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The Negotiable Instrument Act

The Negotiable Instruments Act.,1881 is a common English law. It was enacted on 1st of March 1882. The main purpose of the act was for trade and commerce mainly merchandise. Section 13 of the act defines the term Negotiable Instrument.

The term Negotiation means transfer. Transfer can be made by two ways:

  1. Delivery (Delivery of cheque means a cheque with no name on it is termed as bearer cheque. For example if A sign a cheque mentioning no party to pay a cheque, b further transfers the cheque, the mode of transfer will be termed as delivery.) and
     
  2. Endorsement ( for eg : if a cheque is named on abc, and abc further wants to pay to xyz , here abc will sign on the back of the cheque and further the cheque will be paid to xyz. This transactions is termed as endrosment.)
And the term Instrument means written document. Any transferable document which can be negotiated further. The negotiated document can be negotiated as many times as we want depending on the maturity duration of that said document.

For example: If the maturity period of the said document is given 6 months then within the same period we can negogiate the document as many times as we want.
Salient features of the act
  1. Transferability
  2. Independent title
  3. Certainty
  4. Right to sue

The act is mainly based upon
  1. Promissory note defined under( section 4) of the act
    The ingredients are as follows:
    1. Must be in Writing and signed by maker.
    2. Must have Promise undertaking to pay.
    3. It should be an Unconditional promise.
    4. It should be only through money.
    5. There shall be No certain amount of money mention . it should be either 2 Rs or 5 Rs.
    6. Name of the Parties to be strictly mentioned.
    7. Two parties maker and other one payee. Where promise is made for certain days. Stamp duty is complusary and time limit should be mentioned.
  2. Bills of exchange is defined under (section 5) of the act It must be Signed by drawer.
  3. Cheque is defined under ( section 6) of the act Demand draft is also included as cheque.
Question: can we negotiate cheque?
Answer: - yes it can be negotiate

Types of cheques:
  1. Trucated cheque
  2. Electronic cheque
  3. Bearer cheque
  4. Order cheque
  5. Cross cheque

The act defines Croosing of cheque in section123,124,130.
A giest of Section 123, 124, 130
  1. Sec 123 - General crossing ( When we make Two lines in cheque. Firm/ company name. the cheque amount will be transferred to that particular person either company or Firm)
     
  2. Sec 124- Special crossing (when we make two lines where bank name is written , if I have account in PNB, ICIC etc ,but the line mentions SBI, in this circumstances the particular cheque will be deposited to SBI branch only to that in the same bank it will be deposited.)
     
  3. Sec 130- Cheque bearing Not negotiable ( when we make two lines on cheque and it mentions negotiable, but the same can be it canbe negotiated . It will reflect as an impact as holder in due course and no for the same case cannot be filed in the court.)
     
  4. Account payee crossing (when we make two lines on cheque the normal which we do, that means the person to whom the cheque is written will get it.)

Classification of instruments
  1. Location (Inland (section 11) & Foreign Instrument (section 12))
  2. Payee (Bearer & Order)
  3. Payment (demand & Time)
  4. Validity (Inchoate (section 20)& Ambigious (section 17))

Section 138-142
We can say they are the most important sections defined in the act. They are the soul of this act. The root of this act.

Of Penalties In Case Of Dishonour Of Certain Cheques For Insufficiency Of Funds In The Accounts
Section 138
Section 138 is not applicable on dishonouring of cheque through bank of exchange. It is only applicable in cheque. The most important feature is the maturity date which is 3 months. The cheque where the Date is mentioned within 3 months that will be accepted, but the same will become void after 3 months.

Section :138. - Dishonour of cheque for insufficiency, etc., of funds in the account:
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 8 [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:
  1. 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;
     
  2. 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, 9 [within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
     
  3. 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.

Ingredients of section 138
  • A person must have drawn a cheque for payment of money to another for the discharge of any debt or other liability;
  • That cheque has been presented to the bank within a period of three months;
  • That cheque is returned by the bank unpaid, either because insufficient of funds or that it exceeds the amount arranged to be paid from that account by an agreement made with the bank;
  • The drawer fails to make payment to the payee within 15 days of the receipt of the notice.
  • The cheque must have been drawn for discharge of existing debt or liability. Cheque must be presented within 6 months or within validity period whichever is earlier.
Section 139 Presumption in favour of holder:
It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability.

Section 140. Defence which may not be allowed in any prosecution under section 138:
It shall not be a defence in a prosecution for an offence under section 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section.

Section 141. Offences by companies:
  1. If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence:
    1 [Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.]
     
  2. Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, sectionretary or other officer of the company, such director, manager, sectionretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

    Explanation:
    For the purposes of this section:
    1. company means anybody corporate and includes a firm or other association of individuals; and
    2. director, in relation to a firm, means a partner in the firm.

Section142. Cognizance of offences:
2 [(1)] Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974):
  1. no court shall take cognizance of any offence punishable under section 138 except upon a complaint, in writing, made by the payee or, as the case may be, the holder in due course of the cheque;
  2. such complaint is made within one month of the date on which the cause of action arises under clause
  3. of the proviso to section 138:
3 [Provided that the cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period;] (c) no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall try any offence punishable under section 138.]. 4 [(2) The offence under section 138 shall be inquired into and tried only by a court within whose local local jurisdiction:
  1. if the cheque is delivered for collection through an account, the branch of the bank where the payee or holder in due course, as the case may be, maintains the account, is situated; or
  2. if the cheque is presented for payment by the payee or holder in due course, otherwise through an account, the branch of the drawee bank where the drawer maintains the account, is situated.
Explanation:
For the purposes of clause (a), where a cheque is delivered for collection at any branch of the bank of the payee or holder in due course, then, the cheque shall be deemed to have been delivered to the branch of the bank in which the payee or holder in due course, as the case may be, maintains the account.]

Section 142A. Validation for transfer of pending cases:
  1. Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974) or any judgment, decree, order or direction of any court, all cases transferred to the court having jurisdiction under sub-section (2) of section 142, as amended by the Negotiable Instruments (Amendment) Ordinance, 2015 (Ord. 6 of 2015), shall be deemed to have been transferred under this Act, as if that sub-section had been in force at all material times.

  2. Notwithstanding anything contained in sub-section (2) of section 142 or sub-section (1), where the payee or the holder in due course, as the case may be, has filed a complaint against the drawer of a cheque in the court having jurisdiction under sub-section (2) of section 142 or the case has been transferred to that court under sub-section (1) and such complaint is pending in that court, all subsequent complaints arising out of section 138 against the same drawer shall be filed before the same court irrespective of whether those cheques were delivered for collection or presented for payment within the territorial jurisdiction of that court.

  3. If, on the date of the commencement of the Negotiable Instruments (Amendment) Act, 2015 (26 of 2015), more than one prosecution filed by the same payee or holder in due course, as the case may be, against the same drawer of cheques is pending before different courts, upon the said fact having been brought to the notice of the court, such court shall transfer the case to the court having jurisdiction under sub-section (2) of section 142, as amended by the Negotiable Instruments (Amendment) Ordinance, 2015 (Ord. 6 of 2015), before which the first case was filed and is pending, as if that sub-section had been in force at all material times.]

The reasons why the cheque gets dishounred are as above:
  1. Insufficient fund
  2. Fraud in signature
  3. Stop payment ( countermanded payment)

*There is a provison when a cheque is issued and one who will receive it one contract will be made amongst the parties and that breach of contract is not maintainable.
It is criminal offense under section 406 and 420 of Indian Penal Code.

Courts under which the cases have jurisdication are:

Judicial magistrate first class and metropolitan magistrate
Process of how the cheque gets dishonoured and within what time a party can send notice/ appoarch court

When a cheque check gets dishonored:
  1. Step 1: Bank will inform holder (payee) with the specific reason of why that particular cheque is dishonoured.
  2. Step 2: Holdler with the help of his/her Advocate will send legal notice to drawer within 30 days of the cheque return.
  3. Step 3: Holder will give time limit of 15 daysto drawrer to pay the pay the amount after receiving Legal Notice. Even within 15 days if, drawer lacks paying the amount, or even if he pays half the amount, the transaction will still be void and it will still be counted as dishonor.
  4. Step 4: If drawer still fails to pay the amount within 15 days then the holder has liability to file court case. He has time period of 1 month to file a case and the time period starts from 16th day of the expiry of notice.
  5. Step 5: As a Punishment Imprisonment for 2 years and double the amount of penalty has to be paid by the drawer and even the interest.

Recent amendment
The Negotiable Instruments (Amendment) Act, 2018 was amended on September, 2018 wherein, section 143 A was inserted which allows the Court:
  1. Time period of 6months changed to 3 months.
  2. The amendment also directs the drawer to pay interim compensation which does not exceeds 20% of the cheque amount to the complainant within 60 days of the trial court's order.
  3. This interim compensation is to be paid either in a summary trial or a summons case.

Some Important Judgments on section 138
  1. K.Bhaskaran v. Shankaran
    The above case had given jurisdiction to initatie the prosecution at any of the following places.
    1. Where cheque is drawn
    2. Where payment had been made
    3. Where cheque is present for payment
    4. Where cheque is dishonoured
    5. Where notice is served to drawer.
  2. Naveen Mahlotra v. GOVT of NCT Delhi
    A bench of Justice Gauba, Delhi High Court passed an order that the bank has locus standi to bring a case of offence under section 138neven in respect of cheque issued in other’s name but to discharge the liability of overdraft.
    Complaint case is maintainable even if cheque is not endorsed in favour of the bank.
     
  3. Dayawati v. Yogesh Kumar Gosani
    Delhi High Court, has drawn a distinction between traditional criminal cases and offences under section 138 to hold that it is legal to refer a criminal compoundable case as one under section 138 to mediation.
     
  4. Smt. Asha Baldwa v. Ram Gopal
    The petitioner instituted petition under section 482 CRPC for quashing the entire proceeding for offence under section 138 of NI Act. The court held only handing over of dishonored cheque doesnot attract offence under 138 NI act.
     
  5. Madan Tiwari v. Yashwant Kumar Sahu
    The petitioner had been convicted for an offence under section 138 of NI act and sentenced to undergo two years of rigorous imprisonment along with fine of Rs 5,000/-. The proceedings were held against him somewhere in april 2004 and he was held guilty by the Apex Court. After 15 years the accused went to the supreme Court seeking exemption from surrendering with a request that petitioner is ready to pay the cheque amount.

    However, the Supreme Court has rejected a request of an accused in a cheque bounce case for his exemption from surrendering though he offered the payment of the cheque amount.

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