Negotiable Instruments Act, 1881: formula sheet

Key formulas

Definition (Section 13(1))

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

Quote this first in any definition question.

Promissory note (Section 4)

Written + unconditional undertaking + signed by maker + certain sum + to a certain person or order, or bearer

Not a bank-note or currency-note. An IOU saying 'Mr. B, I O U Rs. 1,000' is not a promissory note per the illustration.

Bill of exchange (Section 5)

Written + unconditional order + signed by maker + directing a certain person to pay a certain sum to a certain person or order, or bearer

An order, so it involves a drawer directing another person.

Mode of negotiation (Section 46)

Bearer: delivery. Order: indorsement and delivery

Delivery completes making, acceptance or indorsement.

Instruments payable on demand (Section 19)

Note or bill with no time specified, and a cheque = payable on demand

Useful in short questions on cheques.

Presumptions (Section 118)

Until the contrary is proved: consideration, date, time of acceptance, time of transfer, order of indorsements, stamp, holder in due course

Proviso: if obtained by offence, fraud or unlawful consideration, the holder must prove he is a holder in due course.

Promissory note (Section 4)

Writing + unconditional undertaking + signed by maker + certain sum only + certain person or bearer

Not a bank-note or currency-note. Maker promises to pay.

Bill of exchange (Section 5)

Writing + unconditional order + signed by maker (drawer) + directs a certain person to pay + certain sum only + certain payee or bearer

Three parties: drawer, drawee, payee.

Cheque (Section 6)

Bill of exchange + drawn on a specified banker + payable on demand only

Includes electronic image of a truncated cheque and a cheque in electronic form.

General crossing (Section 123)

Two parallel transverse lines, or 'and company' (or abbreviation) between two parallel lines, with or without 'not negotiable'

Addition across the face of the cheque.

Special crossing (Section 124)

Name of a banker across the face, with or without 'not negotiable'

Cheque is crossed to that banker.

Negotiation (Sections 46 and 54)

Bearer: delivery. Order: indorsement + delivery. Indorsed in blank: payable to bearer

Subject to the rules on crossed cheques.

Drawer, drawee, payee (Section 7)

Drawer = maker of bill or cheque; Drawee = person directed to pay; Payee = person to whom or to whose order payment is directed

For a cheque the drawee is always a bank. For a promissory note the person who makes it is the maker, not the drawer.

Acceptor (Section 7)

Acceptor = drawee who has signed assent on the bill and delivered it, or given notice of signing to the holder

A drawee is not liable on a bill until he accepts.

Holder (Section 8)

Holder = person entitled in his own name to possession and to receive or recover the amount from the parties

If the instrument is lost or destroyed, the holder is the person so entitled at the time of the loss.

Holder in due course (Section 9)

HDC = consideration + bearer, or payee/indorsee if payable to order + before maturity + no sufficient cause to believe title defective

Learn all four tests. A missing one defeats HDC status.

Liability of prior parties (Section 36)

Every prior party is liable to an HDC until the instrument is duly satisfied

This is the main privilege of an HDC.

Derivative title (Section 53)

Holder deriving title from an HDC has the rights of that HDC

Applies even if the later holder is not himself an HDC.

Estoppels (Sections 121 and 122)

Maker or acceptor cannot deny the payee's capacity to indorse (s.121); indorser cannot deny signature or capacity of a prior party (s.122)

Section 121 applies in a suit by an HDC. Section 122 applies in a suit by a subsequent holder.

Capacity (Section 26)

Every person capable of contracting may bind himself and be bound; a minor binds all parties except himself

A corporation can act only where the law empowers it.

Inchoate stamped instrument (Section 20)

Authority to complete = any amount specified, up to the amount covered by the stamp

The signer is liable to a holder in due course for the amount filled in. A holder who is not a holder in due course can recover only the amount the signer intended.

Ambiguous instrument (Section 17)

Holder's election: treat as promissory note OR bill of exchange

Once the holder elects, the instrument is treated accordingly from then on.

Instruments payable on demand (Sections 19 and 74)

No time specified, or cheque = payable on demand; present within a reasonable time after receipt

No days of grace apply to demand, sight or presentment instruments.

Days of grace (Section 22)

Maturity = due date + 3 days

Applies to every instrument not payable on demand, at sight or on presentment.

Maturity in days (Section 24)

Exclude the day of the date (or of sight, acceptance presentment, protest or the event); count the stated days; then add 3 days of grace

Day 1 is the day after the date of the instrument.

Maturity in months (Section 23)

Period ends on the same day-number of the month reached; if that month has no such day, use its last day; then add 3 days of grace

Count calendar months, not 30-day blocks. Example: 31 August plus 3 months gives 30 November, and maturity is 3 December.

Presentment of a time instrument (Section 66)

Instrument payable after date or sight must be presented for payment at maturity

Maturity already includes the days of grace.

Negotiation

Transfer so as to make the transferee the holder = instrument negotiated (Section 14)

Applies to promissory note, bill of exchange and cheque.

Bearer instrument

Negotiable by delivery (Section 47)

Exception: delivered on condition that it is not to take effect except on a certain event, it is not negotiable (except in the hands of a holder for value without notice of the condition) unless the event happens.

Order instrument

Negotiable by endorsement + delivery (Section 48)

Both are needed. Endorsement without delivery does not complete the transfer (Section 46).

Effect of endorsement

Endorsement + delivery = property passes with right of further negotiation (Section 50)

Right may be restricted or excluded by express words, or the endorsee may be made only an agent.

Blank endorsement

Only or last endorsement in blank = payable to bearer (Section 13, Explanation (ii))

Instrument then passes by delivery.

Time limit

Negotiable until payment or satisfaction at or after maturity (Section 60)

Maker, drawee or acceptor cannot negotiate after maturity.

Presumptions

Section 118: consideration, date, order of endorsements, holder in due course

Rebuttable: they hold until the contrary is proved.

Maturity and grace

Instrument not payable on demand, at sight or on presentment matures on the third day after the day it is expressed to be payable (Section 22)

Needed to decide whether a transfer is before or after maturity.

Payment in due course (Section 10)

Apparent tenor + good faith + no negligence + payee in possession with no reasonable ground for doubting his right

All four elements must be present. Miss one and the payer is not protected by this section.

Dishonour by non-acceptance (Section 91)

Drawee (or one of several drawees not being partners) defaults in acceptance when duly required, or presentment is excused and bill is not accepted

Applies to bills only. The bill may also be treated as dishonoured if the drawee is incompetent to contract or acceptance is qualified.

Dishonour by non-payment (Section 92)

Maker / acceptor / drawee of cheque defaults in payment when duly required to pay

Applies to notes, bills and cheques.

Reasonable time (Section 105)

Nature of instrument + usual course of dealing; public holidays excluded

Used for presentment, notice of dishonour and noting.

Excuse for delay (Section 75A)

Delay beyond holder's control and not due to his default, misconduct or negligence is excused; present within a reasonable time once the cause ceases

Covers delay in presentment for acceptance or payment.

Cheque not presented in reasonable time (Section 84)

Drawer discharged only to the extent of actual damage suffered through delay, where he had funds with the banker when presentment was due

The holder then becomes creditor of the banker in place of the drawer to that extent.

Cheque presentment limit for Section 138

Present within six months from date of drawing or within its validity, whichever is earlier

This is a condition for the criminal offence of dishonour for insufficiency of funds.

Protest after non-acceptance (Section 103)

Bill payable at a place other than the drawee's residence, dishonoured by non-acceptance, may be protested for non-payment at the place specified without further presentment, unless paid before or at maturity

Saves the holder from presenting again for payment.

Noting (Section 99)

Dishonoured note or bill → holder may have a notary public note it, within a reasonable time

The note states the date of dishonour, the reason, and the notary's charges. Noting is the holder's option, not a duty.

Noting equals protest for time limits (Section 104A)

Noted for protest within the time → sufficient; formal protest may be drawn up later as of the date of noting

Applies where a bill or note must be protested within a specified time or before some further proceeding.

Notice of protest (Section 102)

Where protest is required by law → notice of protest replaces notice of dishonour

Same manner and conditions. The notary public may give the notice.

Protest after dishonour by non-acceptance (Section 103)

Bill payable at a place other than the drawee's residence, dishonoured by non-acceptance → may be protested for non-payment at the place specified, without further presentment to the drawee, unless paid before or at maturity

Do not state this for every bill. It applies only to bills drawn payable at some other place than the drawee's stated residence.

Reasonable time (Section 105)

Reasonable time depends on the nature of the instrument and usual course of dealing; public holidays are excluded

Applies to presentment, notice of dishonour and noting.

Discharge of maker, acceptor or indorser (Section 82)

(a) cancellation with intent to discharge; (b) release by the holder; (c) payment in due course by such party, if the instrument is payable to bearer or indorsed in blank

In (c), the discharge is as against all parties to the instrument.

Material alteration (Section 87)

Material alteration → instrument void against any party who was a party at the time of alteration and did not consent

Exception: the alteration was made to carry out the common intention of the original parties. If an indorsee makes it, his indorser is discharged from liability to him on the consideration. Subject to sections 20, 49, 86 and 125.

Acceptor or indorser and earlier alteration (Section 88)

An acceptor or indorser is bound by his acceptance or indorsement despite any previous alteration

Alteration before he signed does not free him.

Payment where alteration is not apparent (Section 89(1))

Payer or banker pays per the apparent tenor, in due course → discharged; payment cannot be questioned

Covers instruments materially altered but not appearing so, and cheques that do not appear crossed or whose crossing was obliterated.

Instrument taken after dishonour or when overdue (Section 59)

Holder who takes it after dishonour (with notice) or after maturity has only his transferor's rights

Proviso: a person who in good faith and for consideration takes an accommodation note or bill after maturity may recover from any prior party.

Qualified acceptance (Section 86)

Holder acquiesces in qualified or partial acceptance → previous parties who did not consent are discharged, unless they assent on notice

Acceptance is qualified if conditional, for part only, for a different place, or for a different time.

Punishment (Section 138)

Imprisonment up to 2 years, or fine up to twice the cheque amount, or both

The offence arises only if every condition of the proviso is satisfied.

Presentation of cheque

Within 6 months from date of cheque or within its validity, whichever is earlier

Proviso (a). A cheque shown as valid for three months must be presented within that period.

Demand notice

In writing, within 30 days of receiving information from the bank of return as unpaid

Proviso (b). The 30 days run from the payee's receipt of the bank's information, not from the cheque date.

Drawer's payment period

Pay within 15 days of receipt of the notice

Proviso (c). Failure to pay gives the cause of action.

Complaint time limit (Section 142(1)(b))

Within 1 month of the date the cause of action arises under proviso (c)

Delay can be condoned if the complainant shows sufficient cause.

Court and jurisdiction (Section 142)

Metropolitan Magistrate or Judicial Magistrate of the first class; place by Section 142(2)

If delivered for collection through an account: the court where the payee's account branch is. If presented otherwise: where the drawer's account branch of the drawee bank is.

Interim compensation (Section 143A)

Not more than 20% of the cheque amount; payable within 60 days (extendable by up to 30 days)

Ordered when the drawer pleads not guilty in a summary trial or summons case, or upon framing of charge in other cases.

Appeal deposit (Section 148)

Minimum 20% of the fine or compensation awarded by the trial court

Over and above any interim compensation paid under Section 143A.

Quick revision

• A negotiable instrument is a promissory note, bill of exchange or cheque payable either to order or to bearer (Section 13).
• A promissory note contains an unconditional undertaking, signed by the maker, to pay a certain sum only to a certain person or order, or to the bearer; bank-notes and currency-notes are excluded.
• A bill of exchange contains an unconditional order, signed by the maker, directing a certain person to pay a certain sum only to a certain person, to his order, or to the bearer.
• An IOU such as 'Mr. B, I O U Rs. 1,000' is not a promissory note under the Section 4 illustrations.
• A promise to pay on a future event that is certain to happen, though its time is uncertain, is not conditional (Section 5).
• A minor may draw, indorse, deliver and negotiate an instrument so as to bind all parties except himself (Section 26).
• If an instrument may be read as a note or a bill, the holder may treat it as either at his election (Section 17).
• Maturity is the date the instrument falls due; unless payable on demand, at sight or on presentment, it matures on the third day after the stated day (Section 22).
• When counting days from the date, sight or an event, exclude the day of the date, sight or event (Section 24).
• Section 138 conditions: presentment within six months or its validity, whichever is earlier; written notice within thirty days of information of return; drawer fails to pay within fifteen days of receiving notice.
• Punishment under Section 138: imprisonment up to two years, or fine up to twice the cheque amount, or both.
• A holder who acquires an instrument after dishonour with notice, or after maturity, has only his transferor's rights (Section 59), with the accommodation-bill exception.

Common mistakes

• Writing that any document of value, such as a share certificate, is a negotiable instrument. Fix: Under Section 13 the list is three instruments only. Check that the document is one of them.
• Treating a conditional promise as a valid promissory note. Fix: Use the illustrations. A promise to pay seven days after a marriage, or on D's death provided D leaves enough, is not a promissory note.
• Treating 'I.O.U. Rs. 1,000' as a promissory note. Fix: Remember the illustration to Section 4: 'Mr. B, I O U Rs. 1,000' is not a promissory note, as it has no promise to pay. 'I acknowledge myself to be indebted to B in Rs. 1,000, to be paid on demand' is a note.
• Treating a promise to pay on an uncertain event as an unconditional promise. Fix: Under Section 5, a promise payable on the lapse of a period after an event that is certain to happen, such as death, is still unconditional, even if the time of its happening is uncertain. The Section 4 illustrations (f), payment seven days after 'my marriage with C', and (g), payment on D's death 'provided D leaves me enough to pay that sum', are held not to be promissory notes. The usual explanation is that payment depends on an uncertain event or a contingency. The Act does not state the reason, so present it as the generally accepted reasoning, not as a quoted rule.
• Treating holder and holder in due course as the same. Fix: Remember HDC needs consideration, receipt before maturity and good faith on title, on top of being a holder.
• Calling a gift receiver an HDC. Fix: No consideration means no HDC status. He is still a holder.
• Counting the date of the instrument as day 1 Fix: Section 24 excludes the day of the date (or sight, or the event). Day 1 is the following day.
• Adding days of grace to a demand or sight instrument Fix: Grace is added only to instruments not payable on demand, at sight or on presentment.
• Saying an order instrument passes by simple delivery. Fix: Write the pair: bearer = delivery; order = endorsement and delivery.
• Treating "Pay C" as a restrictive endorsement. Fix: Under Section 50, "Pay C" does not exclude further negotiation. Only express words such as "Pay C only" do.

Exam tips

• Begin every definition answer with the exact Section 13(1) words, then name the three instruments.
• For fact-based questions, test the instrument against Section 4 or 5 and cite the matching illustration.
• In MCQs, watch for conditional promises and IOUs. These are classic wrong options.
• When writing on presumptions, list them clearly and always mention that they are rebuttable and give the proviso to Section 118(g).
• Keep the document-of-title comparison short and tie it back to the three-instrument list in Section 13.
• Learn the Section 4 illustrations. The examiner often gives a wording and asks whether it is a promissory note.
• For a distinction question, give the section number and at least five points. Parties, promise or order, acceptance, drawee and payment time are the safest.
• In MCQs, check the word 'unconditional' and the words 'certain sum' before choosing.