This article has been written by Oishika Banerji and further updated by Kanika Goel. This article in itself is a detailed analysis of the Negotiable Instruments Act, 1881 including all the details about negotiable instruments like promissory notes, bills of exchange, or cheques in India. This article also covers the relevant and important concepts underlying the statute. Let us delve into this article to understand every aspect of the Act including the relevant and important case laws, recent issues, and recent amendments. 

Introduction

Prior to the enactment of the Negotiable Instruments Act, 1881 (hereinafter referred to as the NI Act), the English Negotiable Instruments Act was applicable in India in order to govern the functioning of the negotiable instruments. However, the question which arises here is, what exactly is a negotiable instrument? Before getting to know all the incidental concepts of a negotiable instrument, it is important to understand the concept of the same. The term “negotiable instruments” is not composed of just one meaning. Rather, it derives various meanings depending upon its mode of implementation or the laws through which it becomes applicable in a country. A negotiable instrument in general is considered to be a paper or a document that ensures that a sum of money is paid upon the demand of the payee or at times, immediately. It is pertinent to note that some of such instruments also guarantee unconditional payment of money (for example, in the case of a bill of exchange or a promissory note).

The NI Act basically covers three major types of instruments namely, bills of exchange, promissory notes, and cheques. Apart from these modes of payment via the instruments, NEFT (National Electronic Fund Transfer) and RTGS (Real Time Gross Settlement) also serve as two additional modes of payment. 

This article aims to discuss all the aspects of the NI Act, 1881 which came into force on 1st March 1882, and is applicable to the whole of India. 

Objective behind the Act

The objective behind the NI Act, 1881 is to ensure that the entire system by which the negotiable instruments are governed is strengthened and legalised in a way that one person can pass an instrument and pay a certain amount of money to another by way of negotiation. The intent behind the formation and enforcement of this Act was to put forth an orderly statement of rules relating to the negotiable instruments.

Composition of the Act

The NI Act aims to define and amend the law relating to the instruments covered under the Negotiable Instruments Act, 1881. The Act is composed of a total of 148 Sections divided into 17 chapters which are depicted below: 

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 – 148): Penalties in case of dishonour of certain cheques for insufficiency of funds in the accounts.

What is meant by negotiation

As per Section 14 of the NI Act, 1881, an instrument is said to be negotiated when that particular instrument is transferred to a person making that person the “holder” of the instrument. As per the provisions of the Act, there are two conditions to be fulfilled while negotiating an instrument:

• The instrument must be transferable to any other person.
• While transferring the instrument, it must be ensured that the transferee vests the stature of the holder of the instrument.

Modes of negotiation an instrument

An instrument may be negotiated in the following two ways:

• As per Section 47 of the Act, an instrument may be negotiated by delivery of it. It means that whenever a negotiable instrument is payable to a bearer, it may be negotiated by mere delivery only. For example, C, a holder of the instrument payable to the bearer delivers it to A’s agent in order to keep it for A. Here, it can be said that the instrument is negotiated by delivery.
• As per Section 48, a negotiable instrument can also be negotiated by endorsement. This means that when the maker of the instrument signs the same, it is endorsed and negotiated.

Who may negotiate

As per Section 51 of the Act, any maker, drawer, holder, payee, or even joint makers or payees can endorse or negotiate an instrument provided that they are not restricted to do so under Section 50 of the Act.

Negotiable instruments

The word “instrument” refers to a written document by virtue of which a right is created in favour of some individual. In order to understand the meaning of the term “negotiable instrument”, it is important to know the meaning of the term “negotiable”. An instrument is considered to be “negotiable” when it can be freely transferred from one party to another for some value and in good faith and the party to that instrument can sue in his own name. It is important to note that the term is not explicitly defined under the Act but Section 13 of the NI Act, 1881 gives an inclusive definition that a negotiable instrument means a bill of exchange, promissory note, or a cheque that is payable on order or otherwise.

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.

What is meant by a negotiable instrument

A document that is usually transferable from one person to another is often considered a “negotiable instrument”. Though the term is undefined in the Act, but as per Section 13(1), it includes a promissory note, a cheque, or a bill of exchange.

As quoted by Justice Willis, a negotiable instrument is defined as “an instrument, the property in which is acquired by anyone who takes it bona fide, and for a value, notwithstanding any defect or title in the person from whom he took it, from which it follows that an instrument cannot be considered as negotiable unless it is such and in such a state that the true owner could transfer the contract or engagement contained therein by simple delivery of instrument.”

For an instrument to be negotiable, there has to be fulfilment of certain conditions which are as follows:

1. An instrument cannot be considered as negotiable unless it can be transferred freely. It must be in a capacity to be transferred from the true owner to any other hand either by delivery or by endorsement of the instrument.
2. Transferee of the instrument should not be affected by any kind of defect in the transferor’s title.
3. The transferee must land into the capacity to sue in his name.

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. As mentioned earlier as well, an instrument is considered as negotiable when it is transferable upon delivery. When an instrument is “payable to the bearer”, it can be negotiated only by delivery but when an instrument 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. Possession of an independent title: It is an unsaid fact that a party cannot transfer a better title to the other party than what he possesses. However, such a rule becomes inapplicable when it comes to negotiable instruments. When a party receives a negotiable instrument for a value in good faith, the defect in the title of the transferor becomes immaterial. This results in the difference of the title status amongst the parties to an instrument. It ensures that the transferee can possess an independent title despite the transferor having a defective title over the instrument.
3. Presumptions: The negotiable instruments under the Act, 1881 are governed by certain presumptions which include those outlined in Sections 118 and 119 of the Negotiable Instruments Act of 1881.
4. Rights incidental to an instrument: When a negotiable instrument is dishonoured, the transferee of the negotiable instrument has the right to sue in his own name. In such a case, 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. Certainty of instrument: A negotiable instrument is considered “a carrier with no bags”. It must be framed in a manner that the negotiation be depicted in the fewest words possible indicating clearly the contract. A negotiable instrument must be free from any sort of irregularities that can pose a hindrance to its transferability and negotiation. 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).
6. Prompt payment: A negotiable instrument allows the holder of that particular instrument to receive a prompt and quick payment as the failure of it would mean the loss of the credit of the persons involved as the parties to that instrument. 

Categorization of a negotiable instrument

There are various categories of negotiable instruments some of which find a place in the NI Act, 1881 as well. Let us understand about these classifications in brief:

Inland instruments 

These instruments as mentioned under Section 11 of the NI Act, 1881 are the ones which are either payable in India or drawn upon a person who is a resident of India. These types of instruments include promissory notes, bills of exchange, or cheques as well.

Foreign instruments

Foreign instruments are the ones which are not considered as inland instruments. This also implies that such type of instrument shall be either payable or drawn upon a person who is not a resident of India or such type of instrument is drawn and made payable outside India. Foreign instruments are mentioned under Section 12 of the NI Act, 1881.

Bearer instruments

Bearer instruments include promissory notes, bills of exchange, or cheques under the conditions that such instruments are expressly payable or endorsed in blank.

Order instruments

Such types of instruments are usually payable on order which may be to a specific person or when there is no type of restriction in the transferability of that particular instrument.

Demand instruments

When there is no time mentioned for the instrument to be payable and the instrument can be made payable on either presentation or on sight, such types of instruments are considered to be demand instruments under Section 19 of the NI Act, 1881.

Inchoate instruments

As per Section 20 of the NI Act, 1881, an inchoate instrument is considered to be that instrument which is signed and delivered on a stamped paper by one party either wholly blank or as an incomplete negotiable instrument. It can also refer to an unregistered instrument which becomes effective only when the prima facie error is removed. In simpler words, an inchoate instrument is any cheque, pro note, or bill of exchange that is signed by the maker despite being unfilled or unrecorded. Few judicial pronouncements (e.g., Magnum Aviation (Pvt.) Ltd. vs. State and Ors (2010)) recognise or regard a cheque as an inchoate instrument if it lacks one or more essentials listed in the characteristics of the negotiable instrument.

Ambiguous instruments

The type of instrument that is unclear on the face of it as to how it is to be treated is known as an ambiguous instrument. Under Section 17 of the NI Act, 1881, the power to treat an instrument as a bill or a note vests with the holder of the instrument. 

Important types of negotiable instruments under Negotiable Instruments Act, 1881

As per Section 13 of the Act, the classification of the negotiable instruments is made into 3 broad categories which are as follows:

• Promissory note as mentioned under Section 4 of the NI Act;
• Bills of exchange under Section 5 of the Act, and
• Cheques under Section 6 of the Act

Let us understand the basics and the important characteristics of the above-mentioned instruments in detail.

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

Meaning

According to Section 4 of the NI 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. 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.

Specimen of promissory note

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I _________ (debtor), S/o _______, PROMISE TO PAY  ________ (creditor), S/o _________, or ORDER, on demand the sum of Rs. 1,00,000 (RUPEES ONE LAKH ONLY) with interest at rate of 5% p.a. From the date of the value received in cash/cheque no._____ dated _______.

PLACE:

DATE:                                                                                                                       SIGN:

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Who are the parties to a promissory note

Following are the parties to a promissory note:

• Maker of the instrument: the one who makes the promissory note and promises to pay a certain amount as stated in a pro note.
• Payee of the instrument: the one to whom the promissory note is paid
• Holder of the instrument: the person in whose name the pro note is endorsed

Characteristics of a promissory note

• It must be signed by the maker which implies that the person promising to pay a certain amount must sign that pro note. It can also be signed by the authorised agent of the maker of the instrument.
• It must be in writing in such a way that it cannot be altered in an easy manner.
• There must be a commitment or undertaking to pay as mere admission of debt is insufficient.
• There must be no conditions. 
• A promissory note must include an undertaking to pay money only. For example, A intends and promises to deliver paddy in alternative to money. This cannot be considered as a pro note.
• A promissory note should clearly indicate about the parties agreeing to undertake the liability of the payment. A promissory note must be clear and unambiguous in terms of the certainty of the parties.
• Even though the date on the promissory note is not an essential characteristic, it becomes material when the amount becomes payable at a certain time after the mentioned date.
• The amount owing must be certain. This can be explained with a very simple example. Let’s say, A promises to pay Rs. 500 and all other sums which shall be due to him. However, this instrument cannot be construed as a promissory note because the amount mentioned is not certain.

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

Meaning

As per Section 5 of the Act, a “bill of exchange” (BOE) is considered to be a type of negotiable instrument that is made in writing consisting of an order which is unconditional, signed by the maker of that instrument, and directs a particular person to pay a certain amount of money only to or to the order of a certain person or to any bearer of that instrument.

The essence of a BOE lies in the fact that it is drawn by a creditor upon his debtor making him pay the amount of money to the person whose name is specified in the instrument.

Specimen of a bill of exchange

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BILL OF EXCHANGE

Rs. 60,000/-

90 days after the date, pay Mr. X, or order a sum of RUPEES SIXTY THOUSAND ONLY for the value received.

ACCEPTED                                                STAMP                                       SIGN OF MAKER

(Drawee’s name)                                                                                             (Drawer’s name)

(Drawee’s address)                                                                                      (Drawer’s address)

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Who are the parties to a bill of exchange

The following are the parties to a bill of exchange:

• The Drawer: This person is the one who draws the bill and is vested with the secondary liability.
• The Drawee of the Bill Of Exchange: Person with the primary liability and the one upon whom the drawer draws the bill.
• The payee of the Bill Of Exchange: The person to whom the amount mentioned in the BOE is to be paid.

Characteristics of a BOE

• A bill of exchange is required to be in writing. Along with being written, it should be suitably stamped and accepted by its drawee or on his behalf.
• As the definition of a bill of exchange depicts, it must be an unconditional order to pay a certain amount of money.
• A bill of exchange should be payable for a certain amount. One cannot agree to pay an uncertain sum of money through a bill of exchange.

Types of bill of exchange

Bills of exchange are further classified into the following categories on the basis of their usage and jurisdiction of their enforcement:

• Foreign bills and inland bills: The bills which are drawn and paid within the same country are considered as inland bills. However, a foreign bill is one which may be issued in one country and executed in some other country. For example: If a bill of exchange is drawn and paid in India itself, it is considered as an inland bill. But, if a bill is drawn in India but executed outside the Indian territory, it is considered as a foreign bill.
• Trade bills: When a bill of exchange is drawn to settle a credit transaction of a party and is accepted by the other party in lieu of it, it is considered a trade bill.
• Demand bills: A bill of exchange which is paid on demand is known as a demand bill. In such cases, there is no time limit prescribed for the payment to be made.
• Time bills: Where on one hand, demand bills are payable on demand, time bills are paid on a specific date and time which is usually mentioned on the bill. 
• Accommodation bills: An accommodation bill is one which is not drawn for a mode of payment in trade transactions but only acts as an agreement for providing financial assistance between the parties to the bill.

Difference between a promissory note and a bill of exchange 

• While on one hand, a promissory note is an unconditional promise to pay, a bill of exchange contains an unconditional order to pay.
• There is a difference between the number of parties to various instruments. Where there are only two parties in a promissory note, a bill of exchange is dealt with by three parties.
• Acceptance of a promissory note is not necessary but it is essential for a drawee to accept a bill of exchange.
• The liability of the parties differs both in a promissory note and a bill of exchange. The drawer of a bill of exchange bears secondary liability, however, the liability of a drawer in the case of a promissory note is always absolute.

Parameters	Promissory Note	Bill of Exchange
Parties to the instrument	Mainly 2 parties; the debtor and the creditor	Mainly three parties: the drawer, the drawee, and the payee
Payment to the maker	Cannot be made payable to the maker itself	The drawer and the payee of the bill can be the same person
Unconditional promise/order	Promissory note contains an unconditional promise to pay	A bill of exchange contains an unconditional order to pay
Acceptance of the instrument	Maker need not give a prior acceptance in order to make the note payable	In order to make a bill payable, the drawee needs to accept it himself or by any other person on his behalf
Liability	Maker of pro note vests with the primary ability	The liability of the drawer of a bill of exchange is secondary and conditional
Relation	The maker of a pro note and the payee stay in an immediate relation	The drawer of a BOE stands in an immediate relation with the drawee and not with the payee

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

Meaning

As per Section 6 of the NI Act, 1881, the cheque is defined as “a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form”.

Classification of cheques under Section 6

As per Section 6, a cheque includes a cheque in the electronic form and also a truncated cheque. Let us understand these in brief.

Truncated cheque

As per Explanation I, a truncated cheque is the one that is cut short in the clearance cycle. This means that rather than using the cheque in a physical capacity, a scanned copy or the electronic image of the same is used for the transmission of the payment.

Cheque in an electronic form

Such a type of cheque is the one that is digitally signed by the maker and is drawn by a secure digital cryptosystem.

Parties to a cheque

There are three main parties to cheque. They are:

• The drawer: The drawer of a cheque is the one who draws the cheque and signs it.
• The drawee: It is the bank upon whom a cheque is drawn. 
• The payee: The payee of a cheque is the person to whom the amount stated in the cheque is to be paid. 

Characteristics of a cheque

1. A cheque must always be in writing with the drawer’s signature upon it.
2. A cheque is a type of bill of exchange, the payment can only be made when demanded.
3. A cheque must bear the date of honour. In case of absence of such date, the cheque is considered to be invalid.
4. As per Section 18 of the Act, the amount of the cheque must be stated in both words and numbers. In cases where the amount stated in words and numbers is different, the amount mentioned in words will supersede and will be considered a sum to be paid.
5. 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 the 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 vs. 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.”

Difference between cheque and bill-of-exchange

1. A cheque is always drawn upon a banker, however, a bill of exchange can be drawn upon anyone.
2. Where on one hand, in accordance with Section 19 of the Act, a cheque is always made payable immediately, a bill of exchange can be made payable at a certain time or immediately.
3. A bill of exchange cannot be crossed but a cheque can be crossed in order to make it non-negotiable.
4. A bill of exchange needs to be accepted by the drawee but there is no requirement for a cheque to be accepted.
5. A bill of exchange is always stamped which is not the case with a cheque. A cheque need not be stamped.
6. A 3-day grace period is allowed when a bill is due for presentation but no grace period is allowed in the cases of the presentation of a cheque.

A cheque and a 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 vs. 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.

Other types of cheques 

A cheque is classified into various types which are mentioned below:

1. Open cheque: With the help of an open cheque, one can withdraw cash from the bank’s counter.
2. Bearer Cheque: When the amount of the cheque is paid to someone whose name is mentioned upon the cheque, it is considered to be a bearer cheque.
3. Crossed  Cheque: When the maker of a cheque crosses it by making two parallel transverse lines on the top left corner of the cheque with mentioning “not-negotiable” or “A/c payee” in order to make it payable only to be payee’s bank account, it is considered as a crossed cheque.
4. Order Cheque: When a cheque is made out to a specific person by cutting the word “bearer” upon it, it is considered an order cheque.

Holder and holder in due course

Holder of an instrument

As per Section 8 of the Act, every instrument initially belongs to the payee of that instrument because he has the right to its possession. However, the payee has the authority to transfer that instrument to any other person in order to pay his debt and such transfer is called negotiation. Therefore, it can be said that the holder of an instrument is either the bearer of the instrument or the endorsee.

Holder in due course 

As per Section 9 of the Act, a holder in due course is the one who for consideration and in good faith becomes the possessor of a negotiable instrument even before the amount stated on that instrument becomes payable. It is pertinent to note that a holder in due course must have obtained the instrument prior to the lapse of maturity of that instrument and he should not have any notice of defect in the instrument. 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.

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.

Indorsement 

Section 15 of the NI Act, 1881 clarifies as to what amounts to indorsement. When “the maker or holder signs the instrument otherwise than as a maker for the purpose of negotiation either on the back of it or on the face of it or on a slip annexed to it, then the instrument is said to have been endorsed”. 

Essential ingredients of indorsement

• Endorsement must be made on the instrument irrespective of the fact that it is made on the back of the instrument or on the front side. It may also be made on a separate document attached to the instrument.
• It is necessary that the endorser signs the instrument. The signature may be in full or even the initials may work.
• An instrument must only be endorsed by the maker or the holder and not by any stranger to it.
• Delivery of the essential is an essential of the process of endorsement. It may be made by the endorser or by his agent. 

Types of indorsement

As per the provisions of the NI Act, 1881, indorsement of an instrument can be done in four ways:

• General indorsement (blank): As per Section 16 read with Section 54 of the NI Act, an instrument is said to be endorsed in “blank” when the person endorsing the instrument mentions his name as the sign. Such a type of instrument can be negotiated by mere delivery. For example, a bill is payable to Y and Y endorses it by just affixing his name as his signature. Here, the instrument is said to be endorsed in blank by Y.
• Indorsement in full: As per Section 16 of the Act, where an endorser mentions the name of the person along with the signature, then it is said to be endorsed fully. As per Section 49, even an endorsement in blank can be converted into an endorsement in full if the last endorsement is a blank endorsement and the receiver of the instrument without writing his name mentions the endorser’s signature. For example, A is the holder of an instrument endorsed by C in blank. A writes over C’s signature, the words, “Pay to B or order.” This type of endorsement operates as an endorsement in full.
• Restrictive indorsement: As per Section 50 of the Act, an endorsement is restrictive when the endorser while making the endorsement restricts/excludes the right of the endorser to further transfer the negotiable instrument. In other words, whenever the right to negotiate is restricted by an endorsement, then it is called a restrictive endorsement. For example, Pay B for the account of A. Here, the right of further negotiation is restricted by B.
• Sans recourse endorsement: When we comprehend Section 52 of the Act, it becomes clear as to what sans-recourse endorsement is. When a person makes an endorsement and also excludes his own liability, it amounts to a sans-recourse endorsement. For example, Pay to B or order sans recourse. This means that in this case, the maker of the instrument being the endorser has opted to exclude its liability for paying the amount due to dishonour of the instrument.
• Partial indorsement: As per Section 56 of the Act, negotiable instruments cannot be transferred for part of the amount mentioned on that instrument. But there is an exception to it as per Section 56, wherein if any part payment is already made, then in that case there can be partial endorsement for the remaining amount. For example, B is the holder of a bill worth Rs. 1500. He endorses it as “pay to C or order Rs. 1000.” 

Legal effects of indorsement

Following are the legal effects of negotiating an instrument by  way of endorsement:

• Through endorsement, the property in the instrument gets transferred to the endorsee through the endorser.
• Through endorsement, the right to further negotiate the instrument gets vested in the endorsee.
• Endorsement gives the right to sue on the instrument.

In the case of A.V. Murthy vs. 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.

Parties to a negotiable instrument

Before getting to know about the types of negotiable instruments, it is important to know who can be a party to a negotiable instrument. As per Chapter III of the Act, any person who is capable of contracting as per the Indian Contract Act, 1872, is eligible to become party to a negotiable instrument.

Capacity of parties to the negotiable instrument

• Minor: As per Section 26, a minor being incapable of contract, cannot bind himself by becoming a party to an instrument. A minor may be the drawer of the instrument, the maker, the acceptor, or even an endorser but he won’t be liable for the instrument. Even in such a case, the instrument remains binding upon all the parties to it. 
• Agency: As per Section 27 of the Act, a person can legally bind himself by an instrument by becoming a party to it either by himself or even through a duly authorised agent. The provision clearly states that even an agent of the party to an instrument can bind his principal by acting on his behalf but only when he is authorised to do it. 

Liability of the parties 

The liability of the parties to a negotiable instrument under Chapter III has been mentioned under Sections 30 to 32 and further under Sections 35 to 42.

Liability of agent signing

Section 28: A promissory note, bill of exchange, or cheque that an agent sign 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.

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.

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.

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.

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.

Liability of indorser 

Section 35: Section 35, outlines the obligations of an endorser. In the case that the instrument is dishonoured, the endorser of a negotiable instrument undertakes the duty to the holder and any subsequent endorsers, unless there is a contrary arrangement. Significantly, the endorser’s liability will be secondary and arise only if the instrument is dishonoured after the proper procedures have been followed. 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. 

Liability of prior parties to the 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.

Discharge from liability

Chapter VII of the Act deals with the concept of discharge from the liability of the parties. These parties include either the maker of the instrument, the acceptor, or the endorser. When a party is discharged from liability over a particular instrument, in such a case, only that party gets discharged but the instrument continues to be negotiable and all the other undischarged parties will be liable on that instrument. 

Modes of discharge from liability

As mentioned above, Chapter VII not only deals with the concept of discharge from liability but also its various modes. Let us understand all the modes of discharge from liability of parties in brief.

Discharge by payment

As per Section 82(c), when a party is to be discharged from liability by the mode of payment, it needs to clear the payment in the due course of that payment. This means that the payment is to be made as per the terms and conditions and in accordance with good faith.

As per Section 79, the term “payment” is inclusive of the principal amount of the instrument along with the interest if any. Such interest if not mentioned while making the instrument remains 18% in accordance with the provisions mentioned under Section 80 of the Act.

Discharge by cancellation

As per Section 82(a), the maker, holder, or endorser is discharged from liability when such party cancels the name of the acceptor of the instrument. This results in the discharge of the liability of the maker, holder, or endorser against the person whose name is cancelled upon the instrument. 

Discharge by release

In accordance with Section 82(b), when the maker, holder, or endorser of an instrument gives notice of discharge to the party against whom the liability is to be discharged, the holder gets discharged from all such liabilities thereafter.

Crossing of cheques

A cheque is considered to be crossed when the maker of the cheque draws two parallel transverse lines across the face of the cheque. In the usual instance, these lines are drawn on the upper-left corner of the cheque. Payment of a cheque is usually affected by the crossing of a cheque. The word “crossing of a cheque” is nothing but a sort of direction to pay the money at the hands of the paying banker. Chapter XIV deals with the crossing of cheques.

Significance of crossing a cheque

A cheque is crossed to ensure that the payment is obtained only by the rightful holder of that cheque and not otherwise. When a cheque is crossed generally, the banker gets the rightful authority to obtain the payment. Crossing of cheques ensures that even in incidents of wrongful delivery of payments, the maker can trace back the transaction through the banker.

Who may cross a cheque

Following parties to a cheque may cross it:

• Drawer of the cheque: a cheque may be crossed generally or specially by the drawer of that instrument.
• Holder of the cheque: if the holder receives an uncrossed cheque, he has the authority to cross it either generally or specially. He may even add the words “not negotiable” to the cheque in order to restrict the instrument from getting negotiated any further.
• Banker: a banker who receives a specially crossed cheque can even cross it again in order to negotiate it with another banker.

Modes of crossing a cheque

There are various modes of crossing a cheque as explained below:

General crossing

As per Section 123, when there remains no words between the lines of crossing or the name of the bank alongside the words if any, the cheque is said to be crossed generally. The maker of the cheque has the discretion to add the words “not negotiable” upon the cheque.

Special crossing

As per Section 124 of the Act, when there remains the name of the banker between the transverse lines, the cheque is said to be crossed specially. In such a case, the payment of the cheque can only be made through a specific banker whose name is mentioned between the lines of crossing.

Not-negotiable crossing

As per Section 130 of the Act, a cheque is said to be crossed as “not-negotiable” when the word “not-negotiable” is mentioned between the transverse lines on the cheque. Such type of crossing restricts the instrument from being negotiated any further. When a cheque is crossed as “not-negotiable”, the maker becomes ineligible for any authority to pass on any title which he is devoid of.

The penal provisions of the Negotiable Instruments Act, 1881 (Chapter XVII)

The criminal penalties found in Sections 138 to 148 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 NI 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.

Dishonour of negotiable instruments

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 dissent. 

An overview of Section 138 of the Act

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 more 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 II 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 vs. 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.

Cognizance of the offence under Section 142 of the Negotiable Instrument Act, 1881

Section 142 of the NI Act, 1881 talks about the cognizance of offence mentioned under Section 138. According to Section 142(1)(a), a court can only take cognizance for an offence under Section 138 on the written complaint of the payee of the cheque or the holder in due course whatever the case may be.

Limitation period for making a complaint

It is pertinent to note that as per Section 142(1)(b), the complaint of the dishonour of the cheque must be made within one month from the cause of action of the offence mentioned under Section 138. However, the court may take cognizance post the limitation time if the payee or the holder in due course satisfies the court that there was a sufficient reason for not making the complaint in the requisite time period.

Who may take cognizance under Section 142

As per Section 142(1)(c), the court of a Metropolitan Magistrate or Judicial Magistrate first class is authorised to take cognizance of the offence mentioned under Section 138.

Jurisdiction of the trial of the offence 

As per Section 142(2), an offence under Section 138 may be tried in the following jurisdictions:

1. The branch of the bank in which the payee maintains his account, or
2. The branch of the drawee bank.

Defence that cannot be taken

As per Section 140 of the Act, the defence that the cheque presented may get dishonoured on presentment cannot be taken by the drawer of the cheque. However, the following defences may be considered by the court:

• Wrong jurisdiction/ lack of jurisdiction
• Absence of notice of 15 days
• Cheque not returned by the payee
• Complaint filed not in compliance with Section 142

Summary trial of the disputes as per Section 143

In accordance with Section 143 of the Act, the offences under Chapter XVII are to be dealt with summarily as per Sections 262–265 of the Code of Criminal Procedure, 1973 for which the sentence passed by the magistrate must not exceed a term of one year and a fine for an amount of not exceeding 5000 rupees.

Speedy disposal of the matters under this provision

As per Section 143(3), every trial conducted by the magistrate under this provision must be concluded within a time span of 6 months from the date of filing of the complaint.

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 vs. 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. vs. 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, 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 is 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. It is pertinent to note that the court having jurisdiction under Section 357(3) CrPC to try the case can also grant suitable compensation in addition to the sentence of imprisonment 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. 

Thus, the plan is to proceed in a summary manner.

Other important provisions under chapter XVII

Presumption in favour of the holder

As per Section 139, the court shall presume that the cheque issued in the favour of the holder was in discharge of the liability whether in part or in full.

Offences by the companies

As per Section 141, even a company can be held liable for an offence committed under Section 138. In such cases where the company commits an offence under Section 138 of the Act, the person in charge responsible for the company’s affairs at the time of the commission of the offence along with the company will be held liable and will be prosecuted against. Also, it is to note that the defence of due diligence and good faith cannot be taken in such cases where a company is accused of committing an offence under Section 138. 

However, no proceeding can be exercised against the Director of a company employed by the Central Government or a State Government.

Mode of service of summons

According to this Section 144, a copy of the summons must be duly served upon the accused or the witness where they reside or work for gain.

Evidence on affidavit

Section 145 denotes that the evidence of the complainant is given on affidavit and the court has the authority to summon and examine the person giving evidence on affidavit.

Offences to be compoundable

According to this Section 147, all the offences under this Act shall be compoundable within the meaning of the provisions of CrPC.

Latest amendment in the Negotiable Instruments Act, 1881

The Negotiable Instruments (Amendment) Act, 2018 which came into force on 1st September, 2018 inserted two important provisions to chapter XVII of the Act. Sections 143A and Section 148 were inserted by the Amendment Act.

Interim compensation 

According to Section 143A, the court while trying an offence mentioned under Section 138 can also grant interim compensation to the complainant which must not exceed 20% of the cheque’s amount. Also, as per Sub-section (3) of Section 143A, such compensation must be paid within a time frame of sixty days further extendable to thirty days from the date of such order.

As per Sub-section 5, such compensation must be received as a fine in accordance with Section 421 of CrPC.

Power of Appellate Court

Section 148 denotes the power of the Appellate Court to order payment. As per this provision, the Appellant Court may order the appellant to deposit the sum of conviction for which the appeal has been preferred which would be 20% interest of the fine or compensation. However, such an amount would be in addition to the amount of compensation granted under Section 143A. 

As per Sub-section (2), such an amount must be deposited within a time frame of 60 days further extendable to 30 days on sufficient cause.

Other important provisions of the NI Act, 1881

Notice of dishonour

Chapter XVIII of the Act deals with the provisions concerning notice of dishonour of a negotiable instrument. The following are the provisions mentioned in this chapter:

• Section 91: It denotes the dishonour by non-acceptance of an instrument. When an instrument is not duly accepted on the presentment of it in a timely manner, it is considered to be dishonoured. 
• Section 92: This provision talks about the notice of dishonour by non-payment. An instrument is considered to be dishonoured by non-payment when the maker of that instrument makes a default in payment which he is required to pay.
• Section 93: This provision talks about the parties by whom and to whom the notice of dishonour should be given. Whenever a negotiable instrument is dishonoured, the person or the maker of the instrument liable for the dishonour must give the notice to the holder or any other party to whom he is liable.

Noting and Protest

According to Section 99 of the Act, when an instrument gets dishonoured due to non-acceptance or non-payment, such dishonour may be called to be noted by the notary public upon that paper or any other affixed paper. 

As per Section 100, when such noting is certified by the notary public, that certificate is considered to be a protest. 

Reasonable time

Chapter X deals with the head of reasonable time. The important provisions in this chapter are dealt with as follows:

• Section 105 deals with what reasonable time is. As per the provision, the reasonable time for the presentation of an instrument or for sending the notice of its dishonour depends upon the usual course of transmission and relevant details such as the exclusion of bank holidays or public holidays etc.
• Section 106 talks about the reasonable time for the notice of dishonour of an instrument. As per the provision, “If the holder and the party to who notice of dishonour is given carry on business or live (as the case may be) in different places, such notice is given within a reasonable time if it is dispatched by the next post or on the day next after the day of dishonour.”

International law

Chapter XVI covers the provisions relating to international law in resonance with the negotiable instruments. As per Section 134 of the Act, a foreign negotiable instrument would be governed by the laws of the land where that instrument is made. However, this is not the case when a foreign instrument is dishonoured. As per Section 135, when the place of the making of the instrument is different from where it is made payable and such instrument gets dishonoured, the law of the place where it was to be made payable would apply.

Presumption as to foreign law

According to Section 137, unless the contrary is proved, the laws of the foreign land where an instrument is made would be considered similar to the Indian laws governing the negotiable instruments.

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.

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.

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 instrument), 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 vs. Perumal (1999), it was held that the assumption under Section 118 of the Negotiable Instruments Act, 1881, had been refuted by the facts in the case of Ayyakannu Gounder vs. Virudhambal Ammal (2004). In Bonala Raju vs. 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.

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 a cheque bounce a criminal offence would become less significant. 

Apart from the significance of NI Act, 1881 in the cheque bounce matters, it is considered a substantial piece of legislation because of its governance over the various negotiable instruments in the Indian territory. It is a comprehensive legal framework of provisions which deals with every aspect of the negotiable instruments ranging from their creation to their enforcement. It highlights the rights and liabilities of the parties and provides for an efficient mechanism of the disputes pertaining to negotiable instruments.  

Frequently Asked Questions (FAQs)

What is the maximum punishment prescribed for the offence committed under Section 138 of the Act?

According to Section 138, any person accused of dishonour of a cheque due to insufficiency of balance in his bank account will be held liable for the offence mentioned under this Section and will be sentenced to imprisonment of a term not exceeding two years or with a fine which would not exceed twice the amount of the cheque.

How is an inland instrument different from a foreign instrument?

Inland instruments are the ones that are either payable in India or drawn upon a person who is a resident of India whereas foreign instruments are the ones that are not considered as inland instruments. This also implies that such type of instrument shall be either payable or drawn upon a person who is not a resident of India or such type of instrument is drawn and made payable outside India.

In which year, was Section 143A introduced in the Act?

Section 143A which talks about interim compensation was inserted into the Act of 1881 by the Negotiable Instruments (Amendment) Act, 2018 on 1st September, 2018.

Who can claim compensation under Section 143A?

The payee or the holder in due course upon the dishonour of the cheque can also file for a claim of interim compensation from the drawer of the cheque. This compensation is treated as a fine as per the provisions of CrPC.

Which court has the power to take cognizance of an offence committed under Section 138?

As per Section 142, the Judicial Magistrate First Class or the court of Metropolitan Magistrate has the authority to take cognizance of an offence under Section 138.

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.