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Negotiable Instruments Act 1881

Negotiable Instruments Act-1881: The laws relating to the negotiable instruments are contained in negotiable instruments act. This law is based on English common law. This Act is applicable to whole of India. This act came in to force in March 1st 1982. The latest amendment is made in the year 2002.  

Negotiable instruments means the documents which can be transferred easily for money’s worth. Negotiable means transferable and instrument means documents. This act deals only with three types of negotiable instruments namely:

Promissory note

Bill of exchange

Cheques 

The Act does not deal with Currency.

Features of Negotiable Instrument:

    i) The right of ownership contained in the instrument can be transferred from one person to another by:

1. Mere delivery (payable to bearer the person who holds becomes the owner)

2. Endorsement and delivery (payable to order mention the name of the person in the instrument) 

ii) The transferee (to whom the instrument is transferred) taking the instrument in the good faith and for consideration gets a good title of the transferor (who transferred) is defective). 

Characteristics of Negotiable Instrument:

1. Property

           In general the right of property of the Negotiable Instrument is with the person who possesses the instrument. The person who holds the instrument is not only given with mere possession but also with right to property.

2. Freely transferrable:-

            The property in Negotiable Instrument can be freely transferrable from one person to another by mere delivery (bearer) or by endorsement & delivery (to order)

3. Title of Holder in Due Course Free From all Defects:-

      A holder in due course (i.e. the person who becomes the possessor of negotiable instrument before maturity, for valuable consideration in good faith) gets the instrument free from all defects in the title.

4. Recovery

              The holder in due course can sue upon a negotiable instrument in his own name for the recovery of the amount and he need not give notice of transfor to the party liable on the instrument to pay.

5. Presumptions:-

                 There are certain presumption which has to be made in case of negotiable instruments if not mentioned otherwise. Presumptions has to be made in relation to 

Consideration:  transferred for some consideration

Date:  date mentioned in the instrument is considered as date of made

Time of acceptance: it is presumed that it is been accepted within a reasonable time before maturity

Stamp: when an instrument is lost it is presumed that it was duly stamped.

Negotiation

When a Negotiable Instrument is transferred from one person to another in a motive to make him as a holder then it is called as negotiable. To complete the negotiation it is essential that the negotiable instrument has to be delivered. The delivery must be voluntary. Sec 46 states that the negotiation ends with delivery.

Note : When it is transferred only for safe custody then it is not a negotiation.

There are two types of negotiation 

                 Negotiation by delivery: when the instrument passes along with ownership from one person to another it is called negotiation by delivery here the bearer of the instrument becomes the owner of the instrument (sec 47).

                 Negotiation by endorsement and delivery: when the transferor transfer the instrument along with the name to whom it is assigned in the face or back of the instrument it is called endorsement and delivery.

Kinds of negotiation

Actual:-  Negotiable Instrument change hand physically

Constructive:- Negotiable Instrument has been given to agent

Conditional or special:- Negotiable Instrument can be delivered on condition for happening or non-happening of such event. The property in this case will not transfer even after delivery.

Endorsement

       Endorsement means writing of a person’s name on the face or back of a Negotiable Instrument or a slip of paper attached for the purpose of negotiation (allonge) Sec.15

 The person who signs the Negotiable Instrument is –Endorser .To whom the instrument is endorsed is – Endorsee.

Essentials of Endorsement:

The endorsement must be done in the Negotiable Instrument or on a paper attached for this purpose. 

It has to be signed by the endorser.

It must be completed by delivery (with an intention to pay ownership).

Kinds of Endorsement

          The endorser can endorse the instrument in different ways which are explained below

Blank or general Endorsement

        When the endorser signs at the back of the instrument, without mentioning the name of the endorsee then the endorsement is called blank endorsement. The effect of such endorsement is like payable to bearer even though originally payable to order(sec 54).

            e.g. at bank of the instrument

                      Santhosh Pawar 

(Just writing the name of the endorser with or without signature).

Full Endorsement

      When the endorser signs in the back of the instrument along with the name of the endorsee to whom it has to be paid is called Endorsement in full.

           e.g. at bank of the instrument

  a) Pay to Ritu Pawar or order 

             Santhosh Pawar. 

b) Pay to Ritu Pawar

               Santhosh Pawar. 

Converting Endorsement in blank into endorsement in full (sec. 49)

     If the endorsement is a blank endorsement then it can be converted in to full endorsement by adding the name of the endorsee , by the holder of the instrument, above the signature of the endorser.

In this case the holder will not be responsible for the dishonor of the cheque.

  e.g. at bank of the instrument

  a)  Santhosh Pawar. 

         It is a blank endorsement

When other person (e.g) Parmesh patil becomes the bearer of the instrument then he can convert it in to full endorsement by adding the name of endorsee above the signature of endorser santhosh pawar in the instrument

3. Restrictive Endorsement

                    When the endorser prohibits the further endorsement of an instrument it is called Restrictive endorsement. In this case the last endorsee can claim or sue on the instrument

        e.g Pay the contents to Ibrahim only

sathish kadam

       this cannot be negotiated further.

4. Endorsement ‘Sans Recourse’

     When the endorser exclude his own liability there on it is called sans recourse. It means without recourse to me. In this case the endorser will not be responsible when the instrument is dishonoured.

      e.g “Pay to Ibrahim without recourse to me”

                                                                 sathish kadam

In this case if the instrument comes back to sathish kadam after other endorsement he can claim the other parties.

5. Facultative endorsement

           If the endorser increases his liability on the instrument by adding such words waive notice on dishonor

     e.g “pay Mr.K or order. Notice of dishonor Waived”

                                                               Mr.Y

6. Conditional Endorsement

                           According to sec.52 when the endorser includes any condition to claim the instrument by the endorsee on happening or non happening of any specific event then it is called conditional endorsement. In this case the endorser will not become liable to the endorsee till the happening of the specific event

      e.g. Pay to A when he reaches Delhi

                                     Mr.Y

In this case A can Claim the money only after he reaches Delhi.

7. Partial Endorsement

         The partial endorsement is when the endorser endorse only a part of amount mention in the instrument to the endorsee. But partial endorsement is not legally accepted.

Forged Endorsement

       When an instrument includes any forged endorsement then no person can claim the rights of the holder in due course or property even if the instrument is acquired in good faith for consideration.

Refernce Books

1. N. D. Kapoor, Legal Aspects of Business

2. P. L. Tulsian , Legal Aspects of Business

3. K. R. Bulchandani, Legal Aspects of Business

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