Negotiable Instruments Act

Act No. 26 of 1881, or the Negotiable Instruments Act 1881, exists to define and amend the law relating to Promissory Notes, Bills of Exchange, and Cheques. The Act was initially drafted in 1866 but was re-drafted for the fourth and final time by the Law Commission in 1881.According to Section 1, it extends to the whole of India.Passed around the British Colonial Rule, it is still in force with recent significant changes. The Act comprises 148 sections, divided into 17 chapters. The Act was mainly established to eliminate dishonor or misuse of financial instruments. 

Negotiable A was enacted, formalizing the usage and characteristics of instruments like the check, the bill of exchange, and promissory notes. The NI Act provided a legal framework for non-cash payment instruments in India. 

 

What is a Negotiable Instrument?

According to Section 13 of the Negotiable Act, "a "negotiable instrument" means a promissory note, bill of exchange, or check that is payable to an order that is expressed to be so payable or which is expressed to be payable to a particular person and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable." In simpler terms, it is a piece of paper considered a document guaranteeing the payment of a specific amount of money, either on demand or at a set time, whose payer is usually named on the document. 

"Negotiation" refers to transferability, and "instrument" refers to a document giving legal effect.Since the NI Act refers to using financial instruments, the Hundi has traditionally been used in India. Section 1 mentions the saving of usage of the Hundi; let us talk about it. 

Hundi 

A hundi is a traditional financial instrument, similar to a bill of exchange or promissory note, equivalent to the present time as a traveler's check. So, what does the NI Act, Section 1, mean by "saving of usage relating to hundi"? At the time of issue of a hundi, it can be transferred multiple times before being presented as payment. Thus, to avoid various transfers and misuse, the holder may transfer the Hundi with the words "saving of usage," meaning further transfers are prohibited, eliminating the over-circulation and potential fraud of Hundi. 

 

Types of Negotiable Instruments 

The Negotiable Act of 1881 consists of three primary types of negotiable or financial instruments in Sections 4, 5, and 6. 

The three primary types of negotiable instruments: 

• Promissory Note
• Bill of Exchange 
• Cheque

 

1. Promissory Note 

A "Promissory note" is an instrument in writing (not being a bank note or a currency note) in which one party (the issuer) promises to pay a fixed sum of money to the other (the payee), either at a fixed future time or on demand of the payee, under specific terms and conditions. It differs from an "IOU" by stating the pay promise with the steps and definite time of payment as well as bearing consequences if not paid. Whereas, an IOU only specifies that a debt exists.

A promissory note cannot be used as private money. 

2. Bill of Exchange 

A "Bill of Exchange" or "draft" is an instrument in writing containing an unconditional order, signed by the maker, directing a particular person to pay a certain sum of money only to, or to the order of, a specific person or to the bearer of the instrument.

They are used primarily in international trade and are not used as often today. 

It was issued by one person (the drawer) to another person (the drawee) to pay a third person (the payee). 

3. Cheque 

A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand, and it includes the electronic image of a check in the electronic form. The person writing the cheque, known as a drawer, has a transaction banking account, often called a current, cheque, or share draft account. 

 

Contents of the Negotiable Act of 1881 

According to the 148 sections mentioned in the NI Act, a few essential content regulations enable people to understand the guidelines to follow. 

A few of the highlighted points from the NI Act are: 

• According to the law, every person capable of contracting can transfer or negotiate a promissory note, bill of exchange, or cheque. 
• A negotiable instrument made, drawn, accepted, endorsed, or transferred without consideration or for a failed consideration creates no payment obligation between the parties. 
• When a negotiable instrument has been lost or obtained from any maker, acceptor, or holder, it has the authority to receive the amount from the holder. 
• The making, acceptance, or endorsement of a promissory note, bill of exchange, or cheque is completed by delivery. 

 

Reforms in the Negotiable Act 

The Negotiable Instrument Act, implemented in 1881, was amended in 1988 to include cheque fraud. Under this Act, the people issuing cheques without sufficient money in their accounts are considered fraud and are charged a penalty, considering it a criminal offense.Parliament enacted the Negotiable Instruments Act of 2002, which was made to plug the loopholes, including cheque truncation or clearance through digital mode, and this Act came into force on 6 February 2003. 

 

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Frequently Asked Questions (FAQs)

What are the essential features of the Negotiable Instruments Act? 

The essential features of the Negotiable Instruments Act are: 

• It promises an unconditional sum of money. 
• It is payable either on demand or after a specified period. 
• Freely transferable by delivery. 

What are the penalties for dishonoring a cheque under the Act?

Under Section 138, the drawer may face the following if a cheque is dishonored due to insufficient funds or other reasons. 

• Imprisonment of 2 years
• A fine is up to twice the cheque amount, provided certain conditions are made. 

What does endorsement mean? 

Endorsement refers to a process where the holder of a negotiable instrument signs on the back of the document, allowing it to be transferred to another party.