This article has been written by Oishika Banerji of Amity Law School, Kolkata. This article discusses the Negotiable Instruments Act, 1881, which governs the functioning of promissory notes, bills of exchange, or cheques payable either to the order or to the bearer, in the entire territory of India.

It has been published by Rachit Garg. 

Introduction

A negotiable instrument is a piece of paper that guarantees the payment of a certain sum of money, either immediately upon demand or at any predetermined period, and whose payer is typically identified. It is a document that is envisioned by or made up of a contract that guarantees the unconditional payment of money and may be paid now or at a later time. 

The term has several meanings based on how it is employed in the implementation of various laws, as well as depending on the nation and environment in which it is used. Promissory notes, bills of exchange, and cheques are the three types of instruments covered by the Negotiable Instruments Act of 1881. Terminology in oriental languages for financial instruments like hundies is not included in this Act’s provisions. 

Technology led to the recognition of two additional payment methods, NEFT (National Electronic Fund Transfer) and RTGS (Real Time Gross Settlement). It is the Payment and Settlement Systems Act of 2007, which contains provisions for the law governing these electronic transfer methods. 

The Negotiable Instruments Act of 1881 came into force on 1st March 1881, and it extends to the whole of India. This article discusses the different aspects of the legislation while also pointing out the pressing challenges that surround the Act in current times. 

All you need to know about negotiable instrument

The word “instrument” refers to a written document by virtue of which a right is created in favour of some individual. The word “negotiable” indicates transferable from one person to another in exchange for payment. Therefore, any document that confers ownership over a quantity of money and that can be transferred (like currency) by delivery is considered to be a “negotiable instrument.” Consequently, a document that can be delivered is a negotiable instrument. The Negotiable Instruments Act of 1881 does not define the phrase “negotiable instrument” as such; at most, Section 13 of that legislation indicates that “negotiable instrument” refers to a promissory note, bill of exchange, or cheque payable to order or to the bearer.

The main distinction between a negotiable instrument and other documents (or a chattel) is that, in the case of a negotiable instrument, the transferee acquires a good title in good faith and for consideration even though the transferor’s title may have a flaw; in contrast, in the case of other documents, the transferee receives a similar title (or, to put it another way, no better title) than the transferor.

Common traits of negotiable instruments

1. Negotiable instruments are transferable by nature: A negotiable instrument may be freely transferred as many times as necessary until it reaches maturity. Delivering the instrument is sufficient if it is “payable to the bearer.” However, if it is “payable to order,” it is accepted upon delivery and endorsement. In addition to becoming entitled to the money transferred with a negotiable instrument, the transferee also gains the ability to transfer the instrument again.
2. Having an independent title: When it comes to negotiable instruments, the usual rule that states that no one can grant a superior title than he or she possesses does not apply. If the transferor had gained a negotiable instrument by fraud but the transferee had acquired it in good faith (bona fide) for value, the transferee would have a good title with regard to that instrument. As a result, the title of the transferee in relation to a negotiable instrument is separate from the title of the transferor. Additionally, in circumstances involving negotiable instruments, the principle of nemo dat quod non habet, according to which no one can grant a higher title than he himself has, does not apply.
3. Application of presumptions: All negotiable instruments are subject to certain presumptions, such as those outlined in Sections 118 and 119 of the Negotiable Instruments Act of 1881.
4. Having the right to sue: A negotiable instrument’s transferee (payee) is not required to notify the party (drawer) responsible for making or honouring the payment under the negotiable instrument of the transfer. In the event of dishonour, the transferee may bring a claim against a negotiable instrument in its own name without notifying the original debtor of the transfer, i.e., without telling the original debtor that the transferee has taken possession of the negotiable instrument.
5. Being certain: A carrier with no bags is a negotiable instrument. A negotiable instrument must be written in the fewest number of words possible and in such a way as to make the contract as clear-cut and certain as possible. A negotiable instrument needs to be devoid of any constraints that would significantly hinder its circulation. A negotiable instrument must also include the payment of a specific (fixed or defined) amount of money (money only and on a specific time period).

Key features of negotiable instruments in the Negotiable Instruments Act of 1881 

The key features of the Act of 1881 can be understood by discussing various negotiable instruments covered under this Act. The same has been provided hereunder.

Promissory Note (Section 4 of the Negotiable Instruments Act, 1881)

1. Regardless of whether it is negotiable or not, an instrument that complies with the definition in Section 4 of the Negotiable Instruments Act, of 1881 must be regarded as a promissory note.
2. According to Section 4 of the Negotiable Instruments Act of 1881, a written instrument (not a banknote or currency note) that contains an unconditional undertaking, signed by the maker with the promisor with the promise to pay a specific amount of money only to, or at the direction of, a specific person, or to the bearer of the instrument, qualifies as a negotiable instrument.
3. It must be signed, sealed, and written down;
4. There must be a commitment or undertaking to pay; The mere admission of debt is insufficient;
5. There must be no conditions;
6. It must include a commitment to pay just money;
7. A promissory note’s maker and payee, or its parties, must be certain;
8. It is repayable immediately or following a specific date; and
9. The amount owing must be certain.

Bill of Exchange (Section 5 of the Negotiable Instruments Act, 1881)

1. As per Section 5, a bill of exchange involves three parties: the drawer, the drawee, and the payee;
2. It must be in writing, suitably stamped, and duly accepted by its drawee;
3. There must be a payment order;
4. Unconditional promise or order to pay is required; and
5. Both the sum and the parties must be agreed upon and must be certain.

Cheque (Section 6 of the Negotiable Instruments Act, 1881)

1. A cheque involves three parties: the drawer, the drawee bank, and the payee;
2. It must be in writing and has the drawer’s signature;
3. Payee is confident;
4. The payment is always due upon demand;
5. It must contain a date in order for the bank to honour it; otherwise, it is invalid;
6. The sum must be expressly stated, both verbally and numerically. If the amount undertaken or ordered to be paid is stated differently in figures and in words, the amount stated in words shall be the amount undertaken or ordered to be paid, according to Section 18 of the Negotiable Instruments Act, 1881;
7. When a cheque is truncated, it is scanned, an electronic image of the cheque is created, and instead of a physical cheque being communicated in a clearing cycle, the image is instantly used to replace any further physical movement of the cheque; and
8. No one other than the Reserve Bank of India or the Central Government may draw, accept, make, or issue any Bill of Exchange or Promissory Note payable to bearer on demand, according to Section 31 of the Reserve Bank of India Act, 1934 (RBI Act, 1934). Despite the provisions of the Negotiable Instruments Act of 1881, Section 31(2) of the RBI Act of 1934 stipulates the same. 

In the case of Surendra Madhavrao Nighojakar v. Ashok Yeshwant Badave (2001), the Supreme Court of India held the following:

1. A cheque is a bill of exchange written by the owner of an account payable on demand to a bank.
2. A post-dated cheque becomes a cheque under Section 138 of the Negotiable Instruments Act of 1881 on the date specified on the face of the cheque, and the 6-month term must be calculated from that date for purposes of Proviso (a) of Section 138 of the Negotiable Instruments Act of 1881. 
3. The cheque is not made payable in any other way than on demand just because the payment date for it has been moved to a later date.
4. Legal action may be brought against the banker (the drawee in the case of a cheque) if it honours the cheque before the date stated on the cheque’s face.
5. When a cheque is described as “payable on demand,” the payee of the cheque is referring to “payable at once.”

Cheque and post-dated cheque

The Hon’ble Supreme Court of India explained the distinction between a cheque and a post-dated cheque with reference to Sections 5 and 6 of the Negotiable Instruments Act, 1881, in the case of Anil Kumar Sawhney v. Gulshan Rai (1993). According to the Supreme Court’s ruling:

1. A post-dated cheque is only a bill of exchange when it is written or drawn; after it is due on demand, it is a cheque.
2. A post-dated cheque is not cashable before the date printed on the document’s face. It remains a bill of exchange under Section 5 of the Negotiable Instruments Act of 1881 until the date indicated on it, at which point it becomes a cheque.
3. Since a post-dated cheque cannot be presented to the bank, the issue of its return would not come up. The requirements of Section 138 of the Negotiable Instruments Act, 1881 only apply when the post-dated cheque becomes a “cheque” with effect from the date indicated on the face of the said cheque.
4. A postdated cheque is nevertheless valid as a bill of exchange until the date printed on it. However, as of the date printed on the face of the said cheque, it qualifies as a cheque under the Negotiable Instruments Act of 1881, and in the event that it is dishonoured, Section 138’s proviso (a) is triggered.

Different types of cheques 

The various types of cheques have been discussed hereunder:

1. Open cheque: With such a cheque, it is possible to obtain cash from the bank’s counter;
2. Bearer Cheque: It is somewhat comparable to an open cheque in that any person carrying or bearing the bearer cheque may be paid the amount specified in the cheque.
3. Crossed  Cheque: A crossed cheque, which would only be credited into the payee’s bank account, can be used to reduce the risk associated with open cheques, which are often risky to write and issue. The top left corner of a cheque can be crossed by drawing two parallel lines across it, with or without writing “Account Payee” or “Not Negotiable.”
4. Order Cheque: It is a cheque that can have the word “word bearer” cut or cancelled and is made out to a specific person;
5. Electronic Cheque: It is a cheque that is generated in a secure system, ensuring safety requirements through the use of digital signatures, and it contains an exact mirror image of the original cheque.

Difference between promissory note and bill-of-exchange 

1. A bill of exchange contains an unconditional order to pay, but a promissory note contains an unconditional promise to pay.
2. There are only two parties in a promissory note, the maker and the payee, whereas there are three parties in a bill of exchange, namely, the drawer, the drawee, and the payee.
3. In a promissory note, acceptance is not necessary; in a bill of exchange, however, the drawee must accept.
4. In a bill of exchange, the obligation of the drawer is secondary and contingent upon the drawee’s failure to pay; in a promissory note, the liability of the drawer or the note’s manufacturer is main and absolute.

Difference between cheque and bill-of-exchange

1. A bill of exchange can be drawn on anyone, including a banker, unlike a cheque, which is drawn on a banker.
2. According to Section 19 of the Negotiable Instruments Act of 1881, a cheque is always payable immediately; a bill of exchange, however, is either payable immediately or after a certain amount of time.
3. One can cross a cheque to make it non-negotiable, but one cannot cross a bill of exchange.
4. Acceptance is not necessary for a cheque, but it is necessary for a bill of exchange.

Difference between holder and holder in due course

1. Any individual with the legal right to possess a promissory note, bill of exchange, or cheque in his or her own name, as well as to receive or obtain payment from the parties thereto, is referred to as the “holder” of that instrument. A holder who accepts the instrument in good faith, with due care and prudence, for value (consideration), and before maturity is referred to as a “holder in due course.” In the event of a “holder,” payment is not essential, and they are also permitted to purchase the instrument after it reaches maturity.
2. A “holder” does not have any particular rights, but a “holder in due course” does have some specific rights. For instance, a holder in due course cannot use the argument that the amount they filled out on an instrument exceeded the authority granted. It was decided that an endorsement was irregular and that the endorsee (AB and Co.) was not a holder in due course, albeit it might be a holder for value, when a bill was prepared by X in favour of Z and Z further endorsed the bill in favour of AB and Co.
3. The key point is that the holder must have legal custody of the instrument in his own name. The possessor must be entitled to obtain or recoup that sum. An endorsee, payee, or bearer are all examples of holders. If someone has entitlement, it indicates that even if they don’t use it, they are still entitled to it and it cannot be taken away from them. In accordance with Section 8 of the Negotiable Instruments Act of 1881, the holder of an instrument must have a right to the instrument even if he does not possess it.
4. A “holder” does not receive a title superior to that of his transferor; rather, a “holder in due process” receives a title superior to that of his transferor. The status of a “holder” is less favourable than that of a “holder in due course. ” The title of a “holder in due course” becomes free from all equities, meaning that a “holder in due course” cannot raise the defence that can be raised against the prior parties. For instance, if a negotiable instrument is lost and then found by someone through criminal activity (theft), the person who received the instrument through criminal activity is not entitled to any rights regarding any money owed in relation to that instrument. However, if such a document is properly transferred to a person as a holder, he will get a good title.

Structure of the Negotiable Instruments Act, 1881

An Act to define and amend the law relating to Promissory Notes, Bills of Exchange and Cheques, the Negotiable Instruments Act, 1881 which came into effect on 9th December, 1881 comprises a total 147 sections spread over 17 chapters. The chapters alongside their contents have been provided hereunder: 

1. Chapter I (Sections 1 – 3): Preliminary 
2. Chapter II (Sections 4 – 25): Notes, bills and cheques
3. Chapter III (Sections 26 – 45A):  Parties to notes, bills and cheques
4. Chapter IV (Sections 46 – 60): Negotiation 
5. Chapter V (Sections 61 – 77): Presentment
6. Chapter VI (Sections 78 – 81): Payment and interest 
7. Chapter VII (Sections 82 – 90): Discharge from liability of notes, bills and cheques
8. Chapter VIII (Sections 91 – 98): Notice of dishonour 
9. Chapter IX (Sections 99 – 104A): Noting and protest 
10. Chapter X (Sections 105 – 107): Reasonable time 
11. Chapter XI (Sections 108 – 116): Acceptance and payment for honour and reference in case of need. 
12. Chapter XII (Section 117): Compensation 
13. Chapter XIII (Sections 118 – 122): Special rules of evidence 
14. Chapter XIV (Sections 123 – 131A): Crossed cheques
15. Chapter XV (Sections 132 – 133): Bill in sets 
16. Chapter XVI (Sections 134 – 137): International law 
17. Chapter XVII (Sections 138 – 147): Penalties in case of dishonour of certain cheques for insufficiency of funds in the accounts.

In the case of A.V. Murthy v. B.S. Nagabasavanna (2002), it was determined that a negotiable instrument is presumptively drawn for consideration and that a complaint of a dishonoured cheque at the threshold may be dismissed on the grounds that money had been advanced four years prior, the debt is not enforceable, and such a course of action is improper.

The Negotiable Instruments (Amendment) Act, 2017, which went into effect on September 1, 2017, enables the court hearing a case involving a bounced cheque to order the drawer to pay interim damages to the complainant not to exceed 20% of the cheque’s value within 60 days of the trial court’s order for such damages to be paid. When the drawer enters a not guilty plea to the allegations in the complaint, either in a summary trial or a summons case or upon the drafting of charges in any other matter, this interim compensation may be awarded. The Amendment also gives the Appellate Court the authority to order the appellant to deposit a minimum of 20% of the fine or compensation granted, in addition to interim compensation, when hearing appeals against convictions under Section 138.

Holder in due course

A person who has obtained a negotiable instrument in conformity with good faith and for value is referred to as a “holder in due process.” Each negotiable instrument holder is considered to be a “holder in due course.” It is the responsibility of a party liable for repayment to prove that the person holding the negotiable instrument isn’t the rightful owner in the event of a dispute. 

In any case, the onus is on the holder to prove that he is a holder in due course, for instance by proving that he obtained the negotiable instrument in accordance with some good faith and for value, if the parties obligated for repayment demonstrate that the negotiable instrument was obtained from its legitimate proprietor by means of a crime or extortion. In law, the “burden of proof” is the requirement to establish specific facts.

Fact of dishonour 

A negotiable instrument may occasionally be dishonoured, which means the party responsible for payment neglects to make the payment. After submitting the proper notice of dishonour, the holder has the right to file a lawsuit for the recovery of the sum. However, he is allowed to have a Notary Public’s certification about the actuality of dishonour before he files the lawsuit. A statement like that is referred to as “protest.” The court will assume that there has been dishonour based on the verification of such a dissent. 

Presumption as to service of notice 

It is assumed that a notice has been served if it has been sent by registered mail to the right address of the cheque’s drawer. The drawer, however, has the right to refute this assumption.

The Apex Court has ruled that a notice is considered to have been properly served if it is delivered to the correct address and returned with the words “refused,” “no one was home,” “house was locked,” or words to that effect.

Inchoate instruments

The rules pertaining to an inchoately stamped instrument were outlined in Section 20 of the 1881 Act. According to the mentioned Section, only two types of instruments, a promissory note and a bill of exchange are stamped in the Act, which makes it clear which ones they are. The problem is that, regardless of the fact that a cheque is not a stamped document or that there are numerous differences between the documents recognised by Section 20 of the Act and a cheque, many judicial pronouncements (e.g., Magnum Aviation (Pvt.) Ltd. v. State and Ors (2010)) recognise or regard a cheque as an inchoate instrument if it lacks one or two essentials listed in the characteristics of the negotiable instrument.

Requirement of stamp

Despite the fact that the Act makes no reference of the stamp’s relevance or requirement, every style of promissory note and bill of exchange must have a stamp on it. The Indian Stamp Act of 1899 mentions a mandatory provision for stamp affixation on such documents.

Liabilities under the Negotiable Instruments Act 1881

The various liabilities that are provided in the Act of 1881 have been laid out hereunder:

1. Liability of agent signing (Section 28): A promissory note, bill of exchange, or cheque that an agent signs without specifying that he is acting as an agent or that he does not intend to assume personal liability makes the agent personally liable for the instrument, with the exception of those who persuaded him to sign under the impression that only the principal would be held responsible.
2. Liability of legal representative signing (Section 29): A promissory note, bill of exchange, or cheque that a legal representative of a deceased person signs binds him personally unless he expressly restricts his duty to the amount of assets he received in that capacity.
3. Liability of drawer (Section 30): If the drawee or acceptor of a bill of exchange or cheque dishonoured it, the drawer is obligated to pay the holder compensation, provided that the drawer has received or been given the proper notice of the dishonour as described further below.
4. Liability of drawee of cheque (Section 31): The drawee of a cheque must pay the cheque when required to do so and, in the event that payment is not made as required, must reimburse the drawer for any losses or damages resulting from the default. This is true even if the drawee has sufficient funds in his possession that are legally applicable to the payment of the cheque.
5. Liability of maker of note and acceptor of bill (Section 32): The maker of a promissory note and the acceptor of a bill of exchange prior to maturity are obligated to pay the amount due at maturity in accordance with the apparent tenor of the note or acceptance, respectively, in the absence of a contract to the contrary, and the acceptor of a bill of exchange at or after maturity is obligated to pay the amount due to the holder upon demand. Any party to the note or bill who is not paid as required by the note or bill must be reimbursed by the maker or acceptor for any losses or damages they suffer as a result of the default.
6. Liability of indorser (Section 35): Without a contract to the contrary, whoever indorses and delivers a negotiable instrument before maturity without, in such indorsement, expressly excluding or making conditional his own liability, is bound by such indorsement to every subsequent holder, in case of dishonour by the drawee, acceptor, or maker, to compensate such holder for any loss or damage caused to him by such dishonour. Every indorser who does dishonour is accountable as if they were a demand-payable instrument.

Section 40 talks about the discharge of the indorser’s liability. The indorser is released from responsibility to the holder to the same extent as if the instrument had been paid in full when the holder of a negotiable instrument destroys or weakens the indorser’s remedy against a preceding party without the indorser’s consent. 

7. Liability of prior parties to holder in due course (Section 36): Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied.

Presumptions under Section 118 and Section 119 of the Negotiable Instruments Act, 1881

According to Section 101 of the Indian Evidence Act, 1872, the plaintiff has the initial burden of proving a prima facie case in his favour. Once the plaintiff presents evidence to support a prima facie case in his favour, the defendant is then required to present evidence to the court of law that supports the plaintiff’s case. The burden of proof may return to the plaintiff as the case develops. The following presumptions shall be made unless the contrary is shown, according to Section 118 of the Negotiable Instruments Act of 1881:

1. Consideration: When dealing with a negotiable instrument, the complaint must establish prima facie that he did so in good faith and without payment. Every negotiable document is deemed to have been drawn for consideration, and every time one of these instruments is accepted, inscribed, or transferred, it is assumed that this was done for (or against) consideration. As a result, in the event that the complainant files a complaint alleging dishonour of a cheque (or other negotiable instruments), the accused person may discharge his or her responsibility by demonstrating that there is no sum due to be paid to the complainant by the accused person under the terms of the instrument.
2. Date: It is assumed that a negotiable instrument was drawn on the date that is specified on the instrument’s face in the case of a negotiable instrument.
3. Time of acceptance: When it comes to negotiable instruments, it is assumed that they were accepted within a reasonable amount of time following their execution date and prior to their maturity.
4. Time of transfer: Every transfer involving a negotiable instrument is assumed to have taken place before the instrument’s maturity date.
5. Order of indorsements: The endorsements that appear on a negotiable instrument are assumed to have been made in the order or sequence that they do.
6. Holder in Due Course: A missing promissory note, bill of exchange, or cheque is assumed to have been properly marked, thereby, implying the concept of holder in due course.
7. Stamp: Every possessor of a negotiable instrument is deemed to have obtained it voluntarily and in exchange for value. The accused party must demonstrate that the negotiable instrument’s holder is not a holder in good standing.

The Negotiable Instruments Act of 1881 mandates that when a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment, the holder of such instrument may cause such dishonour to be noted by a notary public upon the instrument or upon a paper annexed (or attached) thereto, or partly upon each of them, i.e., the instrument and the paper annexed to the instrument. Additionally, according to Section 100 of the Negotiable Instruments Act of 1881, the holder of an instrument may have it protested by a notary public within a reasonable amount of time regarding the dishonour of the instrument.

Following Chinnaswamy v. Perumal (1999), it was held that the assumption under Section 118 of the Negotiable Instruments Act, 1881, had been refuted on the facts in the case of Ayyakannu Gounder v. Virudhambal Ammal (2004). In Bonala Raju v. Sreenivasulu (2006) it was decided that the presumption as to consideration under Section 118 of the Negotiable Instruments Act, 1881, applies when the fulfilment of a promissory note is proven.

According to Section 119 of the Negotiable Instruments Act of 1881, the presumption of proof of protest is discussed. It specifies that if a lawsuit is filed over the nonpayment of a promissory note or a bill of exchange, the court will presume that the nonpayment occurred unless and until the acceptor of the promissory note or bill of exchange refutes (or refutes) the claim.

The penal provisions of the Negotiable Instruments Act, 1881

The criminal penalties found in Sections 138 to 142 of the 1881 Act have been put in place to make sure that contracts entered into using cheques as a form of deferred payment are upheld. Conditions for filing a complaint for cheque dishonour are outlined in Section 138 of the Act. The following are the components needed to comply with Section 138:

1. Cheques are a common form of payment, and post-dated cheques are regularly utilised in a variety of business operations. Cheques that have been postdated are issued to the cheque’s drawer as a convenience. As a result, it becomes important to make sure the cheque’s drawer isn’t abusing the accommodations made for him. 
2. The Negotiable Instruments Act, 1881 governs the use of negotiable instruments, including cheques, bills of exchange, and promissory notes. The purpose of Chapter XVII, which contains Sections 138 to 142, was to foster trust in the effectiveness of banking operations and lend legitimacy to the negotiable instruments used in commercial transactions.
3. A person must have drawn a cheque to pay money to someone else to satisfy any debt or other obligation;
4. The bank has received that cheque during the last three months;
5. When a cheque is returned unpaid by the bank due to inadequate funds or because it exceeds the amount specified in an agreement established with the bank to be paid from that account;
6. Within 15 days of learning from the bank that the cheque was returned as unpaid, the payee issues a written notice to the drawer demanding payment of the money;
7. Within 15 days of receiving the notice, the drawer fails to pay the payee. 

An overview of Section 138 of the Negotiable Instruments Act, 1881

The “Negotiable Instruments Act” was first developed in 1866, and it was finally passed into law in 1881. Chapter XVII, which includes sections 138 to 142, was added to this statute in 1988, after than a century. Section 138 of the Act essentially lays out the punishment for the crime of dishonouring a cheque. “A negotiable document drawn on a designated banker and not expressed to be payable otherwise on demand” is how one may define a cheque under the Section. The word “cheque” is defined in Section 6 of Chapter 2 of the Negotiable Instruments Act, 1881 to include “an electronic image of a truncated cheque and a cheque in electronic form.” Before the recent addition, criminal prosecution of the accused in cases of cheque dishonour was not an option for the payee of the cheque; instead, only civil and alternative dispute resolution procedures were available. Now, the payee of the cheque has access to both civil and criminal remedies.

The Hon’ble Court stated in Modi Cement Limited v. Kuchil Kumar Nandi (1998), that the major goal of Section 138 of the Negotiable Instrument Act, 1881 is to increase the effectiveness of banking operations and to guarantee complete trust while conducting business using cheques. The laws of the commercial world, which are specifically designed to simplify trade and commerce by making provisions for giving sanctity to the instruments of credit that would be deemed to be convertible into money and easily transferable from one to another, are those that deal with negotiable instruments.

In the most recent decision of P Mohanraj vs. M/S. Shah Brothers Ispat Pvt. Ltd. (2021), a division bench composed of Rohinton Fali Nariman, and B.R. Gavai rendered their decision that when discussing whether Section 14 of the Insolvency and Bankruptcy Code, 2016 prohibits proceedings under Section 138 of the Negotiable Instrument Act, 1881, against corporate debtors, it was noted that the proceedings under Section 138 could be described as “civil sheep” in “criminal wolf’s clothing.”

Conditions to commit an offence under Section 138 of the Negotiable Instruments Act, 1881

The term “Negotiable Instrument” is defined as “a promissory note, bills of exchange, or cheque payable either to order or to bearer” under Section 13 of the Negotiable Instrument Act, 1881. In other words, it basically says that “it is a sort of instrument which promises the bearer a sum of money that will be payable on demand or at any future date.” Section 138 essentially outlines the penalties for dishonouring a cheque as a criminal provision. 

The provision itself outlines specific conditions that render dishonouring a cheque illegal, and the prerequisites are: 

1. A cheque must first have been prepared by the person who will be the drawer, and it must be for the payment of money to another party to satisfy a debt.
2. The cheque should be handed to the drawee bank, and if there aren’t enough funds or the amount is greater than “the amount arranged to be paid from that account by an agreement established with the bank,” the bank will return the cheque unpaid.
3. The bank must receive the cheque no later than six months after the day it was drawn or during the duration of its validity, whichever comes first.
4. The bank promptly provides the payee with the “Cheque return memo” if the cheque is dishonoured by the bank.
5. Following that, a demand notice for the return of the unpaid cheque must be sent by the cheque holder, who is also the payee, to the cheque drawer within 30 days of receiving the memo.
6. The drawer must make the payment within 15 days of receiving this notice, and if it is not made within that time frame, the payee may file a lawsuit within 30 days of the expiration of the 15-day period.

The court ruled in the case of Shankar Finance Investment vs. State of Andhra Pradesh (2008) and others that “Section 142 of the Negotiable Instrument Act makes it compulsory that the complaint must be filed by the payee or holder in due course of the cheque where a Payee is a natural person he can file a complaint and when the pay is a form of a company registered person it must be represented by a natural person.” 

Decriminalisation of Section 138 of the Negotiable Instruments Act, 1881

The decriminalisation of minor offices was announced in a public notice released by the Minister of Finance in the year 2020 with the goal of boosting business confidence and streamlining the legal system. for gathering feedback and proposals from interested parties about the decriminalisation of a variety of offences, including the offence under Section 138 of the Negotiable Instruments Act of 1881. 

The primary goal of the government’s proposal is to streamline business procedures and promote investment, but in a reasonable opinion, doing away with Section 138’s criminal penalties will not achieve this goal. Instead, it can be believed that this section was designed to have deterrent effects and to prevent people from breaking their agreements by paying by cheque.

Another goal of this proposal was to decriminalise certain offences in order to open up the legal system. However, this goal will not be achieved because there are already a lot of pending cases in the magistrate courts, and they are being resolved very slowly. Additionally, by decriminalising certain offences, the burden that was previously placed on the criminal courts will be transferred to the civil courts because the person who holds the cheque will now bear that burden.

Speedy disposal of negotiable instrument cases in recent times

The Delhi High Court considered the issue of whether a criminally compoundable offence under Section 138 might be resolved by mediation in the case of  Dayawati v. Yogesh Kumar Gosain (2017). The Court ruled that even while the legislature did not clearly provide for such a provision, the criminal court is still permitted to send both the complainant and the accused to alternative conflict resolution procedures. Without mandating or limiting the method by which it may be reached, the Code of Criminal Procedure, 1973, does permit and accept a settlement. Therefore, there is no prohibition against using alternative dispute resolution procedures, such as arbitration, mediation, and conciliation (recognised under Section 89 of the Civil Procedure Code, 1908), to resolve disputes that are the focus of offences covered by Section 320 of the Code of Criminal Procedure Code. Additionally, it was argued that the proceedings under Section 138 of the 1881 Act are unique from other criminal cases and really have more in common with a civil wrong that has been given criminal undertones.

After considering the purpose of enacting Section 138 and other sections of Chapter XVII of the Act, the Honourable Supreme Court stated in Meters and Instruments (P) Ltd. v. Kanchan Mehta (2017) that an offence under Section 138 of the Act is principally a civil wrong. Section 139 places the burden of proof on the accused, but the standard for such proof is “preponderance of probabilities.” The case must typically be tried summarily in accordance with the provisions of summary trial under the CrPC, with any modifications necessary for proceedings under Chapter XVII of the Act. 

As written, the Section 258 of the CrPC principle will be in effect, and the Court may close the case and release the accused if it is satisfied that the amount on the cheque, as well as any assessed costs and interest, have been paid and if there is no justification for continuing with the punitive element. Compounding at the initial stage must be encouraged but is not prohibited at a later stage, subject to appropriate compensation as may be found acceptable by the parties or the Court. The purpose of the provision being primarily compensatory, the punitive element being primarily with the object of enforcing the compensatory element. 

Cases brought under Chapter XVII of the Act must typically be tried in a summary manner. After taking into account the additional fact that, in addition to the sentence of imprisonment, the Court has jurisdiction under Section 357(3) CrPC to award suitable compensation with a default sentence under Section 64 of the Indian Penal Code, 1860 and with further recovery powers under Section 431 of the CrPC. The Magistrate may decide, under the second proviso to Section 143 of the Indian Penal Code, 1860, that it was undesirable to try the case summarily because a sentence of more than one year may need to be passed. With this strategy, a prison term of more than a year may not be necessary in every circumstance.

The bank’s slip is prima facie proof of the dishonoured cheque, so the Magistrate need not record any additional preliminary evidence. The complaint’s evidence can be provided on affidavit, subject to the court’s ruling and scrutinising the individual providing the affidavit. This type of affidavit testimony is admissible at all stages of a trial or other action. 

According to Section 264 of the CrPC, the affiant may be examined in a particular way, except in cases where the second proviso to Section 143 of the IPC must be used, a sentence of one year may need to be given, and compensation under Section 357(3) of the CrPC is deemed insufficient due to the amount of the cheque, the accused’s conduct, the accused’s financial capacity, or any other circumstance. Thus, the plan is to proceed in a summary manner.

Recommendation for better functioning of the Negotiable Instruments Act, 1881

1. It is recommended to double the number of Magistrates designated solely for instances involving cheque bounces. To deal with certain cases, special courts can be established. The Government is required to allocate the money required to cover the costs associated with hiring more Magistrates, their support staff, and other infrastructure. A judge shouldn’t have more than fifty cases before them on any one day (25 people attended the morning session and 25 people the afternoon session), presuming that the number is a reasonable one.
2. The court’s judicial clerk should sit for an hour, take roll calls, consider requests for adjournment by consent, and adjourn the cases that, in his opinion, need adjournment before the court’s time, which is before 11 AM. When the magistrate’s judicial attention or time is needed, those matters can be detained for judicial review until 11 AM with a note from the court clerk. The recording of the evidence should take up the entire hour of court time beginning at 11 AM. The aforementioned will spare the court between one and two hours per day. As he is not bringing a new financial claim, victims of cheque-bounce instances are not required to pay court costs.
3. According to Section 139 of the Act of 1881, it is presumed that the holder of a cheque received a cheque of the kind mentioned in Section 138 for the discharge, in whole or in part, of any debt or other liability unless the contrary can be proven. The accused may disprove this presumption by presenting convincing evidence that there was no debt or liability. The burden of proof then switches back to the complainant when such rebuttal evidence has been presented and accepted by the court.
4. Since it is a quasi-judicial proceeding, the Court should adopt a creative strategy and avoid becoming bogged down in details. Technicalities should be sought out and firmly rejected.
5. Magistrates must act on their own, and a four-hearing process must be used. A non-bailable warrant must be issued if the accused does not show up for the initial hearing. The accused must provide justification and present a defence at the second hearing. Cross-examination should be done during the third hearing. Arguments should be made at the fourth hearing, and then a decision must be made.
6. Credit is granted based on confidence and trust. To further simplify conducting business in India, it is in the judicial system’s best interest that these reforms are implemented as soon as practicable. It is against the law for someone who borrows money on credit to use Section 138 of the Act to put off making payments, and it is the Court’s responsibility to make sure that it does not become a party to such stalling measures. 

Conclusion 

According to the 213th Law Commission Report, the Indian judicial system is dealing with a significant backlog of cases, and roughly 20% of the litigation-related issues include cheque bounces. The lifeless sections of the Negotiable Instruments Act of 1881 would thus be given some life by the recently enacted provisions. Even though cases involving cheque bounces are penal in nature and result in criminal offences, the procedures for summary judgement are still on the books, and making the offence subject to bail has made these cases practically identical to civil issues. In this approach, newly introduced restrictions would in fact be a proactive measure to protect the legitimacy of cheques. Once the accused individuals or the appellant, if there is an appeal, deposit a sizable sum, they will begin to treat the situation seriously. Even while it is moving in the right way, there is still work to be done to make cheque bounce cases feasible, and summary trials must be given their actual meaning. Otherwise, the entire point of making cheque bounce a criminal offence would become less significant.

References 

1. https://www.researchgate.net/publication/314466023_The_Negotiable_Instruments_Act_1881_Critical_Analysis.
2. https://www.ijlmh.com/paper/critical-analysis-of-section-138-of-negotiable-instruments-act-1881/#:~:text=Promissory%20notes%2C%20bills%20of%20exchange,mode%20of%20of%20transferring%20money.

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