Negotiable Instruments Act Nepal: Complete Legal Guide

The Negotiable Instruments Act 2034 (1977) is the primary legislation governing negotiable instruments in Nepal, providing the legal framework for banking transactions involving promissory notes, bills of exchange, cheques, and drafts. The Act defines various types of negotiable instruments, establishes the rights and liabilities of parties involved, and prescribes procedures for negotiation, endorsement, presentment, payment, and remedies in case of dishonour. Understanding this Act is essential for businesses, financial institutions, and individuals engaged in commercial transactions in Nepal.

What is the Negotiable Instruments Act 2034?

The Negotiable Instruments Act 2034 (1977) was enacted to define negotiable instruments and systematize banking transactions in Nepal. The Act was authenticated and published on 2034/9/18 (January 2, 1977) and came into force on 2039/3/14 (June 28, 1982). It was subsequently amended by the Finance Related Some Nepal Acts Amendment Act 2039 (1982).

The Act provides comprehensive legal provisions for:

• Definition and types of negotiable instruments
• Rights and liabilities of parties
• Negotiation and endorsement procedures
• Presentment for acceptance and payment
• Payment, interest, and discharge from liability
• Crossed cheques and their special provisions
• Notice of dishonour procedures
• Remedies and penalties for violations

What are Negotiable Instruments?

According to Section 2(e) of the Act, Negotiable Instruments means a Promissory Note and Bill of Exchange. A negotiable instrument is a written document that contains an unconditional promise or order to pay a specified sum of money to a designated person or to the bearer. The key characteristic of negotiable instruments is their transferability — they can be transferred from one person to another through delivery or endorsement.

Types of Negotiable Instruments in Nepal

Key Definitions Under the Act

Parties to Negotiable Instruments

Promissory Note Parties

• Maker: The person who makes the promissory note and promises to pay
• Payee: The person to whom payment is to be made
• Holder: The person in possession entitled to receive payment
• Endorser: The person who transfers the note by endorsement
• Endorsee: The person to whom the note is endorsed

Bill of Exchange Parties

• Drawer: The person who draws or makes the bill
• Drawee: The person directed to make payment
• Acceptor: The drawee who accepts the bill
• Payee: The person to whom payment is to be made
• Holder: The person in possession entitled to receive payment
• Endorser: The person who transfers the bill by endorsement
• Alternative Drawee: A person mentioned to be contacted if the drawee does not accept or pay

Rights and Liabilities of Parties

Rights of Holder (Section 4)

The Holder has the right to transfer the Negotiable Instrument to another person through delivery or endorsement.

Liability of Drawer (Section 15)

If the drawer has been provided due notice of dishonour of the Bill of Exchange by the acceptor or drawee, the drawer is liable to compensate the Holder.

Liability of Bank (Section 16)

A Bank having sufficient funds of the Drawer in the account, properly applicable to the payment of the Cheque, must pay the Cheque. In default of such payment, the Bank must compensate the Drawer or Holder in due Course for any loss or damage caused by such default.

Liability of Maker and Acceptor (Section 17)

The maker of a Promissory Note or the acceptor of a Bill of Exchange is bound to pay the amount at Maturity when the instrument is duly presented for payment. In default, they must compensate any party for loss or damage sustained.

Liability of Endorser (Section 19)

Any person who endorses and delivers a Negotiable Instrument shall be responsible to every subsequent Holder, unless a contract expressly limiting or excluding such liability is made.

Liability to Holder in Due Course (Section 20)

Every prior party to a Negotiable Instrument is liable thereon to a Holder in due Course until the instrument is duly satisfied.

Principal Debtor Equivalence (Sections 21-22)

• The maker or drawer (until acceptance) and the acceptor are liable as principal debtors
• Other parties are liable as sureties for the maker, drawer, or acceptor
• Each prior party is liable as principal debtor to each subsequent party

Liability of Surety (Section 23)

The surety of a Bill of Exchange cannot claim that realization must first be attempted from the principal debtor's property. The amount can be directly realized from the surety.

Capacity of Parties (Section 11)

Any person capable of contracting under prevailing law may make, draw, accept, endorse, or negotiate Negotiable Instruments. If such acts are done by a minor, all parties except the minor shall be liable.

Agent Liability (Sections 12-13)

• For acts done by an agent, the principal who authorized such acts shall be liable
• If an agent signs without indicating agency capacity or without intending to incur personal responsibility, the agent is personally liable

Negotiation and Endorsement

Completion of Negotiable Instrument (Section 28)

The function of making, acceptance, or endorsement of a Negotiable Instrument is regarded as completed only after its delivery.

Negotiation by Delivery (Section 29)

• A Negotiable Instrument payable to bearer is negotiable by delivery alone
• If payable to the ordered person, the instrument must be endorsed by the Holder

Effect of Endorsement (Section 30)

The right is transferred after endorsement followed by delivery. The Holder may give such instrument to another by endorsing it or receive payment himself.

Types of Endorsement

Change of Endorsement (Section 31)

The Holder of any Negotiable Instrument having general (blank) Endorsement may change it into special (full) Endorsement.

Partial Endorsement Not Valid (Section 36)

No Negotiable Instrument can be negotiated which is endorsed to transfer only a part of the amount appearing to be due on the instrument.

Negotiable Instrument Obtained Unlawfully (Section 38)

A person obtaining a Negotiable Instrument by offence, fraud, unlawful consideration, or finding a lost instrument cannot make a claim upon the amount with the Drawer, acceptor, or Holder.

Presentment for Acceptance and Payment

Presentment for Acceptance (Section 40)

A Bill of Exchange payable after presentment must be presented to the Drawee for acceptance:

• During business hours on a business day
• Within a reasonable time if no time or place is specified
• By a person entitled to demand acceptance

If the Drawee cannot be found after reasonable search, the Bill of Exchange is deemed to be dishonoured.

Time for Drawee to Consider (Section 41)

The Holder must allow the Drawee two days (exclusive of public holidays) to consider whether to accept the Bill of Exchange, if demanded by the Drawee.

Presentment for Payment (Section 43)

Promissory Notes, Bills of Exchange, and Cheques must be presented for payment to the maker, acceptor, or drawee respectively, by or on behalf of the Holder within business hours. In default, other parties are not liable to such Holder.

Place of Presentment (Sections 44-46)

• If a specific place is mentioned, present at that place
• If no place is mentioned, present at the maker's/acceptor's/drawee's place of business or residence
• If no fixed place of business or residence, present wherever the person can be found

Presentment of Cheque (Section 47)

• No person can charge the Drawer without presentment of a Cheque at the Bank
• If damage is caused due to default of presentment within reasonable time, such damage cannot be charged to the Drawee

When Presentment Not Necessary (Section 51)

The Negotiable Instrument is deemed dishonoured without presentment if:

• The maker, acceptor, or drawee deliberately prevents presentment
• At the specified place, neither the payer nor agent attends during business hours
• The payer closes office during business hours
• The concerned party cannot be found after due search

Payment, Interest, and Discharge from Liability

Payment (Section 53)

Payment of the amount due on a Negotiable Instrument must be made to the Holder. However, a Bank is not bound to pay a Cheque or Draft not presented within six months from the date it was drawn.

Interest (Section 54)

If a rate of interest is specified in the Negotiable Instrument, it shall be calculated at such rate. For computing interest for compensation or recovering loss, the maximum rate of interest charged by commercial banks on loans shall apply.

Discharge from Liability (Section 56)

The Drawer, acceptor, or endorser is discharged from liability in the following conditions:

• If the Holder intentionally cancels the name of the acceptor or endorser with intent to discharge
• If the Holder otherwise discharges such party
• If the instrument is payable to bearer or endorsed in blank and Payment in due Course is made

Discharge by Allowing Additional Time (Section 57)

If the Holder allows the acceptor more than two days to consider acceptance, all prior parties not consenting to such allowance are discharged from liability.

All Parties Discharged (Section 63)

If a Negotiable Instrument at or after maturity is held by the acceptor in his own right, all other parties are discharged from liability.

Crossed Cheques

Chapter 8 of the Act provides special provisions for crossed cheques to enhance security in cheque transactions.

Types of Crossed Cheques

Crossing After Issue (Section 83)

• Holder of uncrossed cheque may make it general or special crossed
• Holder of general crossed cheque may make it special crossed
• Holder may add words "not negotiable" to any crossed cheque
• Banker to whom cheque is specially crossed may re-cross it to another Banker or agent for collection

Payment Out of Due Course (Section 88)

Any Banker paying a crossed cheque without following proper procedures under Sections 84 and 85 shall be liable to the true owner for any loss sustained.

"Not Negotiable" Cheque (Section 89)

A person taking a crossed cheque bearing "not negotiable" shall not have, and cannot give, a better title than that which the person from whom he took it had.

Application to Drafts (Section 91)

The provisions relating to crossed cheques apply to any Draft as if the Draft were a Cheque.

Notice of Dishonour

Dishonour by Non-Acceptance (Section 64)

A Bill of Exchange is deemed dishonoured by non-acceptance when:

• The drawee makes default in acceptance upon being duly required
• The drawee agrees to accept with conditions
• The drawee is incompetent to contract

Dishonour by Non-Payment (Section 65)

A Promissory Note, Bill of Exchange, or Cheque is deemed dishonoured by non-payment when the maker, acceptor, or drawee makes default in payment upon being duly required to pay.

Notice Requirement (Section 66)

When a Bill of Exchange is dishonoured, the Holder or any party who remains liable must give notice to all other related parties. Any party not noticed shall not be liable on that instrument.

Notice is not required to be given to the maker of a Promissory Note, acceptor of Bill of Exchange, or the Drawee.

Mode of Notice (Section 67)

• May be given to the person or their authorized agent
• If person has died, to their heir
• May be oral or written
• Written notice can be sent by post
• Must inform that the instrument has been dishonoured and the party will be held liable
• Must be given within reasonable time at place of business or residence
• If notice miscarries despite being duly directed and sent by post, it remains valid

When Notice is Unnecessary (Section 70)

No notice of dishonour is necessary:

• When dispensed with by the party entitled thereto
• When the drawer has countermanded payment
• When the party has not suffered damage for want of notice
• When the acceptor is also the drawer
• For a Promissory Note which is not negotiable
• When the party entitled to notice cannot be found after due search
• When the party entitled to notice promises unconditionally to pay

Notary Public Provisions

Appointment (Section 106)

Government of Nepal may, by notification in the Nepal Gazette, appoint a Notary Public or designate any Officer to perform Notary Public functions.

Noting by Notary Public (Section 71)

When a Negotiable Instrument has been dishonoured, the Holder may complain to the Notary Public within reasonable time and cause to be noted:

• The particulars of dishonour upon the instrument or paper attached
• The date of dishonour
• The reason assigned for dishonour
• If not expressly dishonoured, reason why the Holder treats it as dishonoured

Protest (Section 72-74)

The Holder may take the facts of dishonour to be certified by the Notary Public after noting. The protest must contain:

• The Negotiable Instrument or its duplicate and everything written thereon
• Name of person for whom and against whom protested
• Statement that payment/acceptance/additional security was demanded
• Terms of answer or statement that no answer was given or person not found
• Place and time of dishonour or refusal

Foreign Negotiable Instruments

Governing Law (Section 99)

• Liability of maker or drawer is regulated by the law of the country where the instrument was made
• Liability of acceptor and endorser is regulated by the law of the country where the instrument is made payable

Dishonour of Foreign Instrument (Section 100)

Where a Negotiable Instrument is made payable in a different country from where it is made or endorsed, the law of the country where it is made payable determines what constitutes dishonour and sufficient notice.

Validity of Foreign Instruments (Section 101)

If a Negotiable Instrument is made, drawn, accepted, or endorsed outside Nepal but in accordance with Nepalese Law, it is valid even if the underlying agreement is invalid according to the law of the country where it was entered into.

Presumption (Section 102)

The law of any foreign country regarding Negotiable Instruments is presumed to be the same as Nepal Law, unless the contrary is proved.

Penalty for Cheque Bounce (Section 107A)

If a person deliberately transfers a Cheque knowing they do not have sufficient deposit in the Bank, and the Cheque is dishonoured when presented for payment:

For detailed information on cheque bounce remedies and procedures, including criminal proceedings under the Banking Offence and Punishment Act 2064, please refer to our comprehensive guide on Cheque Bounce Law in Nepal.

Limitation Period (Section 108)

No complaint relating to a Negotiable Instrument shall be valid which is not filed within five years from the date of cause of action.

Evidentiary Presumptions (Section 103)

Until the contrary is proved, the following presumptions apply:

• Every Negotiable Instrument was made or drawn for consideration
• Every such instrument was accepted, endorsed, negotiated, or transferred for lawful consideration
• Every instrument bearing a date was made or drawn on such date
• Every transfer was made before maturity
• Every accepted Bill of Exchange was accepted within reasonable time after its date and before maturity
• Endorsements appearing on an instrument were made in the order they appear
• The Holder is a Holder in due Course

However, the burden of proving Holder in due Course status lies on the Holder if:

• The instrument was obtained from lawful owner by offence or fraud
• The instrument was obtained from maker, drawer, or acceptor by offence, fraud, or unlawful consideration

Determination of Compensation (Section 107)

Compensation payable in case of dishonour shall be determined as follows:

• Holder: Entitled to the amount together with expenses properly incurred in presenting, noting, and protesting
• Endorser who has paid: Entitled to the amount paid with interest from date of payment until realization

Important Rules for Negotiable Instruments

Ambiguous Instrument (Section 3)

Where a Negotiable Instrument may be construed either as a Promissory Note or Bill of Exchange, the Holder may treat it as either at their election.

No Payment Date (Section 5)

Payment of a Negotiable Instrument without a written payment date shall be made on demand.

Figure vs Letter Discrepancy (Section 6)

If there is a difference between the figure and letter of the amount, the amount written in letters shall be the amount payable.

Additional Time (Section 7)

Payment of a Negotiable Instrument not payable on demand, at sight, or on presentment shall be on the fourth day from the date of payment.

Maturity on Holiday (Section 10)

When the day of maturity is a Public Holiday, the instrument is deemed due on the next preceding business day.

Duplicate for Lost Instrument (Section 27)

If the Holder loses a Negotiable Instrument and requests a duplicate, the Drawee or maker must provide the duplicate upon receiving required security and expenditure costs.