82  Negotiable Instruments Act, 1881: Types of negotiable instruments; Negotiation and assignment; Dishonour and discharge of negotiable instruments

82.1 Background and Scope

The Negotiable Instruments Act, 1881 (NIA) consolidates the law relating to promissory notes, bills of exchange and cheques and the rules of negotiability. It applies to the whole of India and came into force on 1 March 1882. Section 13 defines a negotiable instrument as “a promissory note, bill of exchange or cheque payable either to order or to bearer”. Negotiability gives the instrument two unique features: (a) free transferability by delivery or endorsement, and (b) a transferee in good faith and for value (the holder in due course) acquires a better title than the transferor.

82.2 Definitions — Key Sections

TipNIA — Key Definitions
  • § 4 — Promissory Note (PN) — an unconditional written undertaking signed by maker, to pay a certain sum to / order of a certain person, or to bearer.
  • § 5 — Bill of Exchange (BoE) — an unconditional written order signed by maker, directing a certain person to pay a certain sum to a third or to bearer.
  • § 6 — Cheque — bill of exchange drawn on a specified bank and payable on demand; includes truncated and electronic cheque (post-2002 amendment).
  • § 8 — Holder — person entitled in his own name to possession and recovery of amount.
  • § 9 — Holder in Due Course (HDC) — holder who got the instrument before maturity, for consideration, in good faith, and without notice of defect in transferor’s title.

82.3 Parties and Their Order

TipParties to NIs
Instrument Parties
Promissory Note Maker (debtor) → Payee (creditor)
Bill of Exchange Drawer → Drawee (becomes Acceptor) → Payee
Cheque Drawer (account holder) → Drawee (Bank) → Payee

82.4 PN vs BoE vs Cheque — Comparison

TipComparison Among Instruments
Aspect PN BoE Cheque
Parties 2 3 3
Maker / Drawer Debtor Creditor Account holder
Acceptance Not required Required Not required
Drawn on – Anyone Specified bank only
Payable Demand / future Demand / future On demand only
Days of grace 3 (if time-bill) 3 None
Crossing No No Yes
Notice of dishonour Required Required Not strictly
Stamping Yes Yes No

82.5 Types of Instruments

TipOther Types
  • Bearer / Order instruments.
  • Demand / Time / Usance bills.
  • Inland / Foreign bills.
  • Trade vs Accommodation bill.
  • Documentary vs Clean bill.
  • Crossed and uncrossed cheque (Crossing — §§ 123-131A: General §123, Special §124, Restrictive ‘A/c Payee’ §123A, Not Negotiable §130).
  • Truncated cheque (electronic image — § 6) and Electronic cheque — added in 2002.

82.6 Negotiation vs Assignment

TipNegotiation vs Assignment
Aspect Negotiation (§14) Assignment (TPA §130)
Mode Delivery / Endorsement Written + notice to debtor
Consideration Presumed (§118) Must be proved
Notice to debtor Not necessary Necessary
Title Holder in due course gets better title Assignee can have no better title
Subject NIs only Any actionable claim

82.7 Endorsement (§§ 15-17, 50-56)

Signing on the back of the instrument or on a separate paper (allonge) attached, for the purpose of negotiating it.

TipTypes of Endorsement
  • Blank — only signature.
  • Full — name of endorsee + signature.
  • Restrictive — restricts further negotiation.
  • Partial — only part of amount (generally invalid).
  • Conditional — endorser stipulates a condition.
  • Sans Recourse — without recourse to endorser.
  • Facultative — endorser waives some right.

82.8 Holder in Due Course (HDC, § 9) — Privileges

TipHDC Privileges
  • Acquires good title even if transferor’s was defective (§ 53).
  • All prior parties remain liable to HDC.
  • Bill obtained without consideration becomes valid in his hands (§ 58).
  • Estoppel against denying original validity (§ 120).
  • Estoppel against denying capacity of payee to endorse (§ 121).
  • Estoppel against denying signature/capacity of prior parties.

82.9 Crossing of Cheques (§§ 123-131A)

TipCrossing Types
  • General (§ 123) — two parallel transverse lines with/without “& Co.”.
  • Special (§ 124) — banker’s name across face.
  • Restrictive ‘A/c Payee’ (judicially recognised) — credit only to payee’s account.
  • Not Negotiable (§ 130) — transferee cannot have better title than transferor.

82.10 Dishonour

82.10.1 By Non-Acceptance (§§ 91-92)

If drawee refuses to accept the bill — bill dishonoured by non-acceptance.

82.10.2 By Non-Payment (§ 92)

Maker/Drawee fails to pay on maturity.

82.10.3 Notice of Dishonour (§§ 93-98)

To be given by the holder to all prior parties whom he intends to hold liable; otherwise they are discharged.

82.10.4 Noting and Protest (§§ 99-104A)

For foreign bills protest is compulsory; for inland bills, noting/protest is optional but useful evidence.

82.10.5 §138 NIA — Cheque Dishonour

Inserted by 1988 amendment; in force from 1 April 1989. Dishonour of cheque for insufficiency of funds is a criminal offence:

Tip§ 138 Essentials
  • Drawn on an account maintained by the drawer.
  • For discharge of legally enforceable debt.
  • Returned unpaid due to insufficient funds or exceeds arrangement.
  • Notice to drawer within 30 days of receipt of dishonour memo.
  • Failure to pay within 15 days of notice → offence.
  • Complaint within one month from cause of action.
  • Punishment: imprisonment up to 2 years or fine up to twice the cheque amount or both.
  • Compoundable, bailable, non-cognizable.
  • Negotiable Instruments (Amendment) Act 2018 — interim compensation up to 20 % of cheque amount payable to complainant in summary trial.

82.10.6 Other Dishonour Reasons (Banker’s Right — § 31)

Insufficient funds, account closed, signature mismatch, date issues, words and figures differ, post-dated, stop-payment, customer’s death/insolvency, garnishee order, etc.

82.11 Discharge of NIs (§§ 82-90)

TipModes of Discharge
  • By payment in due course (§ 82(c)) — principal mode.
  • Holder cancelling debtor’s name (§ 82(a)).
  • Holder releasing debtor (§ 82(b)).
  • By novation, rescission, alteration.
  • Material alteration without consent (§ 87) — instrument void.
  • Acceptor becoming holder at/after maturity.
  • Cheque becoming stale after 3 months (RBI rule).

82.12 Presumptions (§§ 118-119)

Tip§ 118 Presumptions (until contrary proved)
  • Consideration.
  • Date.
  • Time of acceptance.
  • Time of transfer (before maturity).
  • Order of endorsement (as appears).
  • Stamp.
  • Holder is HDC.
  • § 119 — Proof of protest.

flowchart TB
  N[NIA 1881] --> D[Definitions<br/>§4 PN · §5 BoE · §6 Cheque · §9 HDC]
  N --> P[Parties<br/>Maker · Drawer · Drawee · Payee · Endorser]
  N --> NG[Negotiation §14<br/>Endorsement · Crossing]
  N --> DH[Dishonour<br/>§§91-104 · §138 cheque bounce]
  N --> Di[Discharge §§82-90<br/>Payment · Cancellation · Material alteration]
    classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;

NoteDistractor warning

PYQ trap: §138 cheque dishonour: 30 days notice + 15 days to pay + 1 month to file; punishment 2 years / fine up to 2× cheque amount. Truncated & electronic cheque added by 2002 amendment.

82.13 Practice Questions

Q 01PNEasy

A Promissory Note is defined in:

  • A§ 4
  • B§ 5
  • C§ 6
  • D§ 9
View solution
Correct Option: A
**§ 4**.
Q 02ChequeEasy

Cheque is defined in:

  • A§ 4
  • B§ 5
  • C§ 6
  • D§ 13
View solution
Correct Option: C
**§ 6**.
Q 03HDCMedium

Holder in due course is defined in:

  • A§ 8
  • B§ 9
  • C§ 13
  • D§ 14
View solution
Correct Option: B
**§ 9** — HDC.
Q 04§138Medium

Punishment under § 138 cheque bounce is up to:

  • A3 months
  • B1 year
  • C2 years (and/or fine up to 2× amount)
  • D5 years
View solution
Correct Option: C
**2 years and/or fine up to 2× cheque amount**.
Q 05NoticeMedium

Notice of cheque dishonour must be given within:

  • A15 days
  • B30 days of dishonour memo
  • C60 days
  • D90 days
View solution
Correct Option: B
**30 days** of receipt of bank memo.
Q 0615 daysMedium

Drawer has how many days to pay after receiving notice?

  • A7
  • B15
  • C30
  • D60
View solution
Correct Option: B
**15 days** to pay after receipt of notice.
Q 07NegotiationMedium

Negotiation is defined in:

  • A§ 13
  • B§ 14
  • C§ 17
  • D§ 20
View solution
Correct Option: B
**§ 14**.
Q 08CrossingMedium

General crossing is defined in:

  • A§ 123
  • B§ 124
  • C§ 130
  • D§ 138
View solution
Correct Option: A
**§ 123** — general crossing.
Q 09Days of graceMedium

Days of grace for time bills:

  • A1
  • B3
  • C5
  • D7
View solution
Correct Option: B
**3 days** of grace.
Q 10TruncatedHard

Truncated & electronic cheque concept added in:

  • A1988
  • B2002
  • C2015
  • D2018
View solution
Correct Option: B
**2002 amendment**.
Q 11StaleMedium

A cheque becomes stale after:

  • A7 days
  • B15 days
  • C3 months (RBI)
  • D6 months
View solution
Correct Option: C
**3 months** since 2012 (RBI).
Q 12AcceptanceMedium

Acceptance is required only on:

  • APN
  • BBoE
  • CCheque
  • DAll NIs
View solution
Correct Option: B
**Bill of Exchange** — drawee becomes acceptor on signing.
Q 13A/c PayeeHard

"A/c Payee" crossing means:

  • APay in cash
  • BCredit only to account of named payee
  • CPay to any bank
  • DSpecial crossing
View solution
Correct Option: B
**Restrictive A/c Payee crossing** — to payee's account only.
Q 14Material altHard

Material alteration without consent renders the instrument:

  • AValid
  • BVoid (§ 87)
  • CVoidable
  • DRenewed
View solution
Correct Option: B
**§ 87** — void.
Q 15CompoundableHard

§ 138 offence is:

  • ACognizable & non-bailable
  • BNon-cognizable, bailable, compoundable
  • CNon-bailable
  • DCognizable
View solution
Correct Option: B
Non-cognizable, bailable, compoundable.
Q 16PresumptionMedium

Section 118 lays down presumption regarding:

  • AConsideration, date, time, HDC
  • BAcceptance only
  • CStamp duty
  • DCrossing
View solution
Correct Option: A
**§ 118 — special presumptions**.
Q 17PartiesEasy

A bill of exchange has:

  • A2 parties
  • B3 parties
  • C4 parties
  • D5 parties
View solution
Correct Option: B
**Drawer, Drawee/Acceptor, Payee**.
Q 18Interim compHard

Interim compensation in cheque-bounce cases (NIA Amendment 2018) is up to:

  • A10 %
  • B15 %
  • C20 %
  • D25 %
View solution
Correct Option: C
**Up to 20 % of cheque amount** as interim compensation.
Q 19DischargeHard

Most common mode of discharge of an NI:

  • AAcceptance
  • BPayment in due course
  • CCancellation by drawer
  • DEndorsement
View solution
Correct Option: B
**§ 82(c)** — payment in due course.
Q 20MatchMedium

Match section with provision:

Section Provision
(i) § 4 (a) HDC
(ii) § 6 (b) PN
(iii) § 9 (c) Cheque dishonour
(iv) § 138 (d) Cheque
  • A(i)-(b), (ii)-(d), (iii)-(a), (iv)-(c)
  • B(i)-(a), (ii)-(b), (iii)-(c), (iv)-(d)
  • C(i)-(d), (ii)-(c), (iii)-(b), (iv)-(a)
  • D(i)-(c), (ii)-(a), (iii)-(d), (iv)-(b)
View solution
Correct Option: A
Direct mapping.

82.14 Quick Recall

ImportantQuick recall
  • NIA 1881 — in force 1 March 1882; §13 — NI = PN/BoE/Cheque payable to order or bearer.
  • §4 PN, §5 BoE, §6 Cheque, §9 HDC, §14 Negotiation.
  • Parties: PN (2), BoE (3 — drawer, drawee/acceptor, payee), Cheque (3).
  • Days of grace: 3 (time bills only); none for cheque.
  • Endorsement: blank, full, restrictive, partial, conditional, sans recourse, facultative.
  • Crossing: §123 general, §124 special, §130 not negotiable, A/c Payee.
  • Dishonour: §§91-92; notice §§93-98; protest §§99-104A.
  • §138 cheque bounce: 30 days notice + 15 days to pay + 1 month to file; up to 2 yrs or 2× cheque amount; non-cognizable, bailable, compoundable; 2018 amendment — interim comp up to 20 %.
  • Discharge: §§82-90; §87 material alteration void.
  • §118 presumptions (consideration, date, time, HDC).