Chapter 8: Negotiable Instrument Act, 1881

The Negotiable Instrument Act: 1881   (total Section-142)

A "  negotiable  instrument  "  means a promissory note, bill of exchange or cheque payable either  to

 order or to bearer. ( Section13) which are transferable from hand to hand by way of negotiation but does not contain words prohibiting transfer.

Example: 1. Pay to X

2. Pay to X or order

3. Pay to X or bearer/ order

4. Pay to X only

5. An instrument crossed “Account Payee Only”

Since the instrument 4 & 5 are not transferable ie the words only prohibits further transfer, they are not negotiable instruments.

Characteristics of Negotiable Instruments:

1.       The Instruments like money are transferable from hand to hand by way of negotiation.

2.       The Instruments like money are transferable from hand to hand for value and are used for settlement of debts.

3.        The transferee’s title is not affected due to transferors defective title if the transferee can prove himself as holder in due course.

4.       The holder in due course can sue against all the prior parties to realize proceeds of the instruments.

Some Negotiable Instruments   :

1.       Promisory Note:    (taken from NI Act Exatly)

( (Section 4). "Promissory note". 

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.

                             Illustrations

          A signs instruments in the following terms

          (a)   "I promise to pay B or order Rs. 500."

           (b)  " I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on  demand, for value received."

 

           (c) Mr. B, O U Rs. 1,000."

          (d)   I  promise  to pay B Rs. 500 and all other  sums  which shall be due to him."

          (e)   I  promise to pay B Rs. 500, first  deducting  thereout  any money which he may owe me."

            (f)   "  I  promise  to pay B Rs. 500  seven  days  after  my  marriage with C."

          (g)   "  I promise to pay B Rs. 500 on D's death, provided  D leaves me enough to pay that sum."

            (h)   "  I promise to pay B Rs. 500 and to deliver to him  my black horse on 1st January next."

      The  instruments respectively marked (a) and (b)  are  promissory  notes.   The instruments respectively marked (c), (d), (e),  (f),  (g)  and (h) are not promissory notes.

2.       Bill of Exchange:

 ( Section 5)."Bill of exchange". A "bill of exchange" is an  instrument  in  writing,  containing  an  unconditional order, signed  by  the  maker,  directing  a certain person to pay on demand or at a fixed determinable future time a certain sum of money only to,  or to the order of, a certain person or to the bearer of the instrument.

3. Cheque:

(Section 6)."Cheque". A "cheque" is a bill of exchange drawn on a specified  banker and not expressed to be payable otherwise than on demand.

Other Negotiable Instruments are Demand Draft, Bill of Lading, Prize Bond and Letter of Credit.

Section 8: Holder: In ordinary sense, holder means who has the instrument in his hand. In legal terms, holder means the payee or  endorsee who is in possession of it or the bearer thereof. A only holder does not get a better title than the previous holder ie if there is fault in the ownership of previous owner , he will have the same fault.    Where  the note, bill or cheque is lost or destroyed, its  holder  is the person so entitled at the time of such loss or destruction.

Section (9) : Holder in due  Course:   " Holder in due course " means any person  who for consideration became the possessor of a promissory note,  bill of  exchange or cheque if payable to bearer, or the payee or  indorsee .

Essential Conditions of Holder in Due Course 

1.       Who receives an instrument innocently ie in good faith and without negligence

2.       Who has paid value for the same

3.       Who has received the instrument before its maturity

4.       Who is in possession of the instrument as a bearer or payee or endorsee

 For all legal purposes, the title of the holder in due course is superior to that of the true owner  and until the instrument is finally paid, every party to that instrument is liable to him. His ownership will not be affected for the defective title of the previous owner.

"Payment in due course".  (Section10)."Payment in due course". "Payment in due course" means payment  in accordance with the apparent tenor of the instrument in good  faith  and  without  negligence  to any person in  possession  thereof  under  circumstances  which do not afford a reasonable ground  for  believing  that  he  is  not entitled to receive payment of  the  amount  therein mentioned.

Bank is sometimes only holder and sometimes holder in due course:

 when bank receives any negotiable instrument from its customers for collection only, then bank acts as agent of customer and bank is only holder of the instrument. Bank cannot demand a better title of the instrument than the customer.

But it banks buys the instruments from its customers for consideration and in good faith and without negligence, then banks ownership will not be hampered.

Noting and Protesting :

when an instrument or bill is dishonoured, the matter of dishonour is witten down with reasons on the face of the instrument, this acts as a official document. the holder of the bill can make it written on the instrument or additional paper annex to it by notary public and it is called "Noting".

After noting, a certificate from Notary Public is collected and can send the same to the maker and it is called protesting .later for legal actions, Noting and protesting will act as witness.