The Law on Negotiable Instruments in India: Summarized

Negotiable Instruments (NI)
The Law of Negotiable Instrument is regulated by The Negotiable Instruments Act ( Hereinafter referred to as NI Act ) 1881, subject to s.31 and 32 of RBI Act.

The S.31 of RBI Act lays down that only the RBI and The Central Govt of India has the power to issue promissory notes payable to the bearer (both demand and order instruments). Also with respect to Bills of Exchange a Bill can be drawn payable to the bearer (but not on demand).

S.32 prescribes punishment for the violation of any provisions of s. 31.

  1. The holder of the instrument becomes entitled to sue in his own name in matters related to that instrument.
  2. The property passes to the transferee for value, notwithstainding any defect in the title of the transferor.

    Transferability:
    The first characteristic of a negotiable instrument is that it is transferable from one person to another any number of times. Transfer of a negotiable instrument operates through two modes: Transfer to the bearer or Transfer to a specific person ( called transfer to order)

  1. A negotiable instrument can be payable to the bearer which means that anyone who has the hold of the instrument is the owner of it.
  2. Or it can be transferred to order meaning that the instrument can be transferred to a specific person by writing his name on the instrument (endorsement).
  1. Consideration:
    Its is presumed by law that every Negotiable instrument was drawn for a consideration and in case it was accepted, transferred or indorsed, the same was done for a consideration as well. While in the Indian Contract Act, the burden of proving the consideration lies on the plaintiff, the NI act shifts the burden of disproving the consideration lies on the defendant.
  2. Date: it is presumed that every N.Instrument bearing a date was drawn on that date.
  3. Time of acceptance:
    It shall be presumed that every accepted bill of Exchange was accepted within a reasonable time after its draw date and it and its maturity.
  4. Time of Transfer: Unless, the contrary is proven, it shall be presumed that every transfer of negotiable instrument was made before its maturity.
  5. With regard to the endorsements appearing on a negotiable instruments appearing on a negotiable instrument, it shall be presumed that they were made in the order in which they appear on the instrument.
  6. In case a negotiable instrument is lost, it shall be presumed that the instrument was duly stamped.
  7. Holder is a holder in due course:
    In bona fide transactions, the holder of a negotiable instrument is presumed to be a holder in due course. However in cases of an instrument obtained through fraud or other unlawful means, the burden of proving that the holder is a holder in due course shall lie on the defendant.
  1. Money orders and postal orders, Deposit receipts.
  2. Share certificates;
  3. Dock warrants
  4. Bills of lading, etc

Three types of Negotiable Instruments:
S.4- Promissory note:

Note: Section 1 of the Act saves from application of this act to other customary negotiable instruments (e.g hundis) drawn according to their prevalent usages and bars the application of this act to such instruments (unless the instrument by explicit declaration suggests otherwise)

Definition:
A promissory note is an instrument in writing (not being a bank note or currency note) containing an unconditional undertaking signed by the maker, to pay certain sum of money only to a certain person, or to the order of a certain person or to the bearer of the instrument.

  1. Maker of the promissory note I.e the person who promises to pay.
  2. Payee- in favour whom the note is drawn. I.e the person who is to receive the payment.

  1. The promissory note must be in writing.
  2. The promissory note must contain an express promise to pay: A mere acknowledgement of debt without any promise to pay does not constitute a promissory note. In this case the usage of the words “promise to pay” is not important. However the document must indicate an intention of payment. Intention is the most important factor in such a determination. (case: Mohammad Akbar Khan v. Attar Singh)

According to Illus (b) to s. 4: A promissory note wherein a debt is acknowledged and specified to be payable on demand constitutes a valid promissory note.

  1. Date and place on which the pronote was drawn is generally mentioned although not essential in law.
  2. Stamping of promissory note is necessary as per the provisions of the Indian Stamp Act in order to be admissible in Evidence.


S.5 Bill of exchange (BoE):
Definition: S.5 defines bill of Exchange as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of certain other person or the bearer of the instrument.

  1. Drawer: The person who is the maker of the bill.
  2. Drawee: On whom the bill is drawn I.e the person who is directed to make a payment.
  3. Payee: The person to whom the payment is to be made.
  1. Must be in writing.
  2. Must contain an order to pay. The order is in an imperative sense suggesting a command or direction unlike a promissory note which is only a promise.
    Case: Ruff v. Webb: The order must be an imperative and not a mere request although it may be politely worded.
  3. The order must be unconditional.
    Case: Dankes v. Deloraine: It was held that a promissory note payable out of a particular fund is conditional and invalid, since it is not certain that the fund will be in existence or sufficient when the Bill of Exchange becomes payable.
  4. The Bill must be signed by the drawer.
  5. The parties (Drawer, Drawee, Payee) must be certain. One person can assume the role of two parties ( Drawer/Drawee can be a same person, Drawer/Payee can be the same person)
  6. The Sum payable must be certain and in terms of Money Only.
  1. Number of Parties: A promissory note involves only two parties. Maker (debtor) and Payee (creditor)
    While a bill of Exchange involves three parties: Drawer, Drawee and Payee.
  2. A promissory note involves a promise.
    While a BoE involves an order/direction.
  3. Acceptance: Acceptance is not required in a promissory note while a Bill of Exchange needs to be accepted by the drawer.
  4. Position of the Maker: The maker of a promissory note stands in an immediate relation with the payee, whereas the drawer of a bill of exchange stands in an immediate relation with the drawee and not the payee.
  5. Payable to bearer: A promissory note cannot be made payable to the bearer while a BoE can be issued to a bearer (provided that it is not payable on demand: S.31 RBI Act)
  6. Notice of Dishonour is required in a BoE but not in a promissory Note.


S.6 Cheque:
Acc to S. 6: A cheque is a bill of exchange drawn on a specified Banker and not expressed to be payable otherwise than on demand. It includes electronic image of a truncated cheque and a cheque in electronic form.

  1. A cheque is always drawn on a bank. I.e the drawee of a cheque is always a bank.
  2. A cheque is always payable on Demand.

Ante dated Cheque: When the cheque is drawn after the date Mentioned on the cheque. (I.e the cheque becomes payable in the past)

Post Dated Cheque: When the cheque is drawn before the date mentioned on the cheque. (the cheque becomes payable in the future.

Case: Anil Kumar Sawhney v. Gulshan Rai: It was held that a post dated cheque remains a bill of exchange till the date shown on its face, it is only from that date it becomes payable on demand and hence a cheque.

The Negotiable Instrument Amendment act 2015, substituted Explanation 1 to S.6 and included an electronic cheque and a truncated cheque within the meaning of S.6 to bring it in conformity with IT Act 2000.

  1. A cheque is always payable on demand but a Bill of Exchange Payable on demand is Prohibited by the RBI Act.
  2. A cheque is always drawn on a Banker but a Bill of exchange can be drawn on any person/bank.
  3. A cheque does not require acceptance while a bill of exchange does.
  4. A cheque is not required to be stamped while a Bill of Exchange is necessary to be stamped.
  5. A cheque can be crossed to curtail its negotiability while a Bill cannot be crossed.


Liabilities of Parties in a Negotiable Instrument:

    Sec 30 Liability of Drawer of Bill
    According to this section, In case of Dishonour of the Bill by the drawee or the acceptor, the drawer is bound to compensate the holder/payee the due amount. However, this liability arises only when a notice of dishonour is received by the drawer.

  1. When the requirement of notice is expressly waived by the drawer.
  2. When the drawer has countermanded (prohibited) payment on the Bill.
  3. Notice is not necessary when the drawer could suffer no damage for the want of notice.
  4. When the drawer cannot be found or located.
  5. Notice is not necessary when the acceptor(drawee) and the drawer are the same person.
  6. Notice is not required in a promissory note which is non-negotiable.
  7. Notice is not required if the drawee/maker has promised to pay unconditionally the amount due.

Also, in case of a bill presented to the drawee for acceptance after maturity, the drawee is bound to pay the amount on demand.

  1. There must be no contract curtailing the liability of the indorser.
  2. The indorsement should not in itself contain words excluding or limiting the indorsers liability.
  3. A notice of dishonour is required to be received by the indorser.


5. Liability of Intervening Parties:
S.36 provides that every until satisfaction of the negotiable instrument, every prior party is liable to the holder in due course. All parties include the maker/drawer/drawee-acceptor and all the indorsers.

S.37. provides:
The maker of a note and the drawer of a cheque are liable to the holder as principal debtors and all other parties are liable as sureties.

  1. By non-acceptance in case of a Bill: s. 91
  2. By non-payment in cases of all three instruments: s.92
  1. Dishonour by Non acceptance: s. 91
    A bill is said to be dishonoured by non-acceptance:
    1. When a bill is properly presented for acceptance, and the drawee does not accept it.
    2. When presentment for acceptance is excused and the bill is not accepted.
    3. When the drawee is incompetent to contract, the bill may be treated as dishonoured.
    4. When the drawee gives qualified/conditional accpetance, the bill may be treated as dishonoured.

      Notice of Dishonour: S.93
      According to the section, when a negotiable instrument is dishonoured, the holder must notify the party/parties to which the holder seeks to make liable.

    1. Waiver: When the requirement of notice is waived by the party entitled
    2. When the drawer has countermanded payment, a notice is not required to make the drawer liable.
    3. When the party entitled to notice could not suffer damage for want of notice.
    4. When the entitled party cannot be found.
    5. When the drawer and acceptor are the same.
    6. In case of a non-negotiable promissory note.
    7. When the party liable, knowing the facts, agrees to pay the due amount.

    S.138 to 142 were inserted by the Banking, Financial Institutions and Negotiable Instruments Amendment Act of 1988. Ans s. 143 to 147 were added by the amendment act of 2002.

    Sec 138 provides that:
    -when a cheque is drawn by a person for any amount of money on an account maintained by him with a banker-
    For the payment of such amount to any person for the discharge of any debt or liability;

    And if such cheque is returned by the bank unpaid due to:
    Insufficiency of Funds

    Or Exceeding the overdraft limit.

    In such a case, the drawer shall be deemed to have committed an offence.

    And the Punishment for such offence shall be an imprisonment of upto two years or with a fine (2x of the cheque) or both.

    Case: Modi cements v Kuchil Kumar: Countermanding payment by the drawer shall also amount to dishonour by non-payment under s.138.

    1. The cheque must be presented by the holder to the drawee bank within 6 months or within the validity of the cheque.
      Case: Anil Kumar Sawhney v. Gulshan Rai: It was held that a post dated cheque is just a bill of exchange untill its maturity and therefore it dosent attract the provisions of 138 untill its maturity.
    2. Notice of Dishonour/Demand Notice: The payee or holder of the cheque must make a demand for payment to the drawer thorough a written notice. This notice should be given within 30 days of the receipt of information of dishonor.

    S.139- presumption in favour of the holder:
    When a cheque is dishonoured, it shall be presumed by a rebuttable presumption that the cheque was recieved in discharge of a debt or laibility.

    1. A written complaint needs to be filed by the payee/holder.
    2. The complaint must be made within 30 days from the arising of cause of action (under 138 proviso c- after the non-payment upon notice).
    3. The complaint must be made to the Court of a Metropolitan Magistrate or JM Class 1. Courts lower than this do not have the power to take cognizance of offences under 138.
    1. Drawing Of Cheque;
    2. Presentation Of Cheque To The Bank;
    3. Dishonour By The Drawee Bank;
    4. Giving Notice To Drawer By Demanding Payment; And
    5. Failure Of Drawer To Make Payment Within 15 Days Of Receipt Of Notice.

    However, a superior bench in Dasharath Rathore v. State of Maharashtra overruled this and held that only the court in whose local jurisdiction the cheque is dishonoured by the drawee bank/branch has jurisdiction.

    This decision created a lot of problems with jurisdiction and Vide 2015 amendment to Negotiable Instruments Act, the above judicial dictum was nullified and clause 2 to s.142 was inserted.

    1. In case where the cheque is delivered for collection through an account, the branch of the bank where the payee or holder in due course, maintains the account, is situated; or
    2. Where the cheque is presented for payment by the payee or holder in due course, otherwise through an account, the branch of the drawee bank where the drawer maintains the account, is situated.

    S.147: Compounding
    According to s 147 every offence under NI Act is compoundable upon the compromise and consent of the parties.

    Case: Meters and Instruments P.LTD v . Kanchan Mehta:
    Generally compounding requires the consent of both parties, but where it appears to the court that the complainant has been duly compensated, it in the interests of justice can close the proceedings and discharge the accused.

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