Legal Aspects of Business

MBA505B

Dr. Bhagyashri Deshpande

I. The Indian Contract Act, 1872& The Sale of Good Act, 1930

II. Negotiable Instruments Act, 1881

III. The Companies (Amendment) Act, 2015

IV. The Consumer Protection Act, 1985 & The Competition Act

V. The Intellectual Property Rights and the Information Technology Act, 2005
 Unit 2
Negotiable Instruments Act:
What are negotiable instruments
Features
Cheques and its types
Dishonor of cheques
Remedies available against dishonor of cheques
What are negotiable instruments?
a. Introduction
b. Scope

c. Definition
 Introduction & Scope
 Law contained in Negotiable Instruments Act, 1881
 Based on English Common Law
 Objective – define and amend
 Extends to whole of India
 Definition

“A Negotiable instrument means a promissory note, bills of exchange or

cheque payable either to order or to bearer.”

Negotiable means transferable and instrument means document

Transferor and Transferee

 Promissory Note
According to Section 4, “A promissory note is an instrument in writing
containing an unconditional undertaking, signed by the maker, to pay a
certain sum of money only to, or to the order of, a certain person, or to the
bearer of the instrument.”
 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.” (Section5)

Ex. Suppose Mr. X of Mumbai purchases goods on credit from Mr. Y of

Pune for Rs. 1000/- to be paid 3 months after date. Mr. Y buys goods from
Mr. S of Nagar for Rs. 1000/- on the same terms & conditions. Here, Mr. Y
may order Mr. X to pay Rs. 1000/- (a certain sum) to Mr. S which will be
nothing but a bill of exchange.
 Definition

Thus, the term, negotiable instrument means a written document which

creates a right in favor of some person and which is freely transferable.

Although the Act mentions only these three instruments (such as a

promissory note, a bill of exchange and cheque), it does not exclude the
possibility of adding any other instrument which satisfies the following two
conditions of negotiability:

1. the instrument should be freely transferable (by delivery or by

endorsement. and delivery) by the custom of the trade; and

2. the person who obtains it is entitled to recover the money of the

instrument in his own name.
 Features
1. Payable to order or bearer

2. Freely transferable

3. Property

Possessor of instrument is the holder and owner thereof

4. Defects in Title

Person who takes the negotiable instrument is free from all the defects.

5. Remedy

Holder / Transferee can sue upon the negotiable instrument.

 Remedy
Transferee can sue in his own name without giving notice to the debtor:

A bill, note or a cheque represents a debt, i.e., an “actionable claim” and

implies the right of the creditor to recover something from his debtor.

The creditor can either recover this amount himself or can transfer his right
to another person.

In case he transfers his right, the transferee of a negotiable instrument is

entitled to sue on the instrument in his own name in case of dishonor,
without giving notice to the debtor of the fact that he has become holder.
 Cheque

Def: A cheque is of bill of exchange drawn on a specified banker & not

expressed to be payable otherwise than on demand

03 Parties- Drawer, Drawee & Payee

Drawee is always a banker

There is no contract between drawee & Payee

If cheque is dishonored, holder has no remedy against banker.

Validity 06 months

Essential elements of Bills of Exchange are applicable to cheque

 Essentials Elements of a Cheque
1. In writing
2. Express order to pay
3. Unconditional order to pay
4. Signed by drawer
5. Certain sum
6. Order to pay money only
7. Certain 03 parties
8. Drawn upon specified banker
9. Payable on demand
 Types of Cheque
Bearer Cheque or Open Cheque
 Those cheques which can be payable at the counter of the
drawee bank
Crossed Cheque
 A cheque is crossed when…
1. It has two transverse parallel lines marked across its face
2. It bears abbreviation “& Co” between the lines
3. It bears the words “not negotiable” between the parallel lines
 Types of Crossed Cheque
1. Crossed Cheque Generally
The banker on whom it is drawn, must pay to collecting banker
Crossed “A/c Payee”

2. Crossed Cheque Specially ( Name of the bank)

The banker on whom it is drawn, must pay to only to the banker
mentioned
 Dishonour of Cheques

Amendment made to existing Act

Amended by Banking, Public Financial Institutions and
Negotiable Instruments Law ( Amendment) Act, 1988

Chapter XVII – incorporated for penalties

Object : holding a person criminally liable

 Dishonour of Cheques

Conditions
a. Presentation of Cheque
b. Return of cheque by bank
c. Demand for payment by notice
d. Failure to make payment
e. Filing of complaint
 Dishonour of Cheques

Place of filing the complaint

Under the jurisdiction of the place where the branch of bank is
located.

Period of Validity of cheque

3 months

What attracts Sec.138/ Reasons for dishonor of cheque

 Dishonour of Cheques

When is an offence committed under Sec. 138

Insufficient funds, stop payment, payment of debt
When cause of action arises?
Cheque returned as unpaid, it accrues on receipt of notice by
drawer
What is a valid notice?
Writing, 30 days, demand, towards interest payment
Averment in the complaint
Who can file a complaint?
On whose name cheque is issued
 Dishonour of Cheques

Persons liable
Drawer - Individual, Company
Presumption of dishonor
Official Mark
Burden of Proof
Legally enforceable debt
Penalty u/s 138
1. 2 years imprisonment
2. Fine - Twice the amount of cheque
3. Both
 Amendment Made

The Negotiable Instruments (Amendment) Bill, 2017 was introduced in Lok Sabha on
January 2, 2018, and sought to amend the Negotiable Instruments Act, 1881. It seeks to
introduce following provisions:

1.       Interim compensation: The Bill inserts a provision allowing the court to direct the
drawer to pay an interim compensation to the complainant under circumstances where the
drawer pleads not guilty of the accusation. Such interim compensation cannot exceed 20%
of the cheque amount and is required to be paid within 60 days of the order.

2.       Deposit in case of appeal: The Bill inserts a provision that if an appeal is filed by
the convicted drawer, the appellate court may direct him to deposit a minimum of 20% of
the amount of compensation or fine awarded which shall be in addition to any interim
compensation.

3.       Returning the interim compensation: If the drawer is acquitted, the complainant
shall have to return the interim compensation or the deposit with an interest within 60
days of the acquittal order.