NEGOTIABLE INSTRUMENTS ACT, 1881
Object of the Act
The main object of the Negotiable Instruments Act is to legalise the system by which instruments contemplated by it could pass from hand to hand by negotiation like any other goods. The purpose of the Act was to present an orderly and authoritative statement of leading rules of law relating to the negotiable instruments To achieve the objective of the Act, the Legislature thought it proper to make provision in the Act for conferring certain privileges to the mercantile instruments contemplated under it and provide special procedure in case the obligation under the instrument was not discharged.
Section 4. “Promissory note” – A ‘Promissory Note’ is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.
Illustrations
(a) “I promise to pay b or order Rs. 500.”
(b) “I acknowledge myself to be indebted to B in Rs. 1,000, to be paid on demand, for value received.”
(c) “Mr. B, I.O.U. Rs.1,000.”
(d) “I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next.”
The instruments marked (a) and (b) are promissory notes. The instruments marked (c) and (d) are not promissory notes.
Essential features
An instrument is a promissory note if there are present the following elements:-
1. Writing : The first essential is that all negotiable instruments must be in writing. An oral engagement to pay a sum of money is not an instrument, much less negotiable.
2. Promise to pay : Secondly, it must contain a promise to pay. A mere acknowledgement of debt is not a promissory note. “I.O.U., E.A. Gay, the sum of seventeen dollars for value received.” Has been held not to be a promissory note. A mere receipt for money does not amount to a promissory note, even though it might contain the terms of repayment. In Mange Lal Vs. Lal Chand, AIR 1995, Rajasthan High Court has held that a document which was in the form of a letter acknowledging receipt of certain sums and affixed with 20 paise revenue stamp was held to be a receipt and not a promissory note. In the case of Muthu Sastrigal Vs. Visvanatha AIR 1914 Madras High Court , it has been held that a document containing the following words “Amount of cash borrowed of you by me is Rs.350. I shall in two weeks time returning this sum with interest, get back this letter.” Has been held to be a promissory note because there is an unconditional undertaking to repay the borrowed money.
3. Unconditional : Thirdly, the promise to pay the money should be unconditional, or subject only to a condition which according to the ordinary experience of mankind is bound to happen. Thus in Beardsley Vs. Baldwin (1741), a written undertaking to pay a sum of money within so may days after the defendant’s marriage was not recognised as a promissory note because possibly the defendant may never marry and the sum may never become payable. Similarly in Roberts Vs Peake (1757), an action was bought upon a promissory note made in the following form.
“We promise to pay AB ￡ 116.11s value received, on the death of George Hindshaw, provided he leaves either of us sufficient money to pay the said sum or if we shall be otherwise able to pay.”
The court pointed out that if the note had merely been made payable on the death of G.H., it would have been a good promissory note, be cause death is an event so certain and necessary that it is bound to happen and therefore the not must have become payable at one time or the other. But the other condition that it would be payable provided there would be sufficient funds left behind made the instrument bad, because that was an uncertain event, and a note payable on an uncertain contingency can never be a negotiable instrument.
4. Money only and a certain sum of money:
Fourthly, the instrument must be payable in money and money only. If the instrument contains a promise to pay something other than money or something in addition to money, it will not be a promissory note. The sum of money payable must also be certain. Negotiable instruments are meant for free circulation and if they are value is not apparent on their face, their circulation would be materially impeded. Accordingly, in Smith Vs Nightingale (1818) a promissory note made in the following form was held bad.
“I promise to pay to JE… the sum of ￡65 with lawful interest for the same, 3 months after date, and also all other the sums which may be due to him.”
It was held that the instrument was too indefinite to be considered a promissory note. It contained a promise to pay interest for a sum not specified and not otherwise ascertained than by reference to the defendant’s book.
5 . Certainties of parties:
Fifthly, the parties to the instrument must be designated with reasonable certainity. There are two parties to a promissory note, viz , the person who make the note and is known as the maker and the payee to whom the promise is made. Both the maker and the payee must be indicated with certainity on the face of the instrument. In Brij Raj Sharan Vs. Saha Raghunandan Sharan AIR 1955, Rajasthan HC, a letter was addressed to A continuing the following statement.
“In your account Rs. 4668 – 15 – 0 are due from my son Mahesh Chandra, I shall pay the amount by December 1948. You rest assured.”
It was contended that it should not be treated as a promissory note because the person to whom the amount was to be paid was not indicated therein. However, Wanchoo C J, holding it be a good note, said “By looking to illustration ‘b ‘ of Section 4… it I cleared that if the person to whom the payment is to be made is certain from the words used in the document, the fact that the name is not mentioned after the words ”I shall pay” would not mean that the payee is uncertain. Since the letter was addressed to A it was clear that A was intended to be the payee”
6 Signed by the maker:
Lastly, the promissory note should be signed by the maker. Signature may be on any part of the document. Where an instrument is in the hand writing of a person and it is addressed by him to another, that is sufficient evidence of his signature. The Allahabad High Court in the case of Raj Bahadur Singh Vs. Hari Pd. Mehra AIR 1983 Patna High Court has held that if a document satisfies all the requirements of a valid promissory note, it would not make any difference to its character as a negotiable instrument that it was an attested document. The Court said: Though attestation of a promissory note is neither required nor prohibited by law, a document which is otherwise a promissory note does not cease to be so merely because it is attested in as much as the document was unilateral and was not bilateral which was necessary for being an agreement.
To consider whether a document is a promissory note or not the following tests are helpful : (i) Is the sum to be paid a sum of money and is that sum certain ? (ii) Is the payment to be made to or to order of a person who is certain or to the bearer of the instrument ? (iii) Has the maker signed the document ? (iv) Is the promise to pay made in the instrument the substance of the instrument ? and (v) Did the parties intend that the document should be a promissory note ?
Kinds of promissory notes.—S.4 recognizes three kinds of promissory notes : (i) A promise to pay a certain sum of money to a certain person,
(2) A promise to pay a certain sum of money to the order of a certain person,
and (3) a promise to pay the bearer:
Section 5 : “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.
Characteristics and requirements – An essential character of a bill of exchange is that it contains an order to accept or to pay and that the acceptor should accept it, in the absence of such a direction to pay, the document will not be a bill of exchange or a hundi.
1) It must be in writing
2) The bill of exchange must contain an order to pay. The order to pay may be in the form of a request, but it must be imperative. In Ruff Vs Webb(1974), the plaintiff Ruff was a servant of defendant Webb. The defendant dismissed him from service and for his wages gave him a draft in the form of a dreft in the following words: ”Mr Nelson will much oblige Mr Webb by paying to J. Ruff or order, 20 guineas on his account. “
Lord Kenyon was of the opinion that “paper… was a bill of exchange , that it was an order by one person to another to pay money to the plaintiff or his order. It is quite apparent that the language of the draft was very polite, but it has been said that “the introduction of the terms of gratitude does not destroy the promise(or order) to pay. “
But if the language of the draft does not show any “order to pay”, the draft will not be a bill of exchange. In Little Vs Slackford, the defendant issued a paper addressed to the plaintiff in the following words:
“Mr Little, please to let the bearer have 7 ￡, and to place them to my account, and you will oblige. Yours humble servant, R. Slackford.”
It was held that the paper does not purport to be a demand made by a part having a right to call on the other party to pay. The fair meaning is you will oblige by doing it.“
The order must be such as to require the other to pay the money at all events. Merely to give him the authority to pay is not sufficient.
From the definition of the term ‘bill of exchange’ given S.5 of the Negotiable Instruments Act, it can easily be found that hundi can be of two types: (1) payable to order and (2) payable to bearer. If the hundi is payable to order, the payee or endorsee is holder in due course; it is not necessary to show that they had obtained the bill of exchange/hundi for consideration. But if the hundi is payable to bearer the person possessing it will be holder in due course only if he had come to possess it for consideration.
Following are bills of exchange -- (1) A banker’s draft (2) A demand draft even if it drawn upon another office of the same bank (3) An order issued by a District Board Engineer on Government Treasury for payment to or order of a certain person.
Section 6 : “Cheque” --- A “cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.
Explanation I – For the purpose of this section, the expression –
(a) “ a cheque in the electronic form” means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system ;
(2) “ a truncated cheque” means a cheque is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.
Explanation II -- For the purpose of this section, the expression “clearing house” means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.
A cheque being a bill of exchange must possess all the essentials of a bill and should also meet the requirements of Section 6. For instance, in the case of Cole Vs. Milson (1951) a document was drawn absolutely in the form of a cheque. It was made payable to “cash or order”. The question was whether it was a valid cheque. Section 5 of the Indian Act and Section 3(1) of the English Act require that a bill of exchange must be made payable to or to the order of a specified person or the bearer. This document was made payable to “cash or order”. Hence it was not payable to any person or to bearer and therefore was not a bill of exchange, it could not be a cheque either.
Bill and Cheque compared
A cheque is no doubt essentially a bill of exchange. Some of the peculiarities which distinguish it from a bill of exchange. Some of the peculiarities were clearly stated by Parkhe B in Ram Churun Mullick Vs. Luchmee Chand (1 854) He said that a cheque “is a peculiar sort of instrument, in many respects resembling a bill of exchange, but in some entirely different. A cheque does not require acceptance, in ordinary course it is never accepted; it is not intended for circulation, it id given for immediate payment, it is not entitled for days of grace.” This passage was cited with approval by Lord Wright in Bank of Baroda Vs. Punjab National Bank(1944). His Lordship made his own valuable contribution to explaining the nature of a cheque. He said: “In addition it is to be noted a cheque is presented for payment, whereas a bill in the first instance is presented for acceptance unless it is a bill on demand. A bill is dishonoured by non-acceptance, this is not so in case of a cheque. These essential differences (besides others) are sufficient to explain why in practice cheques are not accepted. Acceptance is not necessary to create liability to pay as between the drawer and the drawee bank. The liability depends on contractual relationships between the bank and the drawer drawer, it customer. Other things being equal, in particular if the customer has sufficient funds or credit available with the bank, the bank is bound either to pay a cheque or dishonour it at once….It is different in case of an ordinary bill; the drawee is under no liability on the instrument until he accepts; his liability on the bill depends on the acceptance of it.”