Bank Promotion Exams

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Negotiable Instrument Act, 1881

  1. Definition “Negotiable instrument”
    1. Negotiable means transferable
    2. Instrument means a written document
  2. A negotiable instrument is a document which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or by endorsement and delivery.
  3. It is a method of transferring a debt from one person to another.


  1. Freely transferable
  2. Title of holder free from all defects
    1. A person who is holding negotiated instrument he is free from a defect in the title of the transferor
    2. Ex: S sells certain goods to B. B gives a promissory note to S for the price. He refuses to pay the promissory note, claiming that the goods are not according to order. If S sues B on the note, B’s defence is good. But if he negotiates the note to H, a holder in due course, B’s defence will be of no avail.
  3. Recovery

A holder of the negotiable instrument can sue for recovery of the amount.

  1. Presumptions
  2. Negotiable instrument is for consideration
  3. Dated
  4. Reasonable Time of acceptance
  5. Before the maturity it should transferred
  6. Stamp when there is a dishonour

Types of negotiable instrument

  1. Negotiable by statue
    1. Promissory note
    2. Bill of exchange
    3. Cheque
  2. Negotiable by custom or usage
    1. Share warrants
    2. Dividend warrants
    3. Share certificates

Some important Sections of NI Act, 1881

Sec 4 Promissory Note

PN is an instrument in writing, signed by maker, containing an undertaking to pay certain sum to bearer

Sec 5 Bills of exchange

Bills of exchange is an instrument in writing, signed by the maker containing an unconditional order directing a person to pay certain sum to bearer.

Sec 6 Cheque

A cheque is a bill of exchange drawn on specified banker to be paid only on demand.

Sec 7 Drawer, Drawee& Payee

Maker of bill of exchange/cheque is called drawer & person thereby directed to pay is called drawee. The person named in the instrument to whom or to whose order the money is directed to pay is called the payee.

Sec 8 Holder

Holder of a negotiable instrument means a person entitle in his name to possession & to receive/recover the amount.

Sec 9 - Holder in due course

Holder in due course means a person who for consideration became possessor of NI before the instrument became payable.

Sec 10-Payment in due course

If payment is made according to apparent tenor of the instrument, in good faith & without negligence to the person having possession of the instrument under circumstance which do not afford a reasonable ground of suspicion that he is not entitle to receive the payment.

Sec 13 NI

NI means promissory note, bill of exchange or cheque payable to order or bearer.

Sec 18 Difference in words & figure

When there is difference in amount in words & figure, the amount in words is to be treated as the amount ordered by the drawer to pay.

Sec 20 Inchoate Instrument

Not to pay inchoate i.e. incomplete instrument.

Sec  45(a)  Holder’s  right  to  duplica

NI which has been lost before it is over due, the person who was the holder of it may apply to the drawer to give him another instrument of the same tenor, giving security to the drawer, if required, to indemnify him against any possible loss.

Sec 47 Negotiation by delivery

NI payable to bearer is negotiable by its delivery.

Sec 85(1) Protection in case of Order cheque

Paying banker is protected by payment in due course of an order cheque which is properly endorsed by payee or its agent.

Sec 85(2) Protection to paying banker in case of Bearer Cheque

Paying banker is protected by payment in due course of a bearer cheque which is properly endorsed by payee or its agent.

Sec 123- General Crossing

Where a cheque bears across its face parallel transverse lines with or with crossing & the cheque is said to be crossed.

Sec 124- Special crossing

Where cheque bears across its face addition of name of banker with/without words “not negotiable” this addition specially.

Sec126- Payment of crossed cheque

Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker & where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to a banker to whom it is crossed or his agent for collection.

Sec 131- Protection available for collecting banker
Banker who in good faith, without negligence received payment for customer of crossed cheque, shall not incur any liability to the true owner of the cheque in case the title to the cheque proves defective.

Sec 138- Dishonor of cheque

Where any cheque drawn by a person maintaining a/c in bank, for payment to another person out of that a/c, returns unpaid for want of sufficient balance in a/c, such person shall presumed to have committed offence & shall be punishable with imprisonment upto max 2 year or twice the amount of cheque.