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Law of Negotiable Instruments Act 1881

By Team Legal Helpline India, May 2, 2019

Law of  Negotiable Instruments Act 1881 came into being as an Act to define and amend the law relating to promissory notes, bill of exchange and cheques. The chief object behind the Law of Negotiable Instruments Act 1881  was to legalize the system under which Negotiable Instruments pass from one hand to another in negotiations like ordinary goods which can be used as exchange. In India, mostly the English law is followed as the
Law of Negotiable Instruments Act 1881 with some adoptions and modifications.

The law of Negotiable Instruments Act 1881 is not the law of a single country but it applies to the whole of the commercial world. The Law of Negotiable Instruments Act 1881 is bye and large adopted in most of the countries on the same pattern in all the countries.

Law of Negotiable Instruments Act

The earliest attempt to codify a law relating to mercantile uses was made in France in the year 1818. The  French Commercial Code was subsequently adopted as a model by many other countries. In England, the movement for such a codification of law relating to mercantile uses materialized only in 1880 with Bills of Exchange Act, 1882. 

In India, the Law of Negotiable Instruments was enacted under the name and style of Law of Negotiable Instruments Act 1881. The law is more than 135 years of existence has undergone many amendments to suit the moving commercial world. Till date, 27 amendments have been made in the Law of Negotiable Instruments Act 1881.   Section 5 of the N.I. Act 1881 provides the definition of a bill of exchange as under:

S.5. Bill of exchange

A “bill of exchange” is 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, a certain person or to the bearer of the instrument.A promise or order to pay is not “conditional”, within the meaning of this section and section 4, by reason of the time for payment of the amount or any installment thereof being expressed to be on the lapse of a certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain.

The sum payable may be “certain’’, within the meaning of this section and section 4, although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an installment, the balance unpaid shall become due.

The person to whom it is clear that the direction is given or that payment is to be made may be a “certain person”, within the meaning of this section and section 4, although he is mis-named or designated by description only.

               

The cheque has been defined in section 6 of the Negotiable Instruments Act and as per section 6 –

S.6 . 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.

Explanation I. — For the purposes of this section, the expressions—

                (a)  “a cheque in the electronic form” means a cheque drawn in electronic form by using any computer resource and signed in a secure system with digital signature (with or without biometrics signature) and asymmetric crypto system or with electronic signature, as the case may be;]

                (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 transmission, substituting the further physical movement of the cheque in writing.

                Explanation II. For the purposes of 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.]

                [Explanation III .—For the purposes of this section, the expressions “asymmetric crypto system”, “computer resource”, “digital signature”, “electronic form” and “electronic signature” shall have the same meanings respectively assigned to them in the Information Technology Act, 2000(21 of 2000).]

Out of the three specific type of instruments referred in the Negotiable Instruments Act namely the promissory note bill of exchange and cheques it was only the Cheques which became one of the most common instruments for trade and commerce because of certainty and convenience.

Negotiable Instruments has been defined in section 13 of the act and if extracted the way it exists would read:-

S.13. ‘‘Negotiable instrument”

(1)  A “negotiable instrument” means a promissory note, bill of exchange or cheque payable either to order or to bearer.

Explanation (i).—A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable or which is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable.

Explanation (ii).—A promissory 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 originally or by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.]

(2)  A negotiable 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.]

Now the Cheque is the most accepted negotiable instrument and the law has been enacted under Section 138 of the Negotiable Instruments Act to deal with the eventualities of default in the payment of the money due under the cheque. The aforesaid section is reproduced for ready reference here:

Section 138 in The Negotiable Instruments Act, 1881

18 [ 138 Dishonour of cheque for insufficiency, etc., of funds in the account. —Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that 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 that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for 19 [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: Provided that nothing contained in this section shall apply 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, 20 [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.

Explanation.— For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.]

The return of cheque has been considered as an offense. The procedure for dealing it has been described under the Law of Negotiable Instruments Act 1881. We have explained the legal proposition in details to understand the import. The process is also explained in another blog which can be read here:https://www.legalhelplineindia.com/law-related-to-bouncing-of-cheque/

We provide all services under the Law of Negotiable Instruments Act 1881. We have an expert team of Indian lawyers to handle cases of cheque bouncing, contact us with full confidence for any such services. Online services for issuance of legal notice under Section 138 of the Negotiable Instruments Act at very nominal costs.

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