Negotiable Instruments Act, 1881
Key Definitions: Banker, Drawer, Drawee, Payee, Holder, Payment in Due Course, Inland and Foreign Instruments
The Act uses a precise vocabulary to describe the people who deal with an instrument and the instruments themselves. These terms are defined in Section 3 and in Sections 7 to 12, and they recur throughout the Act, from liability and negotiation to crossing and dishonour. This note sets out each definition and explains its significance.
1. Banker (Section 3)
"Banker" includes any person acting as a banker and any post office savings bank. The definition is inclusive and functional: the question is whether a person carries on the business of banking, in the sense of accepting deposits withdrawable by cheque and paying cheques drawn on it. The definition matters chiefly for cheques, which must be drawn on a specified banker (Section 6), and for the protections given to paying and collecting bankers (Part H).
2. Parties to Instruments (Section 7)
Term | Meaning |
|---|---|
Drawer | The maker of a bill of exchange or cheque |
Drawee | The person directed by the bill or cheque to pay |
Drawee in case of need | A person named in the bill, or in an indorsement, in addition to the drawee, to be resorted to in case of need (Section 115) |
Acceptor | The drawee, after he has signed his assent on the bill (or one part of a set) and delivered it, or given notice of such signing to the holder |
Acceptor for honour | A person who, after a bill has been noted or protested for non-acceptance or for better security, accepts it supra protest for the honour of the drawer or an indorser |
Payee | The person named in the instrument to whom, or to whose order, the money is directed to be paid |
A promissory note has a maker (who promises) and a payee; it has no drawee. A bill and a cheque have three parties: drawer, drawee and payee. The same person may fill more than one role; for example, a drawer may draw a bill payable to himself.
3. Holder (Section 8)
Section 8, Negotiable Instruments Act, 1881 (holder) The "holder" of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction. |
The holder is defined by entitlement, not mere possession. A thief or finder of an order instrument is in possession but is not the holder, because he is not entitled in his own name. An agent who holds for his principal is not the holder either. Topic 12 examines the concept in detail.
4. Holder in Due Course (Section 9)
Section 9 (holder in due course) "Holder in due course" means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee thereof, if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. |
The holder in due course is the central figure of the law of negotiable instruments: a holder who took for consideration, before maturity, and in good faith without sufficient cause to suspect a defect in his transferor's title. He takes free from many defects and defences (Topic 13).
5. Payment in Due Course (Section 10)
Section 10 (payment in due course) "Payment in due course" means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned. |
- Apparent tenor: payment on the face of the instrument, for example not before the date it is payable.
- Good faith and without negligence: the payer must act honestly and with reasonable care.
- To a person in possession: in circumstances that give no reasonable ground to believe he is not entitled.
Payment in due course discharges the instrument (Section 82(c)) and protects paying bankers (Topic 35).
6. Inland and Foreign Instruments (Sections 11 and 12)
Kind | Definition | Significance |
|---|---|---|
Inland instrument (Section 11) | Drawn or made in India and made payable in, or drawn on a person resident in, India | Protest not compulsory for dishonour |
Foreign instrument (Section 12) | Any instrument not so drawn, made or made payable | Foreign bills must be protested for dishonour if the law of the place of making or drawing so requires (Section 104); conflict of laws rules apply (Sections 134 to 137) |
⚠ Key point A banker includes any person acting as a banker and any post office savings bank (Section 3). The drawer makes a bill or cheque; the drawee is directed to pay; the drawee in case of need is an alternative; the acceptor is the drawee who has signed his assent and delivered it; the acceptor for honour accepts supra protest; the payee is the person to be paid (Section 7). A holder is a person entitled in his own name to possess and recover (Section 8); a holder in due course took for consideration, before maturity, and in good faith (Section 9). Payment in due course is payment by the apparent tenor, in good faith and without negligence (Section 10). Instruments are inland or foreign (Sections 11 and 12). |
7. Related Topics and Provisions
- Holder (Topic 12) and holder in due course (Topic 13)
- Payment in due course (Topic 27)
- Protection of the paying banker (Topic 35)
- Conflict of laws (Topic 40)