Negotiable Instruments Act, Section 46

Negotiable Instruments Act, Section 46: Delivery

Section 46 of the Negotiable Instruments Act, 1881 explains the importance of delivery in completing and giving effect to a negotiable instrument. 

It clarifies when the making, acceptance, or endorsement of an instrument becomes legally operative and how negotiability is achieved depending on whether the instrument is payable to bearer or to order.

1. Completion of Making, Acceptance or Endorsement

The section begins by stating that the making of a promissory note, the acceptance of a bill of exchange, or the endorsement of a negotiable instrument is completed by delivery.

This means that mere signing of the instrument is not sufficient to create binding legal effect. The instrument must also be delivered. 

Delivery is therefore an essential element in the creation and transfer of rights under a negotiable instrument, as without delivery the instrument remains incomplete and ineffective.

2. Actual and Constructive Delivery

Delivery may be either actual or constructive, and actual delivery occurs when the instrument is physically handed over by one person to another with the intention of transferring possession and rights.

Constructive delivery occurs when, although physical transfer may not take place directly, the circumstances show that control or possession has been transferred with the intention of completing the transaction. 

For example, placing the instrument at the disposal of another party with authority to take it may constitute constructive delivery, and in both cases the essential element is the intention to give effect to the instrument.

3. Delivery Between Parties in Immediate Relation

As between parties who stand in immediate relation such as the maker and payee, drawer and acceptor, or indorser and indorsee delivery to be effective must be made by:

The person making, accepting, or endorsing the instrument or a person duly authorized by him for that purpose.

This ensures that the instrument comes into circulation with the consent and authority of the person whose signature appears on it.

If delivery is made without proper authority, the instrument may not bind the party concerned.

4. Conditional or Special Purpose Delivery

The section further provides that as between immediate parties and any holder who is not a holder in due course, it may be shown that the delivery was conditional or for a special purpose only.

This means that if the instrument was delivered subject to a condition, or for a specific limited purpose such as safe custody or for obtaining a loan it can be proved that it was not intended to transfer absolute ownership.

For example, if a promissory note is handed over with the understanding that it will become effective only upon the occurrence of a particular event, that condition may be raised as a defense against a holder who is not a holder in due course.

However, such defenses are generally not available against a holder in due course, who acquires the instrument in good faith and for value.

 5. Negotiability of Bearer Instruments

The section states that a promissory note, bill of exchange, or cheque payable to bearer is negotiable by mere delivery.

This means that no endorsement is required. The transfer of possession itself passes the property in the instrument to the transferee.

Bearer instruments are therefore freely transferable by simple hand-to-hand transfer.

6. Negotiability of Order Instruments

Where the instrument is payable to order, it is negotiable only by endorsement and delivery. 

Accordingly, the holder must endorse the instrument by signing it and then deliver it to the transferee for the transfer of rights to be complete.