Negotiable Instruments Act, 1881: formula sheet

Key formulas

Section 13 definition

Negotiable instrument = promissory note, bill of exchange or cheque, payable to order or to bearer

This is the Section 13 definition. Separately, Section 1 saves local usage or custom relating to instruments in an oriental language, such as hundis. Courts have recognised negotiability of other instruments by custom, but Section 1 does not itself make them negotiable. None of this is part of Section 13's wording.

Mode of transfer

Bearer instrument: delivery. Order instrument: endorsement + delivery

Both modes need delivery; endorsement alone is not enough.

Essential features

Writing + signature + unconditional promise/order + certain sum + free transferability + right to sue in own name + good title to holder in due course

Remember this as the checklist for MCQs asking which statement is not a feature.

Presumptions

Consideration, date, time of acceptance, time of transfer, order of endorsements, stamping of a lost instrument, holder in due course

All are rebuttable: they hold unless the contrary is proved. For holder in due course (Section 118(g)), if the instrument was obtained from its lawful owner by unlawful means or for unlawful consideration, the holder must prove he is a holder in due course.

Transferee's title

Holder in due course can get better title than the transferor

This is unlike an ordinary assignment, where the assignee gets only the assignor's title.

Holder

Holder = person entitled in his own name to possess the instrument and recover its amount

Payee or endorsee in possession qualifies. A finder or thief does not.

Holder in due course: conditions

HDC = holder + for consideration + before maturity + no sufficient cause to believe a defect existed in transferor's title

All conditions must be met. Missing even one means he is only an ordinary holder. A bill or note taken after its due date does not qualify. A cheque taken long after issue may be treated as overdue, so the holder cannot claim HDC status.

Parties in a bill and cheque

Bill: drawer, drawee, payee. Cheque: drawer, drawee (bank), payee. Note: maker, payee

A promissory note has no drawee.

Privileges of HDC

HDC gets a good title even if the transferor's title was defective (for example, by fraud), and is free from defences between earlier parties

He can recover the full amount from all prior parties. Defences such as lack of consideration between earlier parties are not available against him. This does not cover forgery: a forged signature gives no title, even to an HDC.

Ordinary holder's position

Ordinary holder's title = title of the person from whom he got it

A holder who is not an HDC takes the instrument subject to defects in the earlier title.

Drawee's liability before acceptance

Drawee is not liable on a bill until he accepts it

For a cheque, the bank's duty to pay arises from its contract with the customer (the drawer), not from the instrument itself. The bank is liable to the drawer to pay if funds are sufficient, but not to the payee directly.

Minor's capacity

Minor can bind all parties except himself (Section 26)

He cannot be sued on the instrument, but the other parties are liable to the holder. A minor cannot validly be a maker or acceptor so as to create liability.

Section 20 authority

Signed + stamped + incomplete + delivered ⇒ prima facie authority to holder to complete it

All four conditions must be present. The instrument becomes valid once completed.

Liability to holder in due course

Liability of signer ≤ amount covered by the stamp

The signer is liable to a holder in due course for the amount filled in, only up to the stamp's limit.

Liability to a person not a holder in due course

Liability of signer = amount he authorised

If the holder filled in more than authorised, the signer is not liable for the excess to such a person.

Ambiguous instrument (Section 5)

Drawer and drawee same person, or drawee fictitious or not competent to contract ⇒ holder may treat it as a promissory note or a bill of exchange

The holder's option is at his discretion. Once chosen, it is treated that way.

Negotiation by delivery

Bearer instrument → negotiated by delivery alone

No signature is needed. Applies to bearer notes, bills and cheques.

Negotiation by endorsement

Order instrument → endorsement (signature) + delivery

Both are required. Endorsement without delivery does not complete negotiation.

Blank endorsement

Endorser signs only → instrument becomes payable to bearer

The endorsee can negotiate it further by mere delivery.

Special endorsement

Endorser signs + names the endorsee → payable to that person or his order

Further negotiation needs the endorsee's own endorsement and delivery. A blank endorsement can be converted into special by the holder writing the endorsee's name above the signature.

Restrictive endorsement (Section 50)

Endorsement restricting or excluding further negotiation (e.g. 'Pay X for collection') → endorsee may receive the amount and sue; he may negotiate further only if the endorsement expressly authorises it

Under 'for collection' the endorsee acts as an agent. Without express authority in the endorsement, he cannot endorse onward on his own account.

Partial endorsement (Section 56)

Transfers only part of the amount → not a valid negotiation

The instrument cannot be split into parts by endorsement.

Conditional endorsement (Section 52)

'Pay X if he marries' → endorser's liability, or the endorsee's right to receive the amount, depends on the specified event happening

The event may never happen. If it does not happen, the endorser's liability or the endorsee's right depending on it does not arise.

Negotiation back (Section 37)

Instrument returns to a prior party (maker, drawer, acceptor or endorser) → he may negotiate it further but cannot enforce payment against any intervening party to whom he was previously liable

Exam favourite. He is remitted to his former rights but cannot claim from intervening parties to whom he was liable. This rule is in Section 37, not Section 50.

Presentment for acceptance

Applies to bills of exchange only, to the drawee, before maturity

Promissory notes and cheques are never presented for acceptance.

Presentment for payment (Section 64)

Holder presents a note to the maker, a bill to the acceptor, a cheque to the drawee bank

Applies to all three instruments. If the holder does not present, the drawer and endorsers are not liable to him. The maker of a note and the acceptor of a bill remain liable. For a cheque, the drawer is discharged only to the extent of harm from delay (Section 84).

Payable on demand

Demand instruments must be presented for payment within a reasonable time

If the holder delays unreasonably, endorsers are discharged. The drawer of a cheque is discharged only to the extent he is harmed by the delay.

Days of grace (Section 22)

Due date = stated date + 3 days of grace

Grace applies to bills and notes payable at a stated time or after date or sight. It does not apply to instruments payable on demand or at sight. For a bill after sight, the count runs from acceptance. If the grace-adjusted due date is a public holiday, the instrument falls due on the preceding business day (Section 25).

Notice of dishonour

Holder gives notice to parties he wants to make liable

Without notice, parties who did not get it are not liable to the holder.

Noting vs protest

Noting = notary's minute of dishonour; Protest = notary's formal certificate of dishonour

Both are optional for inland instruments, though advisable. For a foreign bill, protest is required where the law of the place of drawing requires it (Section 104), to hold parties liable.

Discharge by payment in due course (Sections 10 and 78)

Payment to the holder, in good faith, without negligence, at or after maturity (payment in due course is defined in Section 10)

If the maker or acceptor pays the holder in due course, all parties are discharged (Section 78). Payment by a drawer or endorser does not discharge all parties. Section 82 covers other modes such as cancellation and release.

Penalty under Section 138

Imprisonment up to 2 years, or fine up to 2 × cheque amount, or both

The court can impose either punishment or both. The fine cap is twice the cheque amount.

Presentation period

Within 3 months from the date on the cheque, or its validity period, whichever is earlier

A cheque presented late cannot give rise to a Section 138 offence.

Demand notice

Written notice within 30 days of receiving information from the bank about the return

Under the proviso to Section 138, the notice is sent by the payee or holder in due course to the drawer.

Drawer's payment window

Payment within 15 days of receiving the notice

The 15 days run from the drawer's receipt of the notice, not from the date it was sent.

Time to file complaint

Within 1 month from the date the cause of action arises (after the 15 days end)

Section 142 sets this limit. A court may condone delay under Section 142 if the complainant shows sufficient cause.

Interim compensation (Section 143A)

Up to 20% of the cheque amount

The court may direct the drawer to pay this to the complainant during the case.

Who can complain

Payee or holder in due course

Under Section 142, the complaint must be in writing, before a Magistrate. Section 143 provides for summary trial by a Magistrate of the First Class or a Metropolitan Magistrate.

General crossing

Two parallel transverse lines (with or without "& Co." or "Not Negotiable")

Payable only through any banker, not over the counter.

Special crossing

Name of a specific banker written across the face (with or without lines)

Drawee bank pays only to that named banker or its agent for collection.

Account payee direction

Crossing + "Account Payee" or "A/c Payee only"

Not a separate statutory crossing. It is a restrictive direction from banking practice that tells the collecting bank to credit only the payee's account.

Who may cross

Drawer, holder or banker

Under Section 123 a cheque may be crossed generally, and under Section 124 specially, as the drawer chooses. Under Section 125, the holder may cross an open cheque generally or specially, may make a general crossing special, and may add the words "Not Negotiable". A banker to whom the cheque is crossed specially can cross it specially to another banker for collection.

Not Negotiable crossing

Crossing + "Not Negotiable"

The cheque stays transferable, but the transferee cannot get a better title than the transferor had.

Paying banker's protection and liability

Section 128: payment in due course to a banker as the crossing directs = paying banker protected (and the drawer too, once the cheque has reached the payee). Section 129: payment otherwise than as directed = liable to true owner

Protection depends on paying according to the crossing.

Collecting banker's protection (Section 131)

Good faith + no negligence + received for a customer = no liability to true owner

Protection applies even if the customer's title is defective. It is lost if the banker acts negligently, or collects for a person other than a customer.

Quick revision

• A negotiable instrument is transferable by delivery (bearer) or by endorsement and delivery (order), and gives the holder a right to sue in his own name.
• The three main instruments are the promissory note, the bill of exchange and the cheque.
• A promissory note is an instrument in writing (not being a banknote or 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.
• Separately, a promissory note cannot be made payable to bearer on demand (Section 31, RBI Act). A note payable to bearer in other ways, for example after a fixed period, is not barred by this rule.
• A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker (the drawer), 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.
• A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.
• A promissory note has two parties (maker and payee). A bill has three roles (drawer, drawee, payee), and one person can fill two of them.
• The drawee of a bill becomes the acceptor once he accepts it.
• Endorsement means signing the instrument, usually on the back, to transfer it. Delivery is also needed to complete negotiation.
• A holder in due course takes the instrument for value, in good faith and before it is due, and gets a good title.
• Dishonour of a cheque for insufficient funds is a punishable offence, but only if the statutory conditions on presentment, notice and time are met.
• A crossed cheque cannot be paid in cash across the counter. The paying banker must pay it to a banker. A general crossing allows payment to any banker, and under a special crossing it is payable only to the named banker or his agent for collection.

Common mistakes

• Saying a negotiable instrument is transferred by endorsement alone. Fix: Remember that delivery is always needed. Bearer: delivery. Order: endorsement and delivery.
• Believing that no instrument other than the three named in Section 13 can be negotiable by custom. Fix: Remember that Section 1 only saves local usage or custom relating to an instrument in an oriental language, such as a hundi. Courts have recognised negotiability of other instruments by custom, but Section 1 does not itself make them negotiable. It is not a general saving of trade usage. Keep it separate from the Section 13 definition.
• Treating every holder as a holder in due course. Fix: Remember HDC is a holder plus three conditions. Always test each condition before giving HDC status.
• Saying a promissory note has a drawee. Fix: A note has only a maker and a payee. It is a promise, not an order.
• Applying Section 20 to an unstamped blank paper. Fix: Always tick off signed, stamped and delivered before applying the section.
• Saying the signer is liable for any amount the holder writes. Fix: Remember the ceiling: for a holder in due course, liability is capped at the stamp's amount.
• Saying an order instrument is negotiated by delivery alone. Fix: Order instrument needs endorsement and delivery. Delivery alone works only for bearer.
• Thinking a blank endorsement names the endorsee. Fix: In blank endorsement the endorser only signs. Because no one is named, it becomes payable to bearer.
• Saying cheques and promissory notes need presentment for acceptance. Fix: Remember that acceptance is for bills only. Notes and cheques are presented for payment only.
• Mixing noting and protest. Fix: Noting is the first record or minute. Protest is the formal certificate that follows.

Exam tips

• Learn the Section 13 wording exactly: promissory note, bill of exchange, cheque, payable to order or bearer.
• Expect 'which is not a feature' questions. Use the checklist and watch for notice, conditions and uncertain sums.
• Remember that presumptions are rebuttable. Options saying they are conclusive are usually wrong.
• Learn the contrast with assignment. It is a common source of option traps.
• With no negative marking, always attempt every question, using elimination first.
• Expect definition-style MCQs that ask who is the drawee in a cheque. The answer is always the bank.
• Look for the HDC conditions hidden in a story. One missing word such as 'gift' or 'after due date' usually decides the answer.
• Do not mix up the payee and the drawee. The payee receives, the drawee pays.