2/28/23, 4:55 PM Negotiable Instruments Act, 1881 - iPleaders

Negotiable Instruments Act, 1881

By Rachit Garg - December 8, 2022

This article has been written by Oishika Banerji of Amity Law School, Kolkata. This article discusses the
Negotiable Instruments Act, 1881, which governs the functioning of promissory notes, bills of exchange, or
cheques payable either to the order or to the bearer, in the entire territory of India.

It has been published by Rachit Garg. 

Table of Contents 
1. Introduction
2. All you need to know about negotiable instrument
2.1. Common traits of negotiable instruments
2.2. Key features of negotiable instruments in the Negotiable Instruments Act of 1881 
2.2.1. Promissory Note (Section 4 of the Negotiable Instruments Act, 1881)
2.2.2. Bill of Exchange (Section 5 of the Negotiable Instruments Act, 1881)
2.2.3. Cheque (Section 6 of the Negotiable Instruments Act, 1881)
2.2.3.1. Cheque and post-dated cheque
2.2.3.2. Different types of cheques 
2.3. Difference between promissory note and bill-of-exchange 
2.4. Difference between cheque and bill-of-exchange
2.5. Difference between holder and holder in due course
3. Structure of the Negotiable Instruments Act, 1881
3.1. Holder in due course
3.2. Fact of dishonour 
3.3. Presumption as to service of notice 
3.4. Inchoate instruments
3.5. Requirement of stamp
3.6. Liabilities under the Negotiable Instruments Act 1881
3.7. Presumptions under Section 118 and Section 119 of the Negotiable Instruments Act, 1881
3.8. The penal provisions of the Negotiable Instruments Act, 1881
4. An overview of Section 138 of the Negotiable Instruments Act, 1881
4.1. Conditions to commit an offence under Section 138 of the Negotiable Instruments Act, 1881
4.2. Decriminalisation of Section 138 of the Negotiable Instruments Act, 1881
5. Speedy disposal of negotiable instrument cases in recent times
6. Recommendation for better functioning of the Negotiable Instruments Act, 1881
7. Conclusion 
8. References 

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Introduction
A negotiable instrument is a piece of paper that guarantees the payment of a certain sum of money, either
immediately upon demand or at any predetermined period, and whose payer is typically identified. It is a
document that is envisioned by or made up of a contract that guarantees the unconditional payment of money
and may be paid now or at a later time. 

The term has several meanings based on how it is employed in the implementation of various laws, as well as
depending on the nation and environment in which it is used. Promissory notes, bills of exchange, and cheques
are the three types of instruments covered by the Negotiable Instruments Act of 1881. Terminology in oriental
languages for financial instruments like hundies is not included in this Act’s provisions. 

Technology led to the recognition of two additional payment methods, NEFT (National Electronic Fund Transfer)
and RTGS (Real Time Gross Settlement). It is the Payment and Settlement Systems Act of 2007, which contains
provisions for the law governing these electronic transfer methods. 

The Negotiable Instruments Act of 1881 came into force on 1st March 1881, and it extends to the whole of
India. This article discusses the different aspects of the legislation while also pointing out the pressing challenges
that surround the Act in current times. 

All you need to know about negotiable instrument

The word “instrument” refers to a written document by virtue of which a right is created in favour of some
individual. The word “negotiable” indicates transferable from one person to another in exchange for payment.
Therefore, any document that confers ownership over a quantity of money and that can be transferred (like
currency) by delivery is considered to be a “negotiable instrument.” Consequently, a document that can be
delivered is a negotiable instrument. The Negotiable Instruments Act of 1881 does not define the phrase
“negotiable instrument” as such; at most, Section 13 of that legislation indicates that “negotiable instrument”
refers to a promissory note, bill of exchange, or cheque payable to order or to the bearer.

The main distinction between a negotiable instrument and other documents (or a chattel) is that, in the case of
a negotiable instrument, the transferee acquires a good title in good faith and for consideration even though the
transferor’s title may have a flaw; in contrast, in the case of other documents, the transferee receives a similar
title (or, to put it another way, no better title) than the transferor.

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Common traits of negotiable instruments

1. Negotiable instruments are transferable by nature: A negotiable instrument may be freely transferred
as many times as necessary until it reaches maturity. Delivering the instrument is sufficient if it is “payable to
the bearer.” However, if it is “payable to order,” it is accepted upon delivery and endorsement. In addition to
becoming entitled to the money transferred with a negotiable instrument, the transferee also gains the ability
to transfer the instrument again.

2. Having an independent title: When it comes to negotiable instruments, the usual rule that states that no
one can grant a superior title than he or she possesses does not apply. If the transferor had gained a
negotiable instrument by fraud but the transferee had acquired it in good faith (bona fide) for value, the
transferee would have a good title with regard to that instrument. As a result, the title of the transferee in
relation to a negotiable instrument is separate from the title of the transferor. Additionally, in circumstances
involving negotiable instruments, the principle of nemo dat quod non habet, according to which no one can
grant a higher title than he himself has, does not apply.

3. Application of presumptions: All negotiable instruments are subject to certain presumptions, such as those
outlined in Sections 118 and 119 of the Negotiable Instruments Act of 1881.

4. Having the right to sue: A negotiable instrument’s transferee (payee) is not required to notify the party
(drawer) responsible for making or honouring the payment under the negotiable instrument of the transfer. In
the event of dishonour, the transferee may bring a claim against a negotiable instrument in its own name
without notifying the original debtor of the transfer, i.e., without telling the original debtor that the transferee
has taken possession of the negotiable instrument.

5. Being certain: A carrier with no bags is a negotiable instrument. A negotiable instrument must be written in
the fewest number of words possible and in such a way as to make the contract as clear-cut and certain as
possible. A negotiable instrument needs to be devoid of any constraints that would significantly hinder its
circulation. A negotiable instrument must also include the payment of a specific (fixed or defined) amount of
money (money only and on a specific time period).

Key features of negotiable instruments in the Negotiable Instruments

Act of 1881 
The key features of the Act of 1881 can be understood by discussing various negotiable instruments covered
under this Act. The same has been provided hereunder.

Promissory Note (Section 4 of the Negotiable Instruments Act, 1881)

1. Regardless of whether it is negotiable or not, an instrument that complies with the definition in Section 4 of
the Negotiable Instruments Act, of 1881 must be regarded as a promissory note.

2. According to Section 4 of the Negotiable Instruments Act of 1881, a written instrument (not a banknote or
currency note) that contains an unconditional undertaking, signed by the maker with the promisor with the
promise to pay a specific amount of money only to, or at the direction of, a specific person, or to the bearer of
the instrument, qualifies as a negotiable instrument.

3. It must be signed, sealed, and written down;

4. There must be a commitment or undertaking to pay; The mere admission of debt is insufficient;

5. There must be no conditions;

6. It must include a commitment to pay just money;

7. A promissory note’s maker and payee, or its parties, must be certain;

8. It is repayable immediately or following a specific date; and

9. The amount owing must be certain.

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Bill of Exchange (Section 5 of the Negotiable Instruments Act, 1881)

1. As per Section 5, a bill of exchange involves three parties: the drawer, the drawee, and the payee;

2. It must be in writing, suitably stamped, and duly accepted by its drawee;

3. There must be a payment order;

4. Unconditional promise or order to pay is required; and

5. Both the sum and the parties must be agreed upon and must be certain.

Cheque (Section 6 of the Negotiable Instruments Act, 1881)

1. A cheque involves three parties: the drawer, the drawee bank, and the payee;

2. It must be in writing and has the drawer’s signature;

3. Payee is confident;

4. The payment is always due upon demand;

5. It must contain a date in order for the bank to honour it; otherwise, it is invalid;

6. The sum must be expressly stated, both verbally and numerically. If the amount undertaken or ordered to be
paid is stated differently in figures and in words, the amount stated in words shall be the amount undertaken
or ordered to be paid, according to Section 18 of the Negotiable Instruments Act, 1881;

7. When a cheque is truncated, it is scanned, an electronic image of the cheque is created, and instead of a
physical cheque being communicated in a clearing cycle, the image is instantly used to replace any further
physical movement of the cheque; and

8. No one other than the Reserve Bank of India or the Central Government may draw, accept, make, or issue
any Bill of Exchange or Promissory Note payable to bearer on demand, according to Section 31 of the Reserve
Bank of India Act, 1934 (RBI Act, 1934). Despite the provisions of the Negotiable Instruments Act of 1881,
Section 31(2) of the RBI Act of 1934 stipulates the same. 

In the case of Surendra Madhavrao Nighojakar v. Ashok Yeshwant Badave (2001), the Supreme Court of India
held the following:

1. A cheque is a bill of exchange written by the owner of an account payable on demand to a bank.

2. A post-dated cheque becomes a cheque under Section 138 of the Negotiable Instruments Act of 1881 on the
date specified on the face of the cheque, and the 6-month term must be calculated from that date for
purposes of Proviso (a) of Section 138 of the Negotiable Instruments Act of 1881. 

3. The cheque is not made payable in any other way than on demand just because the payment date for it has
been moved to a later date.

4. Legal action may be brought against the banker (the drawee in the case of a cheque) if it honours the cheque
before the date stated on the cheque’s face.

5. When a cheque is described as “payable on demand,” the payee of the cheque is referring to “payable at
once.”

Cheque and post-dated cheque

The Hon’ble Supreme Court of India explained the distinction between a cheque and a post-dated cheque with
reference to Sections 5 and 6 of the Negotiable Instruments Act, 1881, in the case of Anil Kumar Sawhney v.
Gulshan Rai (1993). According to the Supreme Court’s ruling:

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1. A post-dated cheque is only a bill of exchange when it is written or drawn; after it is due on demand, it is a
cheque.

2. A post-dated cheque is not cashable before the date printed on the document’s face. It remains a bill of
exchange under Section 5 of the Negotiable Instruments Act of 1881 until the date indicated on it, at which
point it becomes a cheque.

3. Since a post-dated cheque cannot be presented to the bank, the issue of its return would not come up. The
requirements of Section 138 of the Negotiable Instruments Act, 1881 only apply when the post-dated cheque
becomes a “cheque” with effect from the date indicated on the face of the said cheque.

4. A postdated cheque is nevertheless valid as a bill of exchange until the date printed on it. However, as of the
date printed on the face of the said cheque, it qualifies as a cheque under the Negotiable Instruments Act of
1881, and in the event that it is dishonoured, Section 138’s proviso (a) is triggered.

Different types of cheques 

The various types of cheques have been discussed hereunder:

1. Open cheque: With such a cheque, it is possible to obtain cash from the bank’s counter;

2. Bearer Cheque: It is somewhat comparable to an open cheque in that any person carrying or bearing the
bearer cheque may be paid the amount specified in the cheque.

3. Crossed  Cheque: A crossed cheque, which would only be credited into the payee’s bank account, can be
used to reduce the risk associated with open cheques, which are often risky to write and issue. The top left
corner of a cheque can be crossed by drawing two parallel lines across it, with or without writing “Account
Payee” or “Not Negotiable.”

4. Order Cheque: It is a cheque that can have the word “word bearer” cut or cancelled and is made out to a
specific person;

5. Electronic Cheque: It is a cheque that is generated in a secure system, ensuring safety requirements
through the use of digital signatures, and it contains an exact mirror image of the original cheque.

Difference between promissory note and bill-of-exchange 

1. A bill of exchange contains an unconditional order to pay, but a promissory note contains an unconditional
promise to pay.

2. There are only two parties in a promissory note, the maker and the payee, whereas there are three parties in
a bill of exchange, namely, the drawer, the drawee, and the payee.

3. In a promissory note, acceptance is not necessary; in a bill of exchange, however, the drawee must accept.

4. In a bill of exchange, the obligation of the drawer is secondary and contingent upon the drawee’s failure to
pay; in a promissory note, the liability of the drawer or the note’s manufacturer is main and absolute.

Difference between cheque and bill-of-exchange

1. A bill of exchange can be drawn on anyone, including a banker, unlike a cheque, which is drawn on a banker.

2. According to Section 19 of the Negotiable Instruments Act of 1881, a cheque is always payable immediately;
a bill of exchange, however, is either payable immediately or after a certain amount of time.

3. One can cross a cheque to make it non-negotiable, but one cannot cross a bill of exchange.

4. Acceptance is not necessary for a cheque, but it is necessary for a bill of exchange.

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Difference between holder and holder in due course

1. Any individual with the legal right to possess a promissory note, bill of exchange, or cheque in his or her own
name, as well as to receive or obtain payment from the parties thereto, is referred to as the “holder” of that
instrument. A holder who accepts the instrument in good faith, with due care and prudence, for value
(consideration), and before maturity is referred to as a “holder in due course.” In the event of a “holder,”
payment is not essential, and they are also permitted to purchase the instrument after it reaches maturity.

2. A “holder” does not have any particular rights, but a “holder in due course” does have some specific rights.
For instance, a holder in due course cannot use the argument that the amount they filled out on an
instrument exceeded the authority granted. It was decided that an endorsement was irregular and that the
endorsee (AB and Co.) was not a holder in due course, albeit it might be a holder for value, when a bill was
prepared by X in favour of Z and Z further endorsed the bill in favour of AB and Co.

3. The key point is that the holder must have legal custody of the instrument in his own name. The possessor
must be entitled to obtain or recoup that sum. An endorsee, payee, or bearer are all examples of holders. If
someone has entitlement, it indicates that even if they don’t use it, they are still entitled to it and it cannot be
taken away from them. In accordance with Section 8 of the Negotiable Instruments Act of 1881, the holder of
an instrument must have a right to the instrument even if he does not possess it.

4. A “holder” does not receive a title superior to that of his transferor; rather, a “holder in due process” receives
a title superior to that of his transferor. The status of a “holder” is less favourable than that of a “holder in due
course. ” The title of a “holder in due course” becomes free from all equities, meaning that a “holder in due
course” cannot raise the defence that can be raised against the prior parties. For instance, if a negotiable
instrument is lost and then found by someone through criminal activity (theft), the person who received the
instrument through criminal activity is not entitled to any rights regarding any money owed in relation to that
instrument. However, if such a document is properly transferred to a person as a holder, he will get a good
title.

Structure of the Negotiable Instruments Act, 1881

An Act to define and amend the law relating to Promissory Notes, Bills of Exchange and Cheques, the Negotiable
Instruments Act, 1881 which came into effect on 9th December, 1881 comprises a total 147 sections spread
over 17 chapters. The chapters alongside their contents have been provided hereunder: 

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1. Chapter I (Sections 1 – 3): Preliminary 

2. Chapter II (Sections 4 – 25): Notes, bills and cheques

3. Chapter III (Sections 26 – 45A):  Parties to notes, bills and cheques

4. Chapter IV (Sections 46 – 60): Negotiation 

5. Chapter V (Sections 61 – 77): Presentment

6. Chapter VI (Sections 78 – 81): Payment and interest 

7. Chapter VII (Sections 82 – 90): Discharge from liability of notes, bills and cheques

8. Chapter VIII (Sections 91 – 98): Notice of dishonour 

9. Chapter IX (Sections 99 – 104A): Noting and protest 

10. Chapter X (Sections 105 – 107): Reasonable time 

11. Chapter XI (Sections 108 – 116): Acceptance and payment for honour and reference in case of need. 

12. Chapter XII (Section 117): Compensation 

13. Chapter XIII (Sections 118 – 122): Special rules of evidence 

14. Chapter XIV (Sections 123 – 131A): Crossed cheques

15. Chapter XV (Sections 132 – 133): Bill in sets 

16. Chapter XVI (Sections 134 – 137): International law 

17. Chapter XVII (Sections 138 – 147): Penalties in case of dishonour of certain cheques for insufficiency of
funds in the accounts.

In the case of A.V. Murthy v. B.S. Nagabasavanna (2002), it was determined that a negotiable instrument is
presumptively drawn for consideration and that a complaint of a dishonoured cheque at the threshold may be
dismissed on the grounds that money had been advanced four years prior, the debt is not enforceable, and such
a course of action is improper.

The Negotiable Instruments (Amendment) Act, 2017, which went into effect on September 1, 2017, enables the
court hearing a case involving a bounced cheque to order the drawer to pay interim damages to the complainant
not to exceed 20% of the cheque’s value within 60 days of the trial court’s order for such damages to be paid.
When the drawer enters a not guilty plea to the allegations in the complaint, either in a summary trial or a
summons case or upon the drafting of charges in any other matter, this interim compensation may be awarded.
The Amendment also gives the Appellate Court the authority to order the appellant to deposit a minimum of
20% of the fine or compensation granted, in addition to interim compensation, when hearing appeals against
convictions under Section 138.

Holder in due course

A person who has obtained a negotiable instrument in conformity with good faith and for value is referred to as
a “holder in due process.” Each negotiable instrument holder is considered to be a “holder in due course.” It is
the responsibility of a party liable for repayment to prove that the person holding the negotiable instrument isn’t
the rightful owner in the event of a dispute. 

In any case, the onus is on the holder to prove that he is a holder in due course, for instance by proving that he
obtained the negotiable instrument in accordance with some good faith and for value, if the parties obligated for
repayment demonstrate that the negotiable instrument was obtained from its legitimate proprietor by means of
a crime or extortion. In law, the “burden of proof” is the requirement to establish specific facts.

Fact of dishonour 
A negotiable instrument may occasionally be dishonoured, which means the party responsible for payment
neglects to make the payment. After submitting the proper notice of dishonour, the holder has the right to file a
lawsuit for the recovery of the sum. However, he is allowed to have a Notary Public’s certification about the
actuality of dishonour before he files the lawsuit. A statement like that is referred to as “protest.” The court will
assume that there has been dishonour based on the verification of such a dissent. 

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Presumption as to service of notice 

It is assumed that a notice has been served if it has been sent by registered mail to the right address of the
cheque’s drawer. The drawer, however, has the right to refute this assumption.

The Apex Court has ruled that a notice is considered to have been properly served if it is delivered to the correct
address and returned with the words “refused,” “no one was home,” “house was locked,” or words to that effect.

Inchoate instruments
The rules pertaining to an inchoately stamped instrument were outlined in Section 20 of the 1881 Act. According
to the mentioned Section, only two types of instruments, a promissory note and a bill of exchange are stamped
in the Act, which makes it clear which ones they are. The problem is that, regardless of the fact that a cheque is
not a stamped document or that there are numerous differences between the documents recognised by Section
20 of the Act and a cheque, many judicial pronouncements (e.g., Magnum Aviation (Pvt.) Ltd. v. State and Ors
(2010)) recognise or regard a cheque as an inchoate instrument if it lacks one or two essentials listed in the
characteristics of the negotiable instrument.

Requirement of stamp
Despite the fact that the Act makes no reference of the stamp’s relevance or requirement, every style of
promissory note and bill of exchange must have a stamp on it. The Indian Stamp Act of 1899 mentions a
mandatory provision for stamp affixation on such documents.

Liabilities under the Negotiable Instruments Act 1881

The various liabilities that are provided in the Act of 1881 have been laid out hereunder:

1. Liability of agent signing (Section 28): A promissory note, bill of exchange, or cheque that an agent signs
without specifying that he is acting as an agent or that he does not intend to assume personal liability makes
the agent personally liable for the instrument, with the exception of those who persuaded him to sign under
the impression that only the principal would be held responsible.

2. Liability of legal representative signing (Section 29): A promissory note, bill of exchange, or cheque
that a legal representative of a deceased person signs binds him personally unless he expressly restricts his
duty to the amount of assets he received in that capacity.

3. Liability of drawer (Section 30): If the drawee or acceptor of a bill of exchange or cheque dishonoured it,
the drawer is obligated to pay the holder compensation, provided that the drawer has received or been given
the proper notice of the dishonour as described further below.

4. Liability of drawee of cheque (Section 31): The drawee of a cheque must pay the cheque when required
to do so and, in the event that payment is not made as required, must reimburse the drawer for any losses or
damages resulting from the default. This is true even if the drawee has sufficient funds in his possession that
are legally applicable to the payment of the cheque.

5. Liability of maker of note and acceptor of bill (Section 32): The maker of a promissory note and the
acceptor of a bill of exchange prior to maturity are obligated to pay the amount due at maturity in accordance
with the apparent tenor of the note or acceptance, respectively, in the absence of a contract to the contrary,
and the acceptor of a bill of exchange at or after maturity is obligated to pay the amount due to the holder
upon demand. Any party to the note or bill who is not paid as required by the note or bill must be reimbursed
by the maker or acceptor for any losses or damages they suffer as a result of the default.

6. Liability of indorser (Section 35): Without a contract to the contrary, whoever indorses and delivers a
negotiable instrument before maturity without, in such indorsement, expressly excluding or making
conditional his own liability, is bound by such indorsement to every subsequent holder, in case of dishonour by
the drawee, acceptor, or maker, to compensate such holder for any loss or damage caused to him by such
dishonour. Every indorser who does dishonour is accountable as if they were a demand-payable instrument.

Section 40 talks about the discharge of the indorser’s liability. The indorser is released from responsibility to the
holder to the same extent as if the instrument had been paid in full when the holder of a negotiable instrument
destroys or weakens the indorser’s remedy against a preceding party without the indorser’s consent. 

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7. Liability of prior parties to holder in due course (Section 36): Every prior party to a negotiable
instrument is liable thereon to a holder in due course until the instrument is duly satisfied.

Presumptions under Section 118 and Section 119 of the Negotiable

Instruments Act, 1881
According to Section 101 of the Indian Evidence Act, 1872, the plaintiff has the initial burden of proving a prima
facie case in his favour. Once the plaintiff presents evidence to support a prima facie case in his favour, the
defendant is then required to present evidence to the court of law that supports the plaintiff’s case. The burden
of proof may return to the plaintiff as the case develops. The following presumptions shall be made unless the
contrary is shown, according to Section 118 of the Negotiable Instruments Act of 1881:

1. Consideration: When dealing with a negotiable instrument, the complaint must establish prima facie that he
did so in good faith and without payment. Every negotiable document is deemed to have been drawn for
consideration, and every time one of these instruments is accepted, inscribed, or transferred, it is assumed
that this was done for (or against) consideration. As a result, in the event that the complainant files a
complaint alleging dishonour of a cheque (or other negotiable instruments), the accused person may
discharge his or her responsibility by demonstrating that there is no sum due to be paid to the complainant by
the accused person under the terms of the instrument.

2. Date: It is assumed that a negotiable instrument was drawn on the date that is specified on the instrument’s
face in the case of a negotiable instrument.

3. Time of acceptance: When it comes to negotiable instruments, it is assumed that they were accepted within a
reasonable amount of time following their execution date and prior to their maturity.

4. Time of transfer: Every transfer involving a negotiable instrument is assumed to have taken place before the
instrument’s maturity date.

5. Order of indorsements: The endorsements that appear on a negotiable instrument are assumed to have been
made in the order or sequence that they do.

6. Holder in Due Course: A missing promissory note, bill of exchange, or cheque is assumed to have been
properly marked, thereby, implying the concept of holder in due course.

7. Stamp: Every possessor of a negotiable instrument is deemed to have obtained it voluntarily and in exchange
for value. The accused party must demonstrate that the negotiable instrument’s holder is not a holder in good
standing.

The Negotiable Instruments Act of 1881 mandates that when a promissory note or bill of exchange has been
dishonoured by non-acceptance or non-payment, the holder of such instrument may cause such dishonour to be
noted by a notary public upon the instrument or upon a paper annexed (or attached) thereto, or partly upon
each of them, i.e., the instrument and the paper annexed to the instrument. Additionally, according to Section
100 of the Negotiable Instruments Act of 1881, the holder of an instrument may have it protested by a notary
public within a reasonable amount of time regarding the dishonour of the instrument.

Following Chinnaswamy v. Perumal (1999), it was held that the assumption under Section 118 of the Negotiable
Instruments Act, 1881, had been refuted on the facts in the case of Ayyakannu Gounder v. Virudhambal Ammal
(2004). In Bonala Raju v. Sreenivasulu (2006) it was decided that the presumption as to consideration under
Section 118 of the Negotiable Instruments Act, 1881, applies when the fulfilment of a promissory note is proven.

According to Section 119 of the Negotiable Instruments Act of 1881, the presumption of proof of protest is
discussed. It specifies that if a lawsuit is filed over the nonpayment of a promissory note or a bill of exchange,
the court will presume that the nonpayment occurred unless and until the acceptor of the promissory note or bill
of exchange refutes (or refutes) the claim.

The penal provisions of the Negotiable Instruments Act, 1881

The criminal penalties found in Sections 138 to 142 of the 1881 Act have been put in place to make sure that
contracts entered into using cheques as a form of deferred payment are upheld. Conditions for filing a complaint
for cheque dishonour are outlined in Section 138 of the Act. The following are the components needed to comply
with Section 138:

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1. Cheques are a common form of payment, and post-dated cheques are regularly utilised in a variety of
business operations. Cheques that have been postdated are issued to the cheque’s drawer as a convenience.
As a result, it becomes important to make sure the cheque’s drawer isn’t abusing the accommodations made
for him. 

2. The Negotiable Instruments Act, 1881 governs the use of negotiable instruments, including cheques, bills of
exchange, and promissory notes. The purpose of Chapter XVII, which contains Sections 138 to 142, was to
foster trust in the effectiveness of banking operations and lend legitimacy to the negotiable instruments used
in commercial transactions.

3. A person must have drawn a cheque to pay money to someone else to satisfy any debt or other obligation;

4. The bank has received that cheque during the last three months;

5. When a cheque is returned unpaid by the bank due to inadequate funds or because it exceeds the amount
specified in an agreement established with the bank to be paid from that account;

6. Within 15 days of learning from the bank that the cheque was returned as unpaid, the payee issues a written
notice to the drawer demanding payment of the money;

7. Within 15 days of receiving the notice, the drawer fails to pay the payee. 

An overview of Section 138 of the Negotiable Instruments Act,

1881
The “Negotiable Instruments Act” was first developed in 1866, and it was finally passed into law in 1881.
Chapter XVII, which includes sections 138 to 142, was added to this statute in 1988, after than a century.
Section 138 of the Act essentially lays out the punishment for the crime of dishonouring a cheque. “A negotiable
document drawn on a designated banker and not expressed to be payable otherwise on demand” is how one
may define a cheque under the Section. The word “cheque” is defined in Section 6 of Chapter 2 of the Negotiable
Instruments Act, 1881 to include “an electronic image of a truncated cheque and a cheque in electronic form.”
Before the recent addition, criminal prosecution of the accused in cases of cheque dishonour was not an option
for the payee of the cheque; instead, only civil and alternative dispute resolution procedures were available.
Now, the payee of the cheque has access to both civil and criminal remedies.

The Hon’ble Court stated in Modi Cement Limited v. Kuchil Kumar Nandi (1998), that the major goal of Section
138 of the Negotiable Instrument Act, 1881 is to increase the effectiveness of banking operations and to
guarantee complete trust while conducting business using cheques. The laws of the commercial world, which are
specifically designed to simplify trade and commerce by making provisions for giving sanctity to the instruments
of credit that would be deemed to be convertible into money and easily transferable from one to another, are
those that deal with negotiable instruments.

In the most recent decision of P Mohanraj vs. M/S. Shah Brothers Ispat Pvt. Ltd. (2021), a division bench
composed of Rohinton Fali Nariman, and B.R. Gavai rendered their decision that when discussing whether
Section 14 of the Insolvency and Bankruptcy Code, 2016 prohibits proceedings under Section 138 of the
Negotiable Instrument Act, 1881, against corporate debtors, it was noted that the proceedings under Section
138 could be described as “civil sheep” in “criminal wolf’s clothing.”

Conditions to commit an offence under Section 138 of the Negotiable

Instruments Act, 1881
The term “Negotiable Instrument” is defined as “a promissory note, bills of exchange, or cheque payable either
to order or to bearer” under Section 13 of the Negotiable Instrument Act, 1881. In other words, it basically says
that “it is a sort of instrument which promises the bearer a sum of money that will be payable on demand or at
any future date.” Section 138 essentially outlines the penalties for dishonouring a cheque as a criminal
provision. 

The provision itself outlines specific conditions that render dishonouring a cheque illegal, and the prerequisites
are: 

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1. A cheque must first have been prepared by the person who will be the drawer, and it must be for the payment
of money to another party to satisfy a debt.

2. The cheque should be handed to the drawee bank, and if there aren’t enough funds or the amount is greater
than “the amount arranged to be paid from that account by an agreement established with the bank,” the
bank will return the cheque unpaid.

3. The bank must receive the cheque no later than six months after the day it was drawn or during the duration
of its validity, whichever comes first.

4. The bank promptly provides the payee with the “Cheque return memo” if the cheque is dishonoured by the
bank.

5. Following that, a demand notice for the return of the unpaid cheque must be sent by the cheque holder, who
is also the payee, to the cheque drawer within 30 days of receiving the memo.

6. The drawer must make the payment within 15 days of receiving this notice, and if it is not made within that
time frame, the payee may file a lawsuit within 30 days of the expiration of the 15-day period.

The court ruled in the case of Shankar Finance Investment vs. State of Andhra Pradesh (2008) and others that
“Section 142 of the Negotiable Instrument Act makes it compulsory that the complaint must be filed by the
payee or holder in due course of the cheque where a Payee is a natural person he can file a complaint and when
the pay is a form of a company registered person it must be represented by a natural person.” 

Decriminalisation of Section 138 of the Negotiable Instruments Act,

1881
The decriminalisation of minor offices was announced in a public notice released by the Minister of Finance in the
year 2020 with the goal of boosting business confidence and streamlining the legal system. for gathering
feedback and proposals from interested parties about the decriminalisation of a variety of offences, including the
offence under Section 138 of the Negotiable Instruments Act of 1881. 

The primary goal of the government’s proposal is to streamline business procedures and promote investment,
but in a reasonable opinion, doing away with Section 138’s criminal penalties will not achieve this goal. Instead,
it can be believed that this section was designed to have deterrent effects and to prevent people from breaking
their agreements by paying by cheque.

Another goal of this proposal was to decriminalise certain offences in order to open up the legal system.
However, this goal will not be achieved because there are already a lot of pending cases in the magistrate
courts, and they are being resolved very slowly. Additionally, by decriminalising certain offences, the burden that
was previously placed on the criminal courts will be transferred to the civil courts because the person who holds
the cheque will now bear that burden.

Speedy disposal of negotiable instrument cases in recent times

The Delhi High Court considered the issue of whether a criminally compoundable offence under Section 138
might be resolved by mediation in the case of  Dayawati v. Yogesh Kumar Gosain (2017). The Court ruled that
even while the legislature did not clearly provide for such a provision, the criminal court is still permitted to send
both the complainant and the accused to alternative conflict resolution procedures. Without mandating or
limiting the method by which it may be reached, the Code of Criminal Procedure, 1973, does permit and accept
a settlement. Therefore, there is no prohibition against using alternative dispute resolution procedures, such as
arbitration, mediation, and conciliation (recognised under Section 89 of the Civil Procedure Code, 1908), to
resolve disputes that are the focus of offences covered by Section 320 of the Code of Criminal Procedure Code.

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Additionally, it was argued that the proceedings under Section 138 of the 1881 Act are unique from other
criminal cases and really have more in common with a civil wrong that has been given criminal undertones.

After considering the purpose of enacting Section 138 and other sections of Chapter XVII of the Act, the
Honourable Supreme Court stated in Meters and Instruments (P) Ltd. v. Kanchan Mehta (2017) that an offence
under Section 138 of the Act is principally a civil wrong. Section 139 places the burden of proof on the accused,
but the standard for such proof is “preponderance of probabilities.” The case must typically be tried summarily in
accordance with the provisions of summary trial under the CrPC, with any modifications necessary for
proceedings under Chapter XVII of the Act. 

As written, the Section 258 of the CrPC principle will be in effect, and the Court may close the case and release
the accused if it is satisfied that the amount on the cheque, as well as any assessed costs and interest, have
been paid and if there is no justification for continuing with the punitive element. Compounding at the initial
stage must be encouraged but is not prohibited at a later stage, subject to appropriate compensation as may be
found acceptable by the parties or the Court. The purpose of the provision being primarily compensatory, the
punitive element being primarily with the object of enforcing the compensatory element. 

Cases brought under Chapter XVII of the Act must typically be tried in a summary manner. After taking into
account the additional fact that, in addition to the sentence of imprisonment, the Court has jurisdiction under
Section 357(3) CrPC to award suitable compensation with a default sentence under Section 64 of the Indian
Penal Code, 1860 and with further recovery powers under Section 431 of the CrPC. The Magistrate may decide,
under the second proviso to Section 143 of the Indian Penal Code, 1860, that it was undesirable to try the case
summarily because a sentence of more than one year may need to be passed. With this strategy, a prison term
of more than a year may not be necessary in every circumstance.

The bank’s slip is prima facie proof of the dishonoured cheque, so the Magistrate need not record any additional
preliminary evidence. The complaint’s evidence can be provided on affidavit, subject to the court’s ruling and
scrutinising the individual providing the affidavit. This type of affidavit testimony is admissible at all stages of a
trial or other action. 

According to Section 264 of the CrPC, the affiant may be examined in a particular way, except in cases where
the second proviso to Section 143 of the IPC must be used, a sentence of one year may need to be given, and
compensation under Section 357(3) of the CrPC is deemed insufficient due to the amount of the cheque, the
accused’s conduct, the accused’s financial capacity, or any other circumstance. Thus, the plan is to proceed in a
summary manner.

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2/28/23, 4:55 PM Negotiable Instruments Act, 1881 - iPleaders

Recommendation for better functioning of the Negotiable

Instruments Act, 1881
1. It is recommended to double the number of Magistrates designated solely for instances involving cheque
bounces. To deal with certain cases, special courts can be established. The Government is required to allocate
the money required to cover the costs associated with hiring more Magistrates, their support staff, and other
infrastructure. A judge shouldn’t have more than fifty cases before them on any one day (25 people attended
the morning session and 25 people the afternoon session), presuming that the number is a reasonable one.

2. The court’s judicial clerk should sit for an hour, take roll calls, consider requests for adjournment by consent,
and adjourn the cases that, in his opinion, need adjournment before the court’s time, which is before 11 AM.
When the magistrate’s judicial attention or time is needed, those matters can be detained for judicial review
until 11 AM with a note from the court clerk. The recording of the evidence should take up the entire hour of
court time beginning at 11 AM. The aforementioned will spare the court between one and two hours per day.
As he is not bringing a new financial claim, victims of cheque-bounce instances are not required to pay court
costs.

3. According to Section 139 of the Act of 1881, it is presumed that the holder of a cheque received a cheque of
the kind mentioned in Section 138 for the discharge, in whole or in part, of any debt or other liability unless
the contrary can be proven. The accused may disprove this presumption by presenting convincing evidence
that there was no debt or liability. The burden of proof then switches back to the complainant when such
rebuttal evidence has been presented and accepted by the court.

4. Since it is a quasi-judicial proceeding, the Court should adopt a creative strategy and avoid becoming bogged
down in details. Technicalities should be sought out and firmly rejected.

5. Magistrates must act on their own, and a four-hearing process must be used. A non-bailable warrant must be
issued if the accused does not show up for the initial hearing. The accused must provide justification and
present a defence at the second hearing. Cross-examination should be done during the third hearing.
Arguments should be made at the fourth hearing, and then a decision must be made.

6. Credit is granted based on confidence and trust. To further simplify conducting business in India, it is in the
judicial system’s best interest that these reforms are implemented as soon as practicable. It is against the law
for someone who borrows money on credit to use Section 138 of the Act to put off making payments, and it is
the Court’s responsibility to make sure that it does not become a party to such stalling measures. 

Conclusion 
According to the 213th Law Commission Report, the Indian judicial system is dealing with a significant backlog
of cases, and roughly 20% of the litigation-related issues include cheque bounces. The lifeless sections of the
Negotiable Instruments Act of 1881 would thus be given some life by the recently enacted provisions. Even
though cases involving cheque bounces are penal in nature and result in criminal offences, the procedures for
summary judgement are still on the books, and making the offence subject to bail has made these cases
practically identical to civil issues. In this approach, newly introduced restrictions would in fact be a proactive
measure to protect the legitimacy of cheques. Once the accused individuals or the appellant, if there is an
appeal, deposit a sizable sum, they will begin to treat the situation seriously. Even while it is moving in the right
way, there is still work to be done to make cheque bounce cases feasible, and summary trials must be given
their actual meaning. Otherwise, the entire point of making cheque bounce a criminal offence would become less
significant.

References 
1. https://www.researchgate.net/publication/314466023_The_Negotiable_Instruments_Act_1881_Critical_Analysis.

2. https://www.ijlmh.com/paper/critical-analysis-of-section-138-of-negotiable-instruments-act-
1881/#:~:text=Promissory%20notes%2C%20bills%20of%20exchange,mode%20of%20of%20transferring%20m

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