Introduction
The Negotiable Instruments Act, 1881 is a landmark legislation that governs the use, operation, and legal principles related to negotiable instruments in India. It was enacted to facilitate the smooth functioning of commercial transactions by legally recognizing certain instruments used in trade and business. These include promissory notes, bills of exchange, and cheques.
Definition of Negotiable Instruments (Section 13)
The Act defines a negotiable instrument as a promissory note, bill of exchange, or cheque, payable either to order or to bearer. These instruments are freely transferable and entitle the holder to receive money.
Types of Negotiable Instruments
There are three main types:
- Promissory Note (Section 4): A written promise to pay a specified sum to a certain person or bearer.
- Bill of Exchange (Section 5): A written order from one party to another to pay a specified sum to a third party.
- Cheque (Section 6): A bill of exchange drawn on a banker and payable on demand.
Characteristics of Negotiable Instruments
- Freely Transferable: Ownership can be transferred by delivery or endorsement.
- Right of the Holder in Due Course: A person who receives the instrument in good faith has the right to receive payment, regardless of defects in previous ownership.
- Presumptions in Favor of Instruments (Section 118): The Act provides various presumptions like consideration, date, time of acceptance, transfer, etc.
- Payment to Holder Discharges Liability: Once the payment is made to the holder in due course, the payer is discharged of liability.
- Endorsement and Delivery: These actions transfer the instrument legally.
Holder and Holder in Due Course (Sections 8 & 9)
- Holder: A person entitled to possess and receive the amount.
- Holder in Due Course: A holder who receives the instrument:
- For consideration,
- Before it became overdue,
- In good faith.
They enjoy special protection under the Act.
Rules Regarding Acceptance and Payment (Sections 61–67)
- The Act outlines rules for presentment for acceptance and presentment for payment.
- If not presented in time, the drawer and endorsers may be discharged of liability.
Maturity and Days of Grace (Sections 22–25)
- The maturity of an instrument is the date on which it falls due.
- Three days of grace are added to the date of maturity for promissory notes and bills of exchange.
Endorsement (Sections 15–17)
- Endorsement is signing the instrument for transfer.
- It can be blank (without mentioning endorsee) or full (mentioning endorsee).
- Can be restrictive or conditional.
Dishonor and Notice of Dishonor (Sections 91–93)
- If a negotiable instrument is dishonored, notice must be given to parties involved.
- Dishonor can be due to non-acceptance or non-payment.
Noting and Protesting (Sections 99–104)
- When an instrument is dishonored, the holder may approach a Notary Public to record the fact of dishonor.
- Protest is a formal notarial certificate issued after noting.
Penalty for Dishonour of Cheque (Section 138)
One of the most powerful features:
- Section 138 provides criminal liability if a cheque is dishonored due to insufficient funds or other reasons.
- Punishment can be up to 2 years imprisonment or fine, or both.
This has enhanced the credibility and trust in cheque-based transactions.
Jurisdiction and Cognizance (Sections 142–147)
- Complaints under Section 138 must be filed within the jurisdiction where the cheque was presented or dishonored.
- Section 143–147 introduced provisions for summary trial, presumption in favor of the holder, and compounding of offences.
Amendments
Significant amendments have been made to modernize the law:
- Banking, Financial and Technological updates like inclusion of cheque truncation system, electronic image of cheques, etc.
- Introduction of Sections 143A & 148 through the Negotiable Instruments (Amendment) Act, 2018 allowing interim compensation and enhanced enforcement of judgments.