The Negotiable Instruments Act, 1881.

The Negotiable Instruments Act, 1881.
The Act extends to the whole of India. It regulates commercial transactions, monetary dealings and deals with promissory notes, bills of exchange and cheques. The latest amendment to the Act was made in 2002.

DEFINITION OF NEGOTIABLE INSTRUMENTS
Negotiable instrument is a document which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or by endorsement and delivery. The word “negotiable” means “ transferable from one person to another in return for consideration” and “instrument” means a “ written document by which a right is created in favour of some person”

Characteristics of a Negotiable Instrument:
1. Easy negotiability.
2. Transferee can sue in his own name without giving notice to the debtor.
3. Better title to a bona fide transferee for value.
4. Presumptions:
a). Consideration.
b). Date.
c). Time of acceptance.
d). Time of transfer.
e). Order of endorsements.
f). Stamp.
g).Holder presumed to be a holder in due course.
h).Proof of protest.

KINDS Of NEGOTIABLE INSTRUMENTS
The Act recognises only three kinds of instruments under section 13 of the Act but it does not exclude any other negotiable instrument provided the instrument entitles a person to a sum of money and is transferable by delivery.
The various kinds of instruments are:
Bills of Exchange.
Promissory Notes.
Cheques.

BILLS OF EXCHANGE
Definition: A bill of exchange is 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.
There are three parties to the bill of exchange- drawer, drawee and payee.

Essentials of a Bill of Exchange :
Must be in writing.
Must contain an unconditional order to pay money.
Must be signed by drawer.
Parties must be certain.
Sum payable must be certain.
Must comply with other formalities eg. Stamps, date etc.

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 only to the bearer of the instrument.
Parties to a promissory note are the Maker, the Payee, and the Holder.

Essentials of a promissory note:
Must be in writing.
Must contain an express promise or clear undertaking to pay.
Promise must be unconditional.
Must be signed by the maker in token of an undertaking to pay to the payee or his order.
The maker and the payee must be certain person.
Sum must be certain.
Amount payable must be in legal tender money of India.
Must be properly stamped .
Must contain a name of place, number and the date on which it is made.

Holder in Due Course.
A person is ‘holder in due course’ if he posses the following qualifications:
That for consideration became the possessor of the negitiable instrument if payable to the bearer, or the payee or the indorsee thereof if payable to order .
That he became the holder of the instrument before its maturity.
That he became the holder in good faith without sufficient cause to believe that any defect existed in the title of the transferor.
Privileges of a Holder in Due Course
Gets a better title than that of a transferor.
Liability of prior parties.

CHEQUE
A cheque is a bill of exchange drawn on specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in electronic form.
Cheque is a bill of exchange but has 2 additional qualifications:
a). Always drawn of specified banker.
b). Always payable on demand.

Crossing of Cheques.
There are two types of cheques :
a). Open cheque- a cheque which is payable in cash across the counter of a bank is called an open cheque. Such a cheque runs great risk in the course of circulation.
b). Crossed cheque- is one on which two parallel transverse lines with or without the words are drawn on the left hand top corner of the cheque. The payment of such a cheque is obtained through a banker.

There are two types of crossing:
General crossing: Where a cheque bears across its face two parallel transverse lines without any words or with words ‘and company’ or/ and ‘not negotiable’ written in between these lines is called general crossing.
1. Special crossing: Where a cheque bears across its face an addition of the name of a banker, either with or without words ‘not negotiable,’ the cheque is deemed to be crossed specially.The payment can be obtained only through the particular banker whose name appears across the face of the cheque.
2. Restrictive crossing: This type has been adopted by commercial or banking usage. In this type of crossing the words ‘ A/c Payee’ are added to the general or special crossing.
Who may cross a cheque :
The drawer.
The holder.
The banker.

Negotiation
When a negotiable instrument is transferred to any person, so as to constitute that person as holder thereof, the instrument is said to be negotiated.

There are two methods of negotiation:

1. Negotiation by delivery: If a instrument is payable to bearer , it is negotiation by delivery.
2. Negotiation by indorsement and delivery: If an instrument is payable to order, it is negotiable by the holder by indorsement and delivery thereof.

INDORSEMENT
It means writing of a person’s name on the instrument for the purpose of negotiation. The person who indorses the instrument is known as ‘indorser’ , and the person to whom it is indorsed is called the ‘indorsee’ .
Types of indorsement:

• Blank or general indorsement: A blank indorsement is effected by the simple signature of the indorser on the face or back of the instrument.It specifies no indorse and the instrument in consequence becomes payable to the bearer.
  
• Full or special indorsement: If the indorser signs his name and adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, indoresement is full.
  
• Restrictive indorsement: When by express words , indorsee is prohibited from further negotiation , indorsement is restrictive.
  
• Partial Indorsement: When an indorsement purports to transfer to the indorsee a part of the amount only . A partial indorsement does not operate as negotiation of the instrument.
  
• Conditional indorsement: If the indorser by express words, make his liability, dependent on the happening of the event, although such event may never happen, such indorsement is conditional indorsement.