The word "Negotiable" means "Transferable by Delivery," and the word "Instrument" means "A written document creating a right for the benefit of some person." The word negotiable instrument then implies, simply, a written document that can be transferred by delivery.

According to Section 13(a) of the Act, "Negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer, whether or not the word" order "or" bearer "appears on the instrument."

In Gopal Chandra v. Bepin Behari,it was held that anybody even if he does not have an endorsement from the holder of the note can get payment that is what is meant by ‘payable to bearer on demand.’


  •  The instrument holder is always perceived as the instrument owner. Therefore, the holder does not have to prove his ownership of the instrument. 

  •  Each negotiable instrument can be freely transferred from one person to another without any formality. In other terms, the property in these instruments either goes by endorsement (if payable to order) or delivery (if payable to bearer).

  • There may be some defects in a negotiable instrument. However, if in due course the instrument is transferred to the holder then the holder in due course will become its owner. Although the instrument had some defects the negotiable instrument transferee is named 'holder in due course.' 

  • Each negotiable is transferable before maturity; thus before maturity of the negotiable instrument it can be transferred. 



Promissory Notes

Section 4 of the Act describes the promissory note as a written instrument. It contains an unconditional undertaking signed by the maker to pay certain sum of money on a pre-decided date or on demand by the maker to pay certain sum of money. The person making the promissory note and promising to pay is known as seller. Payee is the person to whom the payment is to be made.

E.g.: I promise to pay Z Rs 2000 and all other sums which shall be due to him.

Essential features of promissory note:

  • It must be in writing;

  • It is unconditional;

  • It is payable to a specified person;

  • The promissory note must be signed by the maker or payer;

  • The amount can be paid on demand or at a fixed or determined date.

  • There must be a stamp on the document.


In Ambalal Purusottam Das v. Jawarlal Purusottam Dave, it was held that mere description on an instrument as a promissory note will not make it a promissory note if it fails to satisfy the statutory requirement of Section 4 and 13 of the Act.

Bills of Exchange:

Exchange bills relate to a legally binding, written document instructing a party to pay the second (another) party a fixed sum of money. Some of the bills may state that money will be due in the future on a specified date, or they may state that payment will be due on demand.

Essential features of Bills of Exchange

  • The amount payable must be certain.

  • The payment must be made in cash.

  • The bill payable may be on demand or after a specified period.

  • The bill may be payable either to the order or to the bearer or payee.


A cheque can be defined as an order for the bank to pay to the drawer's account the amount stated in the document. It is payable on demand and can be considered as a bill of exchange. To stop its negotiability, the cheque can be crossed i.e. a cheque that has been marked specifying an instruction on the way it is to be redeemed. 

The drawer writes on the cheque date, writes the sum of money to be paid, signatures it telling his bank known as' drawee' to pay the individual the amount of money specified in the cheque in favor of whom the cheque is written.


Essential features of Cheque:

  • It must be in writing.

  • There must be an express order to pay.

  • Definite and unconditional order.

  • It must be signed by the drawer.

  • It must contain an order to pay certain amount.

  • Payable on demand.


In Shri Ishar Alloys Steels ltd. v. Jayaswab NECO Ltd,it has been held by the Supreme Court that a post-dated cheque becomes a cheque under the NI Act on the date which is written on the said cheque, and till that date it is only a bill of exchange. 



The parties to negotiable instruments are:

In case of Promissory Notes

  •  MAKER: he is the one who promises to pay the sum specified in the note.

  •  PAYEE: The person to whom the money is payable in the promissory note.

  •  HOLDER: Holder may be the payee or another person to whom the promissory note has been endorsed.

  • ENDORSER: The holder becomes the Endorser when the holder transfers or endorses the instrument to any other person.

  • ENDORSEE: The person to whom the bill is endorsed is called the endorsee.

In case of Bills of Exchange

  • DRAWER: An individual who draws a bill of exchange is named a drawer.

  • DRAWEE: The party to which such a bill of exchange is drawn is called a drawee.

  • ACCEPTOR: The person who accepts the bill of exchange is called as the acceptor. The drawee is normally the acceptor. But on behalf of the drawee, a stranger can also accept a bill

  • ENDORSER: The holder becomes the Endorser when the holder transfers or endorses the instrument to any other person.

  • ENDORSEE: An endorsee is the person to whom the bill is endorsed.

  • HOLDER: the holder of the bill of exchange implies any person legally entitled to possession of the bill and to obtain or recover from the parties the sum due thereon. He is the payee or the endorsee. The finder of a lost bill payable to bearer or an order in wrongful possession of such instrument is not a holder.

  • DRAWEE IN CASE OF NEED: In addition to the name of the drawee, in the bill or endorsement, a person's name is given to have resorted in case of need. In case of need, this person is called drawee.

  • ACCEPTOR FOR HONOUR: in the event of refusal by the original drawer to accept the bill or in the case of better security when requested by the notary public, with the consent of the holder, some other person who was originally not liable for payment of bill, may accept  it for honor of any party liable on the bill .  Such acceptor is called ‘Acceptor for honour”.

In case of Cheque

  • DRAWER: An individual who draws a cheque is named a drawer.

  • DRAWEE: The bank to which such a cheque is drawn is called a drawee.

  • PAYEE: The person to whom the money is payable in the cheque.

  • HOLDER: the holder of the cheque implies to any person legally entitled to possession of the cheque and to obtain the sum due thereon. He is the payee or the endorsee. The finder of a lost cheque payable to bearer or an order in wrongful possession of such instrument is not a holder.

  • ENDORSER: The holder becomes the Endorser when the holder transfers or endorses the instrument to any other person.

  • ENDORSEE: The person to whom the bill is endorsed is called the endorsee.


Presentation is a demand asking the owner of a negotiable instrument to do something in compliance with the instrument's instructions. 

There are three types of presentation that can occur:


Presentment for Acceptance

There are only certain types of bills of exchange that require acceptance. A bill is accepted when the drawee affixes his signature on the instrument indicating his consent to the drawer's order that when it becomes due he will pay the bill. Until he accepts the bill, the drawee is not liable.

In Jagjivan Mavji Vithlani v. Messrs. Ranchhoddas Meghji, it was held that what is requisite for fixing the drawee with the liability under the act is the acceptance by him of the instrument and not an acknowledgement of liability. 

Essentials of a valid acceptance:

  • The form of the bill must be written. A drawee inserts the accepted word either across the face of the bill or back of it and then puts its signature under the words.

  • The bill must be signed by the drawee on his own or by his designated representative. The drawee becomes liable only if he accepts the bill and not before. Before acceptance, he cannot be held liable as he is not a party to the instrument.

  • Once the bill is accepted it must be delivered to the holder. Acceptance will be of no use until the bill has been delivered to the holder. 


Presentment for acceptance is excused in the following cases:

  • After a reasonable search, the drawee cannot be found;

  • If the drawee is dead or insolvent. Section 75 of the Act states that, in such cases, the document may be presented to the legal representatives of the deceased drawee or the insolvent's assignee, but it is not obligatory; 

  • The drawee is a fictional person or is unable to contract;

  • Where, although presentment has been irregular, acceptance has been refused to some other grounds.

Presentment for Sight

Section 62 of the Act provides that no question of acceptance arises in cases of promissory note since the maker is himself liable for it. Nevertheless, to get its maturity fixed a statement that is payable at a certain period must be submitted to the maker for sign. If the maker is not found the maker is excused and the instrument can be viewed as dishonored.


Presentment for Payment 

Section 64 provides that promissory notes, exchange bills and cheque must be submitted on behalf of the holder to the maker, acceptor, or drawee. If the same is not achieved, the parties to the instrument will not be accountable to the owner. 


Presentment of cheque to charge drawee bank

A cheque must be sent for payment during the banking hours and at the bank to which it was issued and also within a reasonable period of time after it has been received by the holder.

Presentment of truncated cheque

Sec 64(2) of the act provides that if an electronic cheque has been presented for payment then the bank can ask for information regarding the truncated cheque from the bank holding the truncated cheque if there is suspicion about such a cheque. 


In Kanhyalal v. Ramkumar, it was held that a contract embodied in an exchange bill is that the drawer tells the payee that on the bill being presented to the drawee  at its maturity, the latter will honour it. This is therefore an essential step in fixing liability on the drawer for non-payment.



Section 22 of the Act provides that the date on which it is due is the maturity of a promissory note or bill of exchange. It's a key aspect of the act.  The act also provides that every promissory note or bill of exchange which is not expressed to be payable on demand, at sight or on presentment is at maturity on the third day after the day on which it is expressed to be payable.


In calculating the date on which a promissory note or bill of exchange made payable for a certain number of days after date or after sight or after certain event is at maturity, the date of the date, or presentation for acceptance of sight, or protest for non-acceptance, or on which the event occurs, is excluded. 

In Shaha & co. v. Bengal National Bank, it was held that the negotiable instrument payable on demand becomes payable at once and there is no question of maturity as regard to them. 



  • A person, who lawfully obtains a negotiable instrument, with his name thereon entitled to receive payment from the parties responsible, shall be called the holder of a negotiable instrument. 

The holder in due course is a person who acquires the negotiable instrument bonafide for some consideration the payment of which is still due.

  • Even without consideration a holder may have a negotiable instrument

A holder in due course has the negotiable instrument for consideration.

  • All prior parties cannot be sued by a holder.

A holder in due course is eligible to sue the previous parties for compensation.

  • In good faith, a holder may or may not have received the instrument

A holder in due course must be a bonafide owner the negotiable instrument.

  • A person can become a holder, before or after the maturity of the negotiable instrument.

A person can become a holder in due course, only before the maturity of the negotiable instrument.



Negotiable instruments are freely transferable; thus, they are often exchanged for payment and discharging obligations from one individual to another.


The item may be passed as follows:

 • Through negotiation;

 • By assignment;

 • By operation of law;

According to Section 14 of Negotiable Instruments Act 1881, "when a promissory note, bill of  exchange or cheque is transferred to any person in order to make that person the owner of the  instrument, the instrument is said to be negotiated."


Two requirements for a legal negotiation must be fulfilled:

 • Moving of the instrument to another party; 

• Transfer must be carried out in such a way so as to constitute the transferee the holder of the instrument.



Negotiation may be effected in the following way:

  1. Negotiation by delivery: Section 47 of the Act states that if a promissory note, bill of exchange or cheque is payable to bearer it may be negotiated by a mere delivery. It does not need the transferor's sign and by  mere possession, the transferee becomes the owner of it.

  2. Negotiation by endorsement and delivery: 


Section 48 of the Act provides that if a promissory note, bill of exchange or cheque is payable to order, it can be negotiated only through endorsement and delivery. If the holder does not sign his endorsement on the instrument and delivers it, the transferee will not become a holder If more than one payee exists, it must be endorsed by everyone.



• Delivery must be constructive and actual with the intent of transferring the property in the instrument.

• Delivery must be made on a voluntary basis.

• Mere delivery without the intention of moving the property is not sufficient to represent a complete negotiation

• There is no negotiation if the instrument is signed but not delivered.



Assignment requires a written document transferring property under the provisions of the Transfer of Property Act, 1882. Bills, promissory notes or cheque are debts; thus, they can be assigned without endorsement. 

Transfer by assignment happens when a negotiable instrument holder transfers his right without endorsing it to another individual. The assigne has the right to possession and can recover the amount due on the instruments from the parties thereto. 

In Narshing Panda v. Narsimha Murthy, A promissory note executed in favor of B. B sold this note under a sales deed to C by assignment. C sued A to get the amount back. A claimed that since C is holder in due course and was not an owner, no case could be maintained While C was not a holder in due course, the Court held that he was a holder within the scope of Section 8, since he had the possession of note and was entitled as an assignee to recover the amount in his own name. Hence an instrument can be transferred by assignment. But a transferee acquires only those rights which the transferor had at the time of assignment and no more.



  • Negotiation requires only a transfer to be delivered.

Assignment requires the transferor to sign a written document.

  • In the case of negotiations consideration is always assumed. 

In the case of assignment consideration must be confirmed.

  • Notice of transfer in the case of negotiation is not necessary.

The transfer notice must be given to the debtor by the assignee in order to complete the assignment.

  • In case of negotiation transferee can sue the third party in his own name.

An assignee cannot do so.

  • In case of negotiation the transferee takes the title free from all the defects in the title of transferor.

The assignee takes the instrument subject to all the defects in the title of the transferor. If the title of the assignor is defective the title of assignee is also defective. 


The title is transferred in case of operation of law in following situations:

  • By the death of his holder where the title vests in his personal representative;

  • By the bankruptcy of the holder, where title vests in his assignee or trustee;

  • Upon the death of a joint payee the title vests at once in the surviving payee or trustee. 




Dishonor of the negotiable instrument means, as the case may be, a loss of honor or respect on the part of the maker, drawee or acceptor for the instrument in question, which eventually results in non-realization of the payment due on the instrument. 


Non-acceptance dishonor is a situation in which a negotiable instrument is refused. In addition, in the case of a bill of exchange, dishonor by non-acceptance is generally observed. This is because it is the only kind of negotiable instrument that requires presentment for acceptance or non-acceptance. Also, in the event of non-acceptance dishonor, only the makers and endorsers are liable to the holder of the bill, provided the holder issues a notice of dishonour. 

Some of the circumstances that lead to a bill's dishonor due to non-acceptance are:

  • In the case of an excuse for presentment, resulting into a non-acceptance of the bill.

  • If the drawee is incapable of contracting.

  • If after a reasonable search we can't find the drawee.

  • If the drawee is a fictitious person.

  • When acceptance is a qualified one.

  • If the drawee refuses to accept it for consideration within 48 hours of presentment.


Effect of dishonour by non-acceptance:

When non-acceptance dishonors a bill this grants the holder an immediate right of action against the drawer or endorsers. The holder does not have to wait until the maturity date and is not required to present it for payment.



A promissory note bill or cheque will be dishonored if the cheque's maker drawee or acceptor commits default of payment if they are expected to do the same. In addition, a holder of a promissory note or bill may call it dishonored if it is expressly excused by the maker or the acceptor when payment is overdue It is important to realize that all the bill's endorsers and makers are responsible to the owner in the case of the bill's dishonor, if the holder gives dishonor notice Further note that a drawee is only liable by non-payment to the holder in the event of dishonour.


Effect of dishonour by non-payment:

The holder has the right to proceed against the drawer, drawee and all other prior indorsers after giving a notice of such dishonour.





When a negotiable instrument is dishonoured either by non-acceptance or by non-payment, holder or any party liable on the instrument must give a notice of dishonour to all other parties whom he wants to hold liable.



A person suffers immensely if a check given in his favor is dishonored because of insufficient funds in the account of the drawer of the cheque. To prohibit such dishonor, the Banking, Public Financial Institution and Negotiable Instrument Legislation (Amendment) Act, 1988, made an offense by amending the Negotiable Instrument Act.

A new Chapter VII consisting of Sections 138 to 142 has been inserted in the Negotiable Instrument Act.

Section 138 makes the dishonour of cheque an offence. The payee or holder in due course can have recourse against the drawer, who may be held liable for the offence.


Under Section 138 –  Where any cheque drawn by a person on an account held by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money due to the credit of that account is insufficient to honour the cheque or if it  exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act be punished with imprisonment [a term may be extended to 2 years], or with fine which may extend to twice the amount of the cheque, or with both.



  • Cheque dishonor

  • debtor liability discharge payment

  • presentment of cheque within its period of validity.

  • Dishonor due to insufficient funds

  • Drawer's failure to pay on demand and notice. 


The act provides that the payee or holder, as the case may be, must, within 15 days of receiving information from the bank on the dishonor of the check in due course of the negotiable instrument, submit a written notice requesting that amount from the drawer.


Notwithstanding such a notice the drawer of cheque should not make the payment of that number to the payee or holder in due course.


In the case of TomyJacob Kattikaran  v. Thomas Manjaly, The Supreme Court held that if it was established that, within the period prescribed by Section 138 of the Act, the appellant did not serve a notice on the drawer, the drawer's acquittal is justified.


Effect of dishonour of cheque

Civil liability- Where a cheque is dishonored, the cheque drawer's legal position is that of the holder's principal debtor. Like any creditor the holder may bring civil suit to reclaim the amount from the drawer which renders him liable as the principal debtor.

Criminal liability- A cheque drawer is deemed to have committed a criminal offense when the cheque drawn by him is dishonored by the drawee due to lack of funds. A drawer's criminal liability is dealt with in section 138 to section 142 of Negotiable Instrument Act 1881 in the event of cheque dishonour.


Maximum Punishment- The maximum penalty for such an offense is imprisonment of up to two years or a fine of up to twice the value of the cheque or both.

Where the cheque is drawn by a company, a firm or an individual's organization, the penalty can be given to every man who was in charge and was liable for his professional conduct as well as to the company.



The Amendment Act contains two important changes – the introduction of Section 143A and Section 148. 


Section 143A of the Amendment Act

In compliance with section 143A of the Amendment Act, any court may now order the drawer who is the issuer of the cheque, to pay interim damages to the claimant when seeking an offense for the dishonor of a cheque. Such provision was rendered in compliance with Section 138 of the Act relating to the bouncing of the cheque due to insufficient funds in the bank or the sum stated in the cheque exceeding the amount arranged to be paid from the bank account. This amendment has been made in line with Section 138 of the Act which refers to the bouncing of cheque due to insufficiency of funds in the account or the amount as mentioned in the cheque exceeding the amount arranged to be paid from the bank account.

Under this provision of the Amendment Act, the court now has the power to order such temporary damages in the conditions of a summary trial or a summons case in which the drawer pleads not to be guilty and in which any other allegation is made. The amount of compensation payable cannot, as stated in the cheque, exceed 20% of the amount.. This amount has to be paid within a specified period of time of 60 days from the date of the order passed by the court, or within a further period of 30 days, as may be directed by the court to show sufficient cause for the delay caused.

The court will therefore direct the complainant on the acquittal of the drawer to pay the drawer the prescribed amount along with the interest. The interest will be charged at the price existing at the beginning of the financial year. This recovery of the payment must be rendered within a span of 60 days in addition to a delay of 30 days, according to the section It should also be noted that, once the provisional payment has been withdrawn, the full compensation will be given to the claimant on the disposal of the lawsuit.

Section 148 of the Amendment Act

During the appeal period, the protection provided in section 143A of the Amendment Act also extends. Section 148 of the Amendment Act provides that if the drawer of the cheque is convicted, if the drawer files an appeal, the appellant court shall have the power to order the drawer of a cheque to deposit an amount. This deposited sum must be at least 20 percent of the Magistrate Court's penalty and compensation in the preferred petition against his / her sentence. That amount may be requested at any point during the appeal ongoing. The procedure for paying the above-mentioned fine and for reimbursing it if the appeal is successful is similar to the procedure laid down in Section 143A of the Amendment Act.


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By: Aayushi Devpura

      "Special Student Columnist"

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