This article is written by Valluri Viswanadham. It aims to present a comprehensive examination of Section 13 of the Negotiable Instruments Act, 1881. It will explore the history of this section and its application while also exploring relevant case laws to offer a comprehensive understanding of the concepts involved and it also analyse judicial interpretations and precedents. The article aims to clarify how courts have interpreted and explained the provisions of Section 13.
Table of Contents
Introduction
According to Section 13 of the Negotiable Instruments Act, 1881, “a negotiable instrument means a promissory note, bill of exchange or cheque payable either to the order or to the bearer, whether the word ‘order’ or ‘bearer’ appears on the instrument or not.” A negotiable instrument is a kind of payment mode or medium in the form of a document that acknowledges or issues a payment to the defined person or the assignee of the instrument. Real-life examples of negotiable instruments include various types of cheques, such as personal cheques, traveller’s and cashier’s cheques, and promissory notes. Each of these instruments serves a unique purpose, from facilitating international trade to providing financing options for businesses.
A negotiable instrument is like a contract that requires payment of a specific amount to someone on demand or at an agreed-upon date. It’s different from non-negotiable documents, which are instruments that cannot be transferred or endorsed to another party and lack the holder’s right to claim payment or ownership from the issuer. Examples include non-transferable contracts and certain types of securities.
For instance, a personal cheque lets you transfer money by writing down the payee’s name and the amount due. Despite online banking being a popular option, this method still exists because it is secure yet slow when processing. Traveller cheque used abroad during vacations fit here, though their usage has declined, all thanks to the digital alternatives readily available. Various examples of negotiable instruments under the Negotiable Instruments Act, 1881, include promissory notes, bills of exchange, and demand drafts. Negotiable instruments have versatile uses in today’s business world. For example, consider a small exporting firm that accepts promissory notes from international buyers. These notes provide terms for payment and assure the company of receiving funds within an agreed-upon time frame.
Promissory notes are formal promises between parties agreeing on future repayments, capturing terms like interest rates, timelines, and signatures to ensure clarity and commitment. Certificates of Deposit (CDs) enable fixed deposits over periods, yielding high-interest returns and benefiting risk-averse individuals as reliable long-term investments. The individual who is getting the payment is known as the payee and he must be documented as the payee in the instrument.
The negotiable instruments are transferable from one individual to another and upon transferring the instrument, the holder of the negotiable instrument is legally responsible for everything in the instrument. For any instrument to be considered negotiable in nature, it ought to be signed, and it can be in the form of a signature or any mark.
By utilising the expression “means” in Section 13(1) of the Negotiable Instruments Act, 1881 (hereinafter referred to as the “Act”), it was not intentional to confine the description of a negotiable instrument. The description of a negotiable instrument under the Negotiable Instruments Act, 1881, was not intended to be exhaustive, which means that the definition provided in the Negotiable Instruments Act, 1881, is not limited to the examples explicitly mentioned. All bills of exchange and promissory notes are negotiable except when they enclose words barring transfer or demonstrate a purpose for which they shall not be transferable.
The words “order” or “bearer” are no longer essential to making a bill of exchange or promissory note negotiable under the Negotiable Instruments Act, 1881. Before the enactment of the Negotiable Instruments Act, 1881, in order to make the instrument negotiable, it was essential to insert functioning words of negotiability, such as “order” or “bearer” or any other term expressing the purpose on the part of the drawer or maker to make it negotiable.
The instrument drawn payable to a particular individual without additional terms was held to be not negotiable. Though not negotiable, it was still recognised as a valid instrument under the Act. The cheque with the word ‘bearer’ struck out and without the word ‘order’ was considered an ‘order’ cheque and was treated as negotiable.
The Bombay High Court in Dossabhai Hirachand vs. Virchand Dalchhakam (1918) refused to recognise the custom of considering a cheque with the word “bearer” struck out and without the word “order” as an “order” cheque and treated it as negotiable. This verdict caused considerable adversity and it affected the merchant community. This judgement reinforced the provisions of the Indian Act without implying alignment with the English Act. Consequently, the provisions of the Negotiable Instruments Act, 1881, in India clarified that a bill payable to a specific person and containing no words barring transfer or indicating a purpose that it should not be transferable is considered a bill payable to order.
In Forbes, Forbes, Campbell And Co. vs. The Official Assignee (1924), the Bombay High Court held that if a negotiable instrument is originally payable to the bearer, no subsequent endorsement can alter its negotiable nature, which implied that a negotiable instrument initially payable to the bearer remains negotiable regardless of any subsequent endorsements that may attempt to restrict further negotiation. A bill negotiable in its inception remains negotiable until the person endorsing it restricts the right of further negotiation or until payment or satisfaction is made by the maker, drawee, or acceptor at or after maturity. The mere removal of the expression “bearer” does not make the instrument non-transferable or obliterate its negotiability. Section 13 defines a “negotiable instrument” and provides a description of a promissory note, bill of exchange, or cheque payable either to the order or to the bearer.
Indian Stamp Act and Negotiable Instruments
The Indian Stamp Act, 1899 (“Stamp Act’) came into force on 1st July 1899. The object of this legislation is to augment the proceeds of the government. Consequently, the language of the Stamp Act should not be interpreted in a technical sense but rather in the common meaning that people who are knowledgeable about the topics covered by the Act would use to interpret it. The Stamp Act gives the definition of ‘bond’ and also ‘promissory note’. Complicatedness had arisen in arranging the examination to explore if the specific document could be the promissory note within the connotation of the Negotiable Instruments Act, 1881 and the Indian Stamp Act, 1899 or a bond within the connotation of the Stamp Act after the amendment of this Section 13 by the Negotiable Instruments Act, 1919.
That difficulty arises in a case where a promissory note is attested by a witness. The document is payable to a certain person and there are no words prohibiting transfer or indicating an intention that it shall not be transferable. In such a case, the document satisfied the necessities of Section 4 of the Negotiable Instruments Act, 1881, which defines a promissory note as a written instrument that is not a bank note or currency note. It contains an unconditional undertaking, signed by the maker, to pay a certain sum of money to a specific person or to the bearer of the instrument. The promise can be on-demand or on a future date. The document is a promissory note payable to order, as it is not expressed to be payable to a particular person and does not contain words barring transfer or demonstrating an intention that it shall not be transferable. It is therefore negotiable.
Given that the document is not prima facie payable to order, can it be considered a bond within the meaning of Section 2(5)(b) of the Stamp Act because it is attested by witnesses. To answer this difficulty, it is essential to see the provisions of two enactments, namely., the Negotiable Instruments Act, 1881, and the Indian Stamp Act, 1899. The Indian Stamp Act came into force in 1899, seventeen years after this Act, which came into force on 1st March, 1882. The Stamp Act for defining the promissory note under Section 2(22) takes into account the explanation of promissory notes.
Considering the provisions of both the Negotiable Instruments Act and the Indian Stamp Act, it is essential to acknowledge the relevance of the Negotiable Instruments Act when interpreting the meaning of Section 2(5)(b) of the Stamp Act. The Legislature, in building an amendment to the Negotiable Instruments Act in 1919, did not think it essential to bring about any alteration in the definition of bond in the Stamp Act. Prior to the amendment, the non-negotiable promissory note, which was attested by witnesses and was payable to a particular person, was considered a bond’.
The Negotiable Instruments Act and the Indian Stamp Act have to be read together in order to find out whether the document given above is a promissory note or bond. The situation prior to the amendment was that the document should specifically be payable to order if it was to be a promissory note. If it is merely payable to a certain person, it is “not payable to order.” Following the amendment, a document is classified as a bond if it is not payable to order or does not meet the criteria of a promissory note. Specifically, for a document to be considered a bond, it must explicitly not be payable by order. For if it is payable to a certain person and it does not contain words prohibiting transfer or indicating an intention that it shall not be transferable, it is payable to order.
Justice PN Bhagwati, when he was the judge of the Gujarat High Court, held in Jagivandas Bhikhabhai vs. Gumanbhai Narottamdas (1965) that after the amendment, even if there is a promissory note that is not expressed to be payable to an order but purely contains an unconditional undertaking to pay to a particular person, it would still be a promissory note and therefore negotiable, provided it does not contain words barring transfer or indicating a purpose for which it shall not be transferable.
Clause-wise explanation of Section 13 of Negotiable Instruments Act, 1881
Section 13
This clause (1) of Section 13 of the Negotiable Instruments Act, 1881, describes the definition of the word “negotiable instrument,” mentioning that it can include a promissory note, a bill of exchange or cheque payable either to the order or to the bearer.
Explanation (i) to Section 13(1)
The promissory note, bill of exchange or cheque is payable to an order that is expressed to be so payable or that is expressed to be payable to a particular person and does not include words barring transfer or demonstrating the purpose that it shall not be transferable.
Explanation (ii) to Section 13(1)
The promissory note, bill of exchange, or cheque is treated as payable to the bearer if it unambiguously states so or if the solitary or last endorsement on it is left empty. This means the instrument can be claimed by whoever holds substantial ownership of it.
Explanation (iii) to Section 13(1)
This explanation specifies that if a promissory note, bill of exchange, or cheque is made payable to a specific individual and not to “him or his order,” it can still be considered payable to that person or to anyone he delegates, giving him elasticity in how he can implement payment.
Section 13(2)
Section 13(2) specifies that a negotiable instrument may be allocated to two or more payees mutually, or it may be allocated in the option to one of two, a lone or a number of several payees.
Classification of negotiable instruments
A negotiable instrument is a written document guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payer named on the document. Common examples include promissory notes, bills of exchange, and cheques
Promissory Note
The promissory note, defined in Section 4 of the Negotiable Instruments Act, states that it is an instrument in writing that contains 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.
Bill of Exchange
The Bill of Exchange, defined in Section 5 of the Negotiable Instruments Act, states that it is a written document that contains an unconditional order instructing a specific person to pay a certain sum of money to that person, to their order, or to the bearer of the instrument.
Cheque
A cheque defined in Section 6 of the Negotiable Instruments Act is a bill of exchange drawn on a designated banker and not expressly stated to be payable other than on demand. It can include an electronic image of the truncated cheque and the electronic form of cheque
Railway Receipt
A railway receipt is a receipt issued by railway management on recognition of goods that permits the consignee to deliver goods at the rail terminal at which the train is destined. The Gujarat High Court, Ibrahim Isaphai vs. Union of India (1964), stated that a railway receipt is not a negotiable instrument or a quasi negotiable instrument. Even though it was meant to be regarded as a quasi-negotiable instrument, it cannot be said that by mere endorsement and delivery of that instrument, not only the right to take delivery of the goods represented thereby passes, but also the title in itself.
Handnote
The Patna High Court had unequivocally held in Bhagwati Prasad Bhagat vs. Pahil Sundari (1968) that if the endorsement portion of a handnote below the stamp and up to the date is written in the handwriting of the executant, it is a negotiable instrument in spite of the circumstance that the body portion of the handotes is not in the handwriting of the said executants, as it does not make any difference and the presumption will arise under Section 118 of the Negotiable Instruments Act that the handnote was made or drawn for consideration.
Hundi
Hundi is a system of transferring currency without using banks or physical currency. It is based on trust and engages trusted people known as hawaladars, who facilitate the transactions. In it, any individual who wants to send money (a remitter) goes to a hawaladar and gives them the currency they want to propel. The hawaladar then gives them a hundi, which is a written document that represents the worth of the currency being transmitted. The remitter gives this hundi to the individual receiving the money (payee) or to another hawaladar who will deliver the payment to the payee. The Rajasthan High Court in Nizamuddin vs. Jugal Kishore (1996) held that “Hundi” is a negotiable instrument.
Relevant precedents on Section 13 of Negotiable Instruments Act, 1881
Packing Paper Sales (Regd. ) and Ors. vs. Smt. Veena Lata Khosla (2007)
The petitioners, the partnership firm in the case of Packing Paper Sales (Regd. ) and Ors vs. Smt. Veena Lata Khosla (2007), gave a loan to the late O.S. Khosla, and O.S. Khosla promised to repay 25,000 within a year with interest at 24% per annum. However, he did not repay the loan after successive promises and he had passed away. The defendants, who are the son and wife of O.S. Khosla, inherited his property. The petitioners argued that the defendants, who are the wife and son of the late Shri O.S. Khosla, inherited his estate and therefore, the defendants shall be held responsible for paying back the loan.
During the examination of witnesses, objections were raised regarding the admission of the documents, which were stated to have been executed by the late O.S. Khosla. As the promissory notes that were executed were not stamped properly and adequately, they were being contested to be inadmissible as evidence. The lower court observed that documents cannot be admitted as evidence as per the provisions of the law and because the stamp duty was not paid as per Section 35(a) of the Indian Stamp Act, which is why documents cannot be validated.
The plaintiffs have contended before the Delhi High Court that the documents are not promissory notes and the defendants, in return, contended that the documents under consideration are promissory notes. Defendants argued that Article 1 under Schedule 1 of the Indian Stamp Act, 1899, clearly states that a document that is in the nature of an acceptance stating the guarantee to pay back a loan or any condition to repay the interest cannot be an acceptance as mentioned in Article 1 to Schedule 1 of the Stamp Act.
Article 1 of the Indian Stamp Act mentions the provisions for different document types and their categorisation for purposes of stamp duty. The categorisation is based on their personality. A promissory note is an unconditional promise, signed by the maker, to pay a certain sum of money to a specific person or bearer of the instrument. After the amendment, a document is classified as a bond if it is not payable to order, does not meet the criteria of a promissory note, and includes additional financial documents recognised as bonds under the Act but lacks the specific characteristics of promissory notes. A bill of exchange is a written order requiring one party to pay a fixed sum of money to another party on demand or at a predetermined date.
Considering that the document under consideration guarantees to pay back the loan, the document cannot be acknowledged. The Delhi High Court clearly observed that in the reading of Section 4 of the Negotiable Instruments Act, 1881, in mutuality with Section 13 of the Act, to consider it a promissory note, the document must fulfill certain conditions, like being in writing and containing an absolute undertaking by the person who created the document. The undertaking should contain the payment of a certain amount of money to a certain person or to the order of that individual, making it mandatory for the person creating the document to sign it.
The Delhi High Court had clearly stated that according to Explanation 1 of Section 13 of the Negotiable Instruments Act 1881, if any document satisfies the mentioned conditions and if the document doesn’t contain any words that prohibit the transfer or any depiction of the purpose that it should not be transferred, then the document must be assumed to be negotiable and there is no specific form in which the document should be executed and it also ought to be customarily satisfactory to a businessman to think about it as a promissory note. The definitions of the promissory note, which were mentioned in Section 2(22) of the Indian Stamp Act, 1899 and the promissory note defined in Section 4 of the Negotiable Instruments Act, 1881, should not be read in isolation.
They should be combined with the definition of the negotiable instrument in Section 13 of the Negotiable Instruments Act, 1881. The definition of a promissory note in the Indian Stamp Act, 1899, is much more extensive compared to the definition of a promissory note in the Negotiable Instruments Act, 1881. The Delhi High Court had held that, if you have to consider any document as a promissory note, not only the document ought to be negotiable, but also the document has to pass three further tests. The guarantee to pay back the loan should be the main factor, and there should not be anything else contradictory with the temperament of the instrument as significantly a promise to pay, the instrument should be anticipated by the parties to be a promissory note.
In order to find out whether a particular document is a promissory note or not, the rationale of the parties at the time of execution of the document should be considered with reference to the essence of the document. The contiguous state of affairs in which the document had been executed, its negotiability in the accepted intellect. Whether the document was intended to be a promissory note or was intended to be a mere acknowledgement of a debt or receipt of consideration.
In this instance, the initial writing encloses the loan establishment receipt. The concluding part of the document contains a guarantee but the proceedings state that it is equivalent to a guarantee to pay back the loan. The order of the lower court was set aside and after paying the necessary stamp duty and the penalty, the documents in dispute were considered admissible in nature.
Muthoottu Chitty Fund and Ors. vs. V.C. Lukose and Ors. (1990)
The appellants are before the Kerala High Court in the case of Muthoottu Chitty Fund and Ors. vs. V.C. Lukose and Ors. (1990). challenging the decrees of the lower court in claims of money based on a cheque approved in favour of the plaintiff. The appellant’s main point was that the document ceased to be a negotiable instrument when the term “bearer” was used to bounce cheques. The removal of the word “bearer” indicated that the maker intended to completely destroy the document’s ability to be negotiable. If it ceases to be a negotiable instrument, neither Section 50 nor Section 51 of the Negotiable Instruments Act, 1881, will have any function.
The counsel for the plaintiff referred to the amendment to the Negotiable Instruments Act, 1881. At first glance, it may appear that, when the word “bearer” is scored off and there is no word “order,” the instrument will not answer the description of a negotiable instrument. According to the previously mentioned explanation, (i) a “cheque payable to order” will accept (1) a cheque that is explicitly made out for that purpose and (2) a cheque made out to a specific individual as long as it meets a requirement. The requirement is that the cheque must not include any language that forbids transfers or that suggests the cheque will not be transferable.
The Kerala High Court made it clear that the goal of non-transferability cannot be taken for granted in the absence of explicit language expressing non-transferability. Therefore, a cheque continues to fall under the legal definition of a negotiable instrument unless it contains explicit terms that prohibit transfer. A meagre deduction of the term “bearer” does not require the presence of phrases that express a desire for them to be non transferable. It’s not like examples of this kind of purpose were absent from the handling of negotiable instruments throughout the revolution in commerce.
The Kerala High Court stated that courts have consistently favoured interpretations that facilitate smooth and effective business practices. Commercial requirements have further augmented such necessities. From the days of marine ships to bulk carriers, from slow-moving machinery to satellites and spacecraft, and from basic ledger files to processing methods, we have come a long way. The basic approach, however, remains the same. The Kerala High Court had held that, even while interpreting the Negotiable Instruments Act of 1881, including Section 13 thereof, the various considerations that have given substance and connotation to the provisions relating to the negotiable instruments will have to be given their due role and relevance.
Frequently Asked Questions (FAQ)
How do negotiable instruments differ from non-negotiable documents?
Negotiable instruments are differentiated from non-negotiable documents mostly in their transferability and the rights they grant to the holder. Negotiable instruments can be transferred freely by endorsement or delivery, and the holder, in due course, acquires them free of defects and defences that could be raised against the original payee. The non-negotiable documents cannot be transferred in such a manner and characteristically do not grant the same rights to subsequent holders.
What is the significance of the terms “order” and “bearer” in the context of negotiable instruments?
The terms “order” and “bearer” in the context of negotiable instruments signify how the instrument can be transferred and to whom it is payable. An “order” instrument is payable to a specific person or their endorsee, allowing the named payee to endorse it to another party. A “bearer” instrument is payable to whoever holds or presents it, making it highly transferable without the need for endorsement.
What are the key features of a negotiable instrument?
The negotiable instrument includes its capacity to be easily transferred from one person to another, the obligation of an unconditional promise or order to pay a fixed amount of money, and the requirement for it to be payable either on demand or at a future date. These instruments must be in writing and signed by the maker or drawer. Their foremost purpose is to assist trade and credit transactions by serving as substitutes for cash and providing a reliable method for deferred payments.
References
- https://corporatefinanceinstitute.com/resources/wealth-management/negotiable-instrument/
- https://nacm.org/pdfs/articles/Negotiable_Instruments.pdf
