Negotiable Instrument Act

Legal Framework of the Negotiable Instruments Act in India

• Negotiable Instruments Act, 1881: The Negotiable Instruments Act of 1881 is a legislation in India that regulates the transfer of negotiable instruments, such as financial documents, from one person to another, thereby granting the transferee qualified claims. The Act institutes a legal structure for the usage, transfer, and enforcement of negotiable instruments, including promissory notes, bills of exchange, and cheques.
• Historical Context: The Negotiable Instruments Act, enacted in 1881 during British governance in India, was introduced to systematize and regulate financial transactions, including promissory notes, bills of exchange, and cheques. Before this Act, there was a lack of regularity and legal clarity surrounding these financial documents, which frequently led to disputes and misunderstandings in commercial transactions. This Act was inspired by similar laws in England and aimed to promote more efficient trade and commerce by providing clear guidelines for the creation, transfer, and implementation of negotiable instruments. It marked a notable advancement in updating India's legal and financial structures by ensuring that negotiable instruments could be accurately used for commercial purposes.
• Applicability: The Negotiable Instruments Act, 1881, is mainly applicable in India, supervising financial instruments. The Act is concerned with individuals and corporate entities in India, as well as international entities participating in transactions that are explicitly governed by Indian legislation. However, it addresses numerous negotiable instruments; it does not include instruments such as letters of credit unless specifically mentioned. The Act is mandatory in both domestic and international trade, providing legal clarification concerning negotiable instruments used in commercial businesses.
• Objective of the Act: The primary focus of the Negotiable Instruments Act is to govern transactions that include negotiable instruments and to ensure assurance in commercial interactions. It highlights the rights, liabilities, and obligations of the parties involved in the negotiation and transfer of such instruments.
• Types of Negotiable Instruments: The Act concerns three significant categories of Negotiable Instruments
  • Promissory Notes (Section 4): A documented commitment to pay a particular amount of money to an assigned individual or the bearer of the note.
  • Bills of Exchange (Section 5): A written direction from one person to another to pay a specified sum of money to a third person, either on a later date or on demand.
  • Cheques (Section 6): A different kind of bill of exchange drawn against a bank and is payable only on demand.

Key Provisions of the NI Act, 1881  

• Definition of Negotiable Instruments (section 13): The Act outlines negotiable instruments as instruments that can be transferred by way of delivery or endorsement, permitting the transferee to begin with a lawful action in their name.
• Responsibilities of Parties: The Act highlights the liabilities of the drawer, drawee, payee, and endorser of negotiable instruments, inclusive of liability for dishonour because of insufficient funds or other reasons (section 138 relating to the dishonour of cheques).
• Acceptance and Payments: Following Sections 7-10 of the Act, address the acceptance of bills of exchange, in Sections 65, 67, and Section 78, the payment procedures for bills. And lastly, in Section 61, the process for Presentment for payment.
• Dishonour of Instruments: The Act established protocols for the dishonouring of negotiable instruments, particularly cheques, and outlined criminal repercussions for dishonoured cheques (Section 138).
• Endorsement and Transfer: The Act includes laws concerning the endorsement of negotiable instruments, which denotes the transfer of the instrument to another person.
• Crossed Cheques (Section 123): This section lays down laws for crossed cheques, implying that the cheque must be deposited into a bank account rather than cashed straight.
• Noting and Protesting (Section 99): This section highlights the procedure for noting and protesting dishonoured negotiable instruments, serving as an official declaration that the instrument has been dishonoured.
• Presumptions: The Act includes definite presumptions that esteem the holder of the negotiable instruments. A presumption of deliberation recommends that an instrument is considered as having been issued for a valid consideration until proven otherwise (section 118). There is also a presumption concerning delivery and enforcement that guides the confirmation of the legality of the transfer instruments.

International Framework

• The International Framework regulating negotiable instruments is affected by a mixture of local laws, universal treaties, and commercial practices. Evidence of universal instruments includes the Uniform Commercial Code in the US, the Geneva and Hague Conventions regarding bills of exchange, and assistance from the International Chamber of Commerce, which regulates practices in universal trade.
• However, organisations like UNICITRAL attempt to align legislation concerning global credit transfers.
• The European Union has also pioneered regulations to maintain regularity in cross-border transactions, including negotiable instruments.
• These structures ensure the secure use and transfer of negotiable instruments globally, thereby facilitating efficient and universal trade and finance. 

Significant Amendments 

• Amendment in 2002: The 2002 Amendment made modifications that went beyond enhancing the provisions under Section 138, facilitating a more efficient implementation process by establishing timelines for filing cases and ensuring the correct resolution of such issues. Section 139 was modified to strengthen the presumption that the cheque was issued for legal consideration, which eases the procedure for holders of dishonoured cheques in seeking action against defaulters.
• Amendment in 2015: The Amendment was brought by the NI Amendment Act of 2015, aimed at dealing with the matters associated with the straightforward dealing of cases concerning dishonoured cheques. It implemented provisions to increase penalties and highlight the lawful Procedure for cases of cheque dishonour. In addition to that, a new provision was introduced for compounding offences, authorizing the parties involved in disputes over cheque dishonour to settle the issue rather than engaging in unnecessary litigation.
• Amendment Act of 2018: The Negotiable Instruments (Amendment) Act of 2018 was introduced to improve the Act of 2015. The NI Act highlights and authorizes promissory notes, bills of exchange, and cheques. The 2018 amendment introduced two new sections to the NI Act.
  • Section 143A: Allows the court to direct the drawer of the cheque to deliver interim compensation to the complainant under the specified situations.
  • Section 148: Empower the appellate court to require the drawer to pay at least 20% of the fine or compensation provided by the trial court if the drawer contests the conviction. 

Violations of the Act

• Dishonour of Cheques (Section 138): The most prevalent violations occur when a cheque is dishonoured because of insufficient funds, stopped payment, or an expired cheque. This is considered a criminal offence under section 138, and the drawer of the dishonoured cheque might face imprisonment, monetary penalties, or both. The payee is required to issue a legal notice to the drawer within 30 days; failure to do so may lead to non-compliance with lawful procedures.
• Failure to Accept or Pay a Bill of Exchange (Section 91): If a bill of exchange is not accepted or paid on time as assigned by legal provisions, it might result in legal issues. For example, if the drawee fails to acknowledge the bill or make the payment upon maturity, this is a clear violation. Additionally, failure to comply with the procedures for protesting or dishonouring bills may result in legal consequences.
• Fraudulent Issuance and Forgery: Forgery, like false signatures, also includes creating counterfeit instruments or improvising legal instruments to mislead the involved parties. Such actions may cause both penalties and damages.
• Failure to Respond to Notice of Dishonour: A Drawer or endorser who denies responding to a given notice of dishonour within 15 days is also a violation under the Act. Not giving a response to the notice might result in the forfeiture of defences and might restrict the ability of the party to contest the claims in court.
• Improper Transfers and Endorsement (Section 30-45): If a NI is endorsed or transferred improperly, or if the transfer does not comply with the provided procedures, it will be a violation of the Act. This will invalidate the transfer, resulting in the transferee's legal right to claim payment under the Act. 
• Modifications of Negotiable Instruments (Section 87): Any unofficial alteration made to a negotiable instrument, like changing the amount or date on the cheque or bill of exchange, might result in a violation. The instrument will become null and void unless all the involved parties authorise the modification.
• Non-Adherence with the Stipulated Time: The Act establishes rigid and strict time frames for actions, including the presentation of instruments for payment, issuance of notices, and filing of complaints regarding cheque dishonour. Failure to meet these time frames may lead to case dismissal or forfeiture of the right to claim the owed amount.
• Disrepute for Absence of Lawful Consideration (Section 118): If an NI clashes and it is resolved that there was no legal consideration for its making, it is considered a violation. A cheque issued without a valid fundamental debt or obligation might be regarded as invalid or unenforceable.
• Insufficient Record-Keeping: Banks and other financial institutions should maintain accurate and up-to-date records of the NI they process. Failure to correctly document or comply with established procedures for crossed cheques or the negotiation of Instruments might lead to violations.

Procedure for Filing a Case

• Cheque Dishonour: The procedure begins when a bank dishonours a cheque due to insufficient funds, stopped payments, or account closure. The bank will provide a cheque return memo that highlights the reason for the return.
• Legal Notice: After the dishonour of the cheque, the payee must deliver a legal notice to the drawer within the given time frame, which is 30 days of receiving details concerning the dishonour. The notice should request the payment of the cheque amount within 15 days of its receipt. Additionally, it should be delivered via registered post or speed post, ensuring receipt of the delivery proof.
• Lodging a Complaint: If the drawer does not settle the amount of the cheque within 15 days, the payee can file a criminal complaint under section 138 of the Act. The complaint should be submitted to a court of magistrates within 1 month after the notice period of 15 days expires. It should be filed in the court where the cheque was presented for payment, or where the cheque was dishonoured, or the residence or business locality of the drawer.
• Details of the Complaint: The complaint should have all the complete information, consisting of the number of cheques, amount, date of issuance, the reason for dishonour, the evidence of receipt of legal notice, and also an affidavit supporting a legal complaint.
• Court Proceedings: After the complaint is filed, the court will issue a summons requesting the appearance of the drawer. The court will review the case, acknowledging the evidence to settle if the drawer is guilty of dishonouring the cheque. This case might involve the examination of witnesses and the submission of relevant documents.
• Possible Decisions of the Case: If the court finds the drawer guilty, they could face imprisonment for up to 2 years or a fine of up to twice the value of the cheque, or both. Additionally, the drawer may be required to compensate the complainant, which may also include the amount of the cheque, along with additional compensation for any inconvenience.
• Appeal Process: If any of the parties is not satisfied with the decision of the court, they have the right to appeal the ruling to a higher court within 30 days of the judgment.
• Additional Remedies: In some situations, the payee and drawer may agree outside of court through mediation or settlement; however, this is only possible before the commencement of the trial or if the magistrate permits. 

How Can Seasoned Advocates Help You?

• Specialized Lawful Assistance: Help in understanding the legal rights and options, and clear the lawful aspects under Section 138 and other relevant sections of the Act. Calculate the specific details surrounding the cheque dishonoured, giving suggestions on the feasibility of pursuing lawful action and highlighting the most appropriate approach.
• Drafting of Legal Notice: Guarantees that the legal notice required under the Act is drafted precisely and meets all the mandatory legal standards. This also includes careful phrasing, an apparent demand for payment, and adherence to the 30-day time frame for sending the notice. The notice often plays a crucial role in the matter, and its accuracy can sometimes impact the outcome.
• Detailed Documentation: Handle the complexity of mandatory documents such as bank return memos, notices of proof delivery, and other supporting documents. Ensuring that everything is in place to strengthen the case.
• Commencing with the Court Case: Confirm that the complaint is filed in the appropriate court, entirely based on jurisdiction. Ensure compliance with a one-month filing time frame. Ensure that the complaint is submitted within the given stipulated time, preventing the case from being dismissed because of delays.
• Proficient Court-Examination: Examining witnesses, including the drawer of the dishonoured cheque, and is vocal about persuasive arguments. Emphasize disparity in the defense's claims, strengthen the position of the payee, and advocate effectively in front of the magistrate. 
• Settlement and Negotiation: Cases under the Act can be resolved by mediation or compounding. Guide in negotiating a satisfactory settlement among the parties, ensuring the payee receives payment without the need for an unnecessary, lengthy court battle. The process may allow for the removal of the case if the drawer fulfils the complete payment. 
• Enforcement of Orders: After a satisfactory ruling, if the court mandates payment, a lawyer can guide in implementing the ruling, ensuring that the drawer fulfills the amount of the cheque or faces sanctions. This may involve commencing warrants of attachments or other implementation measures.  

Conclusion  

The Negotiable Instruments Act, 1881, established the legal framework governing the use, transfer, and imposition of Negotiable Instruments, including cheques, promissory notes, and bills of exchange, in India. The Act identifies negotiable instruments, outlining the procedures for their issuance, endorsement, and dishonour, and describes the rights and obligations of the parties involved. It introduces provisions for cheque dishonor, furnishing a lawful remedy for the payee in circumstances of insufficient funds or halted payments. To know more, contact us.