Fundamentals of The Negotiable Instruments Act, 1881


Posted On : December 19, 2022
Fundamentals of The Negotiable Instruments Act, 1881
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Cheques were the most common mode of financial transactions until digital modes overtook. However, courts are still overburdened with matters of cheque bounce. The rules followed in courts for such matters are summarised in the Negotiable Instruments Act, 1881. Regarding what exactly constitutes a negotiable instrument and who in the legal fraternity deals with such matters, people are often confused.   


Cheques are the most familiar negotiable instruments in India. As lawyers or law students, it is important to understand the essence and crucial provisions of any legal statute. And when it comes to cheque bounce lawyers, the Negotiable Instruments Act and related case laws are the bible for them. One single loophole in the opposition’s case can mould the case in favour of those who might even be wrong. Cases of dishonoured cheques are in abundance in India, which also puts the legal system under pressure. That is why, separate courts and higher court benches are designated for dealing with cases of cheque bounce in India. One may understand the importance of Negotiable Instruments Act 1881 with this fact. 


The banking lawyers near me will handle the legality of negotiable instruments on the bank's part, apart from other paperwork. But when it is a matter of dispute between two private parties, banking lawyers may not be of any help. If you want to serve a cheque bounce notice, lawyers with specific knowledge of the Negotiable Instruments Act, 1881 must be contacted. Here is a glimpse of the fundamentals of NI Act, 1881. 


Understanding Negotiable Instruments

Negotiable means something that is transferable, or capable of being passed from one person to another. 

Instrument can be understood as a tool used for doing a particular job or task. Here, it specifically refers to such transferable documents.


The term negotiable instrument is defined in the negotiable instruments act 1881 under section 13 as “A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.


The Negotiable Instruments Act, 1881

While this codified law came into force in British India in 1881, the matters were previously governed by English laws. Hence, the major source of this law in India was the British Common law. The NI Act, 1881 came into force on March 1, 1882. 

The Negotiable Instruments Act 1881 allows recognition of financial transfer through instruments other than currency or bank notes. The Act mainly defines and recognizes a promissory note, bill of exchange or cheque and related procedures. Particular features of NI Act 1881 have been elaborated hereunder. 


Kinds of Negotiable Instruments 

The definition under section 13 specifies three terms, i.e. cheques, bills of exchange and promissory notes as negotiable instruments. All three as per their respective legal definitions have been explained below:


Promissory Notes

The negotiable instruments act 1881 section 4 covers all that constitutes a promissory note. Given below is the break-down of what is covered as a promissory note:

  • 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,
  • Directly to the person, or to the order of a certain person, or to the bearer of the instrument.


Bill of Exchange

Section 5 of the Negotiable Instruments Act, 1881 defines a bill of exchange with the following elements:

  • An instrument in writing,
  • Containing an unconditional order,
  • Signed by the maker, 
  • Directing a certain person to pay a certain sum of money,
  • Directly, or to the order of a certain person, or to the bearer of such an instrument.


Cheque

The section 6 of the NI Act, defines a cheque with the following ingredients:

  • A bill of exchange,
  • Drawn on a specified banker, 
  • Not expressed to be payable otherwise than on demand,
  • Includes the electronic image of a truncated cheque,
  • Also includes a cheque in the electronic form.

A cheque is drawn by a person, ordering a ‘bank’ to pay the said amount of money. 


Explore the New laws for cheque bounce.


Examples of Non-Negotiable Instruments under NI Act, 1881

To understand negotiable instruments, it is helpful to identify the non-negotiable ones. 

  • Money Orders
  • Fixed Deposit Receipts
  • National Saving Certificates
  • Postal Orders
  • Letter of Credit
  • Share Certificates


The Nature and Requisites of Negotiable Instruments Act 1881

The essence of NI Act, 1881 lies with the characteristics of negotiable instruments explained in the Act which have been enunciated below:

  • It should be written (not oral);
  • It has to be freely transferable, i.e. negotiable (before date of maturity);
  • It should be duly signed;
  • The title of holder must be free from any defects;
  • Has the right to sue in his/ her own name;
  • It can be transferred ‘n’ number of times before the date of maturity;
  • No notice needs to be served to any person at the time of transferring the said instrument;
  • The negotiable instrument is unconditional;
  • A negotiable instrument may be payable to order or the bearer, paid to the person possessing the cheque, or in the bank account of person whose name is specified on such cheque;
  • The status of negotiable instruments is equivalent to cash before its maturity;
  • Validity of negotiable instrument is restricted to a certain amount of money drawn to ensure free negotiability;
  • A negotiable instrument is strictly payable in money;
  • The purpose or consideration is not mentioned on the negotiable instrument as it is presumed to be drawn for a valuable consideration.


Presumptions under Negotiable Instruments Act 1881

Before jumping to any conclusion, what is presumed as per law is crucial to understand for lawyers and law students particularly dedicated to the NI Act 1881. A negotiable instrument drawn under the Act must be:

  • Drawn in return of certain consideration unless the contrary is proved.
  • Date mentioned on a negotiable instrument is deemed to be the date on which it was drawn.
  • Acceptance of the instrument is presumed to be done at a reasonable time before its maturity.
  • The time of transfer is presumed before maturity.
  • The order of endorsement is presumed to be in the same order as mentioned unless the contrary is proved.
  • Holder of a negotiable instrument is presumed to have paid the consideration and taken in good faith, unless the contrary is proved.
  • For a cheque dishonoured, or any other negotiable instrument which is proceeded with a suit in court, with sufficient evidence will be presumed to be dishonoured unless it is proved otherwise. 



The Act does not end but begin with the provisions explained on this page. There is general practice and there are case laws which add to the legality of the Negotiable Instruments Act, 1881. 

Written By:
Vidhikarya

Vidhikarya

Kolkata | Delhi | Mumbai | Bangalore | Chennai | Pune | Vadodara | Nagpur | Goa | Anand

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