This article has been written by Navya Jain. It briefly traces the history of the origin of negotiable instruments. It also discusses the concept of negotiable instruments and the concept of date of maturity. It resolves a crucial question regarding the date of maturity of the instrument if it falls due on a public holiday or Sunday.
Table of Contents
Introduction
The concept of negotiability has been in vogue for time immemorial. Initially, it existed in the form of a barter system. Later, with the evolution of money, it took the form of purchasing goods against money. As the mercantile community progressed further, it developed various instruments such as bills of exchange, promissory notes, cheques, etc. Albeit, a piece of paper, it constitutes and symbolises a contractual commitment between two parties. Hence, a negotiable instrument is a legally valid substitute for money.
Indian jurisdiction first recollects the usage of negotiable instruments in the form of “Hundis” during the Mauryan period. The term “hundi” denotes an indigenous credit instrument created towards a party stating the contractual liability of payment of the amount specified therein. It was often described as a bill of exchange, a promissory note, a letter of credit, and a remittance vehicle. Therefore, ‘hundis’ were often used to raise and remit funds and finance both personal and business transactions. Eventually, with the progressing international standards of trade, the German model of the law of negotiable instruments came to be an inspiration for several nations. Thus, many nations began working towards the evolution of what we call today a formalised negotiable instrument law.
Origin of Negotiable Instruments Act, 1881
Having said that, the Indian law of negotiability is inspired by the British Colonial regime. The original legislation was first drafted by the Third Law Commission of India in 1866. However, it suffered from several defects, and therefore, on account of numerous deviations from English law, the bill had to be revised by a Select Committee. It was only after three more rounds of drafting and criticism that the bill was finally formalised and passed as the Negotiable Instruments Act, 1881. Before the introduction of this legislation, different laws were applicable to different parties. For instance, in a transaction involving Europeans, the English law of negotiations was applicable. Similarly, in the transactions involving Hindus or Muslims, personal laws were responsible for resolving their trade or personal transactions.
Meaning and features of a negotiable instrument
After a brief discussion on the origin of the legislation, let us briefly recapitulate the meaning of the terms “negotiable” and “instrument”. The term negotiable means capable of being transferred by way of delivery. Whereas the term instrument herein is defined as a written document that creates a right in favour of one party and liability against the other. Thus, a negotiable instrument can be defined as a written document specifying one’s liability towards the other. This document also possesses the trait of transferability. As per Section 13(1) Negotiable Instruments Act, 1881, a negotiable instrument refers to the promissory note, bill of exchange, or cheque payable either to the order or to the bearer. In order to categorise an instrument as a negotiable instrument, it must satisfy certain conditions, namely,
- It must be in writing.
- It must be transferable.
- It must create a right to receive and liability to pay the amount.
Every negotiable instrument is drawn based on the following presumptions mentioned in Section 118, Negotiable Instruments Act, 1881. Unless proven otherwise, these presumptions are deemed to be true and applicable to the concerned instrument.
- That the negotiable instrument is made for a certain consideration, thus, whenever accepted, negotiated, or endorsed, the said consideration shall become payable upon maturity.
- That the negotiable instrument shall become payable upon the date prescribed upon it.
- That the negotiable instrument was accepted within a reasonable time frame after having been drawn but before having been matured for payment.
- That the negotiable instrument is transferable before its date of maturity.
- That the endorsements are made in the order that appears upon the negotiable instrument.
- It is presumed that the lost negotiable instrument was duly stamped.
- That the holder of the negotiable instrument is a holder in due course.
Explanation of Section 25 of Negotiable Instrument Act, 1881
The bare reading of the provision enunciates that if a promissory note or a bill of exchange matures on a public holiday, such an instrument shall be deemed to mature on the next preceding business day. Thus, Section 25 of the Act resolves a very crucial conundrum regarding the date of payment. Just imagine a negotiable instrument being drawn, which incidentally becomes mature on a public holiday or on a Sunday. The question then is, when will this instrument become payable? In the case of (A) Sarla Jain vs. Central Bank of India, (2009), the Court clarified that in such circumstances, the instrument shall be deemed to have matured on the subsequent day after the public holiday or the Sunday. Regardless of the nature of the negotiable instrument, the Court has always emphasised interpreting the section in its literal sense in order to preserve the letter and spirit of the provision.
For instance, Rajni draws 12 bills of exchange upon M/s JJ Enterprises, payable on the 26th of every month starting from December 2024 to November 2025. Consequently, a bill of exchange matured on 26th January 2025. Since 26th January is a public holiday, it will be deemed to have matured on the next business day.
Promissory note
A promissory note, as defined under Section 4, the Negotiable Instrument Act, 1881, is a financial instrument containing an unconditional undertaking to pay the debt specified therein to a specified person or to the bearer of the instrument. A promissory note containing an express promise to pay is prepared in writing. In Bachan Singh vs. Ram Avadh (1949), it was held that merely implied undertaking shall not be enough to entrust the title of a promissory note. Thus, an express acknowledgement of the specified amount of debt is paramount. The Court, in the case of Kanhailan Chandak vs. R. Mohan (1980), has often clarified that for a promissory note to be validly admitted as evidence, it must be duly stamped with a sufficient amount. An insufficiently stamped promissory note can not be admitted as evidence to prove the liability of the maker. Apart from this, every promissory note has to be signed by the maker in order to make it a valid negotiable instrument. The person who makes a promissory note is called a maker or issuer. Likewise, the person to whom the debt is payable is called a payee.
Bill of exchange
The term bill of exchange is defined under Section 5, Negotiable Instruments Act, 1881. A bill of exchange is also a legal or a financial instrument drawn against a specified sum of money payable towards a party. Just like any other instrument, the bill must specify the amount to be paid along with the date and place of payment. Unlike a promissory note, it is an unconditional order signed by the maker of the bill to pay the specified amount to the person specified therein or the bearer of the instrument. Thus, a bill of exchange differs from a promissory note on account of the number of parties involved in the formation of a bill of exchange. Unlike a promissory note, a bill of exchange involves three parties, namely, drawer, i.e., the person who draws the bill; drawee, i.e., the person who is directed to pay against the bill of exchange; and payee, i.e., the person to whom the payment is made.
Concept of public holiday
A public holiday refers to a holiday whereby all the offices, public and private institutions and all kinds of services are closed. The public holidays include Sunday and national holidays as well, namely, January 26th, August 15th, and October 2nd, or any other holiday so declared by the Central Government. Having said so, a public holiday must not be confused with a local holiday or a government holiday. The effect of a local holiday depends solely on the particular local area. Similarly, the effect of government holidays remains confined to government institutions and has no bearing on private institutions.
The next matter of concern is who decides whether a particular day can be declared as a public holiday or not. When a writ petition was filed before the Court in the case of Kishanbhai Nathubhai Ghutia & Anr vs. The Hon’ble Administrator Union Territory & Ors, (2022) to declare the liberation day of Dadra & Nagar Haveli as a public holiday, the Court opined that this is a matter of government policy. The court lamented the argument that having a particular holiday be declared as a public holiday is a matter of fundamental right or that it violates a fundamental right.
Day of maturity
Apart from the key details like the name of the drawer, drawee, amount, interest payable, etc. The instrument also specifies the date of maturity of the instrument. The date of maturity is defined under Section 22, Negotiable Instruments Act, 1881. The date of maturity of any instrument can be defined as the date on which the instrument becomes payable. This payment could either become due at sight, upon presentation or after ‘sight’ and sometimes even upon the happening of a certain incident. However, there are some instances where the instrument may not specify the date of maturity. In such a scenario, such an instrument shall become payable on the third day after the day it is expressed to be paid. Those three days are known as days of grace. However, no grace period is given for cheques, bills, or promissory notes without any date of maturity. For instance, Mr. X draws a bill of exchange upon Mr. Y. The bill does not specify any date of maturity. As soon as the bill is presented for payment, let’s say, on 5th April 2024, it shall become due for payment within three days of presentation, i.e. 8th April 2024. These three days are called days of grace.
A promissory note or a bill of exchange becoming due “at sight” or “on presentment” means that it becomes payable as soon as it is presented for payment. In other words, no deadline or date of maturity is specified. The drawee/ payee of the bill/ note becomes liable to pay the same as soon as it is presented for payment by the drawer. In such a scenario, the presentation for the payment must be made within usual business hours. Sometimes, it may also happen that the instrument specifies the place of payment. In that event, it shall become payable at the specified place only. Thus, for instance, let us assume Mr. A made certain purchases from Mr. B for Rs. 1000. As soon as Mr. A is presented with the bill of exchange or promissory note by Mr. B, he shall become liable to pay the same.
Calculating maturity
Let us now understand how to calculate the date of maturity using examples.
Example 1: Maturity on a specified date-
Mr. A draws a negotiable instrument upon Mr. B, payable on 25th April 2020. The instrument shall become mature on a specified date + 3 days of grace. Thus, the date of maturity will be 28th April, 2020.
Example 2: Maturity on happening of a certain event-
Mr. A draws a negotiable instrument upon Mr. B, payable on the date when Mr. B turns 21. The instrument shall become mature on the given date + 3 days of grace.
Example 3: Maturity on the date when it is presented for sight-
Mr. A draws a negotiable instrument upon Mr. B, payable when presented. The instrument shall become mature on the date of presentation for sight + 3 days of grace.
Conclusion
From the analysis above, we can undeniably conclude that there are various types of negotiable instruments. Regardless of the kind of negotiable instrument it may be, the maturity of each of these instruments is a crucial point of discussion. It is often a point of dispute amongst various parties. For the aforesaid purposes, the Court strictly interprets the discussed provision to determine the date of maturity. Unless otherwise stated, the instrument shall be considered to have matured on the date specified, ‘+ 3 days’ of the grace period. In the instance where the date of maturity falls upon a public holiday or on Sunday, it shall be deemed to have matured on the subsequent business day.
Frequently Asked Questions (FAQs)
Does the declaration of a public holiday under the Negotiable Instruments Act, 1881 apply to private companies falling under the purview of the Factories Act, 1948 as well?
In the case of The Management of Bimetal Bearing Ltd. vs. Presiding Officer (2019), the Court opined that, as for the applicability of section 25 is concerned, the aforementioned provision has no applicability to the private industry.
When does the negotiable instrument become mature if it is payable in installments?
When a negotiable instrument is payable in instalments, it shall be deemed to be matured upon expiry of the third day of the date fixed for payment. Thus, the instrument shall be deemed to have matured upon the expiration of the grace days.
References
- https://etheses.lse.ac.uk/315/1/Martin_an%20economic%20history%20of%20hundi.pdf.
- https://www.researchgate.net/publication/370351031_Functions_Characteristics_and_Basic_Elements_of_Negotiable_Instruments.
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