Negotiable Instrument Laws in India govern instruments that are freely transferable and can be used to pay or transfer money. The laws regulate documents like promissory notes, bills of exchange, and cheques, which are widely used in financial transactions. The legal framework ensures that these instruments are legally binding, easily transferable, and offer a secure way to handle financial transactions.
The primary law governing negotiable instruments in India is the Negotiable Instruments Act, 1881.
Key Aspects of Negotiable Instruments Act, 1881:
- Definition of a Negotiable Instrument:
- A Negotiable Instrument is a document guaranteeing the payment of a specific amount of money to the holder or bearer, either on demand or at a set time in the future.
- The Act defines three main types of negotiable instruments:
- Promissory Notes: A written promise to pay a specific sum of money at a future date.
- Bills of Exchange: A written order by one person directing another to pay a certain sum of money on demand or at a specified future date.
- Cheques: A bill of exchange drawn on a bank, payable on demand, and commonly used for payment or money transfer.
- Key Provisions Under the Negotiable Instruments Act:
- Section 4 – “Negotiable”: This section explains that the instrument must be transferable from one person to another. Once transferred, the new holder gets the right to receive payment, which can be enforced in the court.
- Section 5 – “Negotiability”: This section deals with the nature of negotiability, which means that the holder of a negotiable instrument has the right to sue on the instrument in their own name, even if they are not the original payee.
- Section 8 – “Holder and Holder in Due Course”: This section defines who a “holder” and “holder in due course” are. A holder in due course is a person who acquires the instrument in good faith and for value, and therefore, enjoys greater protection under the law.
- Cheques:
- Definition: A cheque is a type of bill of exchange drawn on a bank. It directs the bank to pay a specific amount of money from the drawer’s account to the payee on demand.
- Dishonour of Cheques: The dishonor of a cheque occurs when a bank refuses to pay the cheque because of insufficient funds, a closed account, or other legal reasons. The Negotiable Instruments Act criminalizes the dishonor of cheques under Section 138, which provides for punishment for dishonoring a cheque.
- Section 138 – Dishonor of Cheques for Insufficient Funds:
- This section deals with cases where a cheque is dishonored due to insufficient funds or if the cheque is returned due to other reasons like a closed account.
- If a cheque is dishonored, the payee can initiate legal action against the drawer under this section, which can result in criminal liability, including imprisonment for up to two years and/or a fine which can extend to twice the amount of the cheque.
- Negotiability and Transferability:
- Endorsement: A negotiable instrument can be transferred through endorsement (signing the back of the instrument) and delivery. This means the person holding the instrument can transfer it to another person, who will then have the right to enforce the instrument.
- Bearer Instruments: Instruments that are payable to the holder or bearer are easily transferable by mere delivery, without any further formalities.
- Order Instruments: Instruments payable to a specific person, who can transfer it to another person by endorsement and delivery.
- Rights of Transferee: The person who receives the negotiable instrument (called the transferee) gains the same rights as the original holder if they are a holder in due course.
- Liability Under the Act:
- Liability of the Drawer: The drawer of a negotiable instrument is responsible for ensuring that there are sufficient funds in the account to cover the cheque or instrument. If the cheque is dishonored, the drawer can face penalties.
- Liability of the Endorser: The person who endorses the instrument (transfers it to another) is liable to pay if the instrument is dishonored, provided that the endorser’s endorsement is valid.
- Liability of the Holder in Due Course: A holder in due course is entitled to recover the amount due on the instrument, even if the original maker or drawer did not fulfill the contract. This gives the holder a high level of protection in case of disputes or dishonor.
- The Role of a Notary or Witness:
- In some cases, a negotiable instrument may require the presence of a notary or witness to validate the transaction or transfer of the instrument.
- While this is not always required for negotiable instruments like cheques, some bills of exchange or promissory notes may need it to be legally enforceable in court.
- Time Bar for Filing Complaints:
- A person can file a complaint under Section 138 of the Negotiable Instruments Act for dishonoring a cheque within 30 days from the receipt of notice from the bank stating that the cheque has been dishonored.
- If the payment is not made within 15 days from the receipt of the notice, the complainant can initiate a criminal case for dishonor of the cheque.
- The Role of Courts:
- The Negotiable Instruments Act allows civil suits to be filed in courts for the recovery of the money due under the instrument.
- Criminal complaints for dishonor of cheques are also handled in courts. If found guilty, the drawer of the dishonored cheque can be punished with imprisonment or a fine.
- The Act also provides for summary trials in cases of dishonor of cheques, aimed at expediting the process of litigation.
- Recent Amendments and Developments:
- The Negotiable Instruments (Amendment) Act, 2015: This amendment was made to address the issue of delay in criminal cases related to dishonored cheques. It introduced provisions that allow the court to order the drawer of the dishonored cheque to pay interim compensation to the complainant while the case is pending.
Examples of Negotiable Instruments:
- Promissory Notes: An individual can sign a document promising to pay a sum of money to another person, with the promise enforceable through legal channels.
- Bills of Exchange: A business might issue a bill to another business, requiring payment of a sum of money at a later date.
- Cheques: The most common negotiable instrument, used for everyday transactions and payments.
