Negotiable Instruments Act, 1881

The Negotiable Instruments Act, 1881

• Enacted to define and amend laws related to promissory notes, bills of exchange, and cheques in India.
• It came into force on March 1, 1882.

Chapter I: Preliminary

• Short Title: The Negotiable Instruments Act, 1881
• Extent: The Act extends to the whole of India
• Usages: Local usages related to hundis and instruments in oriental languages are saved, unless the instrument specifies otherwise.
• Interpretation Clause Includes:
  • Banker, defined as any person acting as a banker, including post office savings banks.

Chapter II: Notes, Bills, and Cheques

• This chapter contains the definitions and rules for notes, bills and cheques
• Promissory Note: Requires an unconditional undertaking in writing, signed by the maker, to pay a certain sum of money to a specified person or to the bearer.
• Illustrations provided help distinguish between valid and invalid promissory notes.
• Bill of Exchange: Demands an unconditional order in writing, signed by the maker, directing payment to a specified person or bearer.
• The order isn't conditional if time for payment is subject to the lapse of a period after a certain event
• Cheque: A bill of exchange drawn on a specified banker, payable on demand
  • It encompasses electronic images of truncated cheques and cheques in electronic form.
  • A "Truncated cheque" is one that is truncated during its Clearing cycle
  • "Cheque in electronic form" uses computer resources, digital signatures, and secure systems.
• Key Parties:
  • Drawer: The maker of a bill of exchange or cheque.
  • Drawee: The person directed to pay in a bill of exchange; "Drawee in case of need" can be named in bill/endorsement.
  • Acceptor: The drawee who has signed their assent on the bill to become an acceptor
  • Acceptor for Honour: Accepts bill supra protest for honour after bill has been noted/protested for non-acceptance/better security.
  • Payee: The person named in the instrument to whom or order the money is directed to be paid.
• Holder: Refers to any person entitled to the possession of a promissory note, bill of exchange, or cheque in their own name, and to receive/recover the amount due.
• Holder in Due Course: A person who acquired the instrument for consideration, before maturity, without knowledge of any defect in the transferor’s title
• Payment in Due Course: Payment made in accordance with the apparent tenor of the instrument, in good faith and without negligence, to the person possessing it.
• Instrument Classification
  • Inland Instrument: Is drawn or made in India, payable in India, or drawn upon someone residing in India.
  • Foreign Instrument: Any instrument not an inland instrument.
• Negotiable Instrument: A promissory note, bill of exchange, or cheque payable either to order or to bearer.
  • It can be payable to multiple payees jointly or in the alternative.
• Negotiation: The transfer of a promissory note, bill of exchange, or cheque to a person, thus constituting them the holder.
• Indorsement: The maker or holder's signature on the instrument for negotiation.
  • The person signing is an indorser.
  • Indorsement can be "in blank" (signature only) or "in full" (specifying the indorsee).

Sections on Endorsement, Maturity, Instruments, etc

• Indorsee: The person to whom the instrument is endorsed
• Ambiguous Instruments: Can be treated by the holder as either a promissory note or bill of exchange.
• Amount Discrepancy: If the amount is stated differently in figures and words, the amount in words prevails.
• Instruments Payable on Demand: Promissory notes/bills of exchange without specified payment time, along with cheques, are payable on demand.
• Inchoate Stamped Instruments: An incomplete, stamped negotiable instrument gives the holder authority to complete it of the amount covered by the stamp.
  • The signing person is liable, but only a holder in due course can recover an excess over what they intended to pay.
• "At Sight" and "On Presentment": Means on demand for promissory notes or bills of exchange.
  • "After Sight" refers to presentment for sight in promissory notes, and acceptance, or noting for non-acceptance in bills of exchange.
• Maturity: The date it falls due
  • Days of grace: Every promissory note or bill of exchange, not expressed to be payable on demand, at sight, or on presentment, matures on the third day after it is expressed to be payable.
• Calculating Maturity: Requires identifying the date a instrument is at maturity
  • When calculating the maturity of a bill or note after date or sight, exclude the date of the date/presentment for acceptance, sight or protest/event happening.
  • The termination date is is calculated based a number of months after date or sight, after a certain event (after honour)
  • Otherwise the last day of that month should be used

Chapter III: Parties to Notes, Bills, and Cheques

• Capacity to Make: Every person capable of contracting per their governing law can be a party.
• Minors A minor can draw, endorse, deliver and negotiate but only binds the other parties and not themselves.
• Agency: A person who can bind themselves, per Section 26, can also be bound by a authorized agent acting in their name.
  • A general authority to transact business does not grant the right to act as an agent to bind said person.
• Liability of Agent Signing: An agent signing without clarification of their agent status is personally liable, unless lack of personal responsibility is indicated.
• Liability of Legal Representative: A deceased person's legal representative is personally liable unless they limit liability to received assets.
• Liability of Drawer:
  • The drawer is bound pay the holder
  • The holder must give proper notice of dishonour.
• Liability of Drawee of Cheque: Must pay if there are sufficent funds
  • Default in payment requires compensating the drawer for the loss or damage
• Liability of Maker: Bound to pay the amount at maturity according to the note

Chapter IV: Negotiation

• Lists rules for negotiation of instruments
• Only Drawee can be Acceptor (With Exceptions) States that only the drawee of a bill can bind themself to acceptance
• Acceptance by Several Drawees not Partners Each Drawee of a Bill who is not partners can accept it for themselves.
• Liability of Indorser In the event of dishonour by the drawee, acceptor, or maker, the indorser is bound to compensate every subsequent holder
• Liability of Prior Parties to Holder in Due Course Every party involved is liable to the holder in due course until the instrument is satisified

Other Topics Covered

• Liability of Parties Maker drawer and acceptors liable for dishonour
• Instrument acquired by Unalwful Means Pertains to situations when a negotiable instrument has been attained through an offence of some kind
• Presentment of instruments: Provides rules of presentment for payment of notes, cheques and other instruments
• Dishonour: Details when dishonour due to acceptance or payment issues etc.

Chapter VII: Of Discharge from Liability on Notes, Bills and Cheques

• Discharge from liability: Details how an endorser can be discharged in terms of liability

Chapter VIII: Of Notice of Dishonour

• Applies when and to whom a dishonour notice must be given

Chapter IX: Of Noting and Protest

• When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment, the holder may cause such dishonour to be noted by a notary public upon the instrument,

Chapter X: Of Reasonable Time

• Refers to how to calculate a resonable time

Chapter XI: Of Acceptance and Payment for Honour and Reference in Case of Need

• Acceptance for Honour Notes the criteria for when a bill of exchange is noted or protested for non-acceptance or better security can any person who is not a party already liable

Additional Legal Aspects

• Liability: Outlines the liability to prior parties
• Presentment: Rules for presentment
• Specific Scenarios: Includes scenarios like instruments acquired unlawfully.
• Validation: Specifies validity requirements for instruments.