Negotiable Instruments Act, 1881
What the exam tests
The Negotiable Instruments Act, 1881 tests the three instruments, negotiation and endorsement, holder in due course, dishonour, crossing, and the s 138 cheque-bounce remedy.
Core rules
- A promissory note (s 4) is an unconditional written promise to pay a certain sum to a specified person or bearer. A bill of exchange (s 5) is an unconditional written order to pay. A cheque (s 6) is a bill drawn on a banker payable on demand.
- A holder is entitled to possession and to receive the amount; a holder in due course takes a negotiable instrument for value, in good faith, before maturity, and without notice of defect (s 9). Such a holder takes free of prior defects.
- Negotiation is transfer to another person so as to constitute that person the holder (s 14). Bearer instruments transfer by delivery; order instruments by endorsement and delivery (ss 15-16, 46). Crossing (ss 123-131) directs payment through a bank and affects the collecting banker.
- Dishonour must generally be noted and protested, and notice of dishonour given (ss 91-93). For a cheque returned unpaid for insufficient funds or exceeding arrangement, s 138 requires a written demand within 30 days of receipt of the return memo; the drawer gets 15 days to pay; complaint within one month thereafter.
- Presumptions under ss 118-119 include consideration and date.
Worked example
A draws a cheque for ₹1 lakh to B. The bank returns it marked “insufficient funds.” B must send a demand notice within 30 days of receiving the return memo. If A does not pay within 15 days, B may file a complaint within one month. Without the notice, the s 138 complaint is not maintainable.
Traps
- Treating a cheque as a bill payable after maturity.
- Missing the 30-day notice and 15-day payment windows.
- Confusing holder with holder in due course.
- Forgetting that crossing affects collection, not negotiability.