Negotiable Instrument

Negotiable Instrument Act 1881

It is enacted to define the law relating to Promissory Notes, Bill of Exchange and Cheques. It was enacted on 9th Dec 1981  and came into effect from 1st March 1982.

Negotiable Instruments

Certain documents commonly used in commercial transactions and monetary dealings, that are freely transferable from one person to another in return for consideration, are collectively referred as Negotiable Instruments.
In brief, a negotiable instrument is a written document which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or by indorsement and delivery.
According to Thomas, a negotiable instrument is one which is, by a legally recognised custom of trade or by law,

  • transferable by delivery or by indorsement and delivery.
  •  without notice to the party liable, in such a way that the holder of it for the time being may sue upon It in his own name, and
  • the property in it passes to a bona fide transferee for value free from equities and free from any defect in the title of the person from whom he obtained it.

This means that a person taking an instrument (1) bona fide, and (2) for value, known as a holder in due course, gets a good title even though the title of the transferor may be defective.

This property makes Negotiable instruments a different class of contracts.

As per Negotiable instrument 1881, Negotiable instrument means a Promissory Note, Bill of Exchange or cheque, either payable to order or to bearer (s.13)

Characteristics of a negotiable instrument

  • Freely Transferable : An instrument is freely transferable from one person to another. The right of ownership contained in the instrument can be transferred from one person to another by mere delivery (if payable to bearer ) or by endorsement and delivery (payable to order).
  • Holder’s title free from all defects : Aholder in the due course gets a good title to the instrument even though the title of the transferor is defective. Thus, a holder in due course is not affected by any such fact. But immediate parties are affected due to such defect in the title of the transferor.
  • Recovery :  The holder in due course can sue upon a negotiable instrument in his own name for the recovery of the amount. He need not give notice of transfer to the party liable on the instrument to pay.
  • Must be in writing :  ‘Instrument’ or ‘document’ must be in writing. An oral promise or order to pay money cannot be regarded as a negotiable instrument.
  • Must be signed :  A written promise to pay money makes the debtor bound only when it is signed by him.
  • Transferable Infinitum :  A negotiable instrument may be transferred any number of times and any time, until maturity (in case of cheque, until it becomes stale). It may even be transferred after maturity (i.e., due date) although the holder does not become a holder in due course.
  • Joint or alternate payees:  A negotiable instrument may name more than one payee jointly or alternatively.

Presumptions applicable in Negotiable Instruments

The following presumptions apply to all negotiable instruments, unless contrary is proved. But such presumptions are rebuttable by evidence.

  • Consideration : It shall be presumed that every negotiable instrument was made, drawn, accepted, indorsed, negotiated or transferred, for consideration, facilitating the holder to get a decree from a Court.
  • Date : Every negotiable instrument bearing a date is presumed to have been made or drawn on such date.
  • Time of acceptance : It shall be assumed that every accepted bill was accepted within a reasonable time after its date and before its maturity.
  • Time of transfer : Every transfer of a negotiable instrument is presumed to have been made before its maturity.
  • Order of endorsements:  The endorsements appearing upon a negotiable instrument are presumed to have been made in the order in which they appear thereon.
  • Stamp : When an instrument has been lost, it is presumed that it was duly stamped.
  • Holder presumed to be a holder in due course : Every holder of a negotiable instrument is presumed to be a holder in due course (s. 118).
  • Proof of protest : Where a suit is filed claiming that a instrument has been dishonoured, the court shall presume the fact dishonour, if proof of protest is produced. (Sec.119)
  • Offence / Fraud: Where the Negotiable Instrument has been obtained from its lawful owner/custodian by means of an offence/fraud or for unlawful consideration, the burden of proving that a Holder is a Holder in due course, lies upon him.
  • Other Acts : The NI Act will not affect Sec. 21 of the Indian Paper Currency Act, 1871, or any local usage relating to any instrument in a local language. [s.1]

Types of Negotiable Instruments

  • Instruments negotiable by Statute : As per sec.13 of Negotiable Instruments Act, Promissory Notes, Bill of exchange and Cheques are recognized as negotiable instruments.
  • Instruments negotiable by custom or usage : There are certain other instruments with character of negotiability by the usage or custom of trade. Thus Government promissory notes, banker’s drafts and pay orders, hundis, delivery orders and Carrier’s receipts for goods, have been held to be negotiable by usage or custom.

The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881, which deals with promissory notes, bill of exchange and cheques, and hundis (bills of exchange in vernacular language).

Promissory Note

Promissory Note (not being a bank note or a currency note) is an instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to order of a certain person, or to the bearer of the instrument (s. 4).

  • The person who makes the promissory note and promises to pay is called the maker.
  • The person to whom the payment is to be made is called the payee.

Essential elements of a Promissory Note  

  • In Writing. The instrument must be in writing. Verbal promise is not recognized. Writing includes print, typewriting, or handwriting in pencil or ink.
    • Promise to pay. The instrument must contain an express promise to pay. A mere acknowledgment of indebtedness does not constitute a promissory note.  

So, the following expressions do not constitute a promissory notes:

  • “Mr. A, I owe you Rs. 1000”.
  • “I am indebted to A, for a sum of Rs. 700 to be paid by instalments.”

A receipt for money, if coupled with a promise to pay, it is a promissory note. 

  • Definite and unconditional. The promise to pay must be definite arid unconditional, or else the instrument is invalid.

Thus the following instruments signed by A are not promissory notes :

  • “I promise to pay X Rs. 5000 when X delivers me the goods.”
  • “I promise to pay X Rs. 50000 on Y’s death, provided Y leaves me enough to pay that sum.”

If the promise to pay depends on an event certain to happen (though the time of its happening may be uncertain), it is not treated as ‘conditional’.

The promise to pay at a particular place or after a specified time is also not treated as conditional.

  • Signed by the maker. The instrument must be signed by the maker, otherwise it is not valid, even if it is written by the maker himself and his name appears in the body of the instrument. An agent of a trading firm can sign a promissory note on its behalf of the firm.
  • Maker & Payee. The instrument must clearly identify the maker and the payee, otherwise it is invalid.

The payee may sometimes be misnamed or designated by description only. In such a case, the note is valid if the payee can be ascertained (so a promissory note payable ‘to the manager of a certain bank’ is valid).                                                       ‘

A promissory note cannot be made payable to the maker (promisor) himself. But it may be endorsed by the maker to some other person or endorsed in blank.

  • Specified Amount of money. The money payable must be certain and must not be capable of contingent additions or subtractions.

The sum payable is considered to be certain when:

  • it is payable with interest at a specified rate.
  • it is payable at an indicated rate of exchange.
  • it is payable by instalments, with a provision that on default being made in payment, the balance unpaid shall become due.(s.5).
    • Promise to pay money only. The payment to be made under the instrument must be in the legal tender money of India and nothing else.
    • Bank note or currency note is not a promissory note. This is because a bank note or a currency note is money itself.
    • Other information . Other information like date, place, consideration, etc are usually found but their omission does not invalidate the instrument. The date of a promissory note is not mandatory unless the amount is payable at a certain time after date. But it must bear the necessary stamp under the Indian Stamp Act, 1899.
    • Payable on demand or after a definite period of time. The expression ‘on demand’ means payable immediately or forthwith.
    • It cannot be made payable to bearer on demand. The Reserve Bank of India Act, 1934 prohibits issue of such promissory notes to bearer on demand, except by the Reserve Bank of India itself or the Central Government.

Bill of Exchange

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 (s. 5).

Parties to a Bill of Exchange

There are three parties to a bill of exchange, the drawer, the drawee and the payee.

  1. Drawer : The person who gives the order to pay or who makes the bill is the drawer.
  2. Drawee : The person who is directed to pay is called the drawee. When the drawee accepts the bill, he is called the Acceptor.
  3. Payee : The person to whom the payment is to be made is the Payee.

Where the payee named in a bill is a fictitious or non-existing person, the bill is treated as payable to bearer. In some cases, the drawer and the payee, or when a principal draws on his agent, the drawer and the drawee may be one and the same person.

Apart from the above, the following persons may also become a party to a bill of exchange:

  1. Holder : The drawer or the payee who is in possession of the bill is called the holder. The holder must present the bill to the drawee for his acceptance,
  2. Indorser : When the holder indorses the bill, he is called the indorser.
  3. Indorsee : The person to whom the bill, note or cheque is indorsed Is called the indorsee.
  4. Drawee in case of need : When apart from the drawee, an additional name is entered in the bill or in any indorsement thereon, to be referred to in case of need, such person is called a drawee in case of need (s. 7). When the bill is dishonoured by non-acceptance or non-payment, it must be presented to the ‘drawee in case of need’.

Essential elements of a Bill of Exchange

  1. It must be in writing.
  2. It must contain an order to pay.
  3. It requires three parties, i.e., the drawer, the drawee and the payee.
  4. The order must be unconditional.
  5. The sum payable must be certain.
  6. It must contain an order to pay money.
  7. The parties must be certain.
  8. It must be signed by the drawer.
  9. It must be properly stamped.

The formalities relating to number, date, place and consideration, though usually found in bills, are not essential in law. But a bill must be affixed with the necessary stamp.

A bill as originally drawn cannot be made payable to bearer on demand.

Distinction between Bill of Exchange & Promissory Note

Promissory NoteBill of Exchange
In a Promissory Note there are two parties, the maker and the payee.In Bills of Exchange there are three parties, the drawer, the drawee and the payee.
A Promissory Note contains an unconditional promise to pay.A Bill of Exchange contains an unconditional order to pay.
The maker of a note is the debtor and he himself undertakes to pay. The drawer of a bill is the creditor who directs the drawee (his debtor) to pay.
Maker of Promissory Note cannot undertake to pay conditionally. Acceptor of Bills of Exchange may Accept Bills of Exchange conditionally because he is not the originator of the instrument.
The liability of the maker of a Promissory Note is primary and absolute,Liability of the drawer of a Bills of Exchange is secondary and conditional.
A Promissory Note cannot be made payable to the maker himselfwhereas in Bills of Exchange, the drawer and the payee may be one and the same person
A Promissory Note requires no acceptance as it is signed by the person who is liable to pay.A Bills of Exchange payable after sight or after a certain period must be accepted by the drawee before it is presented for payment.
A Promissory Note cannot be drawn payable to bearer.  A Bills of Exchange can be so drawn. But neither Promissory Note nor Bills of Exchange can be drawn payable to bearer on demand.
The maker of a Promissory Note stands in immediate relation with the payee.The drawer of a Bills of Exchange stands in immediate relation with the acceptor and not the payee.
Certain provisions like (a) presentment for acceptance (Sec. 61), (b) acceptance (Sec. 75), (c) acceptance for honour (Sec. 108), and (d) bill in sets (Sec. 132) do not apply to notes.These provisions apply to Bills of Exchange.
But in the case of dishonour of a Promissory no notice is required to be given to the maker. In case of dishonour of a Bills of Exchange either by non-acceptance or by non­payment, due notice of dishonour must be given to all the persons who are to be made liable to pay. This includes the drawer and the prior indorsers. (s. 93).
No protest is mandatory in the case of dishonor of a Promissory Note.  Foreign Bills of Exchange must be protested for dishonour when such protest is required by the law of the place where they are drawn (s. 104).
Only one copy promissory note is drawn.A bill of exchange can be drawn in sets.


A cheque is a bill of exchange drawn upon a specified banker and not expressed to be payable otherwise than on demand (s.6). It is always drawn on a specified banker (s.3), and  is always payable on demand.

  • All cheques are bills of exchange, but all bills of exchange are not cheques. A cheque does not require acceptance as it is intended for immediate payment.
  • Types of Cheques :
  • Bearer cheque:The owner of the cheque is the holder.
  • Order cheque:In this type of cheque, the name is mentioned in whose order the cheque is issued.
  • Cross cheque:It is a cheque which bears two parallel transverse lines on its face.

Bank Draft : Bank Draft is also a type of cheque. It is an order drawn by one branch of a bank to another branch of the same bank (s.85A). All rules as regards to crossing of cheques are also applicable to drafts (s.131A). Like cheque, draft may be payable to drawer on demand

Validity of Cheque : A cheque must be presented within 90 days from the date of cheque (irrespective of the date when it is signed or prepared). So, the date of a cheque may sometimes be earlier (called ante dated) or after the date of writing or signing (called post dated). This way, the period of validity (valid date of presentation of cheque) can be controlled by the drawer.

Distinction between Bill of Exchange and cheque

Bill of Exchangecheque
A bill of exchange may be drawn on any person, including a banker,A cheque is always drawn on a banker. Thus all bills are not cheques whereas all cheques are necessarily bills.
A bill must be accepted before the drawee can be called upon to make payment upon it.A cheque requires no acceptance.
A bill which is not expressed to be payable on demand is entitled to three days of grace.A cheque is not entitled to any days of grace.
A bill may be payable on demand or after the expiry of a certain period after date or sight.A cheque is always payable on demand.
A bill must be duly presented for payment to the acceptor or else the drawer of the bill will be discharged from liability.The drawer of a cheque is not necessarily discharged from his liability by delay of the holder in presenting it for payment. He is discharged only to the extent of the damage, if any, suffered by him.
There is nothing like crossing a bill.A cheque may be crossed.
A bill, except in certain cases, must be stamped.A cheque does not require any stamp.
The payment of a bill can not be countermanded by the drawer.The payment of a cheque may be countermanded by the drawer.
A bill may be noted or protested for dishonour.A cheque is not required to be noted or protested for dishonour.
Notice of dishonour is mandatory to hold the parties liable thereon.Notice of dishonour is not needed.  

Crossing of cheques

Crossing of cheque is putting indication mark to instruct how the cheque would be redeemed. Cheques are usually crossed as a measure of safety. There are two types of cheques:

  1. Open Cheques : A cheque which is payable in cash across the counter of a bank is called an open cheque. If its holder loses it, the finder may go to the bank and get payment unless its payment has already been stopped.
  2. Crossed Cheque : Two ‘parallel transverse lines with or without the words ‘& Co.’ are drawn and it becomes payable only through a bank (cannot be paid at counter). So, the person who obtains the payment of crossed cheque can be traced through the drawee banker and it offers security and protection to the owner of the cheque.

Types of crossing

  • General crossing (s. 123): A General Crossing is done by adding on the cheque :
  • the words ‘and company’ or any abbreviation thereof, between two parallel transverse lines, either with or without the words ‘not negotiable’.
  •  two parallel transverse lines simply, either with or without the words ‘not negotiable’ (s.123).

The drawee banker of a crossed cheque will make payment only when it is presented by a bank (s. 126).

  • Special crossing: A Special Crossing is done by adding on the cheque :

The name of a banker, either with or without the words ‘not negotiable’ (s. 124). The payment of a specially crossed cheque can be obtained only through the particular banker whose name appears across the face of the cheque or between the transverse lines, if any. The drawee bank will make payment of a specially crossed cheque only to the banker on whom it is crossed, or his agent for collection (s. 126).

  • Restrictive crossing: The words ‘A/c Payee’ are added. Such cheques cannot be endorsed further. The collecting banker must credit the amount collected on cheque to the account of the payee.

Not Negotiable crossing (s. 130)

The words ‘not negotiable’ on a crossed cheque indicates that the title of the transferee of such a cheque cannot be better than that of its transferor (but otherwise does not affect further transferability of the cheque). Normally, a holder in due course with a defective title can give a good title to a subsequent holder in due course. By ‘Not Negotiable’ crossing, the holder or the drawer gets protection against miscarriage or dishonesty in the course of transit.

Who may cross a cheque

A cheque may be crossed by (s. 125):

  1. The drawer. He may cross the cheque generally or specially.
  2. The holder. Where the cheque is uncrossed, the holder may cross it generally or specially. Where it is crossed generally, he may cross it specially. Where it is crossed generally or specially, he may add the words ‘Not Negotiable’.
  3. The banker. Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker (his agent) for collection.

Opening of Crossing

A crossed cheque don’t remain so forever. The drawer has a right to cancel the crossing by writing the words ‘pay cash’ and putting his full signatures. This is termed as opening of crossing.

Classification of Negotiable Instruments

Bearer and Order Instruments

  • Bearer instruments. Any person who is in lawful possession of an instrument payable to bearer, as a holder, is entitled to enforce payment due on it. A promissory note and a bill of exchange cannot be made payable to bearer on demand.
  • Order instruments. A negotiable instrument is payable to order, when it is expressed to be payable to order (e.g., ‘Pay to A or order’ or ‘Pay to the order of A’, the instrument is payable toA) or his order at his option.

Inland and Foreign Instruments

  1. Inland instruments. A promissory note, bill of exchange or cheque which is (1) both drawn or made in India and made payable in India, or (2) drawn upon any person resident in India, is deemed to be an inland instrument (s. 11). A bill of exchange drawn upon a resident in India is an inland bill, irrespective of the place where it was drawn.
    1. Foreign instruments.An instrument, which is not an inland instrument, is deemed to be a foreign instrument (s. 12).

Foreign bills must be protested for dishonour if such protest is required by the law of the place where they are drawn. But protest in case of inland bills is optional (s. 104).

  1. Usance: Usance is the time fixed for the payment of bills drawn in one country and payable in another. It is fixed by the custom of the countries and the length of the usance varies in different countries.

Instruments payable on demand

A cheque is always payable on demand and it cannot be expressed to be payable otherwise than on demand (s. 6). A promissory note or bill of exchange is payable on demand:

  • when no time for payment is specified in it (s. 19)
  • when it is expressed to be payable ‘on demand’, or ‘at sight’ or onpresentment’.

The words ‘on demand’ are usually in a promissory note, the words ‘at sight’ are in a bill of exchange.

In a promissory note or bill of exchange, the expressions ‘at sight ‘ and ‘on presentation’ mean ‘on demand’ (s. 21).

Time instruments

  1. A bill or note is known as a time instrument, when it is payable :
    1. after a fixed period
    1. after sight
    1. on a specified day
    1. on the happening of an event which is certain to happen, when the event is bound to happen (even though the actual time of its happening is uncertain –  like death of a certain person).

But if the event is probable but not certain to happen, the instrument does not become valid if the event happens. Likewise an order to pay on or before a specified date is not a bill.

  • In an instrument with the word ‘After Sight’ :
  • In case of a promissory note, payment can be demanded only after it has been shown to the maker.
  • In case of a bill of exchange, it means after acceptance, or noting for non-acceptance, or protest for non-acceptance (s. 21).

Accommodation Bill

  1. A bill is normally drawn, accepted, or indorsed for consideration, it is a ‘genuine trade bill’. But, when a bill is drawn, accepted or indorsed without any consideration but just allow a person to get money for some period, it is called an ‘accommodation bill’.
  2. The accommodating party signs the bill as drawer, acceptor, or endorser without receiving value.
  3. In case of failure for consideration the bill creates no obligation of payment between the parties to the transaction.

Where any party has transferred the bill with or without indorsement to a holder for consideration, the Holder in due course and every subsequent holder deriving title from him, may recover the amount due to such instrument from the transferor for consideration or any party thereto.  

Rules regarding accommodation bills

  1. The accommodated party cannot, after he has paid the amount of the bill, recover the amount from any person who became a party to the bill for his accommodation (Sec. 43). Ex.1.9
  2. An accommodation bill can even be negotiated after maturity provided the person to whom it is negotiated takes it in good faith and for consideration (Sec. 59).
  3. Non-presentment of an accommodation bill to the acceptor for payment does not discharge the drawer.
  4. When an accommodation bill is dishonoured, failure to give notice of dishonour does not discharge the prior parties from the liability.

Fictitious bill

A bill is said to be fictitious if all the following conditions are satisfied:

  • The drawer of the bill is a fictitious person.
  • The bill is payable to order, and the drawer s himself the payee and the bill has been accepted by the drawee.

Acceptor’s liability

  1. Where both the drawer and the payee of a bill are fictitious persons, the acceptor is liable to that of the first endorser (payee) are in the same handwriting (Sec. 42). holder in due course, if the holder in due course can show that the signature of the supposed drawer.
    1. Where holder knows or has reason to believe that the drawer or the payee is a fictitious person, he is not a holder in due course (as he is not getting the bill in good faith) and so cannot claim the money.

Documentary bill and clean bill

When documents of title to the goods and other documents, e.g., invoice, marine insurance policy, etc. are annexed to a bill, the bill is called a documentary bill. Such documents are delivered to the buyer only on acceptance or payment of the bill. When no documents relating to the goods represented by the bill are attached to it, it is called a clean bill.


Escrow is conditional delivery of negotiable instrument for a purpose other than transferring absolutely property therein (viz, as a collateral security or for safe custody).

When such an instrument is delivered conditionally, the liability to pay does not arise if the conditions agreed upon or the purpose for which it is delivered are not fulfilled, This, however, does not affect the rights of a holder in due course. Ex.1.10

Ambiguous instrument

When an instrument is so drafted that it be interpreted either as a promissory note or a bill of exchange, it is called an ambiguous instrument. Its holder has to decisively elect whether he wants to treat it as a promissory note or a bill of exchange and the instrument will be accordingly treated (Sec. 17). Ex.1.11, Ex.1.12, Ex.1.13

If the amount undertaken or ordered to be paid is stated differently in figures and in words, the amount stated in words is the amount undertaken or ordered to be paid (Sec. 18).

Inchoate instrument (Sec. 20)

An inchoate instrument is an incomplete instrument in some respect. When a person signs and delivers such instrument (incomplete, blank or inadequately stamped paper), he authorises the other person to complete the instrument (upto the amount covered by the stamp) and becomes liable to any holder in due course for such instrument. [Mohanlal Kanailal vs. Keshrimul Chordiya], Ex.1.14, Ex.1.15

The following rules apply for inchoate instruments:

  1. The liability of the person who signs and delivers an inchoate stamped instrument arises only when the blanks are filled in and the instrument is completed.
  2. To make the signer liable on an inchoate instrument, the instrument should be delivered to the transferee.
  3. If an inchoate instrument is completed and negotiated to a holder in due course, he can claim payment of the full amount covered by the stamp.

Undated Bills and Notes

An undated negotiable instrument does not become invalid if the date of its execution can be proved by oral or other evidence. A holder in due course may insert the true date of issue or acceptance, and the instrument shall be payable accordingly.

Bills in Sets (s.132)

Foreign Bill of Exchange are normally drawn in sets (multiple copies) to avoid undue delay, loss or miscarriage in transit so that at least one part of the bill reaches the drawee safely at the earliest, for acceptance.

Each part of the bill is known as a ‘via’ and as soon as any of the parts is accepted or paid the other parts become ineffective.

Rules regarding bills in sets

  1. A bill of exchange may be drawn in parts (two, three or four) and all the parts together make a set which constitutes only one bill.
  2. Each part of the bill in a set must be numbered and must contain reference to other parts and a provision that it shall continue to be payable only when other parts remaining unpaid. Each part must contain a reference to the other parts. If any part of a set does not contain a reference to the other parts, that part becomes a separate bill if a holder in due course gets it.
  3. The entire bill is discharged when payment is made on any of the parts.
  4. The drawer must sign each part of the bill and deliver all the parts. Only one part requires to be stamped and only one part needs to be accepted.
  5. When a person accepts or indorses different parts of the bill in favour of different persons, he and the subsequent endorsers of each part are liable on such parts as separate bills.
  6. Where two or more parts of a set are negotiated to different holders in due course, he who first acquires title to his part is deemed to be the true owner of the bill. He is entitled to the possession of all other parts, and can claim the money in respect of the bill.

Difference between Inland Bills and Foreign Bills

BasisInland BillsForeign Bills
1. Bills drawnInland bills are drawn in India on a person living in India or outside India and payable anywhere in India.Foreign bills are drawn in India or outside India and payable outside India.
2.  Copy of the billInland bills are drawn in a single copyForeign bills are drawn in triplicate
3.  ProtestingProtest is optional in case of dishonour of Inland bills.Foreign bills dishonour must require mandatory protesting.

Maturity and days of grace (s.22)

In a promissory note or a bill of exchange (payable otherwise than on demand), the date of maturity (the date by which the payment must be made) is computed by adding 3 Days of Grace (extra days allowed for payment).

  1. Instruments are not entitled to ‘days of grace’  :
    1. a cheque
    1. a bill or note payable ‘at sight’ or ‘on presentment’ or ‘on demand’, and
    1. bill or note in which no time is mentioned.
      1. Bill or notes entitled to ‘days of grace’ :
  2. payable on a specified day, Ex. 1.17
  3. payable ‘after sight’,
  4. payable at a certain period after date Ex. 1.16
  5. payable at a certain period after the happening of a certain event.

In case of bills or notes entitled to days of grace, the instrument must be presented for payment on the last day of grace. Where an instrument is payable by instalments, each instalment is payable three days after the day fixed for payment of each instalment.

  • Calculation of date of maturity (Sees. 23 to 25)
  • If a promissory note or bill of exchange is made payable a stated number of months, it becomes payable three days after the corresponding date of month after the stated number of months (Sec, 23). Ex.1.18
  • If the months in which the period would terminate has no corresponding day, the period is held to terminate on the last day of such month (Sec. 23). Ex.1.19
  • The day on which the instrument is drawn, or presented for acceptance or sight, or the day on which the event happens, is to be excluded (Sec. 24) Ex.1.20
  • When the day on which a promissory note or bill of exchange is at maturity is a public holiday, the instrument is deemed to be due on the preceding business day (Sec. 25). Ex.1.21 

The expression ‘public holiday’ includes Sunday, and any other day declared by the Central Government, by notification in the Official Gazette, to be a public holiday.

Payment (s. 78)

Payment of amount due on a Bill of Exchange, Promissory Note or Cheque, must, in order to discharge the Maker or Acceptor, be made to the Holder of the Instrument.

Rights of Person liable to pay (s. 81)

  1. Any person liable to pay, or called upon by the Holder to pay the amount on a Note, Bill or Cheque has the right-
    1. Before Payment- To have the instrument shown to him
    1. On Payment- To have the instrument delivered upto him
    1. On loss of instrument or Not produced – To be indemnified against any further claim thereon.
  2. In respect of electronic images of truncated cheques, even after payment, the Banker who received payment is entitled to retain truncated cheque.
  3. A Certificate issued on the foot of the printout of the electronic image of a truncated cheque by the Paying Banker is prima facie proof of such payment.

Payment in Due Course (s. 10)

Payment in due course means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof.

Payment in due course resulting in discharge of a negotiable instrument should satisfy the following conditions :

  1. The payment must be in accordance with the apparent tenor of the instrument. “Apparent tenor” means payment according to what appears on the face of the instrument to be the intention of the parties. A payment before maturity is not a payment according to the apparent tenor of the instrument.
  2. The payment must be made by or on behalf of the drawee or acceptor. It must be made in money (including cheques and currency notes) and in no other mode without the consent of the holder.
  3. The person to whom payment is made should be in possession of the instrument and should also be entitled to receive payment on it.
  4. The payment should be made in good faith, without negligence and under bona fide circumstances.
  5. There should not exist any ground for believing that the possessor is not entitled to receive payment.

Interest on Bills and Notes

  1. When the rate of interest is specified in a promissory note or bill of exchange, it will be calculated at such rate on the principal money due thereon from the date of the instrument to the date of realisation or tender of such amount. If a suit is filed on the instrument, interest is payable up to such date as the Court directs (Sec. 79).
  2. When no rate of interest is specified in the instrument, interest is calculated (in spite of any collateral agreement which is not embodied in the instrument) at the rate of 18 per cent per annum (s. 80). [Seth Tulsidass Lalchand vs. Rajagopal], [syndicate Bank v. N.C.Kalyani Raghavan]
  3. When the party charged is the indorser of an instrument dishonoured by non-payment, he is liable to pay interest only from the time that he receives notice of dishonour (s. 80).

In the following cases, the rate of interest specified in the instrument may not be allowed by the Court: [syndicate Bank v. N.C.Kalyani Raghavan]

  1. Where the rate specified is excessive and the transaction is substantially unfair.
  2. Where the instrument has been obtained by coercion, undue influence, fraud or misrepresentation
  3. Where the stipulation in the contract for payment of interest is in the nature of a penalty

Ex: 1 Examples

Holders title free from all defects

Ex.1.1 Ram sells certain goods to Rahim and receives a promissory note from Rahim. Later Rahim refuse to pay by claiming that the goods are not according to order. If Ram sues Rahim on the note, Rahim has a point in defence. But if Ram negotiates the note to Rehaman, a holder in due course, then Rahim’s defence will not be valid.

Promise to Pay Promisery Note

Ex.1.2 “We have received the sum of Rs. 10,000 from Shri Ram Nayak in cash. This amount will be repaid by us on demand. Held, this is a promissory note.

Definite and Unconditional Payment of Promisery Note

Ex,1.3  A promises to pay B a sum of Rs.500 after the death of C –. This is not a conditional promise for it is certain that C shall die and is treated as a valid promissory note.

Ex,1.4 “I promise to pay Rs.1,000 to B, 30 days after his marriage with C.” Signed by A. This is not a promissory note as it is probable that B may not marry C

Order to Pay a Bills of Exchange

Ex.1.5. “Mr. A, Please let the bearer have Rs7000 and oblige.” Signed by A . This is not a bill of exchange as it contains a request and not an order.

Not Negotiable Crossing

Ex.1.6 V drew a cheque crossed ‘not negotiable’ in blank and handed it to his clerk to fill in the amount and the name of the payee. The clerk inserted a sum in excess of her authority and delivered the cheque to P in payment of a debt of her own. Asthe clerk had no title to the cheque and as such P had no better title, and therefore V was not liable

Inland Instruments

Ex.1.7 (a) A bill is drawn in Delhi on a merchant in Bombay and accepted payable in Calcutta or London.

(b)  A bill is drawn in Delhi on amerchant in London and accepted payable in Calcutta.

(c) The above bills are indorsed in New York.

Accommodation Bill

Ex.1.8 A is in need of Rs. 1,000 and approaches B to lend him. B suggests that A might draw a bill on him which he would Accept. As the credit of A is good, he would get the bill discounted with the banker. On the due date, A would pay Rs. 1,000 to B who would meet the bill. This is an example of Accommodation Bill. Here B is the Accommodating (or accommodation) party and A  is the Accommodated party. 

Rules Regarding Accommodation bills

Ex.1.9 A bill is drawn and accepted for the accommodation of B, the payee. B endorses the bill to C. The bill is dishonoured and B pays the amount of the bill. B cannot sue the drawer or the acceptor to recover the amount.


Ex.1.10 A, the holder of a bill, indorses it to B or order for the express purpose that B may get it discounted. B negotiates the bill to C who takes it bona fide and for value. C is a holder in due course and he acquires a good title to the bill.

Ambiguous Instrument

Ex.1.11 A bill is drawn by A, an agent, acting within the scope of his authority upon his principal, P. The holder may, at his option, treat it as a note or bill because the drawer (A) and the

drawee (P) are the same person.

Ex.1.12 Adraws a bill on B and negotiates it himself. B is a fictitious drawee. The holder may treat the bill as a note made by A.

Ex.1.13 A bill is drawn “Pay A or order the sum of one thousand rupees”, but the amount in figure is written as Rs.100. This will be treated as a bill for Rs.1,000.

Inchoate Instrument

Ex.1.14 A bill is drawn “payable to… or order”. Any holder in due course may write his own name as payee in the blank and sue upon the instrument.

Ex.1.15 Aowes B Rs.1,000. He gives B a blank acceptance on a bill which is sufficiently stamped to cover any amount upto Rs.2,000. B indorses the bill to H, a holder in due course. H who fills up the amount as Rs.2,000 can recover the amount.

Bill or notes entitled to ‘days of grace’

Ex. 1.16 A bill dated 1st January, 2000 is made payable four months after date. It falls due on 4th May, 2000.

Ex. 1.17 A bill is payable on 1st Feb. It falls due on 4th Feb, 2000.

Maturity and days of grace

Ex.1.18 A bill, dated 30th January, 2000, is made payable one month after date. The date of maturity falls on 3rd March, 2000.

Ex.1.19 A bill, dated 31st January, 2000, is made payable two months after date. The bill is at maturity on 3rd March, 2000.

Ex.1.20 A bill payable thirty days after sight is presented for sight on 1st March, 2000. It falls due on 3rd April, 2000.

Ex.1.21 A bill, dated 13 January, 2000, is payable three months after date. It falls due on 16th April, 2000. which happens to be a Sunday. As such it will fall due on 15th April, 2000, i.e., the preceding business day.

Click here for PDF