Section 43 NI Act: Negotiable instrument made, etc., without consideration

Negotiable Instruments Act, 1881

Section 43 NI Act at a Glance

Section 43 NI Act states that a negotiable instrument made, drawn, accepted, indorsed or transferred without consideration, or for a consideration that fails, creates no payment obligation between the parties to that transaction, while protecting a holder for consideration and subsequent holders.

Section 43 NI Act Bare Act Text

43. Negotiable instrument made, etc., without consideration.
A negotiable instrument made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction. But if any such party has transferred the instrument with or without indorsement to a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.
Exception I.—No party for whose accommodation a negotiable instrument has been made, drawn, accepted or indorsed can, if he have paid the amount thereof, recover thereon such amount from any person who became a party to such instrument for his accommodation.
Exception II.—No party to the instrument who has induced any other party to make, draw, accept, indorse or transfer the same to him for a consideration which he has failed to pay or perform in full shall recover thereon an amount exceeding the value of the consideration (if any) which he has actually paid or performed.

Section 43 NI Act in Simple Words

Section 43 NI Act sets out the effect of a negotiable instrument that is made, drawn, accepted, indorsed or transferred without consideration, or for a consideration that fails. Between the parties to that transaction, the instrument creates no obligation of payment.

The second part of Section 43 NI Act protects transferees when consideration is given. If any party to the transaction transfers the instrument, with or without indorsement, to a holder for consideration, that holder, as well as every subsequent holder deriving title from that holder, may recover the amount due on the instrument from the transferor for consideration or from any prior party.

Exception I and Exception II set two limits on recovery on the instrument. Under Exception I, a party for whose accommodation a negotiable instrument has been made, drawn, accepted or indorsed cannot, after paying the amount of the instrument, recover that amount on the instrument from any person who became a party to the instrument for that accommodated party's accommodation.

Under Exception II, a party who induced another party to make, draw, accept, indorse or transfer the instrument to that inducing party for a consideration that the inducing party failed to pay or perform in full cannot recover on the instrument an amount exceeding the value of the consideration, if any, that the inducing party actually paid or performed.

When Section 43 NI Act Applies

Between the parties to the transaction, an instrument made, drawn, accepted, indorsed or transferred without consideration, or for a consideration that fails, creates no obligation of payment.
If a party transfers the instrument (with or without indorsement) to a holder for consideration, that holder and every subsequent holder deriving title from that holder may recover the amount due from the transferor for consideration or any prior party.
Exception I: an accommodated party who pays the amount of the instrument cannot recover it from a person who became a party for that accommodated party's accommodation.
Exception II: a party who induced another party to make, draw, accept, indorse or transfer the instrument for a consideration not paid or performed in full cannot recover more than the value of the consideration actually paid or performed.

Example of Section 43 NI Act

Gopal in Indore makes a promissory note for ₹50,000 in favour of Dinesh without consideration. As between Gopal and Dinesh, Section 43 NI Act creates no obligation of payment, so Dinesh cannot recover the ₹50,000 from Gopal. However, Dinesh indorses and transfers the promissory note to Simran for consideration of ₹50,000. Under Section 43 NI Act, Simran, as a holder for consideration, may recover the ₹50,000 due on the promissory note from Dinesh or from Gopal.

When Section 43 NI Act Does Not Apply

Under Exception I, a party for whose accommodation the instrument was made, drawn, accepted or indorsed cannot, after paying the amount, recover it from any person who became a party for that party's accommodation.
Under Exception II, a party who induced another party to make, draw, accept, indorse or transfer the instrument for a consideration not paid or performed in full cannot recover an amount exceeding the value of the consideration actually paid or performed.

FAQs on Section 43 NI Act

What is Section 43 NI Act?▼

Section 43 NI Act states that a negotiable instrument made, drawn, accepted, indorsed or transferred without consideration, or for a consideration that fails, creates no obligation of payment between the parties to that transaction. However, a holder for consideration to whom the instrument is transferred, and every subsequent holder deriving title from that holder, may recover the amount due from the transferor for consideration or any prior party.

Can a holder for consideration recover on an instrument that was originally made without consideration?▼

Yes. Under Section 43 NI Act, if a party transfers the instrument with or without indorsement to a holder for consideration, that holder and every subsequent holder deriving title from that holder may recover the amount due from the transferor for consideration or any prior party.

Can an accommodated party who pays the instrument recover the money from the accommodating party?▼

No. Under Exception I to Section 43 NI Act, no party for whose accommodation a negotiable instrument was made, drawn, accepted or indorsed can, after paying the amount, recover it from any person who became a party for that party's accommodation.

How much can a party recover if that party failed to pay or perform the full consideration promised for the instrument?▼

No more than the value of the consideration actually paid or performed. Under Exception II to Section 43 NI Act, a party who induced another party to make, draw, accept, indorse or transfer the instrument for a consideration that was not paid or performed in full cannot recover an amount exceeding the value actually paid or performed.

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Sources: Bare Act Text, Negotiable Instruments Act, 1881 (India Code) ·