CA Foundation · Business Laws

The Negotiable Instruments Act, 1881: formula sheet

Full chapter guide

Key formulas

Negotiable instrument (Section 13): Promissory note + Bill of exchange + Cheque, payable to order or to bearer; Payable to order if it names a person and has no words prohibiting transfer. Payable to bearer if so expressed or last indorsement is in blank.
Promissory note (Section 4): In writing + unconditional undertaking to pay + signed by maker + certain sum only + to a certain person, his order or bearer; A bank-note or currency-note is not a promissory note. Only two parties: maker and payee.
Bill of exchange (Section 5): In writing + unconditional order + signed by drawer + directs a certain person to pay + certain sum only + to a certain person, his order or bearer; Three parties at the start: drawer, drawee and payee. The drawee becomes the acceptor on accepting.
Cheque: Bill of exchange drawn on a specified banker, payable on demand; Section 19 says a cheque is payable on demand. Cite the definition without a section number unless you have learnt it.
Instruments payable on demand (Section 19): No time for payment specified (note or bill) or cheque = payable on demand; A note or bill with a fixed period is not payable on demand.
Mode of negotiation (Section 46): Bearer: delivery. Order: indorsement + delivery; Making, acceptance or indorsement is completed by delivery, actual or constructive.
Ambiguous instrument (Section 17): Holder may elect to treat it as a note or a bill; Once elected, it is treated accordingly from then on.
Presumptions (Section 118): Presumed until contrary proved: consideration, date, time of acceptance, time of transfer, order of indorsements, stamp on lost instrument, holder in due course; If the instrument was obtained by an offence, fraud or unlawful consideration, the holder must prove he is a holder in due course.
Negotiation: Transfer so that the transferee becomes the holder = negotiation (Section 14); Mere transfer without making the person a holder is not negotiation.
Bearer instrument: Bearer instrument → negotiable by delivery (Sections 46 and 47); No endorsement is needed.
Order instrument: Order instrument → endorsement + delivery (Sections 46 and 48); Both parts are needed. Endorsement without delivery is incomplete.
Endorsement in blank: Endorser signs name only (Section 16); Makes the instrument behave like a bearer instrument in practice, but see Section 49 for conversion.
Endorsement in full: Signature + direction to pay to, or to the order of, a specified person (Section 16); The named person is the endorsee.
Conversion of blank into full: Holder writes above the endorser's signature a direction to pay to another person (Section 49); The holder does not sign his own name and does not incur the responsibility of an endorser.
Effect of conversion: After blank then full endorsement, the full amount can be claimed from the endorser only by the person endorsed in full or one deriving title through him (Section 55); Others holding the instrument cannot claim the full amount from that endorser.
Effect of endorsement: Endorsement + delivery transfers property with the right of further negotiation (Section 50); Express words can restrict or exclude further negotiation, or make the endorsee a mere agent.
Conditional delivery: Delivery on condition that it takes effect only on an event → not negotiable until the event happens (Section 47 exception); Exception: a holder for value without notice of the condition.
Cheque payable to bearer: Original bearer cheque: drawee discharged by payment in due course to the bearer despite any endorsement (Section 85(2)); Even if the endorsement purports to restrict further negotiation.
Presentment for acceptance: when compulsory: Needed for: (1) bill payable after sight, (2) bill that expressly requires acceptance. Not applicable to promissory notes or cheques.; A bill payable on demand or on a fixed date does not need it unless the bill says so.
Presentment of a note payable after sight (Section 61): Note payable after sight ⇒ present to the maker for sight within a reasonable time; This fixes the maturity. If the holder fails to do it, the other parties are discharged from liability to that holder.
Presentment for payment: who presents to whom: Note → maker | Bill → acceptor (or drawee) | Cheque → drawee bank; Presentment is made by the holder or a person authorised on the holder's behalf.
Effect of non-presentment for payment (Section 64): No presentment ⇒ other parties not liable to that holder; The maker or acceptor, as principal debtor, is not freed by this rule alone.
Due date of a time instrument: Due date = date of instrument (or acceptance/sight) + stated period + 3 days of grace; No grace on instruments payable on demand or at sight. Count from the day after the starting date.
Public and emergency holiday rule (Section 25): Last day of grace is a public holiday ⇒ due on the preceding business day | Emergency holiday declared under the Act ⇒ due on the next day; Apply this after adding grace days.
Time for demand instruments: Payable on demand ⇒ present within a reasonable time; A cheque is valid for three months from its date under the banking rule.
Hours and place: Business hours (banking hours for banks); at the named place, else at the payer's business place or residence; If the payer cannot be located, presentment excuses apply.
Effect of delay in presenting a cheque: Unreasonable delay + bank fails + drawer suffers actual damage ⇒ drawer discharged to the extent of that damage; The drawer is discharged only to the extent of actual damage, not fully.
When presentment is unnecessary (Section 76): Intentional prevention | payer does not attend the named place during business hours | fictitious drawee | payer not found after reasonable search | waiver | drawer had no reason to believe the instrument would be paid when presented; Learn these as a list. Examiners ask for any three or four.
Payment in due course (Section 10): Apparent tenor + good faith + no negligence + to a person in possession with no reasonable ground to doubt his right; All four conditions must be met. Missing any one means it is not payment in due course.
Discharge of maker, acceptor or indorser (Section 82): (a) Cancellation | (b) Release | (c) Payment; Under (c), all parties are discharged only if the instrument is payable to bearer or indorsed in blank AND payment is made in due course by the maker, acceptor or indorser.
Who gives notice, and to whom (Section 93): Holder or a liable party → all parties to be made severally liable, and any one of several parties to be made jointly liable; No notice is needed to the maker of a note, or the drawee or acceptor of a bill or cheque.
Notice not necessary (Section 98): Dispensed with | drawer countermanded payment | no damage from want of notice | party cannot be found after due search | acceptor is also drawer | non-negotiable note | unconditional promise to pay with knowledge of facts; These are the seven cases (a) to (g). Learn them as a list.
Noting (Section 99): Notary notes dishonour within reasonable time; note states date, reason, notary's charges; Applies to promissory notes and bills of exchange dishonoured by non-acceptance or non-payment.
Noting equivalent to protest (Section 104A): Noting within the specified time = sufficient; formal protest can be drawn later as of the date of noting; Protest is the formal certificate; noting is the first step.
Notice of protest (Section 102): Where protest is required by law, give notice of protest instead of notice of dishonour; The notary public who makes the protest may give the notice.
Reasonable time (Section 105): Judged by nature of instrument and usual course of dealing; public holidays excluded; Applies to presentment, notice of dishonour and noting.
Liability of prior parties (Section 36): Every prior party is liable to a holder in due course until the instrument is duly satisfied; This is why notice to prior parties matters.
Acquired after dishonour or when overdue (Section 59): Holder gets only the transferor's rights; Exception: a person who in good faith and for consideration becomes holder after maturity of an accommodation note or bill may recover from any prior party.
Essentials of Section 138: Cheque on own account + for a legally enforceable debt/liability + returned unpaid for insufficient funds or exceeding arrangement; All must be present. Missing any one means no offence under Section 138.
Presentation time (proviso (a)): Within 6 months from the date of the cheque, or within its validity period, whichever is earlier; A cheque dated 1 June presented after 1 December is out of time.
Demand notice (proviso (b)): Written notice to the drawer within 30 days of receiving information from the bank about the return; The 30 days run from the payee's receipt of bank information, not from the cheque date. Notice must be in writing.
Drawer's payment window (proviso (c)): Drawer must pay within 15 days of receiving the notice; The offence is complete only if the drawer fails to pay within these 15 days.
Complaint timeline (Section 142(1)(b)): Complaint in writing within 1 month of the date the cause of action arises under proviso (c); Court may take cognizance later if the complainant shows sufficient cause for the delay.
Who can complain and who can try: Complaint by payee or holder in due course; tried by Metropolitan Magistrate or Judicial Magistrate of the first class (Section 142(1)); No court lower than these can try the offence.
Punishment (Section 138): Imprisonment up to 2 years, or fine up to twice the cheque amount, or both; Say 'may extend to'. These are maximums.
Interim compensation (Section 143A): Up to 20% of the cheque amount; payable within 60 days (extendable by up to 30 days for sufficient cause); Court may order it when the drawer pleads not guilty (summary trial or summons case), or on framing of charge in other cases.
Appeal deposit (Section 148): Appellate Court may order a minimum of 20% of the fine or compensation awarded by the trial Court, in addition to any interim compensation; Payable within 60 days (extendable by up to 30 days). Applies in the drawer's appeal against conviction.
Jurisdiction (Section 142(2)): Cheque delivered for collection through an account: court where payee's account branch is situated. Otherwise presented for payment: court where the drawer's drawee bank branch is situated; Section 142A deals with transfer of pending cases and subsequent complaints against the same drawer.
Section 118 presumptions: Consideration, date, time of acceptance, time of transfer, order of indorsements, stamp (lost instrument), holder in due course; All are rebuttable. They apply until the contrary is proved. Memory aid: C-D-A-T-O-S-H.
Section 118(g) proviso: Instrument obtained by offence, fraud or unlawful consideration → burden of proving holder in due course lies on the holder; This reverses the usual presumption.
Section 37 principal and surety: Maker, drawer (until acceptance), acceptor = principal debtors; other parties = sureties; Applies in the absence of a contract to the contrary.
Section 36: Every prior party is liable to a holder in due course until the instrument is duly satisfied; Protects the holder in due course against all prior parties.
Section 17 ambiguous instrument: Holder may elect to treat it as a promissory note or a bill of exchange; Once chosen, it is treated that way from then on.
Section 20 inchoate instrument: Signed and delivered stamped paper (blank or incomplete) → prima facie authority to complete for any amount not exceeding the amount covered by the stamp; Signer is liable to a holder in due course for that amount. Others cannot recover more than the amount intended.
Section 87 material alteration: Material alteration → instrument void against a party who did not consent, unless made to carry out the common intention of the original parties; An alteration by an indorsee discharges his indorser from liability to him. Subject to Sections 20, 49, 86 and 125.
Section 88: Acceptor or indorser is bound by his acceptance or indorsement despite any previous alteration; Alteration made before he signed does not free him.
Section 89(1): Payment per the apparent tenor, in due course, of an instrument with a non-apparent alteration discharges the payer or banker; Also covers a cheque with crossing that does not appear on presentation.
Section 117 compensation: Amount due + expenses of presenting, noting and protesting; indorser who pays gets the amount with interest at 18% per annum plus expenses; Exchange-rate difference applies when parties reside at different places.
Section 143A interim compensation: Not more than 20% of the cheque amount; payable within 60 days, extendable by up to 30 days; Ordered by the court trying a Section 138 offence. If the drawer is acquitted, the complainant repays with interest at the bank rate.
Section 134 foreign instrument: Maker or drawer: law of the place where made. Acceptor and indorser: law of the place where payable; Applies in the absence of a contract to the contrary.
Section 82 discharge: Discharge by cancellation, by release, or by payment in due course (bearer or blank-indorsed instrument); Payment discharges all parties only when the instrument is payable to bearer or indorsed in blank.

Quick revision

A negotiable instrument is one that is freely transferable by delivery (or endorsement and delivery), giving the holder in due course good title free from defects in prior parties' title, and the right to sue in their own name.
The main instruments are the promissory note, the bill of exchange and the cheque.
A promissory note contains an unconditional promise to pay, while a bill of exchange contains an unconditional order to pay.
A cheque is a bill of exchange drawn on a specified banker and payable on demand.
A promissory note has two parties, the maker and the payee. A bill has the drawer, the drawee and the payee.
Under general crossing (Section 126) the banker must pay only to a banker; under special crossing the banker must pay only to the banker named. A "not negotiable" crossing (Section 130) does not stop transfer but the transferee gets no better title than the transferor.
Negotiation is the transfer of an instrument so that the transferee becomes the holder. A bearer instrument passes by delivery and an order instrument by endorsement and delivery.
Endorsement is signing the instrument, usually on the back, to transfer it. It can be blank or full, among other types.
Presentment is the act of showing the instrument to the drawee or maker for acceptance or payment, as the case may be.
Dishonour occurs when acceptance or payment is refused, and notice of dishonour must be given to the parties you wish to hold liable.
Section 138 makes dishonour of a cheque for insufficiency of funds, or because it exceeds the arrangement with the bank, an offence if the statutory conditions are met.
The Act raises presumptions in favour of the holder, for example that an instrument was made for consideration. These can be rebutted.

Common mistakes

Treating an IOU as a promissory note. Fix: Remember Section 4 illustration (c): 'Mr. B, I O U Rs. 1,000' is not a promissory note because it contains no undertaking to pay.
Calling a conditional promise a promissory note. Fix: Check for the word 'unconditional'. A promise to pay after the maker's marriage, or on D's death only if D leaves enough, is not a note. But a time tied to an event certain to happen, even if the date is uncertain, is not conditional (Section 5).
Saying an order instrument is negotiated by delivery alone. Fix: Link the word 'order' to endorsement plus delivery (Section 48). Link 'bearer' to delivery.
Treating endorsement as complete without delivery. Fix: Remember Section 46: endorsement is completed by delivery, actual or constructive.
Saying every bill of exchange must be presented for acceptance. Fix: Acceptance is compulsory only for bills payable after sight or bills that expressly require it. Bills on demand or on a fixed date do not need it unless the bill says so.
Treating a cheque or promissory note as needing presentment for acceptance. Fix: Only bills are accepted. A note is presented to the maker for payment, and a cheque to the bank for payment. A note payable after sight is presented to the maker for sight within a reasonable time (Section 61) to fix its maturity. Failure to do so discharges the other parties.
Saying notice of dishonour must be given to the maker, drawee or acceptor. Fix: Remember the second paragraph of Section 93: no notice is needed to the maker of a note, or the drawee or acceptor of a bill or cheque. They are the principal debtors.
Treating payment by any party as discharging all parties. Fix: All parties are discharged only if the instrument is payable to bearer or indorsed in blank and the maker, acceptor or indorser pays in due course.
Counting the 30-day notice period from the date of the cheque. Fix: The 30 days run from the payee's receipt of information from the bank about the return. The six months run from the cheque date.
Saying the drawer is prosecuted as soon as the cheque bounces. Fix: Dishonour alone is not enough. The notice must be given and the drawer must fail to pay within 15 days of receiving it.

Exam tips

Start every classification answer with the section's definition, then apply the facts to each essential. This earns the provision marks first.
Learn the eight illustrations to Section 4. Examiners adapt them directly into case studies.
In a 'difference between' question, use a clear two-column style in your answer sheet: definition, parties, who promises or orders, acceptance needed, and payability.
Always add the Section 13 point that the instrument must be payable to order or to bearer. Many students forget it.
Finish with a firm conclusion that names the instrument. Do not leave the answer open-ended.
Always quote the exact words of an endorsement in your answer. Marks depend on classifying it correctly.
Cite section numbers for negotiation (14), delivery (46), bearer (47), order (48), conversion (49), effect (50) and conversion's effect on claims (55). Cite only those you are sure of.
For 'distinguish between negotiation and assignment', use a two-column style in plain points: mode of transfer, rights of transferee, notice, and defects in title.