Negotiable Instrument Act Meaning, Definition, Characteristics, Nature

Historical Background of the Negotiable Instrument Act

The Negotiable Instruments Act was passed in India in 1881. Before its enactment, the provisions of the English Negotiable Instrument Act were applicable in India. The current legislation is derived from the English Act but with certain modifications. It extends to India except the State of Jammu and Kashmir. The Act operates under the provisions of Sections 31 and 32 of the Reserve Bank of India Act, 1934.

Section 31 of the Reserve Bank of India Act states that no person in India, other than the Bank or as expressly authorized by this Act or the Central Government, shall draw, accept, make, or issue any bill of exchange, hundi, promissory note, or engagement for the payment of money payable to bearer on demand. This section further provides that no one except the RBI or the Central Government can make or issue a promissory note expressed to be payable on demand or after a certain time.

Section 32 of the Reserve Bank of India Act makes the issue of such bills or notes punishable with a fine, which may extend to the amount of the instrument.

The effect or the consequences of these provisions are as follows:

1. But a cheque {though a bill of exchange} payable to bearer or demand can be drawn on a person’s account with a banker.

2. A promissory note cannot be made payable to the bearer, whether on demand or after a certain time.

3. A bill of exchange cannot be made payable to the bearer on demand though it can be made payable to the bearer after a certain time.

Meaning of Negotiable Instrument Act

The term “negotiable instrument” comprises two words – ‘negotiable’ and ‘instrument’. The term ‘negotiable’ means “transferable by delivery,” and the term ‘instrument’ refers to a written document by which a right is created in favour of someone. Therefore, the term “negotiable instrument” means “a written document transferable by delivery.”

The term “negotiable instrument” refers to a written document that establishes a right in favour of a person and is freely transferable. While the Act specifically mentions only three instruments (namely, a promissory note, a bill of exchange, and a cheque), it does not preclude the inclusion of any other instrument that meets the following two conditions of negotiability:

1. The person who acquires it in good faith and for value should receive it free from all defects and be entitled to recover the money of the instrument in their name.

2. The instrument should be freely transferable, either by delivery or by endorsement and delivery, as per the custom of the trade; and

As such, documents like share warrants payable to the bearer, dividend warrants and debentures payable to the bearer, are negotiable instruments. However, money orders, postal orders, deposit receipts, share certificates, bills of lading, dock warrants, etc., are not negotiable instruments. Although transferable by delivery and endorsements, they do not confer a better title to the bona fide transferee for value than what the transferor originally possesses.

Definition of Negotiable Instrument Act

According to Section 13 (a) of the Act, “Negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer, whether the word “order” or “ bearer” appears on the instrument or not.”

In the words of Justice, Willis, “A negotiable instrument is one, the property in which is acquired by anyone who takes it bonafide and for value notwithstanding any defects of the title in the person from whom he took it”.

According to Section 13 (1) of the Negotiable Instruments Act, “A negotiable instrument means a promissory note, bill of exchange, or cheque payable either to order or to bearer”. “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)).

Definition of Negotiable Instruments

According to Thomas, “A negotiable instrument is one which is, by a legally recognized custom of trade or bylaw:

1) The property in it passes to a bona fide transferee for value free from equities and free from any defect in the title of the person from whom he obtained it”.

2) Transferable by delivery or by endorsement and delivery.

3) Without notice to the party liable, in such a way that the holder of it for the time being may sue upon it in his name, and

This means that a person taking an instrument ‘for value’ and ‘bona fide’, known as a holder in due course, obtains a good title even though the title of the transferor may be defective.

The law in India related to negotiable instruments is contained in the Negotiable Instruments Act of 1881. It covers Promissory Notes, Bills of Exchange, and Cheques, which are the three most common types of negotiable instruments. The Act applies to the entire country and to all residents in India, whether foreigners or Indians. Its provisions are also applicable to Hundis unless there is a local usage to the contrary. Other native instruments such as Treasury Bills and Bearer debentures are considered negotiable instruments either by mercantile custom or under other enactments.

Characteristics of Negotiable Instrument Act

A negotiable instrument has the following characteristics:

1. Title

The transferee of a negotiable instrument is known as a ‘holder in due course.’ A bonafide transferee for value is not affected by any defect in the title on the part of the transferor or any of the earlier holders of the instrument.

2. Property

The possessor of the negotiable instrument is generally regarded as the owner of the property it represents. A negotiable instrument not only grants possession of the document but also confers property rights. The transfer of property in a negotiable instrument can be accomplished effortlessly, without any formalities. In the case of a bearer instrument, the property passes through mere delivery to the transferee. For an order instrument, both endorsement and delivery are necessary for the transfer of property.

3. Presumptions

Certain presumptions apply to all negotiable instruments, such as the presumption that consideration has been paid under it. It is not necessary to include the words “for value received” or similar expressions in a promissory note because the payment of consideration is presumed. Typically, these words are included to provide additional evidence of consideration.

4 Prompt payment

A negotiable instrument allows the holder to anticipate a prompt payment, as a dishonour implies the deterioration of the credit of all parties involved in the instrument.

5. Rights

The transferee of the negotiable instrument can sue in their name in the case of dishonour. A negotiable instrument can be transferred multiple times until it matures. The holder of the instrument is not required to give notice of the transfer to the party liable for the instrument to pay.

Nature of Negotiable Instrument Act

The nature of negotiable instruments is as follows:

1) Money

Negotiable instruments are payable in the legal tender money of India. The liabilities of the parties involved in negotiable instruments are determined and established in terms of legal tender money.

2) Writing and Signature

Negotiable instruments must be written and signed by the parties following the rules related to Promissory Notes, Bills of Exchange, and Cheques. Demand Drafts are also considered Negotiable Instruments in certain cases, as they possess the same characteristics as negotiable instruments.

3) Title of Holder Free from all Defects

A person who acquires an instrument “bona fide” and “for value,” or the transferee of a negotiable instrument meeting specific conditions, known as a holder in due course, obtains the instrument free from all defects in the title of the transferor. The holder in due course acquires a valid title to the instrument, even if the transferor’s title is flawed. They are not affected by any defects in the title of the transferor or any prior party in any way.

4) Freely Transferability

The property in a negotiable instrument is freely transferable and can be transferred from one person to another through a simple process. In the case of order instruments, two things are necessary for a valid transfer: endorsement (i.e., the signature of the holder) and delivery. For bearer instruments, the transfer is achieved by mere delivery. Any instrument can be made non-transferable by using suitable words, for example, “pay to X only.”

5) Presumptions

A negotiable instrument is always subject to certain presumptions, which apply unless the contrary is proven. For instance, there is a presumption of consideration. It is not necessary to include the words “for value received” or similar expressions in a promissory note because the payment of consideration is presumed. Typically, these words are included to provide additional evidence of consideration.

6) Notice

It is not necessary to give notice of the transfer of a negotiable instrument to the party liable to pay. The transferee can sue in their name.

7) Popularity

Negotiable instruments are popular in commercial transactions due to their easy negotiability and quick remedies.

8) Evidence

A document that does not qualify as a negotiable instrument may still be used as evidence of the fact of indebtedness. For example, P writes to Q “1. O. U. 1,500”. This is not a promissory note but the document can be used as evidence to show that P is indebted to Q for 1,500.

9) Special Procedure

A special procedure is provided for suits on promissory notes and bills of exchange, which is prescribed in the Civil Procedure Code. A decree can be obtained much more quickly than in ordinary suits.