the negotiable instrument act 1881

7/28/2019 The Negotiable Instrument Act 1881

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The Negotiable Instrument Act 1881

Negotiable Instruments Act, 1881 was passed by British India and f or o ver 130 years and except f or

amendments, t he question of revising the act as a whole never been raised.

History

The history of the present Act is a long one. The Act was originally draf ted in 1866 by the 3rd India Law

Commission and introduced in December, 1867 in the Council and it was ref erred to a Select Committee.

Objections were raised by the mercantile community to the numerous deviat ions f rom the English Law

which it contained. The Bill had to be redraf ted in 1877.

Af ter the lapse of a suf f icient period f or crit icism by the Local Governments, the High Courts and thechambers o f commerce, the Bill was revised by a Select Committee. In spite of this Bill could not reach

the f inal stage. In 1880 by the Order of the Secretary of State, the Bill had to be ref erred to a new Law

Commission. On the recommendation of the new Law Commission the Bill was re-draf ted and again it

was sent to a Select Committee which adopted mos t of the additions recommended by the new Law

Commission. The draf t t hus prepared f or the f ourth time was introduced in the Council and was passed

into law in 1881 being the Negot iable Inst ruments Act, 1881 (Act No.26 of 1881)

The mos t important class of Credit Instruments that evolved in India were termed Hundi. Their use was

mos t widespread in the twelf th century, and has continued till today. In a sense, they represent the o ldest

surviving form of credit instrument. These were used in trade and credit transact ions; they were used as

remittance instruments f or t he purpose of transfer of f unds f rom one place to another. In Modern

era Hundi served as Travellers Cheques.

Types of Negotiable Instruments

According to Section of the Negotiable Inst ruments Act means "A negotiable instrumentmeans a

promissory note, bill of exchange or cheque payable either to order or to bearer.'[3] But in Section 1, it is

also described that Local extent , Saving of usage relating to hundis, etc., Commencement . - It

extends to the whole of India but no thing herein contained af f ects t he Indian Paper Currency Act, 1871,

Section 2, or af f ects any local usage relating to any inst rument in an oriental language. Provided that

such usages may be excluded by any words in the body o f the inst rument, which indicate and intention

that the legal relations o f the parties thereto shall be governed by this Act; and it shall come into f orce

on the first day of March, 1882.[3]

Modern era and Negot iable Instruments

With t he growth o f the Economy, Negotiable Instruments have given the new dimensions to the

commercial and corporate world. Now people pref er to carry a small piece of paper known as

Cheque rather than carrying the currency worth the value of the Cheque. Befo re 1988 there being no

provision to restrain the person issuing the Cheque without having suf f icient f unds in his account . Of

course on Dishonoured cheque there is a civil liability accrued. However in reality it takes a long time torecover the money. In order to ensure promptitude and remedy against t he defaulters of the Negot iable

Inst rument a criminal remedy of penalty was inserted in Negot iable Inst ruments Act, 1881 by amending it

with Negotiable Instruments Act, 1988.[3]

With the insertion of these provisions in the Act the situation certainly improved and the instances of
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dishonour have relatively come down but on account of application o f dif f erent interpretative techniques

by different High Courts on different provisions of the Act it further compounded and complicated the

situation although on dishonour o f cheques the trends o f the verdicts o f theSupreme Court of

India unequivocally demonstrate that there is subconscious judicial pressure in the mind of the Judges

which leans heavily in f avour of the holder of the cheque.

Having regard to the working of these penal provisions on dishonour of cheques and the bot tlenecks

that have surf aced in strictly implementing these provisions, Parliament enacted the Negot iable

Inst ruments (Amendment and Miscellaneous Provisions) Act, 2002 (55 of 2002), which is intended to plug

the loopholes. This amendment Act inserts f ive new sections f rom 143 to 147 touching various limbs ofthe parent Act and Cheque truncation through digitally were also included and the amendment Act has

been recently brought into f orce on Feb. 6, 2003.[3]

Statutory Def initions

Some of the important def initions of the Act, which are important are:

Section 6 - Cheque[4]

A cheque is bill of exchange drawn on a specif ied banker and no t expressed to be payable otherwisethan on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic

form.

Explanation I

For the purposes o f this section, the expressions-

(a) a cheque in the electronicf orm means a cheque which contains the exact mirror image of a

paper cheque, and is generated, written and signed in a secure system ensuring the minimum saf ety

standards with t he use of digital signature (with o r without biometrics signature) and asymmetric crypto

system;

(b) a truncated cheque means a cheque which is truncated during the course of a clearing cycle,

either by the clearing house or by the bank whether paying or receiving payment, immediately on

generation of an electronic image for t ransmission, subst ituting the further physical movement of the

cheque in writing.

Explanation II

For t he purposes o f this section, the expression clearing house means the clearing house managed by

the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.

Section 13 - Negotiable Instruments

(1) Negotiable instrument. A Negot iable Inst rument means a promissory note, bill of exchange or

cheque payable either to order o r to bearer.

Explanation (i)-A promiss ory note, bill of exchange or cheque is payable to order which is expressed to be so payable o r

which is expressed to be payable to a particular person, and does not contain words prohibiting transf er

or indicating an intention that it shall not be transf erable.

Explanation (ii)-

A promiss ory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable

or on which the only or last endorsement is an endorsement in blank.

Explanation (iii)-

Where a promissory note, bill of exchange or cheque, either o riginally or by endorsement, is expressed

to be payable to the order of a specif ied person, and not to him or his order, it is nevertheless payable

to him or his o rder at his option.

(2) A negot iable instrument may be made payable to two or more payees jointly, or it may be made

payable in the alternative to one of two, or one or -some of several payees.

Section 123 - Che ue Crossed Generall
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Where a cheque bears across its f ace an addition of the words and company or any abbreviation

thereof , between two parallel transverse lines, or of two parallel transverse lines simply, either with o r

without t he words, not negotiable, that addition shall be deemed a cross ing, and the cheque shall be

deemed to be crossed generally.

Section 124 - Cheque crossed specially

Where a cheque bears across its f ace an addition of the name of a banker, either with or without the

words no t negot iable, that addition shall be deemed a crossing, and the cheque shall be deemed to be

crossed specially, and to be crossed to that banker.

Section 126 Cheque crossed specially

Where a cheque is crossed generally, the banker, on whom it is drawn shall not pay it otherwise than to a

banker.

Payment o f cheque crossed specially- Where a cheque is crossed specially, the banker on whom it is

drawn shall not pay it o therwise than to t he banker to whom it is crossed, or his agent, f or collection.

Section 130 Cheque bearing Not Negot iable

A person taking a cheque crossed generally or specially, bearing in either case the words not negotiable,

shall not have, and shall not be capable of giving, a better t itle to the cheque than that which the person

from whom he took it had.

Dishonour of certain Cheques for Insufficiency of Funds in Accounts

Section 138 to 142 of Chapter XVII, of Negotiable Instrument Act, 1881, deals with dishonour of cheque.

The main object is to introduce f inancial discipline in business dealings. Prior to insertion o f 138 of NI, adishonored cheque's lef t the person aggrieved with the only remedy of f iling a claim. The remedy

available in civil court is a long drawn matter and an unscrupulous drawer normally takes various pleas to

def eat t he genuine claim of the payee. In 1988, Chapter XVII inserted and added Section 138 to 142.

Object o f the amendment is to held person criminally responsible for his acts in Commercial transactions

Trade and Business dealings with people carried out carelessly or without sense of respons ibility.

Section 138 - Dishonour of cheque for insufficiency, et c., of funds in the accounts

Where any cheque drawn by a person on an account maintained by him with a banker f or payment o f any

amount o f money to another person f rom out of that account f or the discharge, in whole or in part, ofany debt or o ther liability, is returned by the bank unpaid, either because of the amount o f money

standing to the credit of that account is insuff icient to honour the cheque or that it exceeds the amount

arranged to be paid f rom that account by an agreement made with that bank, such person shall be

deemed to have committed an of f ence and shall, without prejudice to any other provision o f this Act, be

punished with imprisonment f or a term which may be extended to two years, or with f ine which may

extend to twice the amount of the cheque, or with both;

Provided that nothing contained in this section shall apply unless-

(a) the cheque has been presented to the bank within a period of t hree months from the date on

which it is drawn or within the period of its validity, whichever is earlier;

(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand f or the

payment of the said amount of money by giving a not ice in writing, to the drawer of the cheque within

thirty days of the receipt o f information by him f rom the bank regarding the return of the cheque as

unpaid; and

(c) the drawer of such cheque f ails to make the payment of the said amount of money to the payee

or as t he case may be, to the holder in due course o f the cheque within 30 days of the receipt o f the


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said notice.(EDITED BY RP ON 14.08.2012)

Explanation

For t he purposes o f this section, debt or other liability means a legally enforceable debt or other liability.

Another very important section is presumptions as to Negotiable Instruments under Sect ion 118 of the

Act.

Section 118 - Presumptions as to Negot iable Instruments

Until the contrary is proved, the f ollowing presumptions shall be made:

(a) of considerat ion. -

that every negot iable inst rument was made or drawn fo r consideration, and that every such instrument,

when it has been accepted, indorsed, negot iated or t ransf erred, was accepted, indorsed, negot iated or

transferred f or consideration;

(b) as to date .

that every negot iable instrument bearing a date was made or drawn on such date;

(c) as to time of acceptance.

that every accepted bill of exchange was accepted within a reasonable time aft er its date and before its

maturity;(d) as to time of transfe r.

that every transf er of a negotiable instrument was made before its maturity;

(e) as to order of indorsements.

that the indorsements appearing upon a negot iable instrument were made in the o rder in which they

appear thereon;

(f) as to stamp.

that a lost promissory note, bill of exchange or cheque was duly stamped;

(g) that holder is a holder in due course.

that the holder of a negotiable instrument is a holder in due course;

Provided that, where the instrument has been obtained f rom its lawful owner, or f rom any person in

lawful custody thereof , by means o f an of f ence or f raud, or has been obtained f rom the maker or

acceptor thereof by means o f an of f ence or f raud, or f or unlawful consideration, the burden of proving

that the ho lder is a holder in due course lies upon him.

Five Ingredients of the of fence under Sect ion 138

It is manif est that t o constitute an o f f ence under Section 138 of the Act, the f ollowing ingredients are

required to be f ulfilled:

a person must have drawn a cheque on an account maintained by him in a bank for

payment of a certain amount of money to another person from out of that account

The cheque should have been issued for the discharge, in whole or in part, of any debt

or other liability;

that cheque has been presented to the bank within a period of three months from the

date on which it is drawn or within the period of its validity whichever is earlier;

that cheque is returned by the bank unpaid, either because of the amount of money

standing to the credit of the account is insufficient to honour the cheque or that it exceeds the

amount arranged to be paid from that account by an agreement made with the bank;

the payee or the holder in due course of the cheque makes a demand for the payment

of the said amount of money by giving a notice in writing, to the drawer of the cheque, within

30 days of the receipt of information by him from the bank regarding the return of the chequeas unpaid;

the drawer of such cheque fails to make payment of the said amount of money to the

payee or the holder in due course of the cheque within 30 days of the receipt of the said

notice


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the drawer of such cheque f ails to make payment of the said amount o f money to the payee or the

holder in due course of the cheque within 30 days of the receipt o f the said not ice

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the negotiable instrument act 1881

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