BACK TO NI Act 1881
NI Act 1881
Section 13
Negotiable Instrument
THE STATUTE
Original Text
A 'negotiable instrument' means a promissory note, bill of exchange or cheque payable either to order or to bearer.
Explanation (i) — 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 (ii) — 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 endorsement is an endorsement in blank.
Explanation (iii) — Where a promissory note, bill of exchange or cheque, either originally or by endorsement, 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.
Legal Commentary
Section 13 defines what the NI Act regulates — it lists the three and only three types of negotiable instruments recognised under Indian statute: promissory notes, bills of exchange, and cheques. The defining legal characteristic of a negotiable instrument is transferability combined with the ability of a good-faith transferee (holder in due course) to acquire a better title than the transferor had — a concept that underpins commercial credit.
The 'payable to order or bearer' distinction is crucial: 'order' instruments require endorsement (signature of the payee) to transfer; 'bearer' instruments transfer by mere delivery. A crossed cheque marked 'Account Payee Only' is technically still an 'order' instrument but is restricted by banking practice to the named payee's account — it cannot be negotiated further.
The NI Act does not govern all financial instruments — only these three. Fixed deposit receipts, dividend warrants, government securities, and letter of credit are excluded from Section 13's definition. The Supreme Court in Dalmia Cement (Bharat) Ltd v. Galaxy Traders & Agencies Ltd (2001) emphasised that the characteristics of negotiability — free transferability and holder-in-due-course protection — are what make these instruments commercially vital.
For Section 138 (cheque dishonour), Section 13 matters because it establishes the cheque as a negotiable instrument — which means it can be transferred by endorsement, and the transferee (holder in due course) can file a Section 138 complaint in their own name after dishonour.
Questions & Answers
Section 13 recognises exactly three: (1) Promissory Note — a written unconditional promise by one person to pay another a certain sum; (2) Bill of Exchange — a written unconditional order by one person directing another to pay a certain sum to a third person; (3) Cheque — a bill of exchange drawn on a specified banker, payable on demand. The list is exhaustive.
No. An FDR does not fall within any of the three categories in Section 13. It is not a promissory note (it's not an unconditional promise to pay on demand), not a bill of exchange, and not a cheque. FDRs are governed by the bank's contractual terms, not the NI Act.
Yes, if the cheque was transferred by endorsement and the holder qualifies as a 'holder in due course' under Section 9. As a negotiable instrument under Section 13, a cheque is transferable, and the transferee acquires the right to sue for dishonour — including under Section 138.
A 'payable to order' instrument transfers through endorsement (signature by the payee). A 'payable to bearer' instrument transfers by physical delivery alone — whoever holds it can claim payment. Most cheques today are 'order' instruments. Bearer cheques are rare because 'Account Payee' crossing effectively converts them to non-negotiable restricted instruments.