Negotiable Instruments Act

Post Name : Negotiable Instruments Act
Post Date :  17 May , 2024
Post Description : The Negotiable Instruments Act of 1881 is a significant law governing the usage of negotiable instruments in India. It is concerned with the regulation of bills of exchange, bills of exchange, and cheques. The Act was passed to establish a standardized legal framework for the use of negotiable instruments in India. The statute has been changed multiple times to reflect evolving business practices and legal requirements.

Negotiable Instruments Act

The Negotiable Instruments Act, 1881 provides the legal framework for the use of negotiable instruments in India. To ensure the legal use of securities, it is important to understand the provisions of the law and relevant jurisprudence. The law ensures that the transfer of negotiable instruments is easy and efficient, making them an essential tool for transactions.

Promissory Notes: 

A promissory note is a written promise to pay a certain amount of money to the person named in the document. The person making the promise is called the “Maker” and the person to whom the payment is made is called the “payee”. Currency can be transferred by acceptance and transfer.
In State Bank of India Vs. In Gangadhar Ramchandra Panse, the court ruled that a payee must contain an unconditional promise to pay a specified sum of money. If the promise is conditional, the document is not considered to be Promissory Note.

Bill of Exchange:

A Bill of Exchange is a written order from the manufacturer to the payee to pay a certain amount of money to a third party. The person who prepares the bill is called the “drawer” and the person to whom the payment is made is called the “drawee”. bill of exchange may be transferred by authorization and delivery.
Bank of India Vs. O.P. The Swarnakar Court held that a Bill of Exchange is a negotiable instrument which can be transferred by endorsement and delivery. The transfer of a Bill of Exchange is valid even if the transferor does not own the instrument at the time of transfer.


A Cheque is a written order from the drawer to the bank to pay a certain amount of money to the recipient. The bank is obliged to pay the amount stated in the Cheque to the payee or his authorized representative. A Cheque can be delivered by endorsement and delivery.

In the case of Canara Bank Vs. In Nuclear Power Corporation of India Ltd, the court held that a Cheque must be drawn on a specific bank and cannot be expressed as payment except on demand. The court also found that the bank has a legal obligation to pay the amount of the Cheque to the recipient or his authorized representative even if there is not enough money in the applicant’s account.

Significance of Negotiable Instrument Act

The purpose of this law is to create legal regulations for the portable instrument system currently in use throughout the country. The regulatory law would organize the system systematically, and the law would define decision-making power in all matters related to traded instruments.

  • The law defines each relevant topic as a means to achieve a better understanding and understanding of the negotiated instruments.
  • The Act includes penal provisions to effectively enforce the process of negotiable instruments between two parties. If a party violates or does not fulfill its duty, it can be punished for crimes that carry a prison sentence.
  • It protects the rights of the parties if they carefully fulfill their obligations.
  • It mentions the terms and conditions of various transaction systems and lays down their special provisions.
  • The law overrides any differences or barriers between the parties. In case of disputes, the parties must follow the established regulations and resolve the matter legally.

Cheque and Postdated Cheque

The Supreme Court of India in the Anil Kumar Sawhney case explained the difference between a Cheque and a postdated Cheque by referring to Sections 5 and 6 of the Negotiable Instruments Act, 1881. v. Gulshan Rai (1993). According to the decision of the Supreme Court:

  • A postdated Cheque is only a bill of exchange if it is written or drawn; once it is payable on demand, it is a Cheque.
  • A postdated Cheque cannot be cashed before the date printed on the face of the document. It remains a bill of exchange under section 5 of the
  • Negotiable Instruments Act, 1881 until the date stated on it when it becomes a cheque.
  • Since a postdated Cheque cannot be presented to the bank, it could not be returned. The requirements of Section 138 of the Negotiable Instruments Act, 1881 apply only when a post-dated Cheque becomes a “cheque” effective on the date shown on the face of the said cheque.
  • However, a postdated Cheque is valid as a bill of exchange until the dates printed on it. However, from the date printed on the face of the said cheque, it shall be deemed to be a Cheque under the Negotiable Instruments Act, 1881 and the violation thereof triggers the condition (a) of Section 138 .

Different Types of Cheques

The different types of Cheques are discussed below:

Open Cheque: It is somewhat comparable with a bearer Cheque in that any person who carries or carries a bearer Cheque can be paid the amount stated on the Cheque.
Crossed Cheque: A crossed Cheque drawn only on the payee’s bank account can reduce the risk associated with open Cheques, which are often risky to write and issue. The upper left corner of a Cheque can also be crossed by drawing two parallel lines on it, with or without writing “Account Payee” or “Non-negotiable”.
Order Cheque: It is a Cheque in which the word “bearer” can be crossed out or canceled and is made out to a particular person;
Electronic Cheque: It is a Cheque created in a secure system that ensures security requirements through digital signatures and contains an exact mirror image of the original Cheque.

Difference between Promissory Note and Bill of Exchange

  • A promissory note contains an unconditional order to pay, while a promissory note contains an unconditional promise to pay.
  • Bill of exchange has only two parties, the maker and the payee, while bills of exchange have three parties, namely the maker, the drawee and the payee.
  • Acceptance by voucher is not necessary; however, in promissory notes, the payee must accept.
  • In promissory notes, the promissory note is secondary and depends on non-payment of the promissory notes; in the bill of exchange, the responsibility of the box or its manufacturer is primary and unconditional.

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