The Negotiable Instruments Act, 1881 In India, there is reason to believe that instrument to exchange were in use from

early times and we find that papers representing money were introducing into the country by one of the Mohammedan sovereigns of Delhi in the early part of the fourteenth century. The word 'hundi', a generic term used to denote instruments of exchange in vernacular is derived from the Sanskrit root 'hand' meaning 'to collect' and well expresses the purpose to which instruments were utilised in their origin. With the advent of British rule in India commercial activities increased to a great extent. The growing demands for money could not be met be mere supply of coins; and the instrument of credit took the function of money which they represented.

Before the enactment of the Negotiable Instrument Act, 1881, the law of negotiable instruments as prevalent in England was applied by the Courts in India when any question relating to such instruments arose between Europeans. When then parties were Hindu or Mohammedans, their personal law was held to apply. Though neither the law books of Hindu nor those of Mohammedans contain any reference to negotiable instruments as such, the customs prevailing among the merchants of the respective community were recognised by the courts and applied to the transactions among them. During the course of time there had developed in the country a strong body of usage relating to hundis, which even the Legislature could not without hardship to Indian bankers and merchants ignore. In fact, the Legislature felt the strength of such local usages and though fit to exempt them from the operation of the Act with a proviso that such usage may be excluded altogether by appropriate words. In the absence of any such customary law, the principles derived from English law were applied to the Indians as rules of equity justice and good conscience.

The history of the present Act is a long one. The Act was originally drafted in 1866 by the India Law Commission and introduced in December, 1867 in the Council and it was referred to a Select Committee. Objections were raised by the mercantile community to the numerous deviations from the English Law which it contained. The Bill had to be redrafted in 1877. After the lapse of a sufficient period for criticism by the Local Governments, the High Courts and the chambers of commerce, the Bill was revised by a Select Committee. In spite of this Bill could not reach the final stage. In 1880 by the Order of the Secretary of State, the Bill had to be referred to a new Law Commission. On the recommendation of the new Law Commission the Bill was re-drafted and again it was sent to a Select Committee which adopted most of the additions recommended by the new Law Commission. The draft thus prepared for the fourth time was introduced in the Council and was passed into law in 1881 being the Negotiable Instruments Act, 1881 (26 of 1881). Definition of Negotiable Instruments:
Negotiable instruments act does not give proper definition to negotiable instruments. Section 13 just gives information about, what all would be considered as negotiable instruments. The instrument is mainly an instrument of credit readily convertible into money and easily passable from one hand to another. Here the term negotiable instrument is understood as a document transferable by delivery.

STATUTORY DEFINITION OF NEGOTIABLE INSTRUMENT - A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer. Explanation (i) : A promissory note, bill of exchange or cheque is payable to order which 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. Explanation (ii) : A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank. Explanation (iii) : Where a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option. [section 13(1)]. - - A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees. [section 13(2)]. DRAWER, DRAWEE AND P AYEE - The maker of a bill of exchange or cheque is called the drawer; the person thereby directed to pay is called the drawee [section 7 para 1]. - - The person named in the instrument, to whom, or to whose order the money is by the instrument directed to be paid, is called the payee [section 7 para 5]. - - However, a drawer and payee can be one person as he can order to pay the amount to himself.

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. [Section 4]. Bill of Exchange As per statutory definition, bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument. [Para 1 of section 5]. A cheque is a special type of Bill of Exchange. It is drawn on banker and is required to be made payable on d emand.

Characteristics of Negotiable Instruments: An instrument is to be called 'negotiable' if it possesses

the following characteristics Freely transferable - Transferability may be by (a) delivery, or (b) by endorsement and delivery. Holder's title free from defects: The holder (of the negotiable instrument) in due course acquires a good title not withstanding any defect in a previous holder's title. A holder in due course is one who receives the instrument for value and without any notice as to the defect in title of the transferor. Transferee can get better title than transferor Normal principle is that a person cannot transfer better title to property that he himself has. For example, if a person steals a car and sells the same, the buyer does not get any legal title to the car as the transferor himself had no title to the car. The real owner of car can anytime obtain possession from the buyer, even if the buyer had purchased the car in good faith and even if he had no idea that the seller had no title to the car. This provision is no doubt sound, but would make free negotiability of instrument difficult, as it would be difficult to verify title of transferor in many cases. Hence, it is provided that if a person acquires Negotiable Instrument in good faith and without knowledge of defect in title of the transferor, the transferee can

get better title to the negotiable instrument, even if the title of transferor was defective. This is really to ensure free negotiability of instrument so that persons can deal in the instrument without any fear. The Holder can sue in his own Name - Another characteristic feature of a negotiable instrument, isthat its holder in due course, can sue on the instrument in his own name. A negotiable instrument can be transferred infinitum, i.e., can be transferred any number of times till its maturity. A negotiable instrument is subject to certain presumptions.

Presumptions as to negotiable instruments [Sections 118-119]

1) As to Consideration - Every negotiable instrument is deemed to have been made, drawn, and accepted endorsed, negotiated or transferred for consideration. 2) As to date- Every negotiable instrument bear the date on which it is made or drawn. 3)

As to Acceptance- Every bill of exchange was accepted within a reasonable time after the date mentioned therein and before the date of its maturity.

4) As to Transfer- Every transfer of a negotiable instrument was made before the date of its maturity in case of an instrument payable otherwise than on demand. 5) As to the order of Endorsements - The endorsements appearing on it were made in the order in which they appear thereon. 6) As to lost Instruments - Where an instrument has been lost or destroyed, that it was duly stamped and the stamp was duly cancelled. 7) As to holder-in-due course - The holder of the instrument is a holder in due course. 8) As to dishonour - If a suit is filed upon an instrument, which has been dishonoured, the Court shall, on proof of the protest, presume the fact of dishonour unless it is disproved. Types Of Negotiable Instrument: They are classified into two types, Instruments negotiable by law Promissory notes Bills of exchange cheques Instruments negotiable by custom trade Govt promissory notes Dividend warrants Share warrants Bearer debentures

Promissory note:

Definition
y 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 to, or to the order of, a certain person or to the bearer of the instrument

Examples of Promissory Notes

y A signs instruments in the following terms: "I acknowledge myself to be indebted to 'B' in Rs. 1000, to be paid on demand, for value re ceived." Followings are Not Promissory Notes. (i) "Mr. B, I.O.U. (I owe you) Rs. 1000." (ii) "I promise to pay B Rs. 1500 on D's death, provided he leaves me enough to pay that sum,"

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

There are two parties in a Promissory Note. Maker A person who promises to pay and signs it is called Maker Payee A person to whom promise is made is called Payee. While concluding it is stated that for every matter where there is need of assurance for any monetary transaction or dealing involving monetary transaction; the basic or primary document which can be referred as evidence or proof, and which could be provided to the court of law for the legal recourse is Promissory Note. For having better position it is advisable that at least two witnesses may be taken for favourable deci sion.

Essentials or Characteristics of a Promissory Note

(1) (2) From the definition, it is clear that a promissory note must have the following essential elements. In writing - A promissory note must be in writing. Writing includes print and typewriting. Promise to pay - It must contain an undertaking or promise to pay. Thus, a mere acknowledgement of indebtedness is not sufficient. Notice that the use of the word `promise' is not essential to constitute an instrument as promissory note. Unconditional - The promise to pay must not be conditional. Thus, instruments payable on performance or non-performance of a particular act or on the happening or non-happening of an event are not promissory notes. 

(3)

(4)

Signed by the Maker The promissory note must be signed by the maker, otherwise it is of no effect.

(5) Certain Parties - The instrument must point out with certainty the maker and the payee of the promissory note. (6) (7) Certain sum of money - The sum payable must be certain or capable of being made certain. Promise to pay money only - If the instrument contains a promise to pay something in addition money, it cannot be a promissory note. Number, place, date etc - These are usually found in a promissory note but are not essential in law. If a promissory note does not bear a date, it is deemed to have been made when it was delivered. It may be payable in installments It may be payable on demand or after a definite period - Payable 'on demand' means payable immediately or any time till it becomes time-barred. A demand promissory note becomes time barred on expiry of 3 years from the date it bears.

(8)

(9) (10)

(11) It cannot be made payable to bearer on demand or even payable to bearer a fter a certain period (12) It must be duly stamped under the Indian Stamp Act - It means that the stamps of the requisite amount must have been affixed on the instrument and duly cancelled either before or at the time of its execution. A promissory note, which is not so stamped, is a nullity

BILL OF EXCHANGE
A 'bill of exchange' is defined by as an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of, a certain person, or to the bearer of the instrument.

Characteristic Features of a Bill of Exchange

1. 2. 3. 4. 5. 6. 7. 8. 9. It must be in writing. It must contain an order to pay and not a promise or request. The order must be unconditional. There must be three parties, viz., drawer, drawee and payee. The parties must be certain. It must be signed by the drawer. The sum payable must be certain or capable of being made certain. The order must be to pay money and money alone. It must be duly stamped as per the Indian Stamp Act.

10. Number, date and place are not essential.

Speciemn of a trade bill- inland:

Rs 1,000/-

Chennai 2nd march. 2011

5 months after the date, pay Mr. Varun or order the sum of rupees 0ne thousand only,for received value. Accepted Kishore Kumar signature To Mr. S.Kishore, Chennai. Stamp

Kumar is the drawer of the bill Varun is the payee of the bill Kishore is the drawee

Demand bill of exchange. A bill of exchange which when presented to drawee must be paid or refused. When paid, we call that bill has been honoured, and when there is refusal we call that the bill has been dishonoured. A bill of exchange that must be honoured or dishonoured at its presentation immediately and instantly is known as demand bill of exchange. It is also known as Sight bill of exchange as it must be paid or refused at its first sight, and any delay is considered as not honoured or refused.

While drawing such bill; the maker may write as: On demand Pay Mr. Saeed Ahmed or order Rs. 50,000/Or Pay Mr. Saeed Ahmed or order Rs. 50,000/ -

This shows that whether word demand is written or not, if no future fixed or determinable date is given, it is considered as demand bill of exchange.

Usance bill of exchange. A bill of exchange which is to be paid at future fixed or determinable time is known as usance bill of exchange. Such bill of exchange is drawn as: 90 days after the date pay Mr. Saeed Ahmed or order Rs. 50,000/ 06 months after the date pay Mr. Saeed Ahmed or order Rs. 50,000/02 years after the date pay Mr. Saeed Ahmed or order Rs. 50,000/ -

The date on which a usance bill of exchange becomes payable after counting the given days, months or years is known as date of maturity or due date. FOR EVERY USANCE BILL OF EXCHANGE THE MOST IMPORTANT THING IS THAT THIS BILL OF EXCHANGE MUST BE PRESENTED FIRST TO THE DRAWEE FOR HIS ACCEPTANCE, BEFORE IT IS PRESENTED FOR PAYMENT ON MATURITY. IF THE ACCEPTANCE HAS NOT BEEN TAKEN BY THE DRAWEE AND HE REFUSES TO PAY ON MATURITY, IT COULD NOT BE CONSIDERED AS DISHONOUR, AND HE WOULD NOT BE LIABLE FOR SUCH DISHONOUR. SO USANCE BILL IS PRESENTED TO DRAWEE TWICE; FIRST FOR ACCEPTANCE AND THEN FOR PAYMENT ON MATURITY.

ANOTHER THING TO BE NOTED IS THAT IF THE DRAWER OF USANCE BILL REFUSES TO ACCEPT BILL THEN IT WOULD NOT BE PRESENTED FOR PAYMENT ON DUE DATE OR MATURITY AS HE HAS ALREADY REFUSED TO ACCEPT TO PAY THEN WHY WOULD HE PAY ON DUE DATE.

In above stated situation dishonour of bill would be of two types: -

1. Dishonour for acceptance; it is the situation of dishonour when drawee refuses to give acceptance to pay on maturity or due date. 2. Dishonour for payment; it is situation when drawee had already accepted the bill or gave his acceptance to pay, but on due date refuses to pay it. Again being repeated a bill not accepted or not presented for acceptance; if not paid or honoured on due date would not be considered as Dishonour for Payment

Parties to a bill of exchange According to section 7 of NIA, there are three parties to a bill of exchange. Those are:Drawer, a person who signs at the face of the instrument and who gives instructions is known as Drawer. Drawee, a person to whom instructions are given is known as Drawee. Payee, a person to whom or to whose order sum of money is to be paid is known as Payee. The document which authorizes the banker to get money from the buyer or to get assurance from the seller is Bill Of Exchange.

The seller would draw bill of exchange on buyer and would instruct him either to pay money to the bank or give acceptance on the back of the bill that payment would be made on future fixed or determinable period.

The Demand Bill of Exchange so drawn would be: -

DEMAND BILL OF EXCHANGE

Rs. 50,000/-

November 07, 2007.

On demand pay United Bank limited or order sum of Rs. fifty thousand for value received.

To: Haji Noor Muhammad. 281-Z, Gulberg-8, Lahore.

(Signature) Saleem Ahmed 898-Jodia Bazar. Karachi

USANCE BILL OF EXCHANGE

Rs. 50,000/-

November 07, 2007.

Two months after date pay United Bank limited or order sum of Rs. fifty thousand for value received.

To: Haji Noor Muhammad. 281-Z, Gulberg-8, Lahore.

(Signature) Saleem Ahmed 898-Jodia Bazar. Karachi

In both the cases drawer is Saleem Ahmed (Seller), Drawee is Haji Noor Muhammad (Buyer) and Payee is United Bank Limited (Agent) or order.

Under first bill of exchange Haji Noor Muhammad would make payment to UBL, and UBL would write at the reverse of bill Payment Received and would deliver documents title to goods to Haji Noor Muhammad, and later on remit the money to Saleem Ahmed.

Under second bill of exchange Haji Noor Muhammad would write at the reverse of bill of exchange Accepted to pay on_______ __ or simply Accepted ; bank would deliver the documents title to goods to Haji Noor Muhammad and would keep this bill of exchange till it paid. On maturity if it is paid, then again UBL would get the payment, would write at the reverse of bill Payment Received and deliver it to buyer, Haji Noor Muhammad. Later on the ,money

will be remitted to seller, Saleem Ahmed. In both the cases the transaction was accomplished through a document known as Bill of Exchange. Other related Parties in a bill of exchange

Acceptor Acceptor for honour. Drawee in case of need. Acceptor Drawee of usance bill of exchange when accepts the bill his title is changed from drawee to acceptor Acceptor for honour In case the original drawee of a usance bill of exchange is not in a position to accept it and obviously reason being that due to his financial constraint or deficiency his cannot commit himself for the payment on due date then for the sake of honour of this original drawee any body else if accepts it he becomes acceptor for honour. In this situation the real drawee becomes free from any responsibility and acceptor for honour becomes fully liable for the payment of bill. In case acceptor for honour does not fulfill his commitment then suit can b e moved against acceptor for honour and not real drawee. Drawee in case of need. Sometime when any demand or usance bill of exchange is drawn instead of one; another persons is also shown as drawee. The first one is known as drawee and the other is known as drawee in case of need. Name of real Drawee comes first and before the name of next person words Drawee in case of need must be written. The bill must be present to the real or first drawee, and if he refuses to pay or accept only then it is presented to drawee in case of need. Under this situation the primary responsibility is of first drawee, and if both of them refuse to pay or accept the bill then suit could be filed against first drawee and not against drawee in case of need. But once the drawee in case of need gives his acceptance then first drawee becomes free from any liability,

and if suit needs to be filed it would be against Drawee in case of need and not drawee. Again repeat that first drawee is primarily responsible in case of non payment by both, but when drawee in case of need gives his consent then he becomes liable and makes the first drawee free from any liability.

SPECIMEN OF DRAWEE IN CASE OF NEED BILL OF EXCHANGE

Rs. 50,000/-

November 07, 2007.

On demand pay United Bank limited or order sum of Rs. fifty thousand for value received.

To: Haji Noor Muhammad. 281-Z, Gulberg-8, Lahore.

Drawee in case of need:Mr. Zahid Sheikh. 888-F-Defence Phase 50 Lahore

(Signature) Saleem Ahmed 898-Jodia Bazar Karachi

CHEQUE

y y

A cheque is defined as 'a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Thus, a cheque is a bill of exchange with two added features, viz.: (i) it is always drawn on a specified banker; and (ii) it is always payable on demand and not otherwise.

Bill of Exchange and Cheque distinguished Cheque

Bill of Exchange
1) It must be drawn only on a banker. 2) The amount is always payable on demand. 1) It can be drawn on any person including a banker. 2) The amount may be payable on demand or after a. specified time. 3) A usance (time) bill is entitled to three days of grace. 4) A bill payable after sight must be accepted. 5) Crossing of a bill of exchange is not possible. 6) Notice of dishonour is necessary to hold the parties liable thereon. A party who does not receive a notice of dishonour can generally escape its liability thereon. 7) A bill is noted or protested to establish dishonour.

3) The cheque is not entitled to days of grace.

4) Acceptance is not needed. 5) A cheque can be crossed 6) Notice of dishonour is not necessary. The parties thereon remain liable, even if no notice of dishonour is given.

7) A cheque is not to be noted or protested in case of dishonour. 8) The protection given to the paying banker in 8) No such protection is available in the case of bills. respect of crossed cheques is peculiar to this instrument. Promissory Note and Bill of Exchange distinguished Promissory Note 1) There are only two parties the maker (debtor) and the payee (creditor). Bill of Exchange 1) There are three parties the drawer, the drawee and the payee- although any two of these capacities may be filled by one and the same person. 2) It contains an unconditional order to the drawee to pay according to the drawer`s directors. 3) A bill payable `after sight` must be accepted by the drawee or his agent before it is presented for payment. 4) The liability of the drawer is secondary and conditional upon non-payment by the drawee. 5) Notice of dishonour must be given by the holder to the drawer and the intermediate endorsers to hold them liable thereon.

2) A note contains an unconditional promise by the maker to pay the payee. 3) No prior acceptance is needed.

4) The liability of the maker or drawer is primary and absolute. 5) No notice of dishonour need be given.

6) The maker or drawer does not stand in immediate relation with the acceptor drawee.

6) The maker of the note stands in immediate relation with the payee.