Negotiable Instruments Act, 1881

s.13(a): a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer. The essential idea is free transferability, with the right to give a good title to a holder in due course free from the defects of earlier holders.

Features: (1) freely transferable by delivery (bearer) or endorsement and delivery (order); (2) the holder takes in his own name and may sue in his own name; (3) a holder in due course gets a better title than the transferor (an exception to the nemo dat rule); (4) notice of transfer is not required; (5) there is a presumption as to consideration, date, acceptance, transfer, endorsement and stamp (s.118).

Differences: A promissory note has two parties, a bill has three. A promissory note is a promise to pay, a bill is an order. A promissory note needs no acceptance; a bill (except one payable on demand) needs acceptance by the drawee. A cheque is always payable on demand and drawn on a banker. A promissory note cannot be made payable to bearer on demand (s.31 RBI Act reserved the issue of such notes to the RBI).

Kinds of bills: inland or foreign; time or demand; trade or accommodation bills. Maturity (s.21–25): an instrument payable at a fixed period matures on the due date after three days of grace (s.22); if the last day is a public holiday, the instrument is due on the preceding business day (s.25). Instruments payable on demand or at sight carry no days of grace.

Other key definitions: s.8: holder (entitled in his own name to the possession and to recover the amount); s.9: holder in due course (HDC): (i) takes the instrument for consideration, (ii) before maturity, (iii) without notice of any defect in the title of the transferor, and (iv) it is a negotiable instrument in complete and regular form (s.9 says: becomes the possessor of a cheque payable to bearer or the payee/endorsee of an order instrument). s.10: payment in due course: in accordance with the apparent tenor, in good faith and without negligence, to the person in possession, and under circumstances which do not afford a reasonable ground for believing he is not entitled to receive the payment.

• s.14: negotiation is the transfer to any person so as to constitute him the holder. A bearer instrument is negotiated by delivery (s.47); an order instrument by endorsement and delivery (s.48).

• Endorsement (ss.15–16): the signature of the maker or holder on the instrument, on the back or face, for the purpose of negotiation. Kinds: in blank (signature only; then becomes payable to bearer), in full (name of the endorsee), restrictive (prohibits further negotiation: ‘pay D only’), conditional, partial (invalid: s.56), sans recours, and facultative.

• s.118: presumptions until the contrary is proved: (a) consideration; (b) date; (c) time of acceptance; (d) time of transfer; (e) order of endorsements; (f) stamp; (g) that the holder is a holder in due course. s.139: it shall be presumed, unless the contrary is proved, that the holder received the cheque for the discharge, in whole or in part, of a debt or other liability.

• s.53: a holder in due course gets a good title free from the defects of the transferor’s title, and even if the transferor obtained it by fraud, unless the holder himself was a party to the fraud. s.58: an instrument obtained by unlawful means or for unlawful consideration cannot be recovered by the person who obtained it unless he is a HDC.

• Liability of parties: s.30 the drawer of a bill or cheque is bound to compensate the holder if the instrument is dishonoured; s.32 the acceptor is primarily liable; s.35 the endorser is liable to subsequent holders; s.37 the maker of a promissory note is primarily liable. s.38: as between prior and subsequent parties, the prior parties are liable to the later. s.41–42: acceptance for honour (s.108 onwards).

• Capacity (s.26): every person capable of contracting may bind himself as a maker, drawer, acceptor, endorser etc. A minor may draw, endorse, deliver and negotiate so as to bind all parties except himself.

• Material alteration (s.87): a material alteration without the consent of the parties avoids the instrument, except against a party who made or authorised or consented to the alteration (and subsequent parties). A holder in due course can recover as it originally stood (s.88 and s.89).

• Presentment for acceptance (ss.61–75): a bill payable after sight must be presented for acceptance. Presentment for payment is required (s.64) to charge the parties, within a reasonable time, during business hours, at the proper place. A cheque must be presented within its validity period (three months from the date of the cheque, per RBI direction effective 1 April 2012, and within the period of its validity under s.138).

• Dishonour: by non-acceptance or non-payment. Notice of dishonour (ss.93–98) must be given to parties sought to be held liable. Noting and protest (ss.99–104): noting by a notary public, and protest for foreign bills.

• Discharge (ss.77–82): by payment in due course (s.78), by cancellation, release, material alteration, or merger. The drawer and endorsers are discharged by delay in presentment, by the holder’s default, and by novation.

• General crossing (s.123): two parallel transverse lines, with or without the words ‘& Co.’, ‘not negotiable’; the cheque is payable only through a bank account, not over the counter.

• Special crossing (s.124): the name of a particular banker is written across the face; the drawee bank must pay only to that banker or his agent.

• s.125: the holder may cross an uncrossed cheque, or a generally crossed cheque specially. s.126: payment in due course of a crossed cheque. s.128: payment in due course of a crossed cheque protects the paying banker. s.129: a banker who pays a crossed cheque otherwise than as directed is liable to the true owner. s.130: the effect of the words ‘not negotiable’: the holder cannot give a better title than he himself has. s.131: protection to a collecting banker who in good faith and without negligence receives payment for a customer. s.131A: extension to drafts.

Chapter XVII was inserted in 1988 to ensure the credibility of cheques as payment instruments. It makes the dishonour of a cheque for insufficiency of funds (or because it exceeds the arrangement with the bank) a criminal offence.

Ingredients of s.138:

1. A cheque is drawn by a person on an account maintained by him with a banker, in favour of another person.

2. It is issued for the discharge, in whole or in part, of any debt or other liability that is legally enforceable.

3. The cheque is presented to the bank within three months (or within its validity period, whichever is earlier).

4. The cheque is returned unpaid because the money standing to the credit of the account is insufficient, or exceeds the arrangement with the bank.

5. The payee or holder in due course gives a written demand notice within 30 days of receiving information from the bank regarding the return of the cheque.

6. The drawer fails to pay within 15 days of receipt of the notice.

The cause of action arises on the expiry of the 15-day period. Complaint must be filed within one month from the date on which the cause of action arises (s.142(1)(b)), though the court may condone delay for sufficient cause.

Punishment: imprisonment up to two years, or a fine up to twice the amount of the cheque, or both (2002 amendment).

Related provisions:

• s.139: statutory presumption that the cheque was issued for a legally enforceable debt. The accused can rebut it on the preponderance of probabilities, not beyond reasonable doubt (Rangappa v Sri Mohan, 2010; Bir Singh v Mukesh Kumar, 2019: even a signed blank cheque voluntarily given attracts the presumption).

• s.140: it is not a defence that the drawer had no reason to believe the cheque would be dishonoured.

• s.141: Offences by companies: every person who, at the time of the offence, was in charge of and responsible to the company for the conduct of its business is deemed guilty. The company must be arraigned as an accused (Aneeta Hada v Godfather Travels & Tours, 2012). A director is liable only if in charge of and responsible for the conduct of the business (S.M.S. Pharmaceuticals v Neeta Bhalla, 2005); a signatory of the cheque is automatically liable.

• s.142: Cognizance: only on a written complaint by the payee or holder in due course. s.142(2) (inserted by the 2015 amendment): the court within whose local jurisdiction the branch of the bank where the payee or holder maintains the account is situated has jurisdiction (in case of a cheque delivered for collection through an account). This overruled Dashrath Rupsingh Rathod v State of Maharashtra (2014), which had held that the drawer’s bank branch alone determines jurisdiction. Earlier, K. Bhaskaran v Sankaran Vaidhyan Balan (1999) held that the five acts constituting the offence give multiple venues.

• s.143: Summary trial (with power to impose a sentence up to one year and fine of up to Rs. 5,000 under the CrPC, now Bharatiya Nagarik Suraksha Sanhita, 2023). Time limit for trial: six months (directory). s.145: evidence on affidavit. s.146: the bank’s slip is prima facie evidence of dishonour. s.147: the offence is compoundable (Damodar S. Prabhu v Sayed Babalal H., 2010: guidelines on costs for compounding; Meters and Instruments v Kanchan Mehta, 2017).

• s.143A: Interim compensation (inserted by the Negotiable Instruments (Amendment) Act, 2018): the court may direct the drawer to pay interim compensation up to 20% of the cheque amount to the complainant. For a summary trial, on the plea of not guilty; in other cases, upon framing the charge. It is to be paid within 60 days (extendable by 30 days).

• s.148: in an appeal by the drawer against conviction, the appellate court may order deposit of a minimum of 20% of the fine or compensation awarded by the trial court (2018 amendment; applies to pending appeals: Surinder Singh Deswal v Virender Gandhi, 2019). If the appeal succeeds, the amount is returned with interest.

Other leading cases on s.138:

• NEPC Micon v Magma Leasing (1999): closure of the account amounts to dishonour for insufficiency of funds.

• Modi Cements v Kuchil Kumar Nandi (1998) and Laxmi Dyechem v State of Gujarat (2012): stop-payment instruction or signature mismatch can attract s.138 if the cheque was issued for a debt.

• MSR Leathers v S. Palaniappan (2013): a cheque may be presented multiple times within its validity, and a fresh cause of action arises each time (but only one complaint on a given cause).

• Kusum Ingots & Alloys v Pennar Peterson Securities (2000): the notice is the prerequisite.

• Indian Bank Association v Union of India (2014): directions for speedy trial; Re: Expeditious Trial of Cases under Section 138 of NI Act (2021): constitution of special courts and procedural reforms.

• Sampelly Satyanarayana Rao v IREDA (2016): the debt must be legally enforceable.

Exam tip: timelines are a favourite: 3 months (presentment), 30 days (notice), 15 days (payment), 1 month (complaint), 20% (interim compensation and appeal deposit), 2 years / twice the amount (punishment).

• A banker must honour a customer’s cheque if funds are sufficient; wrongful dishonour exposes the bank to damages (s.31).

• Garnishee orders and countermand (stop-payment) are duties and risk areas; the banker’s lien (s.171 ICA) is a general lien.

• The Information Technology Act does not apply to negotiable instruments except cheques (First Schedule, post-2002 amendment on cheque truncation).