Maturity of Negotiable Instruments : Meaning, Rules, and Payment

A negotiable instrument is a signed document that promises a particular payment to a specified person or holder of the instrument. In India, negotiable instruments are governed under the umbrella of the Negotiable Instruments Act, 1881. This is a significant law that governs all means of negotiable instruments in India. The act establishes a regulatory framework for promissory notes, bills of exchange, and cheques. The act was enacted to provide uniform legal regulations to cover all aspects of negotiable instruments in India. Several times, the act has been amended to make sure that it is in line with changing business practices and new judgments.

Geeky Takeaways:

• A negotiated instrument is a signed document that promises a particular payment to a specified person or holder of the instrument.
• The Negotiable Instruments Act, 1881, is the governing act to provide a regulatory framework for all types of negotiable instruments.
• Negotiable instruments possess key details like the principal amount, interest rate, and date, and they are also signed by the payor.
• Negotiable instruments are easily transferred to different parties, and even the new holder will obtain full legal title to such instruments.

What is Maturity of a Negotiable Instrument?

The Negotiable Instruments Act has specified sections 22, 23, 24, and 25 and has laid down provisions regarding the maturity of negotiable instruments.

As per Section 22 of the Negotiable Instruments Act 1881, the maturity of a promissory note is the date at which it falls due.

Negotiable instruments that are payable on demand mature on the day the instrument is executed. Notes payable at sight and notes payable on presentment mature when presented and payment is demanded. These instruments are not entitled to days of grace and become payable all at once. As there is no particular date for the maturity of such instruments, such instruments cannot be overdue under Section 59. A negotiable instrument that is not expressed to be payable either on demand, at sight or on presentment gets matured on the third day after the day on which it is due to be payable. In cases where days of grace are allowed, the presentation of the instrument must be on the last day of the grace period and not earlier. An earlier presentation is considered invalid. It is worth noting that no days of grace are allowable by the act in the case of cheques, since they are always payable on demand.

Rules for calculating Maturity under Negotiable Instrument Act, 1881

The following section can be referred to understand the concept of maturity of negotiable instrument:

1. Section 22 discusses maturity and days of grace. Maturity is the date at which the instrument is due. Every negotiable instrument that is not payable on demand, at sight, or on presentment is considered to be at maturity on the third day after the day on which such instrument was expressed to be paid.

Important points from section 22:

• In those cases where grace days are allowed, the instrument shall be presented on the last day of the grace day and not earlier.
• Earlier presentation is considered invalid. In the case of cheques, no days of grace are allowed as they are payable on demand.
• Interest may be charged on the grace days, it may vary as per the contract between parties.
• When there is a particular contract with regards to the effect of interest can be sued for before the principal matures. The maturity of interest can be postponed beyond the maturity of the principal or as per the terms agreed.
• The law of the land where the note is accepted determines the number of days of grace. The section does not cover hundis in oriental language as they are governed by local usages.

2. Section 23 states the date from which the time of maturity is to be calculated to arrive at its date of maturity. In the case of any commercial instrument drawn payable at the mentioned days after sight, the day of the date written on the negotiable instrument is to be excluded in calculating the time of maturity. In a case where the negotiable instrument is payable after a fixed period, after date, or after sight or after the happening of any specified event as agreed between the parties, the time of payment shall be determined by excluding the day from which the time is to start and by including the day of payment.

For example, a negotiable instrument dated August 30, 2023, is made payable three months after the date. The instrument shall reach maturity on December 3, 2023.

3. Section 25 discusses the case when the day on which an instrument gets mature is a public holiday. In such a case the instrument shall be considered to be mature on the next preceding business day. Here, in this section, the term public holiday includes Sundays and all other public holidays as declared by the Central Government or by any notification under the official gazette.

For example, a negotiable instrument dated August 30, 2023, is made payable three months after the date. The instrument shall reach maturity on December 3, 2023, and suppose the said maturity day is a Sunday, in such a case the instrument will be deemed to be matured on December 4, 2023 which is a working day.

Payment in Due Course under Negotiable Instrument Act, 1881

Payment in due course is defined in Section 10 of the Negotiable Instruments Act, 1881. Any person who is legally responsible for making payment under any negotiable instrument must make the payment of the amount due in due course to obtain a valid discharge against the holder. Payment in due course refers to payment in keeping with the evident instructions of the instrument; payment must be made in good faith and without negligence to any person in possession.

Section 10 of the Negotiable Instruments Act, 1881 states “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.”

Payment in due course will be considered when the following conditions are fulfilled:

1. Payment must be in accordance with the Apparent Tenor of the Document: The general rule is that whatever appears on the face of the negotiable instrument will be considered the conveyed intention of the negotiable instrument. Thus, when it is mentioned in the document that the payment of the instrument is to be made on or after maturity, any payment before maturity, although it may discharge the obligation between the parties of a negotiable instrument, will not be considered a payment in due course and will make the parties to the contract free from any liability to the holder in due course.

2. Payment is made in Good Faith, without any Negligence: In a case where suspicious circumstances exist and the payer fails to make any inquiry about the instrument, which may amount to an existing defect, the payment shall not be considered to be made in due course. When any payment with regards to a negotiable instrument is made by a person and he possesses the knowledge that the instrument for which payment is made is either stolen or that the person to whom the payment is made is not entitled to receive the payment, or when payment is made to the wrong person who does not hold the title of the holder, it is not considered a payment made in due course.

3. Payment must be made to the Person in Possession of the Instrument: As discussed earlier if the payment of a negotiable instrument is made to the wrong person or to a person who has stolen a negotiable instrument, such a payment shall not be considered a payment made in due course if the person making such payment is aware of such a defect or is under constructive notice of such a defect. When any instrument, payable to a specific person or order, is wrongly paid to another person in possession of the instrument without any endorsement of the person to whom it is payable, the payment is considered to be made as payment in due course. However, if the person in possession proves that he holds the title and the right to receive the payment, it would be considered a good payment. Payment to a special endorsee or an assignee of an insolvent person, any representative of a deceased holder, or the managing member of a Hindu joint family is also considered good payment.

4. Payment must be made in Money only: The payment referred to in the Negotiable Instrument Act is money, which includes notes, which are generally accepted legal tenders in money. The holder of a negotiable instrument is not bound to accept any payment in either goods or by cheque. It is worth noting that a holder of an instrument accepts a cheque or any object only to the amount; he will not be allowed afterward to question the nature of the tender by cheque.

Payment of Interest under Negotiable Instrument Act, 1881

The Negotiable Instruments Act, 1881 lays down the following provisions regarding the payment of interest:

1. When Rate of Interest is mentioned on the Negotiable Instrument (Section 79): When the negotiable instrument possesses the rate of interest on the face of it, the same rate of interest shall be due and will be calculated at the rate mentioned, from the date at which the payment ought to have been paid by the party, until tender or realization of the amount due, or until such date as is directed by the court.

2. When Rate of Interest is not mentioned on the Negotiable Instrument (Section 80): Section 80 of the Negotiable Instrument Act 1881 states that, in a case where no rate of interest is mentioned in the instrument, the interest on the amount due shall be calculated at the rate of eighteen per centum per annum, from the date at which the payment ought to have been paid by the party, until tender or realization of the amount due, or until such date as is directed by the court.

Conclusion

A negotiable instrument is a signed document that promises a particular payment to a specified person or holder of the instrument. In India, negotiable instruments are governed under the umbrella of the Negotiable Instruments Act, 1881. This is a significant law that governs all means of negotiable instruments in India. The Negotiable Instruments Act has specified sections 22, 23, 24, and 25 and has laid down provisions regarding the maturity of negotiable instruments. Under the Negotiable Instrument Act 1881, while calculating maturity, days of grace are also included. Payment in due course is defined in Section 10 of the Negotiable Instruments Act 1881. Any person who is legally responsible for making payment under any negotiable instrument must make the payment of the amount due in due course to obtain a valid discharge against the holder. Section 80 of the Negotiable Instrument Act 1881 states that, in a case where no rate of interest is mentioned in the instrument, the interest on the amount due shall be calculated at the rate of eighteen per cent per annum.

Frequently Asked Questions (FAQs)

1. What is a Negotiable Instrument?

Answer:

A negotiable instrument is a signed document that promises a particular payment to a specified person or holder of the instrument. In India, negotiable instruments are governed under the umbrella of the Negotiable Instruments Act, 1881.

2. What is the grace period in a Negotiable Instrument?

Answer:

Every promissory note or bill of exchange which is not payable on demand, at sight or on presentment is at maturity on the third day after the day on which the instrument is mentioned. All instruments except for the instrument payable on demand are entitled for 3 days grace period.

3. Negotiable instruments are not freely transferable. Whether the statement is true or false?

Answer:

The statement is false. Negotiable instruments are easily transferred to different parties, and even the new holder will obtain full legal title to such instruments.

4. If the instrument does not mention any rate of interest, what is the provision in this regard?

Answer:

Section 80 of the Negotiable Instrument Act 1881 states that, in a case where no rate of interest is mentioned in the instrument, the interest on the amount due shall be calculated at the rate of eighteen per centum per annum, from the date at which the payment ought to have been paid by the party, until tender or realization of the amount due, or until such date as is directed by the court.

5. What is Payment in due course?

Answer:

Payment in due course is defined in Section 10 of the Negotiable Instruments Act, 1881. Any person who is legally responsible for making payment under any negotiable instrument must make the payment of the amount due in due course with the intention of obtaining a valid discharge against the holder. Payment in due course refers to a payment in keeping with the evident instructions of the instrument; payment must be made in good faith and without negligence to any person in possession.