Negotiable Instruments Act, 1881
The Negotiable Instruments Act, 1881, governs the use of negotiable instruments like promissory notes, bills of exchange, and cheques in India. It standardizes procedures related to the creation, transfer, and enforcement of negotiable instruments, ensuring trust in commercial transactions.
1. Introduction to the Negotiable Instruments Act, 1881
- Objective: To facilitate the smooth operation of financial transactions by standardizing instruments of payment and credit.
- Scope: Applicable to the whole of India (including Jammu & Kashmir after amendments) and covers three major negotiable instruments: promissory notes, bills of exchange, and cheques.
2. Key Concepts in Negotiable Instruments
2.1. What is a Negotiable Instrument?
- A negotiable instrument is a document guaranteeing payment of a specific amount to the bearer or a named person.
- The term "negotiable" means that the instrument can be freely transferred to another party.
- Types:
- Promissory Note: A written promise to pay a certain amount to a specific person or bearer.
- Bill of Exchange: An order from the drawer to the drawee to pay a specified sum to the payee.
- Cheque: A bill of exchange drawn on a bank, payable on demand.
2.2. Characteristics of Negotiable Instruments
- Transferability: Instruments can be transferred by simple endorsement and delivery.
- Title: A transferee gets a better title if they acquire the instrument in good faith and for consideration.
- Rights of Holder: A holder in due course has the right to sue in their name and a better position than the original holder.
- Payable on Demand: Certain negotiable instruments can be demanded for payment immediately upon presentation.
Type of Negotiable Instruments
| Type | Definition | Parties Involved |
|---|---|---|
| Promissory Note | A written premise to pay a certain sum to a specified pers. | Maker, Payee |
| Bill of Exchange | An order by one person to another to pay a certain sum to the per. | Drawer, Drawee, Payee |
| Cheque | An order by a drawer to a bank to pay a certain sum to the per. | Drawer, Drawee (Bank), Payee |
3. Detailed Sections of the Act
3.1. Promissory Notes (Sections 4 & 5)
3. Detailed Sections of the Act
3.1. Promissory Notes (Sections 4 & 5)
- Definition: A promissory note is an unconditional written promise made by one person to another, signed by the maker, to pay a definite sum of money.
- Key Features:
- Must be in writing.
- Signature of the maker is essential.
- The amount should be certain and payable either on demand or after a certain time.
3.2. Bills of Exchange (Sections 6 - 10)
- Definition: A bill of exchange is an instrument in writing, containing an unconditional order, directing a person to pay a specific sum to another.
- Parties Involved:
- Drawer: Person who creates the bill.
- Drawee: Person on whom the bill is drawn.
- Payee: Person to whom the payment is to be made.
- Acceptance and Payment: A bill is either payable on demand or at a fixed date.
3.3. Cheques (Sections 6 & 72)
- Definition: A cheque is a type of bill of exchange, always drawn on a bank, and payable on demand.
- Crossing of Cheques: Adding two parallel lines on the top left-hand corner for added security.
- General Crossing: Contains only two parallel lines.
- Special Crossing: Contains the name of a specific banker between the lines.
3.4. Endorsements (Sections 15 - 18)
- Definition: An endorsement involves signing one's name on the back of a negotiable instrument, indicating the intention of transferring the ownership.
- Types:
- Blank Endorsement: Signature without specifying a payee.
- Special Endorsement: Specifies the payee's name.
- Restrictive Endorsement: Limits further negotiation.
- Conditional Endorsement: Attaches conditions to the transfer.
3.5. Holder and Holder in Due Course (Sections 8 & 9)
- Holder: A person in possession of the instrument and entitled to receive the amount.
- Holder in Due Course: A person who has acquired the instrument in good faith, for value, and before it was overdue, obtaining a better title.
3.6. Dishonour of Negotiable Instruments (Sections 91 - 94)
- Types:
- Non-Acceptance: If a bill is not accepted by the drawee, it is dishonoured.
- Non-Payment: If payment is refused on presentation, it's considered dishonoured.
- Consequences: Notice of dishonour must be given to the concerned parties; otherwise, they are discharged from liability.
Flowchart: Dishonour of Negotiable Instruments
Step 1: Instrument Presented
Step 4: Legal Action Initiated (if applicable)
3.7. Noting and Protest (Sections 99 - 104)
- Noting: A formal recording of the dishonour by a notary public, indicating the date and reasons.
- Protest: A notary's certificate proving the dishonour of a negotiable instrument.
3.8. Presumptions under the Act (Section 118)
- The Act assumes certain presumptions in favour of negotiable instruments, such as:
- Consideration is presumed to exist.
- Negotiation is assumed to have occurred before maturity.
- The instrument is presumed to have been accepted and endorsed properly.
4. Amendments to the Negotiable Instruments Act
4.1. 1988 Amendment
- Introduced Section 138, which criminalizes the dishonour of a cheque due to insufficient funds, prescribing penalties, including fines and imprisonment.
4.2. 2002 Amendment
- Enhanced penalties for cheque bounce cases, with imprisonment extended to two years and penalties up to twice the cheque amount.
- Allowed for electronic presentation of cheques and truncated cheque systems.
4.3. 2015 Amendment
- Jurisdiction in cheque bounce cases was clarified, allowing the case to be filed at the bank's branch location where the cheque was presented.
4.4. 2018 Amendment
- Introduced Section 143A and Section 148, enabling courts to order interim compensation (up to 20% of the cheque amount) during trials.
5. Key Provisions and Important Sections
- Section 4: Definition of Promissory Note.
- Section 6: Definition of a Cheque.
- Section 13: Definition of Negotiable Instrument.
- Section 20: Inchoate or Incomplete Instruments.
- Section 138: Dishonour of Cheque for Insufficiency of Funds.
- Section 139: Presumption in favour of the holder.
- Section 142: Cognizance of offences related to dishonour.
6. Important Concepts to Highlight
6.1. Dishonour and Penalty (Sections 138-147)
- A cheque can be dishonoured due to various reasons like insufficient funds or incorrect signatures.
- Penalties include fines and imprisonment.
6.2. Crossing of Cheques (Section 123)
- It's a mechanism to direct the cheque payment through specific banking channels, enhancing security.
6.3. Negotiability vs. Assignability
- Negotiability allows easy transfer by endorsement.
- Assignability requires a formal agreement, often lacking the same legal protection as negotiability.
6.4. Electronic Cheques and Digital Signatures
- The Act accommodates modern banking needs, allowing electronic cheques and digital signatures.
Case Laws Related to the Negotiable Instruments Act, 1881
1. Dalmia Cement (Bharat) Ltd. v. Galaxy Traders & Agencies Ltd. (2001)
Key Issue: Dishonour of a post-dated cheque.
Facts: A cheque was issued with a future date, which was dishonoured upon presentation. The case revolved around the legal consequences of issuing a post-dated cheque that was dishonoured.
Judgment: The Supreme Court held that a cheque's validity and the cause of action for dishonour arise only after the cheque's date. The dishonour of a post-dated cheque falls under Section 138, making the drawer liable.
Importance: Clarified that post-dated cheques are covered under Section 138 for criminal liability if dishonoured.
2. Modi Cements Ltd. v. Kuchil Kumar Nandi (1998)
Key Issue: Liability under Section 138 despite a "Stop Payment" instruction.
Facts: The drawer instructed the bank to stop the payment of a cheque, which resulted in dishonour. The legal question was whether "stop payment" constitutes dishonour under Section 138.
Judgment: The Supreme Court held that even if a drawer stops payment, it would attract penalties under Section 138 if the drawer had no reasonable cause.
Importance: Affirmed that "stop payment" instructions do not exempt the drawer from penalties for dishonour.
3. M.S. Narayana Menon v. State of Kerala (2006)
Key Issue: Presumption of debt under Section 139.
Facts: The drawer argued that the cheque was issued not for debt but as a security. The court examined the applicability of presumptions under Section 139.
Judgment: The Supreme Court held that Section 139 creates a rebuttable presumption in favour of the holder, meaning the burden of proof lies on the accused to show that the cheque was not issued for discharging debt.
Importance: Established the burden of proof for the accused to disprove the presumption of debt under Section 139.
4. Rangappa v. Sri Mohan (2010)
Key Issue: Scope of Section 139's presumption.
Facts: The accused claimed that the cheque was issued as an advance payment, not towards any existing liability.
Judgment: The Supreme Court extended the scope of Section 139, ruling that a presumption of liability exists even for cheques issued as security unless adequately disproven by the drawer.
Importance: Strengthened the holder's position, making it tougher for the accused to rebut the presumption.
5. Goa Plast (P) Ltd. v. Chico Ursula D'Souza (2003)
Key Issue: Interpretation of "debt or other liability" under Section 138.
Facts: A cheque was issued but dishonoured, and the drawer argued that it was not issued for an enforceable liability.
Judgment: The Supreme Court clarified that the term "debt or other liability" in Section 138 includes all legally enforceable debts, not just those resulting from contracts.
Importance: Broadened the interpretation of liability under Section 138.
6. P. Mohanraj & Others v. M/S Shah Brothers Ispat Pvt. Ltd. (2021)
Key Issue: Applicability of the Insolvency and Bankruptcy Code (IBC) over Section 138 proceedings.
Facts: The accused faced proceedings under Section 138 while undergoing insolvency proceedings under IBC. The issue was whether Section 138 proceedings could continue during the IBC moratorium.
Judgment: The Supreme Court ruled that Section 138 proceedings are civil in nature and thus stayed during the IBC moratorium.
Importance: Established precedence on how Section 138 is affected by insolvency proceedings.
7. Kumar Exports v. Sharma Carpets (2009)
Key Issue: Burden of proof for rebutting the presumption under Section 118 and 139.
Facts: The drawer claimed the cheque was issued as security and not as a payment of debt.
Judgment: The Supreme Court reiterated that the accused only needs to raise a reasonable doubt to rebut the presumption; they are not required to disprove it conclusively.
Importance: Highlighted the standards for rebutting statutory presumptions.
8. Dashrath Rupsingh Rathod v. State of Maharashtra (2014)
Key Issue: Jurisdiction for filing a cheque bounce case.
Facts: The case questioned whether a complaint under Section 138 should be filed at the drawee bank's location or the payee's bank.
Judgment: The Supreme Court initially ruled that the complaint should be filed at the location of the drawee bank but was later modified by the 2015 Amendment, which allowed filing at the payee's bank.
Importance: Changed the way jurisdiction is handled for Section 138 complaints.
9. Lalit Kumar Sharma v. State of Bihar (2008)
Key Issue: Liability of the drawer in a partnership firm.
Facts: A cheque issued by a partner of a firm was dishonoured, leading to questions about the liability of other partners.
Judgment: The Court held that partners can be held liable if they are actively involved in the business or consented to the cheque issuance.
Importance: Clarified vicarious liability of partners in cheque bounce cases.
10. C.C. Alavi Haji v. Palapetty Muhammed & Anr. (2007)
Key Issue: Issuance of notice under Section 138.
Facts: The drawer argued non-receipt of the notice of dishonour. The Court examined whether valid service of notice is mandatory.
Judgment: The Supreme Court held that if the drawer does not accept the notice despite it being properly dispatched, they cannot use non-receipt as a defence.
Importance: Simplified rules on service of notice under Section 138.
