Negotiable Instruments Act 1881
Negotiable Instrument Act is a very interesting topic of Economic, Business and Commercial Laws which is explained below:
The Negotiable Instruments Act was enacted, in India, in 1881 and it came into force on 1st March 1881. Prior to its enactment, the provision of the English Negotiable Instrument Act was applicable in India, and the present Act is also based on the English Act with certain modifications. It extends to the whole of India except the State of Jammu and Kashmir. The Act operates subject to the provisions of Section 31 and 32 of the Reserve Bank of India Act, 1934.
What is a Negotiable Instrument?
A “negotiable instrument” means a promissory note, bill of exchange or cheque payable either to the order or to the bearer.
Explanation (i) – A promissory note, bill of exchange or cheque is payable to the order which is expressed to be so payable or which is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable.
Explanation (ii) – A promissory note, bill of exchange or cheque is payable to the bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank.
Explanation (iii) – Where a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be payable to the order of a specified person and not to him or his order, it is nevertheless payable to him or his order at his option.
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 the two, or one or some of several payees. 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 which creates a right in favour of somebody and is freely transferable by delivery.’
A negotiable instrument is a piece of paper that entitles a person to a certain sum of money and which is transferable from one to another person by delivery or by endorsement and delivery. “According to Blackburn J, a negotiable instrument has two characteristics namely:
i. It is transferable, like cash, by delivery (which assumes it is in a deliverable state) so that the transferee can enforce the rights embodied in it in his own
ii. The transferee being a bonafide holder for value can acquire a better title to it than that of his transferor.”
Negotiable Instrument is moreover a document of title which clearly explains the rights towards the payment of money or security for money which is transferable by delivery either by custom or by legislation. The use of negotiable Instruments is mainly to facilitate payment for exports and imports of trade. The rapid growth of technology has revolutionized the world with a computer, which is used in every field or profession. This has reduced the use of the negotiable instrument and in the future, it may decline more. Even though the electronic revolution has got more advantages it may be considered as the next step because the world needs time to become used to it. But, the negotiable instruments are still in use.
Characteristics of Negotiable Instruments
1. Free transferability or easy negotiability
A negotiable instrument is freely transferable from one person to another without any formality. The property (right of ownership) in these instruments passes by either endorsement & delivery (in case it is payable to order) or by delivery merely (in case it is payable to bearer) and no further evidence of transfer is needed.
2. Title of the holder is free from all defects
A person who takes negotiable instrument bonafide will get the instrument free from all defects in the title for value. The holder in due course is not affected by the defective title of the transferor or of any other party.
3. The transferee can sue in his own name without giving notice to the debtor:
A bill, promissory note or a cheque represents a debt, i.e., an “actionable claim” and implies the right of the creditor to recover something from the debtor.
The creditor can either recover this amount himself or can transfer his right to another person. In case the transfers his right, the transferee of a negotiable instrument is entitled to sue on the instrument in his own name in case of dishonor, without giving notice to the debtor of the fact that he has become the holder. In case of transfer or assignment of an ordinary “actionable claim” i.e., a book debt evidenced by an entry by the creditor in his account book, under the transfer of property act, notice to the debtor is necessary in order to make the transferee entitled to sue in his own name.
Certain presumptions apply to negotiable instruments. Section 118, 119 and 139 lay down the following presumptions:
- For consideration: that every negotiable instrument, was made, drawn, accepted, endorsed or transferred for
- As to date: that every negotiable instrument bearing a date was made or drawn on such
- As to the time of acceptance: that every bill of exchange was accepted within a reasonable
time after its date and before its
- As to transfer: that every transfer of a negotiable instrument was made before its
- As to the time of endorsements: that the endorsements appearing upon a negotiable
the instrument was made in the order in which they appear
- As to stamps: that a lost promissory note, bill of exchange or cheque was duly
- As to a holder in due course: that every holder of a negotiable instrument is holder in due course (this presumption would not arise where it is proved that the holder has obtained the instrument from its lawful owner, or from any person in lawful custody thereof, by means of an offence, fraud or for unlawful consideration and in such a case the holder has to prove that he is a holder in due
- As to dishonor: that the instrument was dishonored, in case a suit upon a dishonored instrument is filed with the court and the fact of protest is
Watch Indian Partnership Act, 1932 Click below
Section 139 – Presumption in favor of holder:
It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability. “The effect of these presumptions is to place the evidential burden on the accused of proving that the cheque was not received by the complainant towards the discharge of any liability. Because both sections, i.e., 138 and 139 require that the court shall presume the liability of the drawer of the cheque for the amount for which the cheque is drawn. It is obligatory on the courts to raise this presumption in every case where the factual basis for the raising of this presumption had been established. It introduced an exception to the general rule as to the burden of proof in criminal cases and shifts the onus on to the accused.”
Questions from the Blog:-
i. Define a Negotiable Instrument?
ii. Examples of the Negotiable Instrument Act, 1881?
iii. What are the Characteristics of Negotiable Instruments?
iv. What presumptions apply to negotiable instruments?
The topic Negotiable Instruments Act is an important topic of CS Executive Economic, Business and Commercial Laws (Paper – 7) and is also included in other subjects of CS like BUSINESS ENVIRONMENT & LAW.
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