The Negotiable Instruments Act, 1881

What the Negotiable Instruments Act covers

The Negotiable Instruments Act is Act 26 of 1881, in force since 1 March 1882 and extending to the whole of India. It does not affect local usages for instruments in an oriental language, such as hundis, unless the instrument itself says the Act is to govern it (s. 1).

Section 13 defines a negotiable instrument as a promissory note, bill of exchange or cheque payable either to order or to bearer. An instrument is payable to order when it is expressed to be payable to a particular person and does not contain words prohibiting transfer; it is payable to bearer when it says so, or when its only or last indorsement is in blank.

This is one of the older Acts in this cluster, and the 2024 criminal law reform left it alone: its sections kept their numbers. Where it still refers to the Code of Criminal Procedure — in Chapter XVII — section 8 of the General Clauses Act, 1897 reads that reference as one to the Bharatiya Nagarik Suraksha Sanhita, unless a different intention appears.

Holder and holder in due course

A "holder" is the person entitled in their own name to possess the instrument and to receive or recover the amount due on it (s. 8). A "holder in due course" is a narrower thing: a person who, for consideration, became the possessor of a bearer instrument or the payee or indorsee of an order instrument, before the amount became payable, and without sufficient cause to believe there was any defect in the title of the person they took it from (s. 9).

The distinction matters because of what a holder in due course is protected against. If an instrument was lost, or obtained by an offence or fraud, or for an unlawful consideration, no one claiming through the finder or wrongdoer can recover on it — unless they, or someone through whom they claim, was a holder in due course (s. 58). Between the immediate parties, an instrument given without consideration creates no obligation to pay; but a holder for consideration who takes from one of them can recover (s. 43).

Two estoppels add to that protection: the maker of a note or drawer of a cheque cannot deny the instrument’s original validity against a holder in due course (s. 120), and no indorser can deny the signature or capacity of a prior party in a suit by a later holder (s. 122).

How an instrument is negotiated and indorsed

An instrument is negotiated when it is transferred so as to make the transferee its holder (s. 14). How that is done depends on how it is payable. A bearer instrument passes by delivery alone (s. 47); an order instrument passes by indorsement and delivery (s. 48). Making, accepting or indorsing is only complete on delivery, actual or constructive (s. 46).

An indorsement is the signature of the maker or holder, for the purpose of negotiation, on the back or face of the instrument or on a slip attached to it (s. 15). An indorser who delivers before maturity, without excluding their own liability, must compensate every later holder if the instrument is dishonoured — provided due notice of dishonour reaches them (s. 35).

Two limits catch people out. An indorsement cannot transfer only part of the amount due, though a part payment can be noted and the balance negotiated (s. 56). And a person who signs a stamped paper, blank or incomplete, and hands it over gives the holder authority to complete it for any amount up to what the stamp covers — liable in full to a holder in due course, though no one else can recover more than was intended (s. 20).

Presentment, maturity and interest

Notes, bills and cheques must be presented for payment to the maker, acceptor or drawee; if they are not, the other parties are not liable to the holder (s. 64). A cheque must be presented at the bank it is drawn on before the drawer’s position with that bank changes to the drawer’s prejudice (s. 72). If a cheque is not presented within a reasonable time and the drawer suffers actual damage from the delay — because the bank fails in the meantime, say — the drawer is discharged to the extent of that damage (s. 84). A bank holding enough of the drawer’s funds must pay a duly presented cheque, and must compensate the drawer if it does not (s. 31).

A note or bill with no time for payment, and every cheque, is payable on demand (s. 19). A note or bill payable at a future date carries three days of grace: it falls due on the third day after the day it is expressed to be payable (s. 22). If that day is a public holiday, including a Sunday, it falls due on the preceding business day (s. 25). Where the amount in words differs from the amount in figures, the words prevail (s. 18).

Interest follows the instrument. If a rate is specified, it runs at that rate from the instrument’s date (s. 79). If no rate is specified, section 80 fixes 18% a year from the date the amount ought to have been paid, notwithstanding any agreement about interest between the parties; an indorser pays interest only from when they receive notice of dishonour. The 18% figure was substituted by Act 66 of 1988 with effect from 30 December 1988.

Dishonour, notice of dishonour, noting and protest

An instrument is dishonoured by non-payment when the maker, acceptor or drawee defaults on being duly required to pay (s. 92); a bill is dishonoured by non-acceptance when the drawee defaults in accepting it (s. 91). The holder must then give notice of dishonour to every other party they want to hold liable (s. 93). The notice may be oral or written, in any form, but must tell the party that the instrument has been dishonoured, how, and that they will be held liable (s. 94). No notice is needed to charge the maker of a note or the drawee or acceptor of a bill or cheque (s. 93), or in the cases listed in section 98 — for example, where the drawer has countermanded payment.

A promissory note or bill may also be noted by a notary public — a record of the date and reason for dishonour — and a notary’s certificate of dishonour is a protest (ss. 99, 100). In a suit on a dishonoured instrument, proof of protest raises a presumption that it was dishonoured (s. 119). A holder who recovers is entitled to the amount due plus the expenses of presenting, noting and protesting (s. 117).

Crossed cheques: general, special and "not negotiable"

A cheque is crossed generally when two parallel transverse lines are drawn across its face, with or without the words "and company" or "not negotiable" (s. 123). It is crossed specially when a banker’s name is added across its face (s. 124). A holder may cross an uncrossed cheque, turn a general crossing into a special one, and add "not negotiable" to either (s. 125).

The crossing directs the paying bank. A cheque crossed generally may be paid only to a banker; one crossed specially only to the banker named or its collecting agent (s. 126). A bank that pays otherwise is liable to the true owner for any loss (s. 129). A collecting bank that receives payment in good faith and without negligence for its customer is protected if the customer’s title proves defective (s. 131). The Chapter applies to bank drafts as if they were cheques (s. 131A).