UNIT 2

NI ACT 1881
The Negotiable Instruments Act, 1881 is a significant law that governs the use of negotiable
instruments in India. It provides for the regulation of promissory notes, bills of exchange, and
cheques.
The Act was enacted to provide a uniform legal framework for the use of negotiable instruments
in India.
The Act has been amended several times to ensure that it is in line with the changing business
practices and legal requirements.
Negotiable – Meaning – Transferrable ; Instrument---Paper – Physical
Negotiable instruments are documents which promise payment to the assignee (the person whom
it is assigned to/given to) or a specified person.
These instruments are transferable signed documents which promises to pay the bearer/holder the
sum of money when demanded or at any time in the future.
Meaning of Negotiable Instruments
The negotiable Instrument Act was originally drafted in the year 1866 and implemented in the
year 1881. This act was implemented during the British rule of India and is still in function even
in modern India.
The section 13 of the Negotiable Instrument Act states that, “A negotiable instrument means a
promissory note, bill of exchange or cheque payable either to order or to bearer”. The negotiable
instrument act governs the usage of these negotiable instruments between two parties. However,
no section of this act affects the usage of paper currency, which is governed by the Indian
paper currency act of 1871.
Characteristics of Negotiable Instruments
Negotiable instruments come attached with certain features that define them further, as well as
define the rights and liabilities of the person holding them. The Characteristics of Negotiable
Instruments are as follows:
(1) One of the most important characteristics of negotiable instruments are that of title. The
person holding the instrument is considered to be the owner of that instrument, as well as of the
property contained in it. This is a right that passes on from the person issuing the instrument to the
bearer, or the receiver. It can also pass on through endorsement and delivery.
(2) One of the major reasons for issuing a negotiable instrument is that they are freely
transferable, and do not require any condition to be fulfilled before the transfer.
(3) In case there is any legal defect in the title or property of such negotiable instrument, a person
holding it in good faith, or a timely holder of such instrument holds so without any defects
befalling him.
(4) In cases of legal defects ensuing upon a timely holder or a holder in due course, he can sue
upon the negotiable instrument in his own name, thus making all the prior parties liable to him.
Such a holder can recover all the amount of such an instrument.
 • The main characteristics of negotiable instruments are their financial worth and
transferability. As long as an instrument contains these features, it can be a negotiable
instrument.
• There are several customary payment modes that resemble negotiable instruments. For
example, the traditional ‘Hundi‘ system of India resembles negotiable instruments but is not
legally recognized as such.
• The Negotiable Instruments Act, 1881 is responsible for governing such instruments in India.
This law, however, deals only with cheques, bills of exchange and promissory notes.
Promissory notes
A promissory note refers to a written promise to its holder by an entity or an individual to pay a
certain sum of money by a pre-decided date. In other words, Promissory notes show the amount
which someone owes to you or you owe to someone together with the interest rate and also the
date of payment.
For example, Mr X purchases from Y INR 1,00,000 worth of furniture. If Mr X is not able to pay
for the purchases in cash, or doesn’t want to do so, he could give Mr Y a promissory note. It is X’s
promise to pay Y either on a specified date or on demand.

In another possibility, X might have a promissory note which is issued by Mr.Z. He could
endorse this note and give it to Y and clear of his dues this way. However, the seller isn’t bound to
accept the promissory note. The reputation of a buyer is of great importance to a seller in deciding
whether to accept the promissory note or not.
Bill of exchange

Bills of exchange refer to a legally binding, written document which instructs a party to pay a
predetermined sum of money to the second(another) party.
Some of the bills might state that money is due on a specified date in the future, or they might state
that the payment is due on demand.
• A bill of exchange is used in transactions pertaining to goods as well as services. It is signed
by a party who owes money (called the payer) and given to a party entitled to receive money
(called the payee or seller), and thus, this could be used for fulfilling the contract for payment.
However, a seller could also endorse a bill of exchange and give it to someone else, thus
passing such payment to some other party.
• It is to be noted that when the bill of exchange is issued by the financial institutions, it’s
usually referred to as a bank draft. And if it is issued by an individual, it is usually referred to
as a trade draft.
• A bill of exchange primarily acts as a promissory note in the international trade; the exporter
or seller, in the transaction addresses a bill of exchange to an importer or buyer. A third
party, usually the banks, is a party to several bills of exchange acting as a guarantee for
these payments. It helps in reducing any risk which is part and parcel of any transaction.
 Bill of Exchange under Negotiable Instruments Act

• Section 5 of the Negotiable Instruments Act 1881 states that a “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 the
bearer of the instrument.
• According to Section 5 of the Negotiable Instruments Act 1881, a “bill of exchange”
possesses the following characteristics:
• It must be a written instrument.
• It constitutes a demand or order for payment.
• The order for payment must be unconditional.
• It must be signed by the maker (the person issuing the bill).
• The specified payment amount must be complete and unambiguous.
• It is payable to a certain person or to that person’s order, or it can be made payable to the
bearer of the instrument.
• The payment can be made either on-demand or on a specific future date.
• The bill must be duly stamped in accordance with the legal requirements.
Cheques
• Section 6 of the Negotiable Instruments Act defines what a ‘cheque’ means. According to
this provision, a cheque is basically a bill of exchange drawn on a specific banker.
Furthermore, it is not payable otherwise than on demand.
• The Negotiable Instruments (Amendment) Act had amended this definition to make it broader
in 2015. Accordingly, cheques now include the electronic image of a truncated cheque and
also an electronic cheque. Despite this amendment, the basic definition still remains the same.
• A truncated cheque is one which undergoes truncation during a clearing cycle. Truncation
basically means the conversion of a physical cheque into digital format. Either a clearing-
house or a bank may do this upon generating an electronic image of a cheque.
• An electronic cheque is a cheque which exists in digital format. A computer resource
generates such cheques using digital signatures (either with or without biometrics).
• Looking at the definition of a cheque, we can conclude that it is similar to a bill of exchange.
Furthermore, it is always drawn on a banker and is payable on demand.
The Negotiable Instruments (Amendment) Bill, 2017
• The Negotiable Instruments (Amendment) Bill, 2017 has been introduced in the Lok Sabha
earlier this year on Jan 2nd, 2018.
• The bill seeks for amending the existing Act.
• The bill defines the promissory note, bill of exchange, and cheques.
• The bill also specifies the penalties for dishonor of cheques and various other violations
related to negotiable instruments.
• As per a recent circular, up to INR 10,000 along with interest at the rate of 6%-9% would
have to be paid by an individual for cheques being dishonored.
• The Bill also inserts a provision for allowing the court to order for an interim compensation to
people whose cheques have bounced due to a dishonouring party (individuals/entities at
fault).
• Such interim compensation won’t exceed 20 percent of the total cheque value.
Similarities Between Cheque and Bill of Exchange
• Negotiable Instruments: Both cheques and bills of exchange are considered negotiable
instruments, meaning they can be transferred to another party by mere endorsement or
delivery, making them a valuable means of payment and trade.
• Payee’s Payment Direction: Both instruments address the drawee (the party obligated to
make the payment) to fulfil the payment to the specified payee or the instrument’s bearer.
• Written Instruments: Both cheques and bills of exchange are formal written documents that
outline the terms of the payment, the parties involved, and the amount to be paid.
• Maker’s Signature: Both instruments require the signature of the maker (drawer) who issues
the instrument, indicating their consent and liability for the payment.
• Payable on Demand: Both cheque and bill of exchange are payable on express demand or
order, ensuring that the payment is made promptly as required.
Basis of
Cheque Bill of Exchange
Difference

A document used for immediate A written document

Meaning payments on demand, transferable indicating a debtor’s
through delivery. indebtedness to a creditor.

An instrument in writing
A bill of exchange drawn on a containing an
specified banker and payable on unconditional order, signed
Definition
demand. Includes electronic forms by the maker, directing a
and truncated cheques. certain person to pay a
certain sum of money.

Governing Section 6 of the Negotiable Section 5 of the Negotiable

Section Instruments Act, 1881. Instruments Act, 1881.

On any person, including

Drawn Only on a particular banker.
bankers.

If payable on demand,
considered void as per
Validity Payable on demand to the bearer.
Section 31 of the Reserve
Bank of India Act, 1934.

On the expiry of a certain

Payability On-demand only.
date or period.

Requires formal acceptance

Acceptance No formal acceptance required.
from the drawee.
 Not applicable, payable on A grace period of three
Grace Period
demand. days allowed for time bills.

Can be discounted with a

Discounting Cannot be discounted.
bank.

No stamping required before Must be sufficiently

Stamping
payment. stamped before payment.

Notice not necessary for Notice of dishonour

Notice
dishonour. necessary for resolution.

Crossing Can be crossed for added security. Not allowed.

No formal protest or noting Requires noting and

Dishonour
required. protesting for dishonour.

Discharge from Drawer not discharged if payment Drawer discharged if not

Liability delayed. presented for payment.

CROSSING OF CHEQUES

• A cheque is a negotiable instrument.

• It can either be open or crossed.
• An open cheque is the bearer cheque.
• It is payable over the counter on presentment by the payee to the paying banker.
• While a crossed cheque is not payable over the counter but shall be collected only through a
banker.
• The amount payable for the crossed cheque is transferred to the bank account of the payee.
Types of cheque crossing are :
• General Crossing,
• Special Crossing and
• Restrictive Crossing.
 ➢ A crossing is an instruction to the paying banker to pay the amount of cheque to a particular
banker and not over the counter. The crossing of the cheque secures the payment to a banker.
➢ It also traces the person so receiving the amount of cheque.
➢ Addition of words ‘Not negotiable’ or ‘Account Payee only’ is necessary to restrain the
negotiability of the cheque.
➢ The crossing of a cheque ensures security and protection to the holder.

Types of Cheque Crossing (Sections 123-131 A):

General Crossing – cheque bears across its face an addition of two parallel transverse lines.
Special Crossing – cheque bears across its face an addition of the banker’s name.
Restrictive Crossing – It directs the collecting banker that he needs to credit the amount
of cheque only to the account of the payee.
Non-Negotiable Crossing – It is when the words ‘Not Negotiable’ are written between the two parallel
transverse lines.

ENDORSEMENT OF CHEQUES
What Is an Endorsement?
The act of a person who is a holder of a negotiable instrument in signing his or her name on the back
of that instrument, thereby transferring title or ownership is an endorsement.
An endorsement may be a signature authorizing the legal transfer of a negotiable instrument between
parties, or it can be an amendment to a contract or document, such as a life insurance policy or a
driver's license.
A public declaration of support for a person, product, or service is also called an endorsement.
The person to whom the instrument is endorsed is called the endorsee.
The person making the endorsement is the endorser.
Types of Endorsement
• Blank Endorsement :
Where the endorser signs his name only, and it becomes payable to bearer.
• Special Endorsement :
Where the endorser puts his sign and writes the name of the person who will receive the payment.
• Restrictive Endorsement :
Which restricts further negotiation.
• Partial Endorsement :
Which allows transferring to the endorsee a part only of the amount payable on the instrument.
• Conditional Endorsement :
Where the fulfilment of some conditions is required.
1.Blank Endorsement or General Endorsement
• An endorsement is blank or general where the endorser signs his name only, and it becomes
payable to bearer. Thus, where a bill is payable to “Ram or order”, and he writes on its back
“Ram”, it is an endorsement in blank by Ram and the property in the bill can pass by a
mere presentation.
• We can convert a blank endorsement into an endorsement in full. We can do so by writing
above the endorser’s signature, a direction to pay the instrument to another person or
his order.
2.Special or Full Endorsement
• An endorsement “in full” or a special endorsement is one where the endorser puts his
signature on the instrument as well as writes the name of a person to whom order
the payment is to be made.
• A bill made payable to Ram or order, and endorsed “pay to the order of Shyam” would be
specially endorsed and Shyam endorses it further. We can turn a blank endorsement into a
special one by adding an order making the bill payable to the transferee.
• 3. Restrictive Endorsement
• An endorsement is restrictive which restricts the further negotiation of an instrument.
Example of restrictive endorsement: “Pay to X only”
4.Partial Endorsement
• An endorsement partial is one which allows transferring to the endorsee a part only of the
amount payable on the instrument. This does not operate as a negotiation of the instrument.---
-(INVALID now)
5. Conditional or Qualified Endorsement
• Where the endorser puts his signature under such writing which makes the transfer of title
subject to fulfilment of some conditions of the happening of some events, it is a conditional
endorsement.

PAYING & COLLECTING BANKER

Paying banker is a banker, who actually pays a cheque to his customer or to the order of his
customer.( DRAWEE BANK)
Payment process:
• When payment of a cheque is met, through another bank of collection, it will be easier for the
paying banker, as the identity of the payee would already be fixed by the collecting banker.
• A cheque payment is sorted across the counter, its on a cash payment requested.
Clearing Cheques
MICR Clearing, Speed Clearing, “Express Cheque Clearing Systems” (ECCS), and
“Cheque Truncation System” (CTS)
 Payment in Due – Course:-
Payment in due course has been clearly defined in Sec.10 of the Negotiable Instrument Act, 1881. It is
the manner in which a paying banker should make payment to a cheque presented to him.

Conditions:
1. Date on the cheque leaf -- Within 3 months from the date of the cheque
2. Name of the Payee---Order cheque( Pay – Mr X or order – Payment to be made only to Mr
X)
3. Amount in words and figures—NO difference
4. Signature of the Drawer---Verification
5. In Good Faith—Certainity
6. Without Negligence---Clear Contents
7. To the Person in Possession
A paying banker should pay a cheque only to the person, having possession of the instrument.
Possession is a must for a holder-in-due-course. So, paying banker should make payment only to that
person, who is in possession and presents the cheque for payment.
• Circumstances :Some time there arises a situation that, though the person presenting the
cheque may fulfil all the conditions, there may be a reasonable ground for the banker to doubt
the true ownership of the person, for the cheque.
• Such payment made, without proper clarification is said to be “against payment in due
course”
DUTIES AND RESPONSIBILITIES OF A PAYING BANKER:-
• A banker has an obligation to honour cheques of its customer, drawn on him and presented for
payment, subject to the condition that there are sufficient funds in the accounts and the cheque
is in order.
• Section 31 of the Negotiable Instruments Act 1881, provides that “The drawee of a cheque,
having sufficient funds of the drawer in his hands properly applicable to the payment of such
cheque, must pay the cheque when duly required to do so and in default of such payment
must compensate the drawer for any loss or damage caused by such fault.
• So, it is the bounden duty of a bank to honour its customer cheques, after taking some
precautions. In other words, the paying banker is under an obligation to honour cheque
subject to some conditions, being satisfied.
They are
• a. There must be sufficient funds in the customer’s account on which cheque is drawn.
• b. The funds should be properly applicable to the payment of such cheque.
• c. Cheque should be properly drawn and should not be irregular (or) ambiguous
• d. Cheque should be presented during the banking hours of the bank
 • e. Cheques should be presented for payment within the validity period.
• Now, the validity period for a cheque is three months from the date of issue. So cheques
should be presented within three months of their issue.

STATUTORY PROTECTION TO THE PAYING BANKER

Sec. 85 of the Negotiable Instruments Act, 1881 gives statutory protection to the paying banker.
When protection is needed to a paying banker ----and why?
Protection is needed when the paying banker dishonours cheque of his customer, on genuine grounds.
Why? - It is the bounden duty of the banker to honour the cheques, drawn on him and duly presented
for payment. So, if he dishonours the cheque or make any wrong payments, the paying banker is
liable to be sued for damages.
Condition to get statutory protection by the paying banker / situations at which a Paying Banker can
dishonor a cheque .The banker before honouring the cheques presented to him/her for payment should
look into the following points in order to safeguard himself/herself against the risk of losing the
customer’s money.
Open or crossed cheques
• Drawn on the specific branch
• When limits exceed (CBS/ EFT/ IBT---earlier process )**
• Mutilated Cheque – Torn/ Damaged – Right to reject
If it is by the banker / Drawer --- then “ Mutilation Guaranteed” to be confirmed by the drawer&
the banker
• Date of the Cheque, Words and figures differ , Material Alteration , Specimen Signature,
Insufficient Funds , Chronological Order of Payment(FIFO) , GARNISHEE ORDER ---
-
**---Note : CBS - Core Banking System
EFT ---Electronic Fund Transfer
IBT ---Inter Bank Transfer

CONCEPT OF NEGLIGENCE
Definition of cheque, drawer and drawee(Negotiable Instruments Act 1881)
• 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 truncated cheque and a
cheque in the electronic form.
• (a) "a cheque in the electronic form" means a cheque which contains the exact mirror image
of a paper cheque, and is generated, written and signed in a secure system ensuring the
minimum safety standards with the use of digital signature (with or without biometrics
signature) and asymmetric crypto system;
 • (b) "a truncated cheque' means a cheque which is truncated during the course of a clearing
cycle, either by the clearing house or by the bank whether paying or receiving payment,
immediately on generation of an electronic image for transmission, substituting the further
physical movement of the cheque in writing.

Liability of banker for negligence

• An agent who signs his name to a promissory note, bill of exchange or cheque without
indicating thereon that he signs as agent, or that he does not intend thereby to incur personal
responsibility, is liable personally on the instrument, except to those who induced him to sign
upon the belief that the principal only would be held liable.
Banker’s Duty
• According to section 5(b) of the Banking Regulation Act, 1949, banking means the accepting,
for the purpose of lending or investment, of deposits of money from the public, repayable on
demand or otherwise, and withdrawable by cheque, draft, order or otherwise.
To sum up a banker is who
• 1) Take deposit account
• 2) Take current accounts
• 3) Issue and pay cheques
• 4) Collect cheques crossed and uncrossed for his customers.
Dishonor of cheque-wrongful debit entry
• If a cheque is dishonored because of wrongful debit entry by the drawer book, account holder
will be entitled to claim general damages even without proof of any special loss or damages.
• CASE :
In the mentioned case a cheque for Rs. 11000 issued by the complainant was dishonored and no debit
entry was made in his account. After a gap of six years the bank realized it’s mistake and reversed the
entry for Rs. 15880 charging interest for Rs 4880.it was later held that the interest being charged by
the bank was not valid and the amount was directed to be credited the account of the complainant with
interest at the rate of 5%.
Dishonor of cheque-amount kept in suspense account
• Where the cheque was not credited in the complainant’s joint account, but the amount was
kept in suspense account and the cheque in question was dishonored due to insufficient funds,
deficiency in service stood proved and the complainant awarded punitive damages.
Dishonor of cheque-over writing not authenticated
• A post dated cheque was not encashed for the reason that over writing in the year was not
authenticated with drawer’s signature. Complainant company was unable to say as to who
committed the mistake and so the cheque was rightly returned by the bank.
Dishonor of cheque-Insufficient funds- Wrong claim
 • Cheques were dishonored for want of funds despite deposits in the account. Contention was
raised by the bank that complainant’s own employee in collusion with bank employees
committed fraud in not depositing full amount and made concerted counterfoil. As a criminal
case was pending against them, the district forum held that there was no deficiency in service
but as cheque was dishonored, the full loss incurred was ordered to be paid to the
complainant.
Dishonor of cheque-Banker’s cheque returned unpaid
• A banker’s cheque for Rs. 50000 was returned unpaid for the reason that the first signature on
it was irregular and not for insufficient funds, meant for admission to university. It was held
by the court that this amounted to deficiency in service. The bank was directed to refund the
amount with interest at 15%.
Dishonor of cheque-debiting legal charges
• A cheque was returned with memo of insufficient funds which were not signed or stamped by
drawee bank. Debiting legal charges of Rs. 300 in complainant’s account was held as
deficiency in service. A nominal compensation was ordered to be paid by the drawee bank.
Dishonor of cheque-wrongful dishonor
• A cheque was dishonored by the bank despite the fact that the complainant had sufficient
funds in his accounts. Due to wrongful dishonor of cheque, claim for premium by him was
repudiated by the Insurance Company when there was an accidental fire in his factory and he
suffered a loss of more than Rs. 25 lakhs. A compensation of Rs. 5 lakhs was awarded as
punitive damages.

Banking Negligence as under the Consumer Protection Act, 1986

▪ Demand Drafts-Deficiency in Service (Negligence)

▪ Bank Draft-Mistake of Bank

Bank issuing draft mentioned the name of drawee bank as “Karaikudi” instead of “Kolkata” and
hence was not accepted by the university. Due to mistake on behalf of bank. Complainant lost one
session in MCA course. Compensation awarded was enhanced from Rs. 5000 to Rs 15000 in view of
financial loss suffered by the complainant.
In another case, the bank draft did not bear any branch code number and stamp besides it and also did
not contain name of branch or signature. Along with interest, compensation and litigation costs were
awarded.
Complaint of Maintainability
In one case, it was made evident that the officials of the Bank of Baroda had shown under indulgence
by debiting the amount in the account of the complainant in hot haste without waiting for clearance
assuming that the bank draft was a genuine one and the amount was expected to be received in due
course. There could be no obligation even on part of drawee bank to make payment unless appropriate
evidence was produced that some official in the course of employment had issued a forged bank draft.
Customer to whom goods were sold was not made party and so the complaint was not maintainable.
Courier Service-wrong delivery of draft
• A letter accompanied by two bank drafts valuing Rs. 71,500 wrongly delivered and were
encashed. It was the onerous duty of opposite party to have shown as to whom and in what
manner the letter was delivered. Three persons were arrested and recoveries were made from
them. Appellant was given liberty to recover the amount.
Cheques-Deficiency in Service(Negligence)
Cheque passed without tallying signature
• A cheque was passed without tallying signatures of appellant. Complaint was dismissed on
the grounds that tallying of signatures cannot be investigated in summary pleadings. Forum is
empowered to obtain reports from experts in order to find out deficiency. Section 13(4) of the
Consumer Protection Act confers powers upon District Forum for a fresh decision.
Honoring forged cheques-deficiency in service
• Genuine cheque of complainant was dishonored in spite of sufficient funds in account. Forged
cheques were cleared. District Forum returned complaint for want of jurisdiction. Matter
remanded back to District Forum on grounds that honoring of forged cheques amounted to
deficiency in service.
Crossed cheque-material alterations
• Crossed cheque drawn in favor of the complainant’s firm encashed by a third person amounts
to negligence on part of the bank. The bank should not have accepted the cancellation of
crossing on the cheque resulting in payment to a wrong person. Erasing of crossing on the
cheque amounts to material alteration. Bank is liable to make good the loss suffered by the
complainant.
Cheque encashed by unidentified persons
• Cheque encashed by unidentified persons and the report of hand-writing expert showed that
signatures on the cheque did not tally with the specimen signature of the complainant. Bank
was held liable to pay the amount withdrawn along with interest and costs.
Additional References:
• https://cleartax.in/s/negotiable-instruments
• https://www.toppr.com/guides/business-laws-cs/negotiable-instruments-act/definition-of-
negotiable-instruments/
• www.rbi.org.in
• https://lawbhoomi.com/
• https://www.bdu.ac.in/