81 Negotiable Instruments Act, 1881
81.1 Background and Scope
The Negotiable Instruments Act, 1881 governs promissory notes, bills of exchange and cheques in India. It came into force on 1 March 1882 and has been amended several times — most importantly to introduce Section 138 on dishonour of cheques (1988) and to recognise electronic cheques and truncated cheques (2002) (kapoor2023?).
81.2 Meaning of Negotiable Instrument
Section 13(1) defines: “A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.”
The term negotiable implies transferable by delivery (if payable to bearer) or by endorsement and delivery (if payable to order), with the transferee getting good title free from defects of the transferor’s title (provided he is a holder in due course).
| Instrument | Section | Working content |
|---|---|---|
| Promissory Note | 4 | Written, unconditional promise by the maker to pay a specified sum to the payee |
| Bill of Exchange | 5 | Written, unconditional order by the drawer to the drawee to pay a specified sum to the payee |
| Cheque | 6 | Bill of exchange drawn on a banker, payable on demand |
Other instruments — dividend warrants, share warrants, hundis — are recognised by usage as negotiable, though not defined in the Act.
81.3 Promissory Note (Sec. 4)
| Essential | Working content |
|---|---|
| In writing | Oral promise insufficient |
| Express promise to pay | More than mere acknowledgement of debt |
| Unconditional | Cannot depend on contingency |
| Maker must sign | Signed by promisor |
| Sum in money | Definite, certain |
| Certain payee | Identified |
| Stamp | Adhesive stamp affixed |
81.4 Bill of Exchange (Sec. 5)
A bill has three parties:
- Drawer — the maker.
- Drawee — the person directed to pay.
- Payee — the person to whom payment is to be made.
When the drawee accepts the bill, he becomes the acceptor. Bills may be inland or foreign (Sec. 11–12).
81.5 Cheque (Sec. 6)
A cheque is a bill of exchange drawn on a specified banker and payable on demand. After the 2002 amendment, the term cheque also includes:
- The electronic image of a truncated cheque.
- A cheque in electronic form (digitally signed).
| Type | Working content |
|---|---|
| Bearer cheque | Payable to bearer; transferable by delivery |
| Order cheque | Payable to specified person or order |
| Crossed cheque | Two parallel lines on top-left; payable only through bank account |
| Stale cheque | Older than 3 months; not honoured |
| Post-dated cheque | Bears a future date |
| Ante-dated cheque | Bears an earlier date |
| Mutilated cheque | Damaged |
81.6 Crossing of Cheques (Sec. 123–131)
| Type | Working content |
|---|---|
| General crossing | Two parallel lines, with or without “& Co.” |
| Special crossing | Bank’s name written between the lines |
| Restrictive crossing | “Account payee only” — payable only to the named payee’s account |
| Not negotiable crossing | Words “Not Negotiable” — restricts transferability of title |
81.7 Parties to Negotiable Instruments
| Term | Meaning |
|---|---|
| Holder (Sec. 8) | Entitled to possess the instrument and receive payment |
| Holder in Due Course (HDC) (Sec. 9) | Holder who acquired in good faith, for value, before maturity |
| Drawer / Maker | Issuer |
| Drawee | Person directed to pay |
| Payee | Person to whom payment due |
| Endorser | Transferor by endorsement |
| Endorsee | Transferee |
The Holder in Due Course enjoys a privileged position — good title free from prior defects.
81.8 Negotiation and Endorsement (Sec. 14, 15)
Negotiation is the transfer of an instrument so that the transferee becomes the holder. Methods:
- Bearer instruments — by delivery.
- Order instruments — by endorsement and delivery.
| Type | Working content |
|---|---|
| Blank | Endorser signs only his name |
| In full / Special | Specifies the endorsee |
| Restrictive | Restricts further negotiation |
| Conditional | Subject to a condition |
| Sans recourse | Without liability of endorser |
| Facultative | Endorser waives some right |
81.9 Dishonour and Notice
A negotiable instrument may be dishonoured by non-acceptance (bills only) or by non-payment. The holder must give notice of dishonour to all prior parties to keep their liability alive (Sec. 93).
81.10 Section 138 — Dishonour of Cheque
The 1988 amendment introduced Section 138 — dishonour of cheque for insufficiency of funds is a criminal offence. Conditions for the offence:
| Condition | Working content |
|---|---|
| 1 | Cheque issued for the discharge of a legally enforceable debt or liability |
| 2 | Cheque returned unpaid for insufficiency of funds (or exceeds arrangement) |
| 3 | Cheque presented within validity (3 months) |
| 4 | Payee gives notice within 30 days of dishonour |
| 5 | Drawer fails to pay within 15 days of notice |
| 6 | Complaint filed within one month thereafter |
The offence is punishable with imprisonment up to 2 years, or fine up to twice the cheque amount, or both. Section 143A and 148 (added 2018) require interim compensation up to 20 % of the cheque amount.
81.11 Discharge of Liability
A party may be discharged by:
- Payment in due course.
- Cancellation of the instrument.
- Release of liability.
- Material alteration without consent.
- Operation of law (insolvency, limitation).
81.12 Special Rules — Hundis
Hundis are indigenous bills of exchange used in India. The Act recognises them and applies the general law subject to local usage. Hundi types include Shah Jog, Darshani, Muddati, Dhani Jog, etc.
81.13 Exam-Pattern MCQs
Q1. Which of the following is not a negotiable instrument as defined in Section 13?
A. Promissory note B. Bill of exchange C. Cheque D. Income-tax challan
Answer: D. The Act recognises promissory note, bill of exchange and cheque as the three principal negotiable instruments.
Q2. Match each instrument with its defining section:
| Instrument | Section | ||
|---|---|---|---|
| (i) | Promissory note | (a) | 5 |
| (ii) | Bill of exchange | (b) | 6 |
| (iii) | Cheque | (c) | 4 |
A. (i)-(c), (ii)-(a), (iii)-(b) B. (i)-(a), (ii)-(b), (iii)-(c) C. (i)-(b), (ii)-(c), (iii)-(a) D. (i)-(c), (ii)-(b), (iii)-(a)
Answer: A.
Q3. A bill of exchange has how many parties?
A. Two B. Three (Drawer, Drawee, Payee) C. Four D. Five
Answer: B. Drawer, Drawee, Payee.
Q4. Match each type of crossing with its content:
| Crossing | Content | ||
|---|---|---|---|
| (i) | General | (a) | Bank’s name between lines |
| (ii) | Special | (b) | Two parallel lines, with or without “& Co.” |
| (iii) | Account payee only | (c) | Payable only to the named payee’s account |
| (iv) | Not negotiable | (d) | Words restrict transferability of title |
A. (i)-(b), (ii)-(a), (iii)-(c), (iv)-(d) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a) D. (i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
Answer: A.
Q5. A Holder in Due Course is one who:
A. Has merely received the instrument B. Has acquired the instrument in good faith, for value, before maturity C. Is the original payee D. Holds the instrument after dishonour
Answer: B. HDC (Sec. 9) — good faith, value, before maturity.
Q6. Under Section 138, what is the maximum imprisonment for dishonour of cheque?
A. 6 months B. 1 year C. 2 years D. 3 years
Answer: C. Up to 2 years imprisonment, or fine up to twice the cheque amount, or both.
Q7. Arrange the following Section 138 procedural steps in correct order:
- Cheque dishonoured
- Drawer fails to pay within 15 days
- Payee gives notice within 30 days
- Complaint filed within one month
A. (i), (iii), (ii), (iv) B. (ii), (i), (iv), (iii) C. (iii), (i), (iv), (ii) D. (iv), (iii), (ii), (i)
Answer: A. Cheque dishonoured → Notice within 30 days → Drawer fails within 15 days → Complaint within 1 month.
Q8. Match each endorsement with its content:
| Endorsement | Content | ||
|---|---|---|---|
| (i) | Blank | (a) | Specifies the endorsee |
| (ii) | Special | (b) | Endorser signs only his name |
| (iii) | Sans recourse | (c) | Subject to a condition |
| (iv) | Conditional | (d) | Without liability of endorser |
A. (i)-(b), (ii)-(a), (iii)-(d), (iv)-(c) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a) D. (i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
Answer: A.
- Negotiable Instruments Act 1881. Three instruments: promissory note (Sec. 4), bill of exchange (Sec. 5), cheque (Sec. 6).
- Cheque = bill of exchange drawn on banker, payable on demand. Includes electronic and truncated forms (2002 amendment).
- Bill of exchange: 3 parties — drawer, drawee, payee.
- Crossing: general, special, account payee only, not negotiable.
- Holder in Due Course (Sec. 9): in good faith, for value, before maturity — gets title free from defects.
- Endorsement types: blank, in full, restrictive, conditional, sans recourse, facultative.
- Section 138 (1988) — dishonour of cheque is criminal; up to 2 years + fine up to twice the cheque amount.
- Section 138 timeline: 3-month validity → 30-day notice → 15-day cure → 1-month complaint.
- Discharge: payment, cancellation, release, material alteration, operation of law.
- Hundis — indigenous bills (Shah Jog, Darshani, Muddati).