Negotiable Instruments Act, 1881, was passed by British India and for over 130 years and expect for amendments, the question revising the Act as a whole never been raised. In India, there is reason to believe that Instrument to exchange were in use from early times and money was introducing into the country by one of the Mohammedan sovereigns of Delhi in the early part of the fourteenth century.

History

The history of the present Act is a long one. The Act was originally drafted in 1866 by the 3rd India Law Commission and introduced in December, 1867 in the Council and it was referred to a Select Committee. Objections were raised by the mercantile community to the numerous deviations from the English Law which it contained. The Bill had to be redrafted in 1877. After the lapse of a sufficient period for criticism by the Local Governments, the High Courts and the chambers of commerce, the Bill was revised by a Select Committee. In spite of this Bill could not reach the final stage. In 1880 by the Order of the Secretary of State, the Bill had to be referred to a new Law Commission. On the recommendation of the new Law Commission the Bill was re-drafted and again it was sent to a Select Committee which adopted most of the additions recommended by the new Law Commission. The draft thus prepared for the fourth time was introduced in the Council and was passed into law in 1881 being the Negotiable Instruments Act, 1881 (Act No.26 of 1881)

The most important class of Credit Instruments that evolved in India were termed Hundi

Hundi

Hundis were legal financial instruments that evolved on the Indian sub-continent. These were used in trade and credit transactions; they were used as remittance instruments for the purpose of transfer of funds from one place to another. In the era of bygone kings and the British Raj these Hundis...

. Their use was most widespread in the twelfth century, and has continued till today. In a sense, they represent the oldest surviving form of credit instrument. These were used in trade and credit transactions; they were used as remittance instruments for the purpose of transfer of funds from one place to another. In Modern era Hundi

Hundi

Hundis were legal financial instruments that evolved on the Indian sub-continent. These were used in trade and credit transactions; they were used as remittance instruments for the purpose of transfer of funds from one place to another. In the era of bygone kings and the British Raj these Hundis...

 served as Travellers Cheques.

Types of Negotiable Instruments

According to Section of the Negotiable Instruments Act means "A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.' But in Section 1, it is also described that Local extent, Saving of usage relating to hundis, etc., Commencement. -It extends to the whole of India but nothing herein contained affects the Indian Paper Currency Act, 1871, Section 2, or affects any local usage relating to any instrument in an oriental language. Provided that such usages may be excluded by any words in the body of the instrument, which indicate and intention that the legal relations of the parties thereto shall be governed by this Act; and it shall come into force on the first day of March, 1882.

Modern era and Negotiable Instruments

With the growth of the Economy, Negotiable Instruments have given the new dimensions to the commercial and corporate world. Now people prefer to carry a small piece of paper known as Cheque

Cheque

A cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...

 rather than carrying the currency worth the value of the Cheque

Cheque

A cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...

. Before 1988 there being no provision to restrain the person issuing the Cheque

Cheque

A cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...

 without having sufficient funds in his account. Of course on Dishonoured cheque there is a civil liability accrued. However in reality it takes a long time to recover the money. In order to ensure promptitude and remedy against the defaulters of the Negotiable Instrument a criminal remedy of penalty was inserted in Negotiable Instruments Act, 1881 by amending it with Negotiable Instruments Act, 1988.

With the insertion of these provisions in the Act the situation certainly improved and the instances of dishonour have relatively come down but on account of application of different interpretative techniques by different High Courts on different provisions of the Act it further compounded and complicated the situation although on dishonour of cheques the trends of the verdicts of the Supreme Court of India

Supreme Court of India

The Supreme Court of India is the highest judicial forum and final court of appeal as established by Part V, Chapter IV of the Constitution of India...

 unequivocally demonstrate that there is subconscious judicial pressure in the mind of the Judges which leans heavily in favour of the holder of the cheque.

Having regard to the working of these penal provisions on dishonour of cheques and the bottlenecks that have surfaced in strictly implementing these provisions, Parliament enacted the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 (55 of 2002), which is intended to plug the loopholes. This amendment Act inserts five new sections from 143 to 147 touching various limbs of the parent Act and Cheque truncation

Cheque truncation

Cheque truncation is the conversion of physical cheque into electronic form for transmission to the paying bank. Cheque truncation eliminates cumbersome physical presentation of the cheque and saves time and processing costs.-History:To settle a cheque it has to be presented to the drawee bank...

through digitally were also included and the amendment Act has been recently brought into force on Feb. 6, 2003.

Statutory Definitions

Some of the important definitions of the Act, which are important are:

Section 6 - Cheque

A cheque is 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 which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;

(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.

Section 13 - Negotiable Instruments

(1) Negotiable instrument. 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.

Section 123 - Cheque Crossed Generally

Where a cheque bears across its face an addition of the words and company or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words, not negotiable, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally.

Section 124 - Cheque crossed specially

Where a cheque bears across its face an addition of the name of a banker, either with or without the words not negotiable, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker.

Section 126 Cheque crossed specially

Where a cheque is crossed generally, the banker, on whom it is drawn shall not pay it otherwise than to a banker.

Payment of cheque crossed specially. - Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent, for collection.

Section 130 Cheque bearing Not Negotiable

A person taking a cheque crossed generally or specially, bearing in either case the words not negotiable, shall not have, and shall not be capable of giving, a better title to the cheque than that which the person from whom he took it had.

Dishonour of certain Cheques for Insufficiency of Funds in Accounts

Section 138 to 142 of Chapter XVII, of Negotiable Instrument Act, 1881, deals with dishonour of cheque. The main object is to introduce financial discipline in business dealings. Prior to insertion of 138 of NI, a dishonored cheque's left the person aggrieved with the only remedy of filing a claim. The remedy available in civil court is a long drawn matter and an unscrupulous drawer normally takes various pleas to defeat the genuine claim of the payee. In 1988, Chapter XVII inserted and added Section 138 to 142. Object of the amendment is to held person criminally responsible for his acts in Commercial transactions Trade and Business dealings with people carried out carelessly or without sense of responsibility.

Section 138 - Dishonour of cheque for insufficiency, etc., of funds in the accounts

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 provision of this Act, be punished with 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;

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 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.

Another very important section is presumptions as to Negotiable Instruments under Section 118 of the Act.

Section 118 - Presumptions as to Negotiable Instruments

Until the contrary is proved, the following presumptions shall be made:

(a) of consideration. - that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was 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 every accepted bill 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;

(e) as to order of indorsements. - that the indorsements appearing upon a negotiable instrument were made in the order in which they appear thereon;

(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 instrument 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.

Five Ingredients of the offence under Section 138

It is manifest that to constitute an offence under Section 138 of the Act, the following ingredients are required to be fulfilled:

1. a person must have drawn a cheque on an account maintained by him in a bank for payment of a certain amount of money to another person from out of that account
2. The cheque should have been issued for the discharge, in whole or in part, of any debt or other liability;
3. that 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;
4. that cheque is returned by the bank unpaid, either because of the amount of money standing to the credit of the 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 the bank;
5. the payee or the holder in due course of the cheque 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 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid;
6. the drawer of such cheque fails to make payment of the said amount of money to the payee or the holder in due course of the cheque within 30 days of the receipt of the said notice;