Introduction
The Negotiable Instruments Act, 1881 governs the law relating to negotiable instruments in India. These instruments are crucial in commercial transactions, providing a reliable and standardized means of transferring money.
The Act defines the types of negotiable instruments, their characteristics, and the legal obligations of parties involved in their execution and transfer.
Meaning of Negotiable Instrument
A negotiable instrument is a document that guarantees the payment of a specific amount of money, either on demand or at a set time, and is transferable by endorsement or delivery.
Key Features:
- Freely transferable
- Holder in due course gets better title
- Presumption of consideration
- Written and signed by the maker/drawer
Types of Negotiable Instruments
The Act specifically recognizes three types:
- Promissory Note (Section 4)
A written instrument containing an unconditional promise to pay a certain sum of money to a specified person or bearer. - Bill of Exchange (Section 5)
An order by one person to another to pay a certain sum to a third party. - Cheque (Section 6)
A bill of exchange drawn on a banker and payable on demand.
Parties to a Negotiable Instrument
- Promissory Note: Maker and Payee
- Bill of Exchange: Drawer, Drawee, Payee
- Cheque: Drawer (account holder), Drawee (bank), Payee
Endorsement and Delivery
Endorsement is the act of signing the back of the instrument to transfer it to another person.
Delivery is essential for the completion of negotiation.
Types of Endorsements:
- Blank
- Special
- Restrictive
- Conditional
Holder and Holder in Due Course
- Holder: A person entitled to possess and receive the amount.
- Holder in Due Course (HDC): One who takes the instrument for consideration, before maturity, in good faith. HDC has special protection under the law.
Dishonour of Negotiable Instruments
An instrument is dishonoured if the drawee refuses to accept or pay.
- Dishonour by Non-Acceptance (Bills only)
- Dishonour by Non-Payment (Bills, Promissory Notes, Cheques)
Notice of Dishonour must be given by the holder to the drawer and previous endorsers.
Noting and Protest
- Noting: A formal record of dishonour made by a Notary Public.
- Protest: A formal certificate issued by the Notary Public detailing the facts of dishonour.
Penalties under Section 138 (Dishonour of Cheque)
Section 138 of the Act provides criminal liability for dishonour of cheques due to insufficient funds.
Essentials:
- Cheque issued for a legally enforceable debt or liability
- Dishonoured due to insufficient funds
- Notice issued within 30 days of receiving dishonour information
- Payment not made within 15 days of notice
Punishment: Up to 2 years imprisonment or fine up to twice the cheque amount or both.
Presumptions under the Act
Presumptions are made under Sections 118 and 139 regarding:
- Consideration
- Date
- Time of acceptance
- Endorsement
- Holder in due course
These presumptions can be rebutted.
Mind Map (Text Format)
Negotiable Instruments Act, 1881
→ Types of Instruments
→ Promissory Note
→ Bill of Exchange
→ Cheque
→ Essential Elements
→ Writing, Signature, Transferability
→ Parties Involved
→ Drawer, Drawee, Payee
→ Endorsements
→ Blank, Special, Restrictive
→ Holder & HDC
→ Rights & Protections
→ Dishonour
→ Non-Acceptance, Non-Payment
→ Section 138
→ Cheque Bounce Offence
→ Presumptions
→ Under Sections 118 & 139
→ Legal Remedies
→ Civil & Criminal Proceedings
Situation-Based Questions
Q1. A cheque is issued by A to B in repayment of a loan. The cheque bounces due to insufficient funds. What remedy does B have?
Answer:
Under Section 138, B can send a notice within 30 days. If A fails to pay within 15 days of notice, B can file a complaint in court within 1 month.
Q2. X receives a cheque as a gift. Is he a holder in due course?
Answer:
No. To qualify as a holder in due course, the holder must have received the instrument for consideration.
Frequently Asked Questions (FAQs)
What is a Negotiable Instrument?
A negotiable instrument is a transferable document guaranteeing the payment of a certain amount of money either on demand or at a future date.
Can a cheque be endorsed multiple times?
Yes. A cheque can be endorsed multiple times unless it is marked “Account Payee Only”.
Is a post-dated cheque valid?
Yes, but it is payable only on or after the date mentioned.
Can a criminal case be filed for cheque bounce?
Yes, under Section 138 of the Negotiable Instruments Act.
What is the time limit for filing a cheque bounce case?
Within 1 month from the expiry of 15 days given in the legal notice.
Case Citations
- K. Bhaskaran v. Sankaran Vaidhyan Balan, (1999) 7 SCC 510
– Explained ingredients of Section 138. - M.M.T.C. Ltd. v. Medchl Chemicals & Pharma (P) Ltd., (2002) 1 SCC 234
– Presumption under Section 139 in favour of the holder. - Rangappa v. Sri Mohan, (2010) 11 SCC 441
– Presumption under Sections 118 and 139 reaffirmed.