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Negotiable Instrument : Meaning and Modes of transfer

Section 13 of Negotiable Instruments Act

(1) A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.

Explanation 1: A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable or which is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable.
Explanation 2: A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the only or last indorsement is an indorsement in blank.
Explanation 3: Where a promissory note, bill of exchange or cheque, either originally or by indorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.

(2) A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees


Subsection (1) was substituted by sec 3 of Act VII of 1919. This section enumerates the instruments which are negotiable and the conditions under which they become so. If the conditions laid down in the section are not satisfied they are not negotiable, i e , they cannot be made to pass from hand to hand by endorsement and delivery, but nevertheless, they form the basis of enforceable contracts as between the original contracting parties.

Modes of transfer and effects thereof

Negotiable instruments can be transferred by delivery or endorsement or by both. They may also be transferred, like an ordinary chose in action by assignment or sale under section 130 of the Transfer of Property Act by an instrument in writing with all the incidents of a transfer under that section. Non negotiable instruments can be transferred under section 130 of the Transfer of Property Act by instrument in writing which need not be registered.

The transferee of an instrument known as chose in action or actionable claim under the Transfer of Property Act succeeding, as he does to the right, title and interest of the transferor, takes the instrument subject to all the liabilities and equities of the transferor at the date of the transfer. But the transferee of a negotiable instrument under this Act takes it free from all the defects of title of his transferor.

As has been previously explained the present law has been enacted for the facility of trade and commerce and some instruments have been made transferable by delivery or endorsement or by both and the necessity of a written document of transfer applicable to choses in action has been dispensed with.

Negotiability gives a ready circulation and currency to pronotes among the community at large and enables them to perform in a vast variety ot cases the function of money. The holder of a negotiable instrument is competent to sue on it in his own name without giving any notice and absence or failure of consideration, provable as between the immediate parties, cannot be shown when the instrument passes to a holder in due course who holds it free from all defects.

Definition is exhaustive

This definition of negotiable instruments is exhaustive so far as this Act is concerned. It includes Government Pronotes which are transferable only by indorsement on the back and should be renewed when there is no space left for indorsement. Port Trust and Improvement Trust Debentures and not Municipal Debentures of Bombay, foreign bonds issued by foreign Governments if payable by custom to a bearer, Debentures but not bonds issued by public bodies like Corporations, and Municipalities or trading companies, stock certificates like share certificates, dividend warrants issued by a company on its bankers in the form of a cheque and made payable to bearer or order, Railway receipt according to a custom in Bombay but not in Rangoon, a bill of lading but not a mate's receipt are negotiable.

Share certificates issued by a company in the prescribed form are not in themselves negotiable but they are held negotiable on the ground of estoppel or usage. Pending issue of bonds or certificates for delivery scrips are provisionally granted on stamp to purchasers of stocks. Such scrips can be transferred like a negotiable instrument. Law Merchant is capable of expansion and in England, to keep pace with the growing expansion of trade and commerce, instruments not originally negotiable, have been taken in the fold of negotiable instruments. It is submitted that similar steps will have to be taken also here to meet the requirements of growing trade and commerce.

Promissory Note

To be negotiable a pronote must be payable either to order or to bearer. A note that is neither payable to order nor to bearer is not negotiable. A note payable to a person or to order or bearer on demand is void and illegal. A pronote payable to a specified person or order is a negotiable instrument and is negotiable by endorsement. Before the Amending Act VIII of 1919 it was necessary to add the words, order, or, bearer, to make it negotiable and an instrument payable to a person without the addition of either of those two words was held to be not negotiable. It was not the practice in Bombay market to add these words the custom prevailing there received a blow when the Bombay High Court held a cheque, in which the word ‘bearer’ was struck out and the word Order was not added, as not negotiable. To remove this anomaly the Amending Act VIII of 1919 was passed and explanation 1 was added. Under the explanation a note payable to A is equivalent to a note payable to A or order and is, therefore, negotiable

A note is payable to a bearer when it is specifically so stated; and even when it is not so stated but the note is payable to a named payee it becomes payable to a bearer when, if their is a single endorsement, it is in blank, and if there are more than one endorsement, the last one is an endorsement in blank without the specification of the name of any particular person. Thus, a cheque is made payable to A, A puts his endorsement on the back without naming the person to whom it is to be paid but delivers it to X for negotiation. The cheque becomes a bearer cheque. Similarly, when a hundi drawn in favour of A or bearer is endorsed by the payee in favour of B without the addition of the word “or bearer” it ceases to be a bearer hundi and it can be paid only to the endorsee named.

Words of Prohibition

An instrument becomes non-negotiable when transfer is expressly prohibited or when it is expressly made payable only to one certain person and neither of the words ‘bearer’ or ‘order’ is mentioned. To the former category falls a note like “Pay to A and to none else” and to the latter class falls a case “Pay to A alone”. As in both the cases the note is not payable either to the order or bearer and the note has to be paid only to A and to none else, it is not a negotiable instrument. An instrument made or drawn payable to order or bearer can become non-negotiable by clearest words prohibiting transfer.

Payable to two or more jointly

This clause has been added by Sec 2 of Act V of 1914. Before the addition of this clause, a note payable to two persons jointly was held valid but one, payable to either of the two payees in the alternative, was bad. But the addition of this clause has made such notes, i.e, notes payable in the alternative to either, quite valid. The Jog hundis payable alternatively to one of several payees are negotiable.