The law relating to “negotiable instruments” is contained in the Negotiable Instruments Act, 1881. The Act extends to the whole of India. The Negotiable Instruments Act, 1881, has been amended for more than a dozen times so far.
The latest in the series are: (i) the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (effective from 1st April, 1989), and (ii) the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 (effective from 6th February, 2003). The provisions of all the Amendment Acts have been incorporated at relevant places in Part IV of this book.
The Negotiable Instruments Act, 1881, as amended up-to-date, deals with three kinds of negotiable instruments, i.e., Promissory Notes, Bills of Exchange and Cheques.
The word negotiable means ‘transferable by delivery,’ and the word instrument means ‘a written document by which a right is created in favour of some person.’
Thus, the term “negotiable instrument” literally means ‘a written document transferable by delivery.’
According to Section 13 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)].
The Act, thus, mentions three kinds of negotiable instruments, namely notes, bills and cheques and declares that to be negotiable they must be made payable in any of the following forms:
(a) Payable to order:
A note, bill or cheque is payable to order which is expressed to be ‘payable to a particular person or his order.’ For example, (i) Pay A, (ii) Pay A or order, (iii) Pay to the order of A, (iv) Pay A and B, and (v) Pay A or Bare various forms in which an instrument may be made payable to order.
But it should not contain any words prohibiting transfer, e.g., ‘Pay to A only’ or ‘Pay to A and none else’ is not treated as ‘payable to order’ and therefore such a document shall not be treated as negotiable instrument because its negotiability has been restricted.
It may be noted that documents containing express words prohibiting negotiability remain valid as a document (i.e., as an agreement) but they are not negotiable instruments as they cannot be negotiated further.
(b) Payable to bearer:
‘Payable to bearer’ means ‘payable to any person whosoever bears it.’ A note, bill 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.
Thus, a note, bill or cheque in the form “Pay to A or bearer,” or “Pay A, B or bearer,” or “Pay bearer” is payable to bearer. Also, where an instrument is originally ‘payable to order,’ it may become ‘payable to bearer’ if endorsed in blank by the payee.
For example, a cheque is payable to A. A endorses it merely by putting his signature on the back and delivers to B with the intention of negotiating it (without making it payable to B or S’s order). In the hands of B the cheque is a bearer instrument.
Section 31 of the Reserve Bank of India Act:
It is important to note that the above definition is subject to the provisions of Section 31 of the Reserve Bank of India Act, 1934, which as amended by the Amendment Act of 1946, provides as under:
- No person in India other than the Reserve Bank or the Central Government can make or issue a promissory note ‘payable to bearer.’
- No person in India other than the Reserve Bank or, the Central Government can draw or accept a bill of exchange ‘payable to bearer on demand’.
- A cheque ‘payable to bearer on demand’ can be drawn on a person’s account with a banker.
The effect of the above provisions is that:
(i) A promissory note cannot be originally made ‘payable to bearer,’ no matter whether it is payable on demand or after a certain time. It must be made ‘payable to order’ initially. However, on being endorsed in blank it can become ‘payable to bearer’ or ‘payable to bearer on demand’ subsequently and it shall be valid in that case.
(ii) A bill of exchange may be originally made ‘payable to bearer’ but it must be payable otherwise than on demand (say, payable three months after date) in that case. If it is ‘payable on demand’ then it must be made ‘payable to order.’ However, on being endorsed in blank subsequently, it can become ‘payable to bearer on demand.’
(iii) A cheque drawn on a bank can be originally made ‘payable to bearer on demand’ and it shall be valid. In fact cheques are always payable on demand.
The object of the above provisions of the Reserve Bank of India Act is to prevent private persons from infringing the monopoly of ‘Note Issue’ of the Reserve Bank and the Government of India.
For, if individuals are allowed to issue instruments ‘payable to bearer on demand,’ then there may be someone so rich and well known person whose bills of exchange and promissory notes may be taken as currency notes.
A currency note bears the words’ I promise to pay the bearer the sum of Rupees 10, 50 or 100,’ as the case may be. The general public is, therefore, prohibited to issue such notes or bills.
Section 32 of the Reserve Bank of India Act, 1934, makes the issue of such bills or notes a criminal offence and declares them illegal and unenforceable at law. Accordingly, ‘a promise to pay A or bearer’ or ‘a promise to pay the bearer’ is not enforceable at law and the document containing such a promise is illegal and void.
More comprehensive definition:
The definition given in Section 13 of the Negotiable Instruments Act does not set out the essential characteristics of a negotiable instrument. Possibly the most expressive and all-encompassing definition of negotiable instrument had been suggested by Thomas who is as follows:
“A negotiable instrument is one which is, by a legally recognised custom of trade or by law, transferable by delivery or by endorsement and delivery in such circumstances that (a) the holder of it for the time being may sue on it in his own name and (b) the property in it passes, free from equities, to a bona fide transferee for value, notwithstanding any defect in the title of the transferor.”
Essential Features of Negotiable Instruments are given below:
Writing and Signature:
Negotiable Instruments must be written and signed by the parties according to the rules relating to Promissory Notes, Bills of Exchange and Cheques. Demand Drafts are also construel as Negotiable Instruments in the limiting case as they have the same property as N.I. Instrumes.
Negotiable instruments are payable by legal tender money of India. The liabilities of the parties of Negotiable Instruments are fixed and determined in terms of legal tender money.
Negotiable Instruments can be transferred from one person to another by a simple process. In the case of bearer instruments, delivery to the transferee is sufficient. In the case of order instruments two things are required for a valid transfer: endorsement (i.e., signature of the holder) and delivery. Any instrument may be made non-transferable by using suitable words, e.g., “pay to X only.”
The transferee of a negotiable instrument, when he fulfils certain conditions, is called the holder in due course. The holder in due course gets a good title to the instrument even in cases where the title of the transferrer is defective.
It is not necessary to give notice of transfer of a negotiable instrument to the party liable to pay. The transferee can sue in his own name.
Certain presumptions apply to all negotiable instruments. Example: It is presumed that there is consideration. It is not necessary to write in a promissory note the words “for value received” or similar expressions because the payment of consideration is presumed. The words are usually included to create additional evidence of consideration.
A special procedure is provided for suits on promissory notes and bills of exchange (The procedure is prescribed in the Civil Procedure Code). A decree can be obtained much more quickly than it can be in ordinary suits.
Negotiable instruments are popular in commercial transactions because of their easy negotiability and quick remedies.
A document which fails to qualify as a negotiable instrument may nevertheless be used as evidence of the fact of indebtedness.