What Is A Negotiable Instrument Act, 1881 In India?

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Negotiable Instruments Act, 1881 is a law relating to all negotiable instruments such as promissory notes, bills of exchange and cheques.

The word "negotiable instrument" means a document which is transferable from one person to another.

What Is A Negotiable Instrument Act, 1881 In India?

As per definition it is "an instrument, the property in which is acquired by anyone who takes it bona fide, and for value, notwithstanding any defect of title in the person from whom he took it, from which it follows that an instrument cannot be negotiable unless it is such and in such a state that the true owner could transfer the contract or engagement contained therein by simple delivery of instrument.

Three major conditions to be met are:

The instrument should be freely transferable.

  • An instrument cannot be negotiable unless it is such and in such state that the true owner could transfer by simple delivery or endorsement and delivery.
  • The person who takes it for value and in good faith is not affected by the defect in the title of the transferor.
  • Such a person can sue upon the instrument in his own name.

Following are the important characteristics of negotiable instruments:

(1) The holder of the instrument is presumed to be the owner of the property
contained in it.

(2) They are freely transferable.

(3) A holder in due course gets the instrument free from all defects of title of any previous holder.

(4) The holder in due course is entitled to sue on the instrument in his own name.

(5) The instrument is transferable till maturity and in case of cheques till it becomes stale (on the expiry of 6 months from the date of issue).

(6) Certain equal presumptions are applicable to all negotiable instruments unless the contrary is proved.

Under the Negotiable instrument act, it recognises only three types of instruments viz., ci Promissory Note, a Bill of. Exchange and a Cheque as negotiable instruments.

However, it does not mean that other instruments are not negotiable instruments provided that they satisfy the following conditions of negotiability:

1. The instrument should be freely transferable by the custom of trade.

Transferability may be by (i) delivery or (ii) endorsement and delivery.

2. The person who obtains it in good faith and for consideration gets it free from
all defects and can sue upon it in his own name.

3. The holder has the right to transfer. The negotiability continues till the
maturity.

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Read more about: cheque, demand draft
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