Negotiable Instrument Act (1881) Notes Pdf For Judiciary Preparation

Author : Yogricha

Updated On : June 6, 2024

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Overview: Negotiable Instruments Act is one of the most important minor acts for judiciary preparation. For a complete preparation and to score like a topper, you must prepare from Negotiable Instrument Act Notes for Judiciary. In this article your will find all the important details about the act.

Whether you are a Law Student in your law school or a judiciary aspirant preparing entirely for Judiciary Negotiable Instruments Act is a must. In this article we will be covering all the important sections that are frequently asked in Judiciary and other law exams including AIBE and LL.M. Entrance exams. You must know these important sections, have a deep understanding for prelims and mains exams.

In this article we will cover:

  • Notes on Important sections in Negotiable Instruments Act
  • How to make your own Notes for Negotiable Instruments Act
  • Important questions for Judiciary Prelims

Overview of the Act:

The Negotiable Instruments Act, 1881, deals with the legal framework governing negotiable instruments. Negotiable instruments are documents that promise the payment of a specific amount of money to the bearer or a specific person or to the order of a specific person. These instruments include promissory notes, bills of exchange, and cheques, which play a crucial role in commercial transactions and finance. Here are some key points about the Negotiable Instruments Act and below you can download Negotiable Instrument Act Notes for Judiciary:

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Types of Negotiable Instruments: The Act primarily covers three types of negotiable instruments:

  • Promissory Notes: These are written promises made by one person (the maker) to another (the payee) to pay a specific sum of money.
  • Bills of Exchange: These are written orders issued by one party (the drawer) to another party (the drawee) to pay a specific sum of money to a third party (the payee) at a future date.
  • Cheques: Cheques are instruments used to make payments. They are orders from an account holder to a bank to pay a specific amount to the person or entity named on the cheque.
  1. Characteristics of Negotiable Instruments: Negotiable instruments possess certain key characteristics, including negotiability (can be transferred to others), payment promise, and a fixed amount of money.
  2. Liability of Parties: The Act outlines the rights and obligations of parties involved in negotiable instruments, such as the drawer, drawee, payee, and endorser. It establishes the liabilities of each party in the instrument.
  3. Presumption of Consideration: In negotiable instruments, there is a presumption of consideration, which means that the instrument is presumed to have been issued in exchange for something of value.
  4. Holder in Due Course: A "holder in due course" is a person who acquires a negotiable instrument for value, before it is overdue, and without any knowledge of defects in the title of the instrument. Such a holder has certain legal privileges.
  5. Dispute Resolution: The Act provides legal procedures for handling disputes related to negotiable instruments, including issues like dishonor of a cheque.
  6. Amendments and Reforms: The Negotiable Instruments Act has undergone several amendments and reforms to adapt to changing economic and financial circumstances. One significant reform was the introduction of the Negotiable Instruments (Amendment) Act, 2015, which added provisions to deal with issues related to cheque bouncing and electronic payment systems.
  7. Impact on Commercial Transactions: The Act plays a crucial role in facilitating and regulating commercial transactions, trade, and financial activities. It provides legal certainty and enforceability to these instruments, which are widely used in business.

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Historical Background:

  1. Enactment of the Act: The Negotiable Instruments Act was enacted in India in 1881. Prior to this, the provisions of the English Negotiable Instruments Act were applicable in India. The Indian Act was based on the English Act but included certain modifications to suit the Indian context.
  2. Evolution of Negotiable Instruments: The origin of negotiable instruments dates back to early commerce and trade practices. In primitive societies, where barter was the primary mode of exchange, the concept of bills of exchange as a system of payment did not exist. Money and writing were not yet invented. As societies evolved and the need for a common medium of exchange became evident, money and instruments like bills of exchange came into use.

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Relation with Reserve Bank of India Act, 1934:

  1. Provisions of the Reserve Bank of India Act: The Negotiable Instruments Act operates subject to the provisions of Sections 31 and 32 of the Reserve Bank of India Act, 1934.
  2. Section 31 of the RBI Act: Section 31 of the Reserve Bank of India Act restricts the drawing, accepting, making, or issuing of bills of exchange, hundis, promissory notes, or engagements for payment of money payable to the bearer on demand. This means that, apart from the Reserve Bank of India or as expressly authorized by the Central Government, no person in India can engage in these activities.
  3. Section 32 of the RBI Act: Section 32 of the Reserve Bank of India Act specifies that the issuance of bills or notes by unauthorized parties is punishable by a fine that may extend up to the amount of the instrument. This is to ensure that the issuance of such financial instruments is regulated and controlled.

List of Important Sections for prelims and Mains Examination

Section Exam
Section 1 Prelims and Mains
Section 4-9 Prelims
section 13-17 Prelims and Mains
Section 22 Prelims and Mains
Section 25 Prelims and Mains
Section 39 Prelims and Mains
Section 79 Prelims and Mains
Section 80 Prelims and Mains
Section 82 Prelims and Mains
Section 87 Prelims and Mains
Section 117 Prelims and Mains
Section 118-122 Mains
Section 137 Prelims and Mains
Section 138-139 Mains

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Notes on Important sections in Negotiable Instruments Act

Section 1 - Short Title and Commencement:

  • This section begins by stating that the Act may be referred to as the "Negotiable Instruments Act, 1881."
  • It specifies the date on which the Act came into force. The Negotiable Instruments Act came into effect on the 1st day of March 1882.
  • It explains that the Act applies to the whole of India, except for the State of Jammu and Kashmir.

Section 4 - Definition of "Promissory Note":

  1. Written Instrument: A promissory note is a written instrument, which means it is a physical document that contains the terms of the promise to pay a sum of money.
  2. Excludes Bank or Currency Notes: The definition explicitly excludes banknotes or currency notes. These are issued by the government or authorized financial institutions and represent legal tender for payment. Promissory notes are different from these and represent a specific promise to pay.
  3. Unconditional Undertaking: A key characteristic of a promissory note is that it contains an unconditional undertaking. This means that the promise to pay is absolute and not subject to any conditions or contingencies.
  4. Maker's Signature: The promissory note must be signed by the maker. The maker is the person who is making the promise to pay the specified sum of money.
  5. Promise to Pay a Specific Sum: The central feature of a promissory note is the promise to pay a certain sum of money. The amount should be clearly specified within the document.
  6. Payee or Bearer: The instrument should specify that the money is payable to a certain person, to the order of a certain person, or to the bearer of the instrument. This allows for the negotiability of the instrument.
  7. Transferability: The inclusion of "to the order of" or "to the bearer" means that the promissory note is negotiable. It can be transferred from one party to another by endorsement or by mere delivery.
  8. Legal Formality: A promissory note is a legally recognized document, and it is governed by the rules and regulations outlined in the Negotiable Instruments Act.

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Section 5 - Definition of "Bill of Exchange":

  1. Written Instrument: A bill of exchange is an instrument in writing, which means it is a physical document that contains the terms of the order to pay a sum of money.
  2. Unconditional Order: The central characteristic of a bill of exchange is that it contains an unconditional order. This order is a directive to a certain person to pay a specified sum of money. The order to pay must be clear and without any conditions or contingencies.
  3. Maker's Signature: Similar to a promissory note, a bill of exchange is signed by the maker. The maker is the person who is issuing the order for payment.
  4. Payment Instructions: The instrument directs a certain person (the drawee) to make a payment to a certain person (the payee) or to the bearer of the instrument. This provision allows for the negotiability of the bill.
  5. Conditionality of Payment Time: The definition clarifies that the time for payment may be expressed to be on the lapse of a certain period after the occurrence of a specified event. However, this doesn't make the order conditional if the event's occurrence is expected and certain in the ordinary course of events, even if the timing is somewhat uncertain.
  6. Certain Sum: The bill may involve the payment of future interest or be payable at an indicated rate of exchange. The inclusion of such features does not make the sum payable uncertain.
  7. Default Provisions: The definition also specifies that even if the instrument provides that, on default of payment of an installment, the balance unpaid shall become due, it doesn't affect the certainty of the sum payable.
  8. Identification of Parties: The person to whom the direction for payment is given or to whom payment is to be made may be a certain person even if they are misnamed or designated by description only.

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Section 6: Definition of "Cheque":

  1. Bill of Exchange Form: A cheque is essentially a type of bill of exchange. Like a bill of exchange, it is an instrument in writing used for making payments.
  2. Drawn on a Specified Banker: A significant feature of a cheque is that it is drawn on a specified banker, meaning it is addressed to a particular bank where the drawer (the person issuing the cheque) holds an account. The bank is responsible for making the payment as per the cheque's instructions.
  3. Payable on Demand: A key attribute of a cheque is that it is not expressed to be payable at any specific future date but is payable "on demand." This means that the payee (the person receiving the cheque) can present it for payment immediately.
  4. Inclusion of Electronic Forms: The definition has been updated to encompass modern technological advancements. It explicitly mentions that a "cheque" includes the electronic image of a truncated cheque and a cheque in electronic form.
  5. Electronic Cheques: The inclusion of electronic forms acknowledges the use of digital technology in banking and finance. An electronic image of a truncated cheque refers to a scanned or digitally captured version of a physical cheque. A cheque in electronic form is a completely digital representation of a cheque, such as those used in online or mobile banking.
  6. Payment Assurance: Cheques provide a form of payment assurance, allowing the payee to receive funds from the drawer's bank account, provided there are sufficient funds available.
  7. Use in Banking: Cheques are widely used for a variety of transactions, including payments, transfers, and settlements, making them an integral part of the banking and financial system.

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Section 7-  "Drawer" and "Drawee":

This is one of the key concepts in this act, given below are key pointers, kind more details on the Negotiable Instrument Act Notes for Judiciary that you can download from the link given above:

  1. Drawer Defined: The term "drawer" refers to the person who creates or makes a bill of exchange or cheque. In the context of a bill of exchange, the drawer is the one who orders the drawee to make a payment to the payee. In the case of a cheque, the drawer is the individual or entity that issues the cheque for a specific payment.
  2. Drawee Defined: The term "drawee" refers to the person or entity who is directed to make the payment as specified in the bill of exchange or cheque. The drawee is legally obligated to honor the payment as instructed by the drawer. In the case of a bill of exchange, the drawee is typically the party on whom the bill is drawn. In the case of a cheque, the drawee is the specific bank where the drawer holds an account.
  3. Crucial Relationship: The relationship between the drawer and the drawee is essential for understanding the functioning of bills of exchange and cheques. The drawer initiates the payment process by issuing the instrument, while the drawee is the party responsible for making the actual payment to the payee.
  4. Payment Instructions: The drawer's instructions to the drawee are central to the negotiable instrument. The bill of exchange or cheque contains these payment instructions and serves as a legally binding document.
  5. Payment Assurance: The existence of a drawee provides assurance to the payee that the funds will be available for payment when the instrument is presented for payment. It ensures the negotiability and reliability of these financial instruments.
  6. Legal Roles and Liabilities: The roles and legal liabilities of the drawer and the drawee are defined by the Negotiable Instruments Act and the terms of the instrument itself. The drawer initiates the financial transaction, while the drawee is obligated to make the payment as per the instrument's instructions.
  7. “Acceptor”—After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the “acceptor”.
  8. “Acceptor for honour”— When a bill of exchange has been noted or protested for non-acceptance acceptance or for better security,] and any person accepts it supra protest for honour of the drawer or of any one of the indorsers, such person is called an “acceptor for honour”.
  9. “Payee”—The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the “Payee”.

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Section 8 - "Holder":

  1. Definition of Holder: In the context of a promissory note, bill of exchange, or cheque, a "holder" refers to any person who is entitled in their own name to possess the instrument and to receive or recover the amount due on it from the parties involved in the instrument.
  2. Possession and Entitlement: The definition of a holder involves two key elements: possession and entitlement. To be considered a holder, a person must have both the physical possession of the instrument and the legal entitlement to receive the amount mentioned in the instrument.
  3. Legal Rights: The holder has specific legal rights granted by the Act. These rights include the right to demand payment from the parties who have signed the instrument, and the right to negotiate or transfer the instrument to others.
  4. Negotiability: The concept of the holder is fundamental to the negotiability of these financial instruments. The negotiability of promissory notes, bills of exchange, and cheques allows them to circulate in the financial market, making them essential for trade and commerce.
  5. Lost or Destroyed Instruments: The section also addresses situations where the promissory note, bill of exchange, or cheque is lost or destroyed. In such cases, the holder is the person who was entitled to possess the instrument at the time of the loss or destruction. This provision ensures that the person with the rightful entitlement remains the holder, even in the absence of the physical document.
  6. Protection of Rights: The Act provides legal protections for holders, ensuring that they can exercise their rights and recover the amounts due to them even in cases of loss or destruction of the instrument.

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Section 9 - "Holder in Due Course":

  1. Definition of Holder in Due Course: A "holder in due course" refers to any person who, for consideration, becomes the possessor of a promissory note, bill of exchange, or cheque. This individual must meet specific criteria outlined in the section.
  2. Types of Instruments: The definition applies to various types of negotiable instruments, including promissory notes, bills of exchange, and cheques. The characteristics of a holder in due course can vary slightly based on the type of instrument.
  3. Payable to Bearer or Payee/Indorsee: To qualify as a holder in due course, the instrument should be either payable to bearer or payable to order. If it's payable to bearer, the holder becomes a holder in due course by merely possessing it. If it's payable to order, the holder must either be the payee or an indorsee (a person whose name appears on the back of the instrument).
  4. Timing: A holder in due course must acquire the instrument for consideration before the amount mentioned in it becomes payable. This means that the holder must possess the instrument before the payment is due as specified in the instrument.
  5. Good Faith: To qualify as a holder in due course, the person must acquire the instrument without having sufficient cause to believe that any defect existed in the title of the person from whom they derived their title. In simpler terms, the holder must obtain the instrument in good faith, without knowledge of any legal issues or problems related to the instrument's title.
  6. Consideration: The holder must provide some form of consideration in exchange for the instrument. Consideration can be in the form of money, goods, services, or any other valuable item. It signifies that the holder has a legitimate interest in the instrument.
  7. Protection of Rights: Being a holder in due course comes with certain legal advantages, such as having a higher degree of protection when enforcing the rights associated with the instrument. A holder in due course is not subject to certain defenses that may be raised against a holder who is not in due course.

Section 13 - "Negotiable Instrument":

Understand the key pointer of this section in Negotiable Instrument Act Notes for Judiciary, the pdf can be download from the link given above:

  1. Definition of Negotiable Instrument: A "negotiable instrument" is a legal term that encompasses promissory notes, bills of exchange, or cheques that are payable either to order or to bearer.
  2. Payable to Order: An instrument is considered payable to order when it is expressly made payable to a specific person or when it is expressed to be payable to a particular person. The presence of such an order indicates that the instrument is transferable to others. Importantly, it should not contain words prohibiting transfer or indicating an intention that it shall not be transferable.
  3. Payable to Bearer: An instrument is regarded as payable to bearer when it is expressly made payable to the bearer or when the only or last endorsement on it is an endorsement in blank. In such cases, the instrument can be transferred simply by delivery, and the holder is not required to be a specific named person.
  4. Option for Order Payee: Even if a promissory note, bill of exchange, or cheque is originally expressed to be payable to the order of a specified person but is not restricted to only that person or their order, it is still considered payable to the specified person or their order at their discretion. This flexibility in the instrument's use allows for its negotiability.
  5. Joint or Alternative Payees: The section also allows for the making of a negotiable instrument payable to two or more payees jointly or in the alternative to one of two or to one or some of several payees. This provision provides flexibility in the payment arrangements.
  6. Transferability: A key feature of negotiable instruments is their transferability. These instruments can circulate in the market, changing hands through endorsements or delivery, and the holder has the right to demand payment from the parties involved.

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Section 14- Negotiation:

When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.

Section 15 Indorsement:

When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same, and is called the “indorser”.

Section 22 - "Maturity":

  1. Definition of Maturity: This section defines "maturity" in the context of a promissory note or bill of exchange as the date at which the instrument falls due, i.e., the date on which the instrument becomes payable.
  2. Key Aspect of Negotiable Instruments: Maturity is a crucial concept in negotiable instruments. It signifies the date on which the maker or acceptor is legally obligated to make the payment specified in the instrument.
  3. Clear Determination of Payment Date: By defining maturity, this section ensures that there is no ambiguity or confusion regarding the date on which the holder of the instrument can demand payment. The maturity date is a clear and legally binding deadline for payment.
  4. Enforceable Right: The holder of a promissory note or bill of exchange can enforce their right to demand payment on the maturity date, and the maker or acceptor is legally obliged to fulfill the payment obligation on or after that date.
  5. Legal Certainty: Having a well-defined maturity date is essential for the negotiability of the instrument and the predictability of the rights and obligations associated with it.
  6. Consequences of Maturity: When a promissory note or bill of exchange reaches its maturity date, the holder can present it for payment, and if the payment is not made, it is considered dishonored, leading to legal consequences.

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Section 25 - When Day of Maturity is a Holiday:

  1. Maturity Date: The maturity date of a promissory note or bill of exchange is the date on which the instrument becomes due for payment. The holder of the instrument has the legal right to demand payment on this date.
  2. Public Holidays: Public holidays are official non-working days, such as national or regional holidays, when businesses and government offices are typically closed.
  3. Legal Provision: Section 25 provides a specific rule to address situations when the maturity date of a negotiable instrument falls on a public holiday.
  4. Deeming the Due Date: According to this section, if the day of maturity coincides with a public holiday, the instrument is not considered due on that holiday. Instead, it is deemed to be due on the next preceding business day that is not a public holiday.
  5. Practical Application: This provision is practical and fair because it ensures that the holder has a clear and working day to demand payment when the maturity date falls on a holiday. It prevents any ambiguity or disputes regarding the due date.
  6. Business Days: The provision uses the term "business day" to distinguish regular working days from holidays. Business days are typically days when banks and financial institutions are open for transactions.
  7. Enforceable Right: The holder of the instrument can exercise their legal right to demand payment on the next preceding business day, which is treated as the effective due date for the purpose of payment.

Section 39 - Suretyship:

  1. Accepted Bill of Exchange: The provision applies when the holder of an accepted bill of exchange (a negotiable instrument) enters into a contract with the acceptor. An accepted bill of exchange is one on which the drawee (acceptor) has agreed to pay the specified amount.
  2. Contractual Discharge under the Indian Contract Act: The provision references sections 134 and 135 of the Indian Contract Act, 1872. These sections deal with the discharge of parties from their obligations under a contract. According to these sections, certain acts or events can discharge the parties from their contractual liabilities.
  3. Reserving the Right to Charge Other Parties: In the context of a bill of exchange, the holder of the bill may explicitly reserve the right to charge the other parties involved in the bill (e.g., the drawer or the endorser) even if the holder enters into a contract with the acceptor that, under the Indian Contract Act, would otherwise discharge those other parties.
  4. Preserving Liability: By reserving the right to charge the other parties, the holder ensures that the liability of the other parties on the bill of exchange is not discharged. This means that the other parties can still be held legally responsible for the payment of the bill even if a separate contract is made with the acceptor.
  5. Legal Protection for the Holder: This provision safeguards the rights of the holder of the bill of exchange and allows them to maintain the option of pursuing the other parties for payment if the need arises, even in situations where a contract with the acceptor might, under the Indian Contract Act, release the other parties from liability.

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Section 79 - Interest when Rate is Specified:

  1. Rate of Interest: This section applies when a promissory note or bill of exchange explicitly mentions a specified rate of interest. The rate of interest is a crucial term in these financial instruments and is often agreed upon by the parties involved.
  2. Calculation of Interest: In cases where a specified rate of interest is mentioned, the interest on the principal amount is calculated at the rate specified. The interest is calculated from the date of the instrument, which is the date when the instrument was issued, until one of the following events occurs:
  • Tender or Realization: Interest continues to accumulate until the principal amount mentioned in the instrument is either tendered (offered for payment) or fully realized (collected).
  • Date Directed by the Court: In cases where a legal suit is initiated to recover the amount, the court may direct a specific date until which interest should be calculated. This date may vary based on the circumstances of the case.
  1. Legal Clarity: Section 79 provides legal clarity regarding the calculation of interest when a specified rate is mentioned. It ensures that interest is calculated from the date of the instrument until the principal amount is settled, either voluntarily or through a legal process.
  2. Protection of Rights: This section helps protect the rights and expectations of parties involved in promissory notes and bills of exchange by specifying the rules for interest calculation when a rate is mentioned in the instrument.

Section 80 - Interest when No Rate is Specified:

  1. Absence of Specified Interest Rate: Section 80 applies when a promissory note or bill of exchange does not specify a particular rate of interest. In such cases, it provides a default rate for the calculation of interest.
  2. Default Interest Rate: Notwithstanding any agreement between the parties to the instrument regarding interest, the default rate of interest, as per this section, is 18 percent per annum. This rate is to be applied when there is no specific interest rate mentioned in the instrument.
  3. Calculation of Interest: When no specified rate of interest is mentioned, interest is calculated at the default rate of 18 percent per annum. The interest is calculated from the date at which the amount due on the instrument should have been paid by the party charged.
  4. Duration of Interest: The interest continues to accumulate until one of the following events occurs:
  • Tender or Realization: Interest accrues until the principal amount due on the instrument is either tendered (offered for payment) or fully realized (collected).
  • Date Directed by the Court: In the case of a legal suit to recover the amount, the court may specify a date until which interest should be calculated. The court's directive may depend on the circumstances of the case.

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Exception for Indorser: In cases where the party charged is the indorser of an instrument that was dishonored due to non-payment, the liability for interest arises only from the time the indorser receives notice of the dishonor.

Section 87 - Effect of Material Alteration:

  1. Material Alteration: Section 87 addresses situations where a material alteration is made to a negotiable instrument. A material alteration is one that changes the terms or characteristics of the instrument, such as the amount, date, parties, or other essential elements.
  2. Void Against Non-Consenting Parties: Any material alteration made to a negotiable instrument renders the instrument void as against anyone who is a party to the instrument at the time of making such alteration and does not consent to it. In other words, if a party to the instrument did not agree to the alteration, the instrument becomes void as far as that party is concerned.
  3. Exception for Common Intention: The section provides an exception. If the material alteration was made to carry out the common intention of the original parties, it will not render the instrument void. This means that if all parties involved in the instrument agree to the alteration and it aligns with their original intentions, the instrument remains valid.
  4. Indorsee's Liability: If a material alteration is made by an indorsee (a person who endorses the instrument), it discharges the liability of the indorser (the person who previously endorsed the instrument) from any obligation related to the consideration of the altered part. In other words, the indorser is no longer responsible for the altered portion of the instrument.
  5. Limitations: Section 87 is subject to the provisions of other sections, including Sections 20, 49, 86, and 125 of the Act. These sections may contain specific rules and exceptions that apply to the alteration of negotiable instruments.

Section 138 - Dishonour of cheque for insufficiency, etc., of funds in the account:

Section 138 of the Negotiable Instruments Act, 1881, pertains to the dishonoring of a cheque for various reasons, such as insufficient funds, a stale cheque, a post-dated cheque, alterations, irregular signatures, frozen accounts, or stop payment instructions. When an individual draws a cheque on their bank account to pay a specific amount to another party, and the cheque is returned unpaid due to insufficient funds or exceeding the agreed amount, the individual is considered to have committed an offense.

As a result, they may face legal consequences, including imprisonment for up to one year or a fine of up to twice the amount mentioned in the cheque, or both. These penalties are imposed without prejudice to any other provisions of the Act.

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Ingredients 

Section 138 of the Negotiable Instruments Act, 1881 contains the following ingredients-

  1. The cheque has to be drawn by the accused on a bank account which is maintained by him with a particular banker in a bank;
  2. The amount of money mentioned in the cheque is for discharging the liability either wholly or partially; and
  3. The cheque is dishonoured which means it is returned unpaid due to insufficient funds or is returned because the amount contained in the cheque exceeds the arrangement made with the bank. The offence is said to be committed at the exact moment the cheque is returned unpaid to the holder or drawer of the cheque.

The exceptions to this provision are as follows:

The section's requirements do not apply until one of the following conditions is met:

  • The cheque has been presented to the bank within its validity period or within six months from the date it was drawn, whichever is earlier.
  • The payee, in the normal course of payment, has issued a written demand for the money within fifteen days of being informed by the bank of the cheque's return as unpaid.

If the drawer of the cheque fails to make the payment to the payee or the designated recipient within fifteen days of receiving the notice.

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Important cases:

  1. ICDS Ltd. v. Beena Shabeer (2002) 6 SCC 426: This case provided clarification on the terms 'any cheque' and 'other liability.' The court ruled that according to the provisions outlined in Section 138 of the Negotiable Instruments Act, 1881, if a person issues a cheque to settle any liability, even if the liability was incurred by a different individual, the person who draws the cheque can be prosecuted in the event the cheque is dishonored.

  2. MSR Leathers v. S. Palaniappan (2013) 1 SCC 177: In this case, it was established that the dishonor of a negotiable instrument, whether on its second presentation or any subsequent presentation, constitutes dishonor within the scope of Section 138 of the Negotiable Instruments Act, 1881.

Section 139- Presumption in favour of holder

Section 139 of the Negotiable Instruments Act, 1881, establishes a legal presumption in favor of the holder of a dishonored cheque. This section pertains to the liability of an individual who issues a cheque that subsequently bounces.

According to this provision, the person who issued the cheque is presumed to be in violation of the law until they can prove their innocence. It is presumed under this section that a presented cheque is meant to either partially or fully discharge a debt or liability.

The person accused of this offense cannot evade liability simply by claiming that the cheque was provided as security. When the presumption of liability is challenged and disproved, the burden of proof shifts from the accused to the complainant. In such cases, the complainant must demonstrate that the cheque was indeed issued to settle a debt.

This presumption is also governed by the Rule of Evidence outlined in Section 118(a) of Chapter XIII of the Act.

How to make your own Notes for Negotiable Instruments Act:

Creating your own notes for the Negotiable Instruments Act or any legal subject can be a helpful way to understand and retain important information. Here's a step-by-step guide on how to make your own notes:

  1. Start with reading the Bare Act and highlight the important sections as per your understanding.
  2. Pick previous year question papers and mark all the sections that have been asked previously once or multiple time. You also have to highlight the sections mentioned above and in the short notes document.
  3. Read and understand all the sections and try putting them into small pointers.
  4. Write down those pointer and support these sections with case laws and illustrations.
  5. Reach out to your teachers and mentors when you feel that you have a confusion.

Read more: How to Start Your Judiciary Exam Preparation at the Beginner Level

Previous Year Questions for Practice:

After you are done reading the important sections from the details given above and from the Negotiable Instrument Act Notes pdf mentioned above, you must ensure that you practice as much as possible. Here are some multiple-choice questions (MCQs) related to the Negotiable Instruments Act, 1881, to test your knowledge:

Ques 1: What are the primary types of negotiable instruments governed by the Negotiable Instruments Act, 1881?

  1. Promissory notes, bills of exchange, and cheques
  2. Bonds, shares, and warrants
  3. Invoices, receipts, and contracts
  4. Land deeds, mortgages, and insurance policiey.

Ques 2: In the context of the Act, what does the term "drawer" refer to?

  1. The person or entity that makes a demand for payment on a cheque
  2. The individual or entity that draws a negotiable instrument
  3. The financial institution that issues a chequebook
  4. The party responsible for presenting the instrument to the bank.

Ques 3: What is the significance of "crossing" a cheque under the Negotiable Instruments Act?

  1. It invalidates the cheque.
  2. It makes the cheque payable only to the bearer.
  3. It provides an additional layer of security and restricts the negotiability of the cheque.
  4. It allows the drawer to avoid the liability of the cheque.

Ques 4: In the case of a dishonored cheque, what does Section 138 of the Act primarily deal with?

  1. Enforcement of promissory notes
  2. Prosecution and penalties for dishonored cheques
  3. Legal remedies for bills of exchange
  4. Rules for endorsing negotiable instruments

Ques 5: Which of the following is a valid defense against the prosecution under Section 138 of the Negotiable Instruments Act?

  1. The drawer's claim that they were unaware of the insufficiency of funds.
  2. The drawer's assertion that the cheque was issued for a loan.
  3. The drawer's claim that the cheque was a gift.
  4. The drawer's statement that the cheque was post-dated.

Ques 6: Under the Act, when must a payee make a demand for payment after receiving notice of a dishonored cheque?

  1. Within 24 hours
  2. Within 7 days
  3. Within 15 days
  4. Within 30 days

Ques 7: What does Section 139 of the Negotiable Instruments Act establish?

  1. The liability of the bank for dishonored cheques
  2. The presumption in favor of the holder in case of a dishonored cheque
  3. Rules for crossing and endorsing cheques
  4. The requirements for a cheque to be considered valid

Ques 8: In the context of the Act, what does the term "endorsement" refer to?

  1. The act of crossing a cheque
  2. The signature of the drawer on the cheque
  3. The transfer of rights in a negotiable instrument to another party
  4. The act of presenting the cheque to the bank for payment

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Conclusion:

It's important to note that the Negotiable Instruments Act, 1881, has been amended and interpreted through various court decisions, making it essential for you to have a thorough understanding of its provisions and implications. The Negotiable Instruments Act, 1881, is a vital piece of legislation in India that governs the use and characteristics of negotiable instruments, such as promissory notes, bills of exchange, and cheques. These instruments play a crucial role in commerce and finance, facilitating transactions and financial dealings.

  • For Judiciary exams of Most states, NIA, 1881 is one of the most important subject.
  • Ensure that you practice while understanding the provisions.
  • Prepare for prelims and mains together, irrespective of the state.
  • Your understading will get deeper once you start reading the case laws and illustrations.

All the Best for your preparation

Negotiable Instrument Act (1881) Notes Pdf For Judiciary Preparation

Author : Yogricha

June 6, 2024

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Overview: Negotiable Instruments Act is one of the most important minor acts for judiciary preparation. For a complete preparation and to score like a topper, you must prepare from Negotiable Instrument Act Notes for Judiciary. In this article your will find all the important details about the act.

Whether you are a Law Student in your law school or a judiciary aspirant preparing entirely for Judiciary Negotiable Instruments Act is a must. In this article we will be covering all the important sections that are frequently asked in Judiciary and other law exams including AIBE and LL.M. Entrance exams. You must know these important sections, have a deep understanding for prelims and mains exams.

In this article we will cover:

  • Notes on Important sections in Negotiable Instruments Act
  • How to make your own Notes for Negotiable Instruments Act
  • Important questions for Judiciary Prelims

Overview of the Act:

The Negotiable Instruments Act, 1881, deals with the legal framework governing negotiable instruments. Negotiable instruments are documents that promise the payment of a specific amount of money to the bearer or a specific person or to the order of a specific person. These instruments include promissory notes, bills of exchange, and cheques, which play a crucial role in commercial transactions and finance. Here are some key points about the Negotiable Instruments Act and below you can download Negotiable Instrument Act Notes for Judiciary:

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Types of Negotiable Instruments: The Act primarily covers three types of negotiable instruments:

  • Promissory Notes: These are written promises made by one person (the maker) to another (the payee) to pay a specific sum of money.
  • Bills of Exchange: These are written orders issued by one party (the drawer) to another party (the drawee) to pay a specific sum of money to a third party (the payee) at a future date.
  • Cheques: Cheques are instruments used to make payments. They are orders from an account holder to a bank to pay a specific amount to the person or entity named on the cheque.
  1. Characteristics of Negotiable Instruments: Negotiable instruments possess certain key characteristics, including negotiability (can be transferred to others), payment promise, and a fixed amount of money.
  2. Liability of Parties: The Act outlines the rights and obligations of parties involved in negotiable instruments, such as the drawer, drawee, payee, and endorser. It establishes the liabilities of each party in the instrument.
  3. Presumption of Consideration: In negotiable instruments, there is a presumption of consideration, which means that the instrument is presumed to have been issued in exchange for something of value.
  4. Holder in Due Course: A "holder in due course" is a person who acquires a negotiable instrument for value, before it is overdue, and without any knowledge of defects in the title of the instrument. Such a holder has certain legal privileges.
  5. Dispute Resolution: The Act provides legal procedures for handling disputes related to negotiable instruments, including issues like dishonor of a cheque.
  6. Amendments and Reforms: The Negotiable Instruments Act has undergone several amendments and reforms to adapt to changing economic and financial circumstances. One significant reform was the introduction of the Negotiable Instruments (Amendment) Act, 2015, which added provisions to deal with issues related to cheque bouncing and electronic payment systems.
  7. Impact on Commercial Transactions: The Act plays a crucial role in facilitating and regulating commercial transactions, trade, and financial activities. It provides legal certainty and enforceability to these instruments, which are widely used in business.

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Historical Background:

  1. Enactment of the Act: The Negotiable Instruments Act was enacted in India in 1881. Prior to this, the provisions of the English Negotiable Instruments Act were applicable in India. The Indian Act was based on the English Act but included certain modifications to suit the Indian context.
  2. Evolution of Negotiable Instruments: The origin of negotiable instruments dates back to early commerce and trade practices. In primitive societies, where barter was the primary mode of exchange, the concept of bills of exchange as a system of payment did not exist. Money and writing were not yet invented. As societies evolved and the need for a common medium of exchange became evident, money and instruments like bills of exchange came into use.

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Relation with Reserve Bank of India Act, 1934:

  1. Provisions of the Reserve Bank of India Act: The Negotiable Instruments Act operates subject to the provisions of Sections 31 and 32 of the Reserve Bank of India Act, 1934.
  2. Section 31 of the RBI Act: Section 31 of the Reserve Bank of India Act restricts the drawing, accepting, making, or issuing of bills of exchange, hundis, promissory notes, or engagements for payment of money payable to the bearer on demand. This means that, apart from the Reserve Bank of India or as expressly authorized by the Central Government, no person in India can engage in these activities.
  3. Section 32 of the RBI Act: Section 32 of the Reserve Bank of India Act specifies that the issuance of bills or notes by unauthorized parties is punishable by a fine that may extend up to the amount of the instrument. This is to ensure that the issuance of such financial instruments is regulated and controlled.

List of Important Sections for prelims and Mains Examination

Section Exam
Section 1 Prelims and Mains
Section 4-9 Prelims
section 13-17 Prelims and Mains
Section 22 Prelims and Mains
Section 25 Prelims and Mains
Section 39 Prelims and Mains
Section 79 Prelims and Mains
Section 80 Prelims and Mains
Section 82 Prelims and Mains
Section 87 Prelims and Mains
Section 117 Prelims and Mains
Section 118-122 Mains
Section 137 Prelims and Mains
Section 138-139 Mains

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Notes on Important sections in Negotiable Instruments Act

Section 1 - Short Title and Commencement:

  • This section begins by stating that the Act may be referred to as the "Negotiable Instruments Act, 1881."
  • It specifies the date on which the Act came into force. The Negotiable Instruments Act came into effect on the 1st day of March 1882.
  • It explains that the Act applies to the whole of India, except for the State of Jammu and Kashmir.

Section 4 - Definition of "Promissory Note":

  1. Written Instrument: A promissory note is a written instrument, which means it is a physical document that contains the terms of the promise to pay a sum of money.
  2. Excludes Bank or Currency Notes: The definition explicitly excludes banknotes or currency notes. These are issued by the government or authorized financial institutions and represent legal tender for payment. Promissory notes are different from these and represent a specific promise to pay.
  3. Unconditional Undertaking: A key characteristic of a promissory note is that it contains an unconditional undertaking. This means that the promise to pay is absolute and not subject to any conditions or contingencies.
  4. Maker's Signature: The promissory note must be signed by the maker. The maker is the person who is making the promise to pay the specified sum of money.
  5. Promise to Pay a Specific Sum: The central feature of a promissory note is the promise to pay a certain sum of money. The amount should be clearly specified within the document.
  6. Payee or Bearer: The instrument should specify that the money is payable to a certain person, to the order of a certain person, or to the bearer of the instrument. This allows for the negotiability of the instrument.
  7. Transferability: The inclusion of "to the order of" or "to the bearer" means that the promissory note is negotiable. It can be transferred from one party to another by endorsement or by mere delivery.
  8. Legal Formality: A promissory note is a legally recognized document, and it is governed by the rules and regulations outlined in the Negotiable Instruments Act.

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Section 5 - Definition of "Bill of Exchange":

  1. Written Instrument: A bill of exchange is an instrument in writing, which means it is a physical document that contains the terms of the order to pay a sum of money.
  2. Unconditional Order: The central characteristic of a bill of exchange is that it contains an unconditional order. This order is a directive to a certain person to pay a specified sum of money. The order to pay must be clear and without any conditions or contingencies.
  3. Maker's Signature: Similar to a promissory note, a bill of exchange is signed by the maker. The maker is the person who is issuing the order for payment.
  4. Payment Instructions: The instrument directs a certain person (the drawee) to make a payment to a certain person (the payee) or to the bearer of the instrument. This provision allows for the negotiability of the bill.
  5. Conditionality of Payment Time: The definition clarifies that the time for payment may be expressed to be on the lapse of a certain period after the occurrence of a specified event. However, this doesn't make the order conditional if the event's occurrence is expected and certain in the ordinary course of events, even if the timing is somewhat uncertain.
  6. Certain Sum: The bill may involve the payment of future interest or be payable at an indicated rate of exchange. The inclusion of such features does not make the sum payable uncertain.
  7. Default Provisions: The definition also specifies that even if the instrument provides that, on default of payment of an installment, the balance unpaid shall become due, it doesn't affect the certainty of the sum payable.
  8. Identification of Parties: The person to whom the direction for payment is given or to whom payment is to be made may be a certain person even if they are misnamed or designated by description only.

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Section 6: Definition of "Cheque":

  1. Bill of Exchange Form: A cheque is essentially a type of bill of exchange. Like a bill of exchange, it is an instrument in writing used for making payments.
  2. Drawn on a Specified Banker: A significant feature of a cheque is that it is drawn on a specified banker, meaning it is addressed to a particular bank where the drawer (the person issuing the cheque) holds an account. The bank is responsible for making the payment as per the cheque's instructions.
  3. Payable on Demand: A key attribute of a cheque is that it is not expressed to be payable at any specific future date but is payable "on demand." This means that the payee (the person receiving the cheque) can present it for payment immediately.
  4. Inclusion of Electronic Forms: The definition has been updated to encompass modern technological advancements. It explicitly mentions that a "cheque" includes the electronic image of a truncated cheque and a cheque in electronic form.
  5. Electronic Cheques: The inclusion of electronic forms acknowledges the use of digital technology in banking and finance. An electronic image of a truncated cheque refers to a scanned or digitally captured version of a physical cheque. A cheque in electronic form is a completely digital representation of a cheque, such as those used in online or mobile banking.
  6. Payment Assurance: Cheques provide a form of payment assurance, allowing the payee to receive funds from the drawer's bank account, provided there are sufficient funds available.
  7. Use in Banking: Cheques are widely used for a variety of transactions, including payments, transfers, and settlements, making them an integral part of the banking and financial system.

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Section 7-  "Drawer" and "Drawee":

This is one of the key concepts in this act, given below are key pointers, kind more details on the Negotiable Instrument Act Notes for Judiciary that you can download from the link given above:

  1. Drawer Defined: The term "drawer" refers to the person who creates or makes a bill of exchange or cheque. In the context of a bill of exchange, the drawer is the one who orders the drawee to make a payment to the payee. In the case of a cheque, the drawer is the individual or entity that issues the cheque for a specific payment.
  2. Drawee Defined: The term "drawee" refers to the person or entity who is directed to make the payment as specified in the bill of exchange or cheque. The drawee is legally obligated to honor the payment as instructed by the drawer. In the case of a bill of exchange, the drawee is typically the party on whom the bill is drawn. In the case of a cheque, the drawee is the specific bank where the drawer holds an account.
  3. Crucial Relationship: The relationship between the drawer and the drawee is essential for understanding the functioning of bills of exchange and cheques. The drawer initiates the payment process by issuing the instrument, while the drawee is the party responsible for making the actual payment to the payee.
  4. Payment Instructions: The drawer's instructions to the drawee are central to the negotiable instrument. The bill of exchange or cheque contains these payment instructions and serves as a legally binding document.
  5. Payment Assurance: The existence of a drawee provides assurance to the payee that the funds will be available for payment when the instrument is presented for payment. It ensures the negotiability and reliability of these financial instruments.
  6. Legal Roles and Liabilities: The roles and legal liabilities of the drawer and the drawee are defined by the Negotiable Instruments Act and the terms of the instrument itself. The drawer initiates the financial transaction, while the drawee is obligated to make the payment as per the instrument's instructions.
  7. “Acceptor”—After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the “acceptor”.
  8. “Acceptor for honour”— When a bill of exchange has been noted or protested for non-acceptance acceptance or for better security,] and any person accepts it supra protest for honour of the drawer or of any one of the indorsers, such person is called an “acceptor for honour”.
  9. “Payee”—The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the “Payee”.

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Section 8 - "Holder":

  1. Definition of Holder: In the context of a promissory note, bill of exchange, or cheque, a "holder" refers to any person who is entitled in their own name to possess the instrument and to receive or recover the amount due on it from the parties involved in the instrument.
  2. Possession and Entitlement: The definition of a holder involves two key elements: possession and entitlement. To be considered a holder, a person must have both the physical possession of the instrument and the legal entitlement to receive the amount mentioned in the instrument.
  3. Legal Rights: The holder has specific legal rights granted by the Act. These rights include the right to demand payment from the parties who have signed the instrument, and the right to negotiate or transfer the instrument to others.
  4. Negotiability: The concept of the holder is fundamental to the negotiability of these financial instruments. The negotiability of promissory notes, bills of exchange, and cheques allows them to circulate in the financial market, making them essential for trade and commerce.
  5. Lost or Destroyed Instruments: The section also addresses situations where the promissory note, bill of exchange, or cheque is lost or destroyed. In such cases, the holder is the person who was entitled to possess the instrument at the time of the loss or destruction. This provision ensures that the person with the rightful entitlement remains the holder, even in the absence of the physical document.
  6. Protection of Rights: The Act provides legal protections for holders, ensuring that they can exercise their rights and recover the amounts due to them even in cases of loss or destruction of the instrument.

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Section 9 - "Holder in Due Course":

  1. Definition of Holder in Due Course: A "holder in due course" refers to any person who, for consideration, becomes the possessor of a promissory note, bill of exchange, or cheque. This individual must meet specific criteria outlined in the section.
  2. Types of Instruments: The definition applies to various types of negotiable instruments, including promissory notes, bills of exchange, and cheques. The characteristics of a holder in due course can vary slightly based on the type of instrument.
  3. Payable to Bearer or Payee/Indorsee: To qualify as a holder in due course, the instrument should be either payable to bearer or payable to order. If it's payable to bearer, the holder becomes a holder in due course by merely possessing it. If it's payable to order, the holder must either be the payee or an indorsee (a person whose name appears on the back of the instrument).
  4. Timing: A holder in due course must acquire the instrument for consideration before the amount mentioned in it becomes payable. This means that the holder must possess the instrument before the payment is due as specified in the instrument.
  5. Good Faith: To qualify as a holder in due course, the person must acquire the instrument without having sufficient cause to believe that any defect existed in the title of the person from whom they derived their title. In simpler terms, the holder must obtain the instrument in good faith, without knowledge of any legal issues or problems related to the instrument's title.
  6. Consideration: The holder must provide some form of consideration in exchange for the instrument. Consideration can be in the form of money, goods, services, or any other valuable item. It signifies that the holder has a legitimate interest in the instrument.
  7. Protection of Rights: Being a holder in due course comes with certain legal advantages, such as having a higher degree of protection when enforcing the rights associated with the instrument. A holder in due course is not subject to certain defenses that may be raised against a holder who is not in due course.

Section 13 - "Negotiable Instrument":

Understand the key pointer of this section in Negotiable Instrument Act Notes for Judiciary, the pdf can be download from the link given above:

  1. Definition of Negotiable Instrument: A "negotiable instrument" is a legal term that encompasses promissory notes, bills of exchange, or cheques that are payable either to order or to bearer.
  2. Payable to Order: An instrument is considered payable to order when it is expressly made payable to a specific person or when it is expressed to be payable to a particular person. The presence of such an order indicates that the instrument is transferable to others. Importantly, it should not contain words prohibiting transfer or indicating an intention that it shall not be transferable.
  3. Payable to Bearer: An instrument is regarded as payable to bearer when it is expressly made payable to the bearer or when the only or last endorsement on it is an endorsement in blank. In such cases, the instrument can be transferred simply by delivery, and the holder is not required to be a specific named person.
  4. Option for Order Payee: Even if a promissory note, bill of exchange, or cheque is originally expressed to be payable to the order of a specified person but is not restricted to only that person or their order, it is still considered payable to the specified person or their order at their discretion. This flexibility in the instrument's use allows for its negotiability.
  5. Joint or Alternative Payees: The section also allows for the making of a negotiable instrument payable to two or more payees jointly or in the alternative to one of two or to one or some of several payees. This provision provides flexibility in the payment arrangements.
  6. Transferability: A key feature of negotiable instruments is their transferability. These instruments can circulate in the market, changing hands through endorsements or delivery, and the holder has the right to demand payment from the parties involved.

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Section 14- Negotiation:

When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.

Section 15 Indorsement:

When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same, and is called the “indorser”.

Section 22 - "Maturity":

  1. Definition of Maturity: This section defines "maturity" in the context of a promissory note or bill of exchange as the date at which the instrument falls due, i.e., the date on which the instrument becomes payable.
  2. Key Aspect of Negotiable Instruments: Maturity is a crucial concept in negotiable instruments. It signifies the date on which the maker or acceptor is legally obligated to make the payment specified in the instrument.
  3. Clear Determination of Payment Date: By defining maturity, this section ensures that there is no ambiguity or confusion regarding the date on which the holder of the instrument can demand payment. The maturity date is a clear and legally binding deadline for payment.
  4. Enforceable Right: The holder of a promissory note or bill of exchange can enforce their right to demand payment on the maturity date, and the maker or acceptor is legally obliged to fulfill the payment obligation on or after that date.
  5. Legal Certainty: Having a well-defined maturity date is essential for the negotiability of the instrument and the predictability of the rights and obligations associated with it.
  6. Consequences of Maturity: When a promissory note or bill of exchange reaches its maturity date, the holder can present it for payment, and if the payment is not made, it is considered dishonored, leading to legal consequences.

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Section 25 - When Day of Maturity is a Holiday:

  1. Maturity Date: The maturity date of a promissory note or bill of exchange is the date on which the instrument becomes due for payment. The holder of the instrument has the legal right to demand payment on this date.
  2. Public Holidays: Public holidays are official non-working days, such as national or regional holidays, when businesses and government offices are typically closed.
  3. Legal Provision: Section 25 provides a specific rule to address situations when the maturity date of a negotiable instrument falls on a public holiday.
  4. Deeming the Due Date: According to this section, if the day of maturity coincides with a public holiday, the instrument is not considered due on that holiday. Instead, it is deemed to be due on the next preceding business day that is not a public holiday.
  5. Practical Application: This provision is practical and fair because it ensures that the holder has a clear and working day to demand payment when the maturity date falls on a holiday. It prevents any ambiguity or disputes regarding the due date.
  6. Business Days: The provision uses the term "business day" to distinguish regular working days from holidays. Business days are typically days when banks and financial institutions are open for transactions.
  7. Enforceable Right: The holder of the instrument can exercise their legal right to demand payment on the next preceding business day, which is treated as the effective due date for the purpose of payment.

Section 39 - Suretyship:

  1. Accepted Bill of Exchange: The provision applies when the holder of an accepted bill of exchange (a negotiable instrument) enters into a contract with the acceptor. An accepted bill of exchange is one on which the drawee (acceptor) has agreed to pay the specified amount.
  2. Contractual Discharge under the Indian Contract Act: The provision references sections 134 and 135 of the Indian Contract Act, 1872. These sections deal with the discharge of parties from their obligations under a contract. According to these sections, certain acts or events can discharge the parties from their contractual liabilities.
  3. Reserving the Right to Charge Other Parties: In the context of a bill of exchange, the holder of the bill may explicitly reserve the right to charge the other parties involved in the bill (e.g., the drawer or the endorser) even if the holder enters into a contract with the acceptor that, under the Indian Contract Act, would otherwise discharge those other parties.
  4. Preserving Liability: By reserving the right to charge the other parties, the holder ensures that the liability of the other parties on the bill of exchange is not discharged. This means that the other parties can still be held legally responsible for the payment of the bill even if a separate contract is made with the acceptor.
  5. Legal Protection for the Holder: This provision safeguards the rights of the holder of the bill of exchange and allows them to maintain the option of pursuing the other parties for payment if the need arises, even in situations where a contract with the acceptor might, under the Indian Contract Act, release the other parties from liability.

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Section 79 - Interest when Rate is Specified:

  1. Rate of Interest: This section applies when a promissory note or bill of exchange explicitly mentions a specified rate of interest. The rate of interest is a crucial term in these financial instruments and is often agreed upon by the parties involved.
  2. Calculation of Interest: In cases where a specified rate of interest is mentioned, the interest on the principal amount is calculated at the rate specified. The interest is calculated from the date of the instrument, which is the date when the instrument was issued, until one of the following events occurs:
  • Tender or Realization: Interest continues to accumulate until the principal amount mentioned in the instrument is either tendered (offered for payment) or fully realized (collected).
  • Date Directed by the Court: In cases where a legal suit is initiated to recover the amount, the court may direct a specific date until which interest should be calculated. This date may vary based on the circumstances of the case.
  1. Legal Clarity: Section 79 provides legal clarity regarding the calculation of interest when a specified rate is mentioned. It ensures that interest is calculated from the date of the instrument until the principal amount is settled, either voluntarily or through a legal process.
  2. Protection of Rights: This section helps protect the rights and expectations of parties involved in promissory notes and bills of exchange by specifying the rules for interest calculation when a rate is mentioned in the instrument.

Section 80 - Interest when No Rate is Specified:

  1. Absence of Specified Interest Rate: Section 80 applies when a promissory note or bill of exchange does not specify a particular rate of interest. In such cases, it provides a default rate for the calculation of interest.
  2. Default Interest Rate: Notwithstanding any agreement between the parties to the instrument regarding interest, the default rate of interest, as per this section, is 18 percent per annum. This rate is to be applied when there is no specific interest rate mentioned in the instrument.
  3. Calculation of Interest: When no specified rate of interest is mentioned, interest is calculated at the default rate of 18 percent per annum. The interest is calculated from the date at which the amount due on the instrument should have been paid by the party charged.
  4. Duration of Interest: The interest continues to accumulate until one of the following events occurs:
  • Tender or Realization: Interest accrues until the principal amount due on the instrument is either tendered (offered for payment) or fully realized (collected).
  • Date Directed by the Court: In the case of a legal suit to recover the amount, the court may specify a date until which interest should be calculated. The court's directive may depend on the circumstances of the case.

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Exception for Indorser: In cases where the party charged is the indorser of an instrument that was dishonored due to non-payment, the liability for interest arises only from the time the indorser receives notice of the dishonor.

Section 87 - Effect of Material Alteration:

  1. Material Alteration: Section 87 addresses situations where a material alteration is made to a negotiable instrument. A material alteration is one that changes the terms or characteristics of the instrument, such as the amount, date, parties, or other essential elements.
  2. Void Against Non-Consenting Parties: Any material alteration made to a negotiable instrument renders the instrument void as against anyone who is a party to the instrument at the time of making such alteration and does not consent to it. In other words, if a party to the instrument did not agree to the alteration, the instrument becomes void as far as that party is concerned.
  3. Exception for Common Intention: The section provides an exception. If the material alteration was made to carry out the common intention of the original parties, it will not render the instrument void. This means that if all parties involved in the instrument agree to the alteration and it aligns with their original intentions, the instrument remains valid.
  4. Indorsee's Liability: If a material alteration is made by an indorsee (a person who endorses the instrument), it discharges the liability of the indorser (the person who previously endorsed the instrument) from any obligation related to the consideration of the altered part. In other words, the indorser is no longer responsible for the altered portion of the instrument.
  5. Limitations: Section 87 is subject to the provisions of other sections, including Sections 20, 49, 86, and 125 of the Act. These sections may contain specific rules and exceptions that apply to the alteration of negotiable instruments.

Section 138 - Dishonour of cheque for insufficiency, etc., of funds in the account:

Section 138 of the Negotiable Instruments Act, 1881, pertains to the dishonoring of a cheque for various reasons, such as insufficient funds, a stale cheque, a post-dated cheque, alterations, irregular signatures, frozen accounts, or stop payment instructions. When an individual draws a cheque on their bank account to pay a specific amount to another party, and the cheque is returned unpaid due to insufficient funds or exceeding the agreed amount, the individual is considered to have committed an offense.

As a result, they may face legal consequences, including imprisonment for up to one year or a fine of up to twice the amount mentioned in the cheque, or both. These penalties are imposed without prejudice to any other provisions of the Act.

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Ingredients 

Section 138 of the Negotiable Instruments Act, 1881 contains the following ingredients-

  1. The cheque has to be drawn by the accused on a bank account which is maintained by him with a particular banker in a bank;
  2. The amount of money mentioned in the cheque is for discharging the liability either wholly or partially; and
  3. The cheque is dishonoured which means it is returned unpaid due to insufficient funds or is returned because the amount contained in the cheque exceeds the arrangement made with the bank. The offence is said to be committed at the exact moment the cheque is returned unpaid to the holder or drawer of the cheque.

The exceptions to this provision are as follows:

The section's requirements do not apply until one of the following conditions is met:

  • The cheque has been presented to the bank within its validity period or within six months from the date it was drawn, whichever is earlier.
  • The payee, in the normal course of payment, has issued a written demand for the money within fifteen days of being informed by the bank of the cheque's return as unpaid.

If the drawer of the cheque fails to make the payment to the payee or the designated recipient within fifteen days of receiving the notice.

Get details: Study plan for Judiciary preparation 2023

Important cases:

  1. ICDS Ltd. v. Beena Shabeer (2002) 6 SCC 426: This case provided clarification on the terms 'any cheque' and 'other liability.' The court ruled that according to the provisions outlined in Section 138 of the Negotiable Instruments Act, 1881, if a person issues a cheque to settle any liability, even if the liability was incurred by a different individual, the person who draws the cheque can be prosecuted in the event the cheque is dishonored.

  2. MSR Leathers v. S. Palaniappan (2013) 1 SCC 177: In this case, it was established that the dishonor of a negotiable instrument, whether on its second presentation or any subsequent presentation, constitutes dishonor within the scope of Section 138 of the Negotiable Instruments Act, 1881.

Section 139- Presumption in favour of holder

Section 139 of the Negotiable Instruments Act, 1881, establishes a legal presumption in favor of the holder of a dishonored cheque. This section pertains to the liability of an individual who issues a cheque that subsequently bounces.

According to this provision, the person who issued the cheque is presumed to be in violation of the law until they can prove their innocence. It is presumed under this section that a presented cheque is meant to either partially or fully discharge a debt or liability.

The person accused of this offense cannot evade liability simply by claiming that the cheque was provided as security. When the presumption of liability is challenged and disproved, the burden of proof shifts from the accused to the complainant. In such cases, the complainant must demonstrate that the cheque was indeed issued to settle a debt.

This presumption is also governed by the Rule of Evidence outlined in Section 118(a) of Chapter XIII of the Act.

How to make your own Notes for Negotiable Instruments Act:

Creating your own notes for the Negotiable Instruments Act or any legal subject can be a helpful way to understand and retain important information. Here's a step-by-step guide on how to make your own notes:

  1. Start with reading the Bare Act and highlight the important sections as per your understanding.
  2. Pick previous year question papers and mark all the sections that have been asked previously once or multiple time. You also have to highlight the sections mentioned above and in the short notes document.
  3. Read and understand all the sections and try putting them into small pointers.
  4. Write down those pointer and support these sections with case laws and illustrations.
  5. Reach out to your teachers and mentors when you feel that you have a confusion.

Read more: How to Start Your Judiciary Exam Preparation at the Beginner Level

Previous Year Questions for Practice:

After you are done reading the important sections from the details given above and from the Negotiable Instrument Act Notes pdf mentioned above, you must ensure that you practice as much as possible. Here are some multiple-choice questions (MCQs) related to the Negotiable Instruments Act, 1881, to test your knowledge:

Ques 1: What are the primary types of negotiable instruments governed by the Negotiable Instruments Act, 1881?

  1. Promissory notes, bills of exchange, and cheques
  2. Bonds, shares, and warrants
  3. Invoices, receipts, and contracts
  4. Land deeds, mortgages, and insurance policiey.

Ques 2: In the context of the Act, what does the term "drawer" refer to?

  1. The person or entity that makes a demand for payment on a cheque
  2. The individual or entity that draws a negotiable instrument
  3. The financial institution that issues a chequebook
  4. The party responsible for presenting the instrument to the bank.

Ques 3: What is the significance of "crossing" a cheque under the Negotiable Instruments Act?

  1. It invalidates the cheque.
  2. It makes the cheque payable only to the bearer.
  3. It provides an additional layer of security and restricts the negotiability of the cheque.
  4. It allows the drawer to avoid the liability of the cheque.

Ques 4: In the case of a dishonored cheque, what does Section 138 of the Act primarily deal with?

  1. Enforcement of promissory notes
  2. Prosecution and penalties for dishonored cheques
  3. Legal remedies for bills of exchange
  4. Rules for endorsing negotiable instruments

Ques 5: Which of the following is a valid defense against the prosecution under Section 138 of the Negotiable Instruments Act?

  1. The drawer's claim that they were unaware of the insufficiency of funds.
  2. The drawer's assertion that the cheque was issued for a loan.
  3. The drawer's claim that the cheque was a gift.
  4. The drawer's statement that the cheque was post-dated.

Ques 6: Under the Act, when must a payee make a demand for payment after receiving notice of a dishonored cheque?

  1. Within 24 hours
  2. Within 7 days
  3. Within 15 days
  4. Within 30 days

Ques 7: What does Section 139 of the Negotiable Instruments Act establish?

  1. The liability of the bank for dishonored cheques
  2. The presumption in favor of the holder in case of a dishonored cheque
  3. Rules for crossing and endorsing cheques
  4. The requirements for a cheque to be considered valid

Ques 8: In the context of the Act, what does the term "endorsement" refer to?

  1. The act of crossing a cheque
  2. The signature of the drawer on the cheque
  3. The transfer of rights in a negotiable instrument to another party
  4. The act of presenting the cheque to the bank for payment

Read About: Preparation for Judiciary Exams with College

Conclusion:

It's important to note that the Negotiable Instruments Act, 1881, has been amended and interpreted through various court decisions, making it essential for you to have a thorough understanding of its provisions and implications. The Negotiable Instruments Act, 1881, is a vital piece of legislation in India that governs the use and characteristics of negotiable instruments, such as promissory notes, bills of exchange, and cheques. These instruments play a crucial role in commerce and finance, facilitating transactions and financial dealings.

  • For Judiciary exams of Most states, NIA, 1881 is one of the most important subject.
  • Ensure that you practice while understanding the provisions.
  • Prepare for prelims and mains together, irrespective of the state.
  • Your understading will get deeper once you start reading the case laws and illustrations.

All the Best for your preparation

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