Negotiable Instruments Act, 1881 is an act in India dating from the British colonial rule, that is still in force largely unchanged.

The history of the present Act is a long one. The Act was originally drafted in 1866 by the 3rd India Law Commission and introduced in December 1867 in the Council and it was referred to a Select Committee. Objections were raised by the mercantile community to the numerous deviations from the English Law which it contained. The Bill had to be redrafted in 1877. After the lapse of a sufficient period for criticism by the Local Governments, the High Courts and the chambers of commerce, the Bill was revised by a Select Committee. In spite of this Bill could not reach the final stage. In 1880 by the Order of the Secretary of State, the Bill had to be referred to a new Law Commission. On the recommendation of the new Law Commission, the Bill was re-drafted and again it was sent to a Select Committee which adopted most of the additions recommended by the new Law Commission. The draft thus prepared for the fourth time was introduced in the Council and was passed into law in 1881 being the Negotiable Instruments Act, 1881 (Act No.26 of 1881)

The most important class of Credit Instruments that evolved in India were termed Hundi. Their use was most widespread in the twelfth century and has continued till today. In a sense, they represent the oldest surviving form of credit instrument. These were used in trade and credit transactions; they were used as remittance instruments for the purpose of transfer of funds from one place to another. In Modern era Hundi served as traveller’s cheques.

According to Section 13 of the Negotiable Instruments Act, “A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.’But in Section 1, it is also described that Local extent, Saving of usage relating to hundis, etc., Commencement. -It extends to the whole of India but nothing herein contained affects the Indian Paper Currency Act, 1871, Section 2, or affects any local usage relating to any instrument in an oriental language. Provided that such usages may be excluded by any words in the body of the instrument, which indicate an intention that the legal relations of the parties thereto shall be governed by this Act; and it shall come

Main Types of Negotiable Instruments are:

  1. Inland Instruments
  2. Foreign Instruments
  3. Bank
  4. Finance companies(listed) Draft

Modern day

We prefer to carry a small piece of paper known as Cheque rather than carrying the currency worth the value of the Cheque. Before 1988 there being no provision to restrain the person issuing the Cheque without having sufficient funds in his account. Of course on Dishonoured cheque there is a civil liability accrued. In order to ensure promptitude and remedy against the defaulters of the Negotiable Instrument a criminal remedy of penalty was inserted in Negotiable Instruments Act, 1881 by amending it with Negotiable Instruments Act, 1988.

With the insertion of these provisions in the Act the situation certainly improved and the instances of dishonour have relatively come down but on account of application of different interpretative techniques by different High Courts on different provisions of the Act it further compounded and complicated the situation although on dishonour of cheques the trends of the verdicts of the Supreme Court of India

Parliament enacted the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 (55 of 2002), which is intended to plug the loopholes. This amendment Act inserts five new sections from 143 to 147 touching various limbs of the parent Act and Cheque truncation through digitally were also included and the amendment Act has been recently brought into force on Feb. 6, 2003.


Section-6 of N.I.T Act,1881-

A cheque is defined as ‘a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand’.

Thus, a cheque is a bill of exchange with two added features:-

(i)  It is always drawn on a specified banker; and

(ii)  it is always payable on demand and not other­wise

Features of a Cheque

A Cheque is a bill of exchange with following features, viz.,

  • must be in writing
  • contain an unconditional order to pay
  • drawn on a specified banker
  • for a certain sum of money
  • the payee must be a definite person
  • amount must be written both in figures and words
  • it must be dated
  • it is always drawn on a specified banker
  • it is always payable on demand and not otherwise

Types of Cheque

Two Types:

  1. Open Cheques: An open cheque is one which is payable in cash across the counter of the bank
  2. Crossed Cheques: A crossed cheque is one which has two short parallel lines marked across its face. It can be paid only to another banker.
  • The advantage of crossing is that it reduces the danger of unathorised persons getting possession of a cheque and cashing it.
  • A crossed cheque can only be cashed through a bank of which the payee of the cheque is a customer.

Crossing of cheques

Crossing on a cheque is a direction to the paying banker by the drawer that payment should not be made across the counter. It is a peculiar method of modifying the instrument to the banker for payment of the cheque. The payment on a crossed cheque can be collected only through a banker.

It is effected by drawing two parallel transverse lines with or without the words ‘and company’ or any abbreviation thereof. A cheque that is not crossed is called an `open cheque`.

Why crossing

As payment cannot be claimed across the counter on a crossed cheque, crossing of cheques serves as a measure of safety against theft or loss of cheques in transit.

Types of crossing

Crossing may be either General  or Special

General – It mean as where a cheque bears across its face an addition of the words ‘and company’ or any abbreviation thereof, between two parallel transverse lines or of two parallel transverse lines simply, either with or without the words ‘not negotiable’, that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally.

Special –It  implies the specification of the name of the banker on the face of the cheque.The object of special crossing is to direct the drawee banker to pay the cheque only if it is presented through the particular bank mentioned therein. Thus, it makes the cheque system still safer.

Who can cross a cheque

A cheque may be crossed by any of the following:

  1. The drawer of a cheque.
  2. The holder of a cheque.
  3. The Banker, in whose favour the cheque has been crossed specially.

Bill of Exchange

A ‘bill of exchange’ is defined by as an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of, a certain person, or to the bearer of the instrument.

Characteristic Features of a Bill of Exchange

  1. It must be in writing.
  2. It must contain an order to pay and not a promise or request.
  3. The order must be unconditional.
  4. There must be three parties, viz., drawer, drawee and payee.
  5. The parties must be certain.
  6. It must be signed by the drawer.
  7. The sum payable must be certain or capable of being made certain.
  8. The order must be to pay money and money alone.
  9. It must be duly stamped as per the Indian Stamp Act.
  10. Number, date and place are not essential.

Parties to a Bill of Exchange

  1. The Drawer – the person who draws or makes the bill.
  2. The Drawee – the person on whom the bill is drawn.
  3. The Payee – the person to whom the amount of the bill is payable.
  4. The Holder – is the original payee but where the bill has been endorsed, the endorsee.
  5. The endorser – is the person who endorses a bill.
  6. The endorsee – is the person to whom the bill is negotiated by endorsement.
Promissory Notes

A promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money to, or to the order of, a certain person or to the bearer of the instrument

Examples of Promissory Notes

“A” signs instruments in the following terms:

“I acknowledge myself to be indebted to ‘B’ in Rs. 1000, to be paid on demand, for value re­ceived.”

Essentials or Characteristics of a Promissory Note

From the definition, it is clear that a promissory note must have the following essential elements:-

(1)     In writing –  A promissory note must be in writing. Writing includes print and typewriting.

(2)    Promise to pay – It must contain an undertaking or promise to pay. Thus, a mere acknowledgement of indebtedness is not sufficient.

  • Notice that the use of the word `promise’ is not essential to constitute an instrument as promissory note.

(3)   Unconditional – The promise to pay must not be conditional. Thus, instruments payable on perfor­mance or non-performance of a particular act or on the happening or non-happening of an event are not promissory notes.

(4) Signed by the Maker – The promissory note must be signed by the maker, otherwise it is of no effect.

(5) Certain Parties – The instrument must point out with certainty the maker and the payee of the promissory note.

(6)    Certain sum of money – The sum payable must be certain or capable of being made certain.

(7)   Promise to pay money only – If the instrument contains a promise to pay something in addition money, it cannot be a promissory note.

(8)   Number, place, date etc – These are usually found in a promissory note but are not essential in law. If a promissory note does not bear a date, it is deemed to have been made when it was delivered.

(9)   It may be payable in installments

(10)  It may be payable on demand or after a definite period – Payable ‘on demand’ means payable immediately or any time till it becomes time-barred. A demand promissory note becomes time barred on expiry of 3 years from the date it bears.

(11)  It cannot be made payable to bearer on demand or even payable to bearer after a certain period

(12) It must be duly stamped under the Indian Stamp Act – It means that the stamps of the requisite amount must have been affixed on the instrument and duly cancelled either before or at the time of its execution. A promissory note, which is not so stamped, is a nullity.

Parties to A Promissory Note

  1. The Maker – the person who makes the note promising ‘to pay the amount stated therein.
  2. The Payee – the person to whom the amount of the note is payable.
  3. The Holder – is either the original payee or any other person in whose favour the note been endorsed.
  4. The Endorser – the person who indorses the note in favour of another person.
  5. The Endorsee – the person in whose favour the note is negotiated by indorsement.

Bill of Exchange and Cheque distinguished

 Cheque Bill of Exchange
1)   It must be drawn only on a banker.

2)   The amount is always payable on demand.


3)   The cheque is not entitled to days of grace.

4)   Acceptance is not needed.

5)   A cheque can be crossed

6)   Notice of dishonour is not necessary. The parties thereon remain liable, even if no notice of dishonour is given.


7)   A cheque is not to be noted or protested in case of dishonour.


8)The protection given to the paying banker in respect of crossed cheques is peculiar to this instrument.

1)     It can be drawn on any person including a banker.

2)     The amount may be payable on demand or af­ter a. specified time.

A usance (time) bill is entitled to three days of

3)     grace.

4)     A bill payable after sight must be accepted.

5)     Crossing of a bill of exchange is not possible.

6)     Notice of dishonour is necessary to hold the parties liable thereon. A party who does not receive a notice of dishonour can generally escape its liability thereon.

7)     A bill is noted or protested to establish dishon­our.


8)     No such protection is available in the case of bills.


Promissory Note and Bill of Exchange distinguished

Promissory Note Bill of Exchange
1)  There are only two parties – the maker (debtor) and the payee (creditor).


2)  A note contains an unconditional promise by the maker to pay the payee.

3)  No prior acceptance is needed.



4)  The liability of the maker or drawer is primary and absolute.

5)  No notice of dishonour need be given.


6)  The maker of the note stands in immediate relation with the payee.

1)  There are three parties – the drawer, the drawee and the payee- although any two of these capacities may be filled by one and the same person.

2)  It contains an unconditional order to the drawee to pay according to the drawer`s directors.


3)  A bill payable `after sight` must be accepted by the drawee or his agent before it is presented for payment.


4)  The liability of the drawer is secondary and conditional upon non-payment by the drawee


5)  Notice of dishonour must be given by the holder to the drawer and the intermediate endorsers to hold them liable thereon.


6)  The maker or drawer does not stand in immediate relation with the acceptor drawee.


The acceptance of a bill is the indication by the drawee of his assent to the order of the drawer.

It has been defined as the signature of the drawee of a bill who has signed his assent upon bill and delivered it or given notice of such signing to the holder to some person on his behalf.

An acceptance to be valid must be

  • in writing,
  • signed by the drawee or his agent,
  • on bill of exchange, and
  • completed by delivery to the holder or by notice of acceptance to him or some person on his behalf [Jagjivan Mauji Vithlani v. M/s Ranchahodas Meghaji, 1945]

An acceptance of a bill may be general or qualified.

(a)  General Acceptance

(b)  Qualified Acceptance

Who may Accept

A bill of exchange may be accepted by the following persons­:-

(1)   The drawee of the bill

  • Where there are more than one drawees, by all or some of them.
  • A drawee in case of need.

(4) An agent of any of the person mentioned above.

(5) An acceptor for honour.

(6) An agent of the acceptor for honour.

(7) In case no drawee is mentioned in the bill and a person accepts it, he becomes an acceptor by estoppel.

Acceptance for Honour

  • When a bill of exchange has been noted or protested for non-acceptance or for better security and any person accepts it supra protest for honour of the drawer or of anyone of the endorsers, such person is called an acceptor for honour.
  • After acceptance of the bill by the acceptor for honour, the payee, at the due date, has to present the bill first to the drawee for payment and if it is also dishonoured for payment by the drawee and noted or protested as the case may be it should then be presented to the acceptor for honour for payment.


  • Presentment of a negotiable instrument is made for two purposes.
  1. Presentment for acceptance – It is only bills of exchange that require presentment for acceptance and that too not all but certain kind of bills only. Bill payable on demand or on a fixed date need not be presented for acceptance.
  2. Presentment for payment – A negotiable instrument must be presented for payment to the maker, acceptor or drawee, thereof, as the case may be, by the holder or his agent.


Hundis are instruments written in an oriental language. The word ‘hundi’ appears to have been derived, from the Sanskrit work ‘hund’ which means ‘to collect’. These hundis were, therefore, originally used for the collection of debts. Hundis have been in circulation in India from very early times, long before the Negotiable Instrument Act, 1881.

It is to be noted that The Negotiable Instruments Act does not apply to hundis, but where, by any words in the instrument itself, the usages regarding such instruments are excluded, or where it is expressly indicated that the legal relations of the parties thereto shall be governed by the Negotiable Instruments Act 1881, the Act becomes applicable. In the absence of any of the above indications, hundis shall be governed by local usages applying to such documents [Kanhyalal v. Ramkumar, 1956].

Kinds of hundis

  • Shah-Jog Hundi – A Shah-jog hundi is drawn by one merchant on another asking the latter to pay the said hundi to a ‘Shah’. ‘Shah’ is a respectable and responsible person, a man of worth and known in the bazar.
  • Darshni Hundi – A darshni hundi must be presented for payment within a reasonable time after its receipt by the holder.

q  Muddati Hundi or Miadi Hundi – Hundi payable agter a specified period of time.

q  Nam Jog Hundi­ – A hundi payable to the specified person is called Nam-jog hundi.

q  Nishan.Jog Hundi – This hundi is payable only to the persons who presents it.

q  Dhani.Jog Hundi-  A dhani-jog hundi is payable to a dhani, owner.

q  Firman-Jog and Dekhanhar Hundis – There are payable to order.


According to sec-8 of N.I.T Act,1881-

A holder of a negotiable instrument is a person entitled in his own name to the possession of that negotiable instrument and to receive or recover the amount due thereon from the parties thereto.

Holder in Due Course


A ‘holder in-doe-course’ is a person who for consideration became the pos­sessor of a negotiable instrument before the due date of payment of that instrument and without having suf­ficient cause to believe that any defect existed in the title of the person from whom he derived his title. He nust fulfil the following qualifications:-

  1. He must be a holder
  2. He must be a holder for valuable consideration.
  3. He must have become the holder of the negotiable instrumentbefore its maturity.
  4. He must have become the holder of the negotiable instrument before its maturity.
  5. He must take the negotiable instrument complete and regular on the face of it.
  6. He must have become holder in good faith without having sufficient cause to believe that any defect existed in the title of the transferor.


1.  Dishonour by Non-Acceptance (Section 91)

(I) When the drawee does, not accept it within 48 hours from the time of presentment for accep­tance;

(2)             when presentment for acceptance is excused and it remains unaccepted;

(3)             when the drawee is a person incompetent to contract;

(4)             when the drawee could not be found after a reasonable search.

(5)             where the acceptance is qualified;

(6)             where one or more of the several drawees refuse to accept the bill.

  1. Dishonour by Non-Payment

A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note,acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same (sec.92).Also a promissory note or a bill of exchange is dishonuured by non-payment when presentment for payment is excused expressly by the maker of the note or acceptor of the bill and the note or bill remains unpaid at  or  after  maturity.

Notice of Dishonour

When a negotiable instrument is dishonoured by non-acceptance or non-payment, the holder must give notice of dishonour to the drawer and all other parties whom he seeks to make liable. Each party receiving notice of dishonour must in order to render any prior party liable to himself give notice of dishonour to such party within a reason­able time after he has received it. The notice may be oral or in writing though for safety it is advisable to give a written notice.

Notice of dishonour unnecessary

(1)   When it is dispensed with by the party entitled thereto.

(2) When the payment has been countermanded by the drawer or endorser.

(3) When the party charged could not suffer damages for want of notice.

(4) When the party entitled to notice cannot after reasonable search be found.

(5) Where the party liable to give notice is unable, without any fault of its own, to give it, e.g. death or serious illness of the holder or his agent or any other accident.

(6) Where the promissory note is not negotiable.

(7) In case the drawer himself is acceptor, no notice is necessary to charge the drawer.

(8) When the party entitled to notice, knowing the facts, promises unconditionally to pay the amount due on the instrument.