Negotiable Instruments Act, 1881

Negotiable Instruments

• Documents used in commercial transactions are known as negotiable instruments if they meet certain conditions.
• Negotiable means transferable from one person to another for consideration.
• Instrument means a written document that creates a right for someone.
• A negotiable instrument entitles a person to a sum of money and is transferable by delivery or indorsement and delivery.
• The law regarding negotiable instruments is in the Negotiable Instruments Act, 1881.
• The Act deals with promissory notes, bills of exchange, cheques, and hundis (bills of exchange in a vernacular language).
• It is based on English Law and judicial decisions, except where conditions in India require a change.
• The Act extends to all of India but doesn't affect local usages related to instruments in vernacular languages, unless excluded in the instrument.
• The Act came into force on March 1, 1882, and was last amended in 1988.

The Reserve Bank of India Act, 1934

• It does not affect Sections 31 and 32 of the Reserve Bank of India Act, 1934.
• Section 31 prevents private individuals from infringing on the government's monopoly on note issuance (paper currency) in India.
• Only the Reserve Bank or the Central Government can draw, accept, make, or issue a bill of exchange, hundi, or promissory note payable to the bearer on demand.
• No one else can make or issue a promissory note payable to the bearer of the instrument.
• The words "or to bearer" in the definition of a promissory note in Section 4 of the Negotiable Instruments Act are inoperative.
• A bill or note indorsed in blank can become payable to the bearer on demand, and a cheque is payable to the bearer on demand.
• Section 32 of the Reserve Bank of India Act states that anyone who issues a bill or note payable to the bearer on demand will be fined.

Definition of Negotiable Instrument

• It is a method of transferring debt from one person to another.
• The Negotiable Instruments Act does not define the term.
• Section 13 states that a negotiable instrument includes a promissory note, bill of exchange, or cheque payable either to order or to bearer.
• Justice Willis defines a negotiable instrument as property acquired by someone who takes it in with good intention and for value, regardless of any title defect.
• According to Thomas, a negotiable instrument is legally recognized by custom of trade or law.
• It is transferable by delivery or by indorsement and delivery.
• The holder can sue upon it in their own name without notice to the liable party.
• The property passes to a good intention transferee for value, free from equities and defects in the title.
• A person taking an instrument bona fide and for value, known as a holder in due course, obtains a good title even if the transferor's title is defective.
• A test for a bearer instrument is whether a good title can be acquired through a thief

Characteristics of a Negotiable Instrument

• It is freely transferable, property passes from one individual to another by delivery or indorsement
• The holder's title is free from defects, a bonafide person is free from defects of a transferor/prior party
• The holder in due course can sue in their own name to recover the amount.
• Certain presumptions apply to all negotiable instruments, unless proven otherwise.
  • Consideration: Presumed to have been made, drawn, accepted, indorsed, negotiated, or transferred for consideration.
  • Date: Presumed to have been drawn on such date.
  • Time of Acceptance: Presumed to have been accepted within a reasonable time of its date and before its maturity.
  • Time of Transfer: Every transfer presumed to have been made before its maturity.
  • Order of Indorsements: Presumed to have been made in the order in which they appear.
  • Stamp: Presumed that it was duly stamped.
  • Holder presumed to be a holder in due course.
  • Proof of Protest: The Court presumes the fact of dishonour until such fact is disproved.
• The above presumptions are rebuttable by evidence and would not arise, if an instrument has been obtained by any offence, fraud or unlawful consideration.

Types of Negotiable Instrument

• Negotiable by statute.
  • The Negotiable Instruments Act mentions promissory notes, bills of exchange and cheques, these instruments are negotiable by Statute.
• Negotiable by custom or usage.
  • Instruments include exchequer bills, bank notes, share warrants, circular notes, bearer debentures, dividend warrants, share certificates with blank transfer deeds, etc.
  • Indian Courts usually follow the practice of English Courts in according the character of negotiability to other instruments.
  • Government promissory notes, banker's drafts and pay orders, hundis, delivery orders and railway receipts for goods, have been held to be negotiable by usage or custom.