Module VI
Commercial Laws
Negotiable Instruments Act
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ANALYSIS AND STRATEGY
Commercial Laws are a part of Unit VI of the prescribed syllabus for UGC-NET. It covers
various aspects like Contracts, Partnerships, the Sale of Goods, Negotiable lnstruments etc.
and comprises the statutes that govern these aspects respectively
The Negotiable Instrument Act, 1881 is the statute that governs the Negotiable Instruments
and related issues in India and the syllabus mentions the same. The learners can expect
anywhere from -2 questions specifically from this Act. The questions can vary from the level
easy'to moderate:. Ordinarily, questions are direct provision based
The learners can easily ace this Unitifthey are thorough with the Bare provisions, concepts.
An effort has been made to extensively cover all the relevant and important aspects of the
Act based on anadysis of the syllabus and previous year papers. A dedicated and thorough
study of the Reading Resource can ensure a good score in this Unit.
Table of Contents
Negotiable Instruments Act, 1881
3
Key Definitions
Holder and Holder in Due Course
Negotiation of Negotiable Instruments
Penalties 8
Other Important Provisions
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Negotiable Instruments Act, 1881
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Negotiable Instruments mean signed documents promising the payment of a certain
amount of money to the
assignee. The term
negotiable refers
the fact that the note in
to
question can be transferred or assigned to another party; non-negotiable describes one
that is firmly established and cannot be adjusted or amended.
The statute that governs the provisions regarding Negotiable Instruments in India is the
Negotiable Instruments Act, 1881. This Act came into force on 1" March, 1882. This Act
grants legal recognition to different mercantile instruments. It not only regulates different
kinds of Negotiable Instruments but also liabilities and obligations of different parties
***
Key Definitions
Section 13 of the Act provides that a Negotiable Instrument means:
(a) A promissory note,
(b) A bill of exchange or
(c) A cheque, payable either to order or to the bearer.
1. Promissory Note
A Promissory Note is an instrument in writing (not being a bank-note or a
currency-note) containing an unconditional undertaking. signed by the maker, to pay a
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certain sum of money only to, or to the order of, a certain person, or to the bearer of the
instrument. (Section 4)
Essentials ofa Promissory Note
I t should be in writing.
. I t should contain an unconditional undertaking.
I t should be signed by the maker.
I t should be made to pay a certain sum.
I t should be a promise to pay money and nothing else.
There are two parties in the making of a Promissory Note:
Maker: A person who makes the Promissory note and promises to pay.
Payee: The person to whom the promise to be paid is made
2. Bill of Exchange
A "bill of exchange" is an instrument in writing containing an unconditional order,
directing a certain person certain of money only to,
signed by the maker, to pay a sum or
to the order of, a certain person or to the bearer of the instrument. (Section 5)
Essentials ofa Bill ofExchange
The parties must becertain.
I t should be in writing.
I t should beunconditional.
.The exact time of payment should be mentioned in the bil.
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. I t must indicate a drawee who should be called on either to accept or pay it.
There are three parties involved in the making of a Bill of Exchange:
.The Drawer: The person who makes the bill (or who promises to pay).
.The Drawee: The person to whom the bill is presented for payment or who is
directed to pay. When he accepts the bill, he becomes an acceptor.
.The Payee: The person to whom the payment is to be made.
3. Cheque
A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand and it includes the electronic image of a truncated
cheque and a cheque in the electronic form. ( Section 6)
A cheque has two conditions in addition to that of a Bill of Exchange:
. I t must bedrawn upon a particular banker.
I t is payable only on demand, always.
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Holder and Holder in Due Course
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Whenever a person is:
Entitled to the possession of a Negotiable Instrument in his own name, and
I s entitled to receive or recover the amount due from the parties,
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Such person is known the Holder of that
a as
Negotiable Instrument. (Section 8) Broadly
speaking. a holder is the owner of the Negotiable Instrument.
The term possession does not signify mere physical control over the instrument. It means
that the person is entitled to the same and is a de jure holder. For example, if a thief
steals a Cheque from somewhere, He will not be deemed a holder, despite his being in
possession of the Cheque.
Holders in due course are an exception to the maxim nemo dat quod non-habet (no
one can transfer a better title than he himself has). Holders in due course hold a good title
to any Negotiable Instrument despite the defect in the title of the person from whom he
received it.
Section 9 lays down the following conditions for a person to be treated as a Holder in due
course:
I s the possessor of a promissory note, bill of exchange or cheque.
Must have become such a possessor for consideration.
Has obtained the instrument before the amount mentioned in it became payable.
Has no sufficient cause to believe that any defect existed in the title of the person
from whom he derived his title.
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-. ----...---- -----. -.* --------- ***************** ****"***
Negotiation of Negotiable Instruments
***
When a Negotiable Instrument is transferred from the holder to any other person in order
to make the transferee liable to receive the payments (and to make him the holder
henceforth), the instrument is said to have been negotiated.. (Section 14)
A Negotiable Instrument can be negotiated in two ways:
. If the Instrument is payable to Bearer, it can be negotiated by Delivery. (Section
47)
2. If the Instrument is payable upon Order, it can be negotiated by Indorsement
and Delivery. (Section 48)
Indorsement
Indorsement means signature at the back of the back of the instrument to transfer the
rights to another person (Section 15).
Following are the most common types of Indorsements:
1. Indorsement in Blank: Indorser signs his name only. [Section 16 (1)]
2. Indorsement in Full: When the indorser adds a direction to pay the amount
mentioned in the instrument to, or to the order of, a specified person. (Section 16
(
Restrictive Indorsement: When the Indorser restricts or excludes the right of the
Indorsee to further negotiate the instrument. (Section 5o)
4. Sans Recourse Indorsement: When the Indorser excludes his own liability.
(Section 52)
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5. Conditional Indorsement: When the Indorsee's right to receive payment is made
conditional upon the happening of some event. (Section 52)
Penalties
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Chapter XVIl of the Negotiable Instruments Act, 1881 provides for penalties in cases of
Dishonour of Cheque for insufficiency of funds in the account. This provision has been
added to encourage the use of Cheques and that adequate remedies are available to those
who are defrauded by others.
A Cheque is said to be dishonoured when the bank refuses to pay the amount upon
presentment of the Cheque. Section 138 of the Act provides for the Dishonour of Cheque.
Section 138 was introduced as a criminal offence in 1989 by way of an amendment to the
Negotiable lInstruments Act, 1881.The main objective of introduction of this section was to
encourage the use of cheques and increasing the credibility of transactions through
cheques by making the dishonoring of the cheques as an offence.
This section provides that whenever a person draws any cheque on an account
maintained by him with a banker for payment ofany amount of money to another person
from that account in lieu of any debt or liability due on him and that cheque is returned
by the bank unpaid, either:
Due to insufficient amount of money in that account, or
. The amount payable exceeds the amount arranged to be paid from that account by
an agreement made with that bank.
In such cases, the person shall be deemed to have committed an offence.
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Punishment: Imprisonment for a term which may be extended to two years, or with fine
which may extend to twice the amount of the cheque, or with both.
Exceptions:
Nothing will constitute an offence unless:
(a) the cheque has been presented to the bank within a period of six 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 for the payment of the said amount of money by giving a notice; in writing, to
the drawer of the cheque, within thirty days of the receipt of information by him from the
bank regarding the return of the cheque as unpaid; and
(c) the drawer of such cheque fails to make the payment of the said amount of money to
the payee or, as the case may be, to the holder in due course of the cheque, within fifteen
days of the receipt of the said notice.
Any person who has been accused of having committed such an ofence shall be
presumed to be guilty. Section 139 of the Act raises presumption in favour of the holder
and it shall be presumed that he had received such a cheque for payment of any debt or
liability, either in whole or in part.
offences by Companies: Where such an offence, as aforesaid has been committed by a
Company, every person who was in charge of, and was responsible to, the company for the
conduct of its business at the time of commission of the of the Offence, as well as the
company, shall be deemed to be guilty and shall be liable to be proceeded against and
punished accordingly. (Section 141)
Exceptions:
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N o person shall be liable under this Act if he proves that the offence was
committed without his knowledge, or that he had exerecised all due diligence to
prevent the commission of such offence.
. I n those cases where where a person is nominated as a Director of a company by
virtue of his holding any office or employment in the Central Government or State
Government or a inancial corporation owned or controlled by the Central
Government or the State Government, as the case may be, he shall not be liable for
prosecution under this Chapter.
All these offences are compoundable in nature. ( Section 147)
Other Important Provisions
Section Provision
Section u - landA
Inland
promissory note, bill
of exchange or cheque drawn or made in
India, and made payable in, or drawn upon any person resident, in
Instrument
India shall be deemed to be an inland instrument.
Any such instrument not so drawn, made or made payable shall be
Section 12- Foreign
deemed to be a foreign instrument.
Instrument
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Section 17 Where an instrument may be construed either as a promissory
Ambiguous note or bill of exchange, the holder may at his election treat it as
Instruments either, and the instrument shall be thenceforward treated
accordingly.
Section 18 If the amount undertaken or ordered to be paid is stated
and in words, the stated in words
differently in figures amount
shall be the amount undertaken or ordered to be paid.
Where one person signs and delivers to another a paper stamped
Section20-
InchoateStamped in accordance with the law relating to negotiable instruments then
Instruments in forece in India, and either wholly blank or having written
thereon an incomplete negotiable instrument, he thereby gives
prima facie authority to the holder thereof to make or complete, as
the case may be, upon it a negotiable instrument, for any amount
specified therein and not exceeding the amount covered by the
stamp. The person so signing shall be liable upon such
instrument, in the capacity in which he signed the same, to any
holder in due course for such amount: provided that no person
other than a holder in due course shall recover from the person
delivering the instrument anything in excess of the amount
intended by him to be paid thereunder.
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Section 8 - (a) consideration:-that every negotiable instrument was made
Presumption as to or drawn for consideration, and that every such instrument, when
negotiable it has been accepted, indorsed, negotiated or transferred, was
Instruments accepted, indorsed, negotiated or transferred for consideration;
(b) as to date:-that every negotiable instrument
bearing a date
was made or drawn on such date;
(c) as to time of acceptance:-that accepted bill
every of
exchange was accepted within a reasonable time after its date and
before its maturity:
(d) as to time of transfer:-that every transfer
of a negotiable
instrument was made before its maturity;
order of indorsements:-that the indorsements
(e as to
appearing upon a negotiable instrument were made in the order in
which they appear then on;
(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 inst rument has been obtained from its lawful owner,or
from any person in lawful custody thereof, by means of an offence
or fraud, or has been obtained from the maker or acceptor thereof
by means of an offence or fraud, or for unlawful consideration, the
|
burden of proving that the holder is a holder in due course lies
upon him.
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Section 19- In suit upon instrument which has been dishonoured,
a an
the
Presumption on Court shall, on proof of the protest, presume the fact of dishonour,
proof of protest unless and until such fact is disproved.
Section 142- () Notwithstanding anything contained in the Code of Criminal
Cognizanceof Procedure, 1973
offences
(a) no court shall take cognizance of any offence punishable under
section 138 except upon a complaint, in writing, made by the payee
or, as the case may be, the holder in due course of the cheque;
(b) such complaint is made within one month of the date on
which the cause of action arises under clause (c) of the proviso to
section 138: Provided that the cognizance of a complaint may be
taken by the Court after the prescribed period, if the complainant
satisfies the Court that he had suficient cause for not making a
complaint within such period.
(c) no court inferior to that of a Metropolitan Magistrate or a
Judicial Magist rate of the first class shall try any offence
punishable under section 138
(2) The offence under section 138 shall be inquired into and tried
only by a court within whose local local jurisdiction -
(a) if the cheque is delivered for collection through an account, the
branch of the bank where the payee or holder in due course, as the
case may be, maintains the account, is situated; or
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|(6) ifthe cheque is presented for payment by the payee or holder
in due course, otherwise through account, the branch of the
an
drawee bank where the drawer maintains the account, is situated.
Section 143 Power
-
() Notwithstanding anything contained in the Code
of Crimina!
ofCourt to try cases Procedure, 1973 (a of 1974) all ofences under this Chapter shall be
summarily tried by a Judicial Magistrate of the first class or by a Metropolitan
Magistrate and the provisions of sections 262 to 265 (both
inclusive) of the said Code shall, as far as may be, apply to such
trials:
Provided that in the case of any conviction in a summary trial
under this section, it shall be lawful for the Magist rate to pass a
sentence of imprisonment for a term not exceeding one year and
an amount of fine exceeding five thousand rupees:
Provided further that when at the commencement of, or in the
course of, a summary trial under this section, it appears to the
Magistrate that the nature of the case is such that a sentence of|
imprisonment for a term exceeding one year may have to be
passed or that it is, for any other reason, undesirable to try the
case summarily, the Magistrate shall after hearing the parties,
record an order to that effect and thereafter recall any witness who
may have been examined and proceed to hear or rehear the case in
the manner provided by the said Code.
(2) The trial of a case under this section shall, so far as
practicable, consistently with the interests of justice, be continued
from day to day until its conclusion, unless the Court finds the
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the following day to be necessary
adjournment of the trial beyond
for reasons to be recorded in writing.
Every trial under this section shall be conducted as
3 made to
endeavour shall be
expeditiously as possible and an
conclude the trial within six months from the date of filing of the
complaint.
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