Fundamentals of Negotiable Instruments

Introduction to NI Act

Negotiability means transfer of an instrument from a person / entity to another person / entity. The transfer should be without restriction and in good faith. As per section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument means a promissory note , bill of exchange  or a cheque , payable either to order or to bearer. Kindly note that a Currency Note is not a negotiable instrument as per section 21 of the Indian Currency Act .

Negotiable instruments covered under NI Act

Negotiable Instruments Act 1881 had been passed in 1882 and was modified in 1989 and 2002, as some more sections were added into the age old law. This act is applicable in entire India , including Jammu & Kashmir. J & K was brought in the ambit of the act in 1956. The act has provisions of Negotiable Instruments such as Promissory Notes, Checks, Drafts , Bills of exchanges etc. There are 147 different sections in this act. Initially it did not have provisions regarding the Demand Draft, which were later inserted by amendment. Key sections of this act are as follows:

  • Section 4 deals with promissory notes
  • Section 5 deals with Bill of Exchange
  • Section 6 deals with Cheque
  • Section 9 deals with holder and holder in Due course.
  • Section 15 deals with Endorsements
  • Various other sections such as 123-131 deal with crossing of cheques.

Holder versus Holder in Due Course

Holder is the person who is entitled in his own name to the possession of a negotiable instrument.

Normally a payee or endorsee is a holder.

  • Please note that holder may be or may not be with possession of the Instrument.
  • If the payee or endorsee dies, then the legal heir is the holder .
  • If there is a forged endorsement then , last endorsee is the holder.
  • If it is a bearer cheque, the person in whose name it is made is a holder.
  • If it is damaged the payee or last endorsee is the holder.
  • If it is stolen, then also payee or last endorsee is holder because a thief cannot become holder.
  • The holder has the right to obtain a duplicate of instrument is lost.
  • A holder can cross a cheque if it is not already crossed.

Holder in Due Course:

Holder in due course means a person who must have the possession of the instrument. This is the basic difference between the Holder and Holder in Due course.

  • Holder in Due course must obtain the instrument in Good Faith.
  • If the instrument bears not-negotiable crossing , then the NO person can be a holder in due course.
  • If the instrument bears A/C payee crossing and restricted endorsement then NO person can be a holder in due course.
  • Forgery / theft / deceit do not convey any title.

Promissory Note

PN means a paper with a writing which has a promise. But it does not mean that we write “I owe You” and it becomes a PN. When a person issues a promissory note, he/ she would have to stamp it as per the Indian Stamp Act and normally a revenue stamp is affixed on the PN signed by the promissory. Thus:

  • PN is always in writing.
  • PN has an unconditional undertaking called promise
  • The promise is to pay money
  • The money has to be paid to the certain person.

As per section 4 of the Negotiable Instruments Act, 1881, an instrument in writing 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 instrument is called Promissory note.

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