTIABLE 
INSTRUMENTS 
ACT, 1881 
 
At the end of this chapter, you will be able to: 
? Understand the meaning, characteristics and elements of 
different kinds of negotiable instruments. 
? Know the parties to notes, bills and cheques, various ways 
of negotiation of the instruments and their presentment. 
? Know the concepts of noting and protest, and of dishonour 
of instrument. 
CHAPTER 
2 
 
 
2.2 CORPORATE AND OTHER LAWS 
 
 
 1. INTRODUCTION 
The law relating to negotiable instruments is the law of the commercial world 
which was enacted to facilitate the activities in trade and commerce making 
provision for giving sanctity to the instruments of credit which could be deemed 
to be convertible into money and easily passable from one person to another. In 
the absence of such instruments, the trade and commerce activities were likely to 
be adversely affected as it was not practicable for the trading community to carry 
with it the bulk of the currency in force. The source of Indian law relating to such 
instruments is admittedly the English Common Law.  
The main objective of the Act is to legalise the system by which instruments 
contemplated by it could pass from hand to hand by negotiation like any other 
goods.  
Notes, Bills & Cheques (Section 4-25)
Parties to Notes, bills & Cheques (Section 
26-45A)
Negotiation (Section 46-60)
Presentment (Section 61-77)
Payment and Interest (Section 78- 81)
Discharge from liability on instruments 
(Section 82-90)
Notice of dishonour (Section 91- 98)
Noting and protest (Section 99-104A)
Compensation (Section 117)
Special Rules  of evidence (Section 118-122)
International law (Section 134-137)
Penalties (Section 138-147)
 
Negotiable 
Instruments Act can 
be broadly covered 
under following 
headings 
2.3 
THE NEGOTIABLE INSTRUMENTS ACT, 1881 
 
The Law in India relating to negotiable instruments is contained in the Negotiable 
Instruments Act, 1881. This is an Act to define and amend the law relating to 
promissory notes, bills of exchange and cheques. The Act applies to the whole of 
India, but nothing herein contained affects the Reserve Bank of India Act, 1934, 
(section 21 which provides the Bank to have the right to transact Government 
business in India), 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 an 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. 
The provisions of this Act are also applicable to Hundis, unless there is a local 
usage to the contrary. Other native instruments like Treasury Bills, Bearer 
Debentures etc. are also considered as negotiable instruments either by 
mercantile custom or under other enactments. 
Recent developments: The Act was amended several times. Recent three 
amendments made in the N.I. Act were the Negotiable Instruments (Amendment 
and Miscellaneous Provisions) Act, 2002 and the Negotiable Instruments 
(Amendment) Act, 2015 and Negotiable Instruments (Amendment) Act, 2018. 
The Negotiable Instruments (Amendment) Act, 2018 received the assent of the 
President and was notified in the Official Gazette on 2
nd
 August, 2018 and came 
into effect from September 1, 2018. 
The Amendment Act 2018 contains two significant changes – the introduction of 
Section 143A and Section 148. These sections provide for interim compensation 
during the pendency of the criminal complaint and the criminal appeal. 
 2. MEANING OF NEGOTIABLE INSTRUMENTS 
Negotiable Instruments is an instrument (the word instrument means a 
document) which is freely transferable (by customs of trade) from one person to 
another by mere delivery or by indorsement and delivery. The property in such an 
instrument passes to a bonafide transferee for value.  
The Act does not define the term ‘Negotiable Instruments’. However, Section 13 
of the Act provides for only three kinds of negotiable instruments namely, bills 
of exchange, promissory notes and cheques, payable either to order or 
bearer. 
 
 
2.4 
 
CORPORATE AND OTHER LAWS 
 
A negotiable instrument is payable to order when 
a. It is expressed to be so payable 
b. When it is expressed to be payable to a specified person and does not 
contain words prohibiting its transfer. (i.e. it is transferrable by indorsement 
and delivery) 
A negotiable instrument is payable to bearer when 
a. When it is expressed to be so payable e.g. pay bearer 
b. When the only or last indorsement (indorsement means signing of the 
instrument) on the instrument is an indorsement in blank 
Essential Characteristics of Negotiable Instruments 
1. It is necessarily in writing. 
2. It should be signed. 
3. It is free transferable from one person to another. 
4. Holders title is free from defects. 
5. It can be transferred any number of times till its satisfaction. 
6. Every negotiable instrument must contain an unconditional promise or 
order to pay money. The promise or order to pay must consist of money 
only. 
7. The sum payable, the time of payment, the payee, must be certain. 
8. The instrument should be delivered. Mere drawing of instrument does not 
create liability. 
Type of Negotiable Instrument
Promissory Note
Bill of Exchange
Cheque
2.5 
THE NEGOTIABLE INSTRUMENTS ACT, 1881 
 
Presumptions as to Negotiable Instruments [Section 118] 
Presumptions made in 
relation 
Presumptions drawn
Until the contrary is proved, the following presumption shall be made:
of consideration every negotiable instrument was made or 
drawn for consideration
as to date every negotiable instrument bearing a date 
was made or drawn on such date
as to time of acceptance every accepted bill of exchange was accepted 
within a reasonable time after its date and 
before its maturity
as to time of transfer every transfer of a negotiable instrument was 
made before its maturity;
as to order of indorsements indorsements appearing upon a negotiable 
instrument were made in the order in which 
they appear thereon
as to stamps lost promissory note, bill of exchange or 
cheque was duly stamped
as to holder the holder of a negotiable instrument is a 
holder in due course
The above presumptions are rebuttable by evidence to the contrary.  
 3. PROMISSORY NOTE 
Meaning 
According to section 4 of the NI Act, 1881, “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.” 
Specimen of Promissory note 
`
 10,000        Lucknow 
 April 10, 2020 
Three months after date, I promise to pay Shri Ramesh (Payee) or to his order