Negotiable Instruments Act 1881

The Negotiable Instruments Act was enacted, in India, in 1881. Prior to its enactment, the provision of the English Negotiable Instrument Act was applicable in India, and the present Act is also based on the English Act with certain modifications.

What is Negotiation of an instrument?

Negotiation of an instrument is the process by which the ownership of an instrument is transferred from one person to another.

According to Section 14 of the Act, when a note, bill or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.

Methods of the negotiation of instrument

Two methods of the negotiation of instrument are follows:

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

  • Negotiation by endorsement and delivery: An order instrument can be negotiated only by way of endorsement and delivery.

Definition of Negotiable Instrument

Negotiable instrument means a promissory note or bill of exchange or cheque payable either to order or to the bearer.


Meaning of Negotiable Instrument

Negotiable instrument means an Instrument, the property in which is acquired by anyone, who takes it bonafide and for value notwithstanding any defect in the title of any prior party.


Characteristics of a Negotiable Instrument

The important characteristics of the negotiable instrument are as follows:

  1. Negotiable instrument must be payable either to order or to bearer.

  2. Negotiable instruments are freely transferable from one person to another.

  3. It is transferable Infinitum (i.e., indefinitely), it means it can be transferred for any number of times.

  4. The holder in due course gets a good title to the negotiable instrument even though the title of the transferor is defective.

Presumptions as to Negotiable Instruments

These presumptions need not be proved as they are presumed to exist in every negotiable instrument. Until the contrary is proved the following presumptions shall be made in case of all negotiable instruments:

  1. Of consideration: that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, endorsed, negotiated or transferred, was accepted, endorsed, negotiated, or transferred for consideration;

  2. as to date: that every negotiable instrument bearing a date was made or drawn on such date;

  3. as to time of acceptance: that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity;

  4. as to time of transfer: that every transfer of a negotiable instrument was made before its maturity;

  5. as to order of indorsements: that the indorsements appearing upon a negotiable instrument were made in the order in which they appear thereon;

  6. as to stamp: that a lost promissory note, bill of exchange or cheque was duly stamped;

  7. that holder is a holder in due course: that the holder of a negotiable instrument is a holder in due course provided that, where the instrument has been obtained from its lawful owner, by means of an offence or fraud, or has been obtained from the maker or acceptor thereof by means of an offence or fraud, or for unlawful consideration, the burden of proving that the holder is a holder in due course lies upon him.

Promissory Note

Promissory Note, on the other hand, is a promise to pay a certain amount of money within a stipulated period of time. And the promissory note is issued by the debtor.


Bill of Exchange

Bill of exchange is an instrument ordering the debtor to pay a certain amount within a stipulated period of time. Bill of exchange needs to be accepted in order to call it valid or applicable. And the bill of exchange is issued by the creditor.


Cheque

A cheque is a bill of exchange, drawn on a specified banker and it includes the electronic image of a truncated cheque and a cheque in electronic form.


Classification of Negotiable Instruments

Broadly, Negotiable instruments are classified into 4 types.

  1. Based on Transfer (BearerOrder)
  2. Based on payment (DemandTime)
  3. Based on Location (InlandForeign)
  4. Other Instruments (AmbiguousInchoate)

Types of Negotiable Instruments

8 major types of negotiable instruments are discussed below:

  1. Bearer instrument
  2. Order instrument
  3. Demand instrument
  4. Time instrument
  5. Inland instrument
  6. Foreign instrument
  7. Ambiguous instrument
  8. Inchoate Instrument

Business Law Notes

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Business Law Book References

  1. Goel, P. K. (2006). “Business Law for Managers” Wiley
  2. Sheth, T. (2017). “Business Law” (2ed.) Pearson.
  3. Kuchhal. M.C. & Prakash. “Business Legislation for Management” (2ed.) Vikas Publishing.

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