The Negotiable Instruments Act, 1881 for CA Foundation
The Negotiable Instruments Act, 1881: promissory notes, bills of exchange and cheques; holders; negotiation and endorsement; crossing; and dishonour of cheques.
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Practise The Negotiable Instruments Act, 1881 free
What you'll learn
- Instruments, parties and holders
Tell the three instruments apart and define holder and holder in due course. - Negotiation, crossing and dishonour
Apply endorsement, crossing and Section 138 rules.
Key formulas
| Bearer instrument | Negotiated by delivery (s.47) |
|---|---|
| Order instrument | Endorsement + delivery (s.48) |
| Section 138 timeline | Notice within 30 days → drawer pays within 15 days → complaint within 1 month |
| Section 138 punishment | Up to 2 years, or fine up to 2× the amount, or both |
Concepts explained
Promissory note, bill of exchange and cheque
A promissory note is a written promise to pay; a bill of exchange is a written order to pay; a cheque is a bill drawn on a banker payable on demand.
What it means
- Promissory note (s.4): unconditional promise, signed by the maker, certain sum, to a certain person; can't be payable to bearer on demand (RBI Act s.31).
- Bill of exchange (s.5): unconditional order by the drawer to the drawee to pay the payee; time bills need acceptance.
- Cheque (s.6): drawn on a specified banker, payable on demand; includes electronic cheques and truncated cheques.
- All are freely transferable and the transferee in due course gets a good title.
- 'I promise to pay Ravi ₹10,000' signed by Meena
Answer: Promissory note (Meena maker, Ravi payee)
- 'I promise to pay Ravi ₹10,000 when I marry'
Answer: Not valid: conditional on an uncertain event
Related terms
- Hundi: indigenous Indian bill of exchange
- Inland vs foreign instrument: drawn and payable in India, or not
Exam tip: Promise → note; order → bill; order to a bank on demand → cheque.
Holder, holder in due course and negotiation
A holder is entitled to possess and receive payment; a holder in due course also gave value, took it before maturity and in good faith, and gets a better title than the transferor.
What it means
- Bearer instruments are negotiated by delivery (s.47); order instruments by endorsement and delivery (s.48).
- Endorsements: blank, special (full), restrictive, sans recourse, conditional.
- A holder in due course is protected against defects in earlier parties' title (except forgery).
- Days of grace: 3 days for bills payable otherwise than on demand (s.22).
- B gifts a bill to C
Answer: C is a holder but not a holder in due course
- Payee signs only his name on the back
Answer: Becomes payable to bearer
Related terms
- Sans recourse: endorser excludes his own liability
- Forged endorsement: no title passes through it
Exam tip: Holder in due course needs all three: value, before maturity, good faith.
Crossing and Section 138
Crossing controls how a cheque is paid; Section 138 makes the bouncing of a cheque for insufficient funds a criminal offence, subject to strict time limits.
What it means
- General crossing: two parallel lines; special: a bank's name; account payee: credit only to payee's account; 'not negotiable': no better title than transferor.
- Section 138 conditions: cheque presented within validity, returned unpaid for insufficient funds, notice within 30 days of information, drawer fails to pay within 15 days.
- Complaint within one month of the cause of action.
- Punishment: up to 2 years, or fine up to twice the amount, or both.
- Payee learns of dishonour on 3 June
Answer: Notice by 3 July
- 'State Bank of India' written between the lines
Answer: Paid only through SBI
Related terms
- Section 143A: interim compensation up to 20% of the amount
- Noting and protest: a notary records dishonour of a bill
Exam tip: Remember 30-15-30 for the Section 138 timeline.
Memory tricks
Notice within 30 days; payment within 15 days; complaint within 1 month.
Consideration, before maturity, good faith without notice of defect (s.9).
Promissory note has 2 parties; bill and cheque have 3.
Try 3 CA Foundation-style questions
Q1. Under Section 31 of the RBI Act, a promissory note payable to bearer on demand can be made only by
- the RBI or the Central Government
- any scheduled bank
- any company
- any individual
Show answer
Answer: (1) the RBI or the Central Government
Only the RBI (and the Central Government, for one-rupee notes and coins) can issue promissory notes payable to bearer on demand, which work like currency.
Q2. Under Section 138, a cheque is dishonoured for insufficient funds. The payee must send a written notice demanding payment within
- 15 days of the date of the cheque
- 3 months of dishonour
- 30 days of receiving information of dishonour
- 1 year of dishonour
Show answer
Answer: (3) 30 days of receiving information of dishonour
The payee must give notice within 30 days of learning of the dishonour; the drawer then has 15 days to pay; the complaint is filed within one month after that period ends.
Q3. A bearer cheque is negotiated by
- endorsement and delivery
- registration with the bank
- mere delivery
- a court order
Show answer
Answer: (3) mere delivery
Section 47: an instrument payable to bearer is negotiated by delivery alone. An order instrument needs endorsement and delivery (s.48).
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