ICAI Notes- The Negotiable Instruments Act, 1881 | Business Laws for CA Foundation PDF Download

 Page 1


LEARNING OUTCOMES 
 THE NEGOTIABLE  
 INSTRUMENTS ACT, 1881 
 
After studying this chapter, you would be able to understand- 
? The meaning, characteristics and elements of different kinds of 
negotiable instruments 
? Classification and various ways of negotiation, Know about 
provisions related to Presentment of Instruments and Rules of 
Compensation 
 
 
 
Chapter covers following headings
Notes, Bills & 
Cheques-Types, 
Classification and its 
characterstics
Modes of 
Negotiation
Presentment of 
Instruments
Rules of 
Compensation
CHAPTER 
7 
   
CHAPTER OVERVIEW
 
 
© The Institute of Chartered Accountants of India
Page 2


LEARNING OUTCOMES 
 THE NEGOTIABLE  
 INSTRUMENTS ACT, 1881 
 
After studying this chapter, you would be able to understand- 
? The meaning, characteristics and elements of different kinds of 
negotiable instruments 
? Classification and various ways of negotiation, Know about 
provisions related to Presentment of Instruments and Rules of 
Compensation 
 
 
 
Chapter covers following headings
Notes, Bills & 
Cheques-Types, 
Classification and its 
characterstics
Modes of 
Negotiation
Presentment of 
Instruments
Rules of 
Compensation
CHAPTER 
7 
   
CHAPTER OVERVIEW
 
 
© The Institute of Chartered Accountants of India
  
 
BUSINESS LAWS  
 
7.2 
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.  
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, Railway Receipts, 
Delivery Orders, Bill of Lading etc. are also considered as negotiable instruments either by 
mercantile custom or under other enactments. 
Recent developments: The Act was amended several times. Following are the significant 
amendments made in the Negotiable Instruments Act, 1881 (N.I. Act): 
? The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002;  
? The Negotiable Instruments (Amendment) Act, 2015, and  
? The Negotiable Instruments (Amendment) Act, 2018. 
© The Institute of Chartered Accountants of India
Page 3


LEARNING OUTCOMES 
 THE NEGOTIABLE  
 INSTRUMENTS ACT, 1881 
 
After studying this chapter, you would be able to understand- 
? The meaning, characteristics and elements of different kinds of 
negotiable instruments 
? Classification and various ways of negotiation, Know about 
provisions related to Presentment of Instruments and Rules of 
Compensation 
 
 
 
Chapter covers following headings
Notes, Bills & 
Cheques-Types, 
Classification and its 
characterstics
Modes of 
Negotiation
Presentment of 
Instruments
Rules of 
Compensation
CHAPTER 
7 
   
CHAPTER OVERVIEW
 
 
© The Institute of Chartered Accountants of India
  
 
BUSINESS LAWS  
 
7.2 
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.  
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, Railway Receipts, 
Delivery Orders, Bill of Lading etc. are also considered as negotiable instruments either by 
mercantile custom or under other enactments. 
Recent developments: The Act was amended several times. Following are the significant 
amendments made in the Negotiable Instruments Act, 1881 (N.I. Act): 
? The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002;  
? The Negotiable Instruments (Amendment) Act, 2015, and  
? The Negotiable Instruments (Amendment) Act, 2018. 
© The Institute of Chartered Accountants of India
 
 
    
 
7.3 
THE NEGOTIABLE INSTRUMENTS ACT, 1881 
 
1. 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 pass 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. 
It is to be noted that Hundies, Treasury Bills, Bearer Debentures, Railway Receipts, Delivery 
Orders, Bill of Lading etc. are also considered as negotiable instruments either by mercantile 
custom or usage.  
 
(1)  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) 
(2)  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 i.e., the person who 
possesses it can demand payment. For example,. A cheque made payable to 
specified person and that cheque is endorsed by signing on the back of the 
cheque by that specified person. 
Type of Negotiable 
Instrument
Promissory Note
Bill of Exchange
Cheque
© The Institute of Chartered Accountants of India
Page 4


LEARNING OUTCOMES 
 THE NEGOTIABLE  
 INSTRUMENTS ACT, 1881 
 
After studying this chapter, you would be able to understand- 
? The meaning, characteristics and elements of different kinds of 
negotiable instruments 
? Classification and various ways of negotiation, Know about 
provisions related to Presentment of Instruments and Rules of 
Compensation 
 
 
 
Chapter covers following headings
Notes, Bills & 
Cheques-Types, 
Classification and its 
characterstics
Modes of 
Negotiation
Presentment of 
Instruments
Rules of 
Compensation
CHAPTER 
7 
   
CHAPTER OVERVIEW
 
 
© The Institute of Chartered Accountants of India
  
 
BUSINESS LAWS  
 
7.2 
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.  
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, Railway Receipts, 
Delivery Orders, Bill of Lading etc. are also considered as negotiable instruments either by 
mercantile custom or under other enactments. 
Recent developments: The Act was amended several times. Following are the significant 
amendments made in the Negotiable Instruments Act, 1881 (N.I. Act): 
? The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002;  
? The Negotiable Instruments (Amendment) Act, 2015, and  
? The Negotiable Instruments (Amendment) Act, 2018. 
© The Institute of Chartered Accountants of India
 
 
    
 
7.3 
THE NEGOTIABLE INSTRUMENTS ACT, 1881 
 
1. 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 pass 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. 
It is to be noted that Hundies, Treasury Bills, Bearer Debentures, Railway Receipts, Delivery 
Orders, Bill of Lading etc. are also considered as negotiable instruments either by mercantile 
custom or usage.  
 
(1)  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) 
(2)  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 i.e., the person who 
possesses it can demand payment. For example,. A cheque made payable to 
specified person and that cheque is endorsed by signing on the back of the 
cheque by that specified person. 
Type of Negotiable 
Instrument
Promissory Note
Bill of Exchange
Cheque
© The Institute of Chartered Accountants of India
  
 
BUSINESS LAWS  
 
7.4 
Essential Characteristics of Negotiable Instruments 
1. It is necessarily in writing. 
2. It should be signed. 
3. It is freely transferable from one person to another. 
4. Holder’s 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. 
2. 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.” 
  
Characterstics
written signed transferable
title free 
from 
defects
can be 
transferrred 
number of 
times
unconditional 
promise/order 
to pay
certainity of 
sum payable, 
time of 
payment and 
the payee
delivered
© The Institute of Chartered Accountants of India
Page 5


LEARNING OUTCOMES 
 THE NEGOTIABLE  
 INSTRUMENTS ACT, 1881 
 
After studying this chapter, you would be able to understand- 
? The meaning, characteristics and elements of different kinds of 
negotiable instruments 
? Classification and various ways of negotiation, Know about 
provisions related to Presentment of Instruments and Rules of 
Compensation 
 
 
 
Chapter covers following headings
Notes, Bills & 
Cheques-Types, 
Classification and its 
characterstics
Modes of 
Negotiation
Presentment of 
Instruments
Rules of 
Compensation
CHAPTER 
7 
   
CHAPTER OVERVIEW
 
 
© The Institute of Chartered Accountants of India
  
 
BUSINESS LAWS  
 
7.2 
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.  
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, Railway Receipts, 
Delivery Orders, Bill of Lading etc. are also considered as negotiable instruments either by 
mercantile custom or under other enactments. 
Recent developments: The Act was amended several times. Following are the significant 
amendments made in the Negotiable Instruments Act, 1881 (N.I. Act): 
? The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002;  
? The Negotiable Instruments (Amendment) Act, 2015, and  
? The Negotiable Instruments (Amendment) Act, 2018. 
© The Institute of Chartered Accountants of India
 
 
    
 
7.3 
THE NEGOTIABLE INSTRUMENTS ACT, 1881 
 
1. 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 pass 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. 
It is to be noted that Hundies, Treasury Bills, Bearer Debentures, Railway Receipts, Delivery 
Orders, Bill of Lading etc. are also considered as negotiable instruments either by mercantile 
custom or usage.  
 
(1)  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) 
(2)  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 i.e., the person who 
possesses it can demand payment. For example,. A cheque made payable to 
specified person and that cheque is endorsed by signing on the back of the 
cheque by that specified person. 
Type of Negotiable 
Instrument
Promissory Note
Bill of Exchange
Cheque
© The Institute of Chartered Accountants of India
  
 
BUSINESS LAWS  
 
7.4 
Essential Characteristics of Negotiable Instruments 
1. It is necessarily in writing. 
2. It should be signed. 
3. It is freely transferable from one person to another. 
4. Holder’s 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. 
2. 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.” 
  
Characterstics
written signed transferable
title free 
from 
defects
can be 
transferrred 
number of 
times
unconditional 
promise/order 
to pay
certainity of 
sum payable, 
time of 
payment and 
the payee
delivered
© The Institute of Chartered Accountants of India
 
 
    
 
7.5 
THE NEGOTIABLE INSTRUMENTS ACT, 1881 
 
Specimen of Promissory note 
` 
10,000       Lucknow 
 April 10, 2022 
Three months after date, I promise to pay Shri Ramesh (Payee) or to his order the 
sum of Rupees Ten Thousand, for value received. 
  Stamp 
  Sd/- 
  Ram 
To, 
Shri Ramesh, 
B-20, Green Park, 
Mumbai. 
(Maker) 
Parties to promissory note 
1. Maker: The person who makes the promise to pay is called the Maker. He is the 
debtor and must sign the instrument. 
2. Payee: Payee is the person to whom the amount on the note is payable. 
 
Essential Characteristics of a Promissory Note 
a. In writing- An oral promise to pay is not sufficient. 
b. There must be an express promise to pay. Mere acknowledgment of debt is 
insufficient.  
Example 1: I acknowledge myself to be indebted to B in ` 1,000, to be paid on 
demand, for value received. (Valid promissory note as the promise to pay is definite) 
Example 2: “Mr. B, I.O.U ` 1,000.” – Invalid promissory note as there is no promise to 
pay. It is just an acknowledgement of debt. 
© The Institute of Chartered Accountants of India