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Negotiable Instrument Act 1881

negotiable instrument act

To ease the commercial transactions, negotiable instruments play an important role as it is very convenient and eases the burden of cash transactions.

What is negotiable instrument act?

Section 13 of Negotiable Instruments Act defines a negotiable instrument as a promissory note, bill of exchange or a cheque payable either to order or to bearer. Negotiable means transferable and instrument means a written document.

A negotiable instrument can be defined as one which passes a title to the drawee from the drawer by delivery or by endorsement and delivery, the drawee is a bona fide holder in value without knowledge of any defect to the attachment or title of the instrument. A cheque is the most used negotiable instrument whose usage was increased with the development of the banking and financial sector in India.

Negotiable instruments Act, 1881

The Act was enacted during the British era, which was drafted by the third law commission in 1866. The Act was enacted with 142 sections and later in the 2003 amendment act, Section 143Section 147 was added.

The act regulates the negotiable instruments, it also punishes for misuse or wrong use of the instrument. There are three types of Negotiable instruments recognized by the act: Promissory notes, Bills of Exchange and Cheques.  It provides important definitions of the negotiable instrument, cheque, bill of exchange, the holder in due course, payment in due course, drawer-drawee, etc. The act regulates the rights, duties and the liabilities of the drawer, drawee, holder in due course, etc. it provides for a mechanism where there is a defect in the title with or without knowledge.

Some important sections

Section 4-6 provides for definitions of a promissory note, bill of exchange and a cheque respectively. Section 7 of the Act provides for the meaning of drawer and drawee. The person who makes the instrument is the drawer and the person who is directed to get the amount payable is drawee. Section 18 provides the situation where the amount is different in numbers and words, the amount specified in words shall be the amount payable. The payment of the instrument should only be made to the holder of the instrument, section 78. The types of crossings of the cheque have been covered under S-123, 124 and 126. There can be three types of dishonour i.e. Dishonour by non-Acceptance (Section 91); Dishonour by non-payment (Section 92), and dishonour of cheque for insufficiency of funds (Section 138).

Section 138 of negotiable instrument act

Insufficiency of funds in the account from which cheque is drawn constitutes the offence of dishonour of cheque under Section 138. An offence under Section 138 has been created to protect the essence of the act and to honest people should not be harassed. It is a civil liability which can be converted to criminal liability

The following are the acts which must be present in order to constitute an offence under section 138:

  1. Drawing of Cheque
  2. Presentation of the Cheque to the bank within 6 months from the date of which it is drawn.
  3. Returning the cheque unpaid by the drawee bank
  4. Giving notice in writing to the drawer of the cheque demanding payment of the cheque amount within 30 days of the receipt of the information from the bank.
  5. Failure of Drawer to make payment within 15 days of the receipt of the notice.[1]

Dalmia Cement (Bharat) Ltd. v Galaxy Traders and Agencies Ltd.[2], is a landmark judgment where the Apex Court opined about the object of Section 138 of negotiable instrument act. The objective is purely imposing a strict liability with respect to the instruments referred. All commercial transactions, i.e. commercial laws are the species to the Negotiable Instrument Act which is the genus. These instruments of credit should be convertible to money and there should be no delay in passing of the title from the drawer to the drawee.

There can be various reasons for the dishonour of cheque such as incorrect signature, insufficiency of funds, material altercations, account closed[3], frozen Account Etc. The punishment provided under section 138 is imprisonment extending up to two years or fine which extend up to twice the amount of the cheque or both. Both civil[4] and criminal complaints can be filed.

Section 141 of the negotiable instrument act

Section 141 of the negotiable instrument act deals with the dishonour of cheque drawn by a company. The section extends vicarious liability to every person who when the offence was committed was in charge of or responsibility for the conduct of the business which also extends to key managerial positions like the Director. In the case of Aneeta Hada v. Godfather Travels and Tours Private Limited[5], the Apex Court held that Company can be prosecuted and only then the person responsible can be vicariously liable.

To attract the provisions of section 141, the offence of Section138 shall have been committed by the company as the principal offender.[6] However, no person shall be held liable if the person proves the fact the offence has been committed without his knowledge or all necessary steps was taken by him to prevent the happening of the offence.

In the case of K.K. Ahuja v. V.K. Vora and anr[7], the Supreme Court summarized the provisions of section 141 for the understanding which as follows:

  1. If the person so accused is the managing director or joint managing director, then there needs to be shown no proof of him being responsible because the word “managing’ before a director is sufficient to hold the person liable. The only thing to be shown is he/she was the managing director at the time of committing the offence,
  2. For the Director or any officer of the company who signed the cheque on behalf the company, there need not be the requirement of any special proof to prove to be in charge or responsible for the business of the company. The sign on dishonoured cheque tantamount amounts to responsibility under Section 141(2).
  3. For every person mentioned under Section 2(24) of Companies Act, there need to be special averments which will prove the involvement of the person in the business. Some special averments with respect to consent and negligence may be required.
  4. Other officers of the company can be held liable for such offence of dishonour under section 141(2).

Conclusion

Negotiable instrument Act, 1881 deals with all the provisions of the instruments which are a crucial part of the modern-day commercial transactions due to development in the banking, trading and other commercial sectors. The act provides for liabilities and duties of both the drawer and drawee. Section 138 and 141 of the Act deals with stringent measures for the offence of dishonour of cheque by individual and by the company.

[1] Paragraph 9 of Sita Ram Singhania v State of Gujarat, (2005) 2 GLR 1298

[2] (2001) 6 SC 463

[3] NEPS Micon Ltd. and others v. Magma Leasing Ltd., 1999 ISJ (BANKING) 0433

[4] Money recovery suit under order 27 of the Civil Procedure Code

[5] (2012) 5 SCC 661

[6] Anil Hada v Indian Acrylic Ltd AIR 2000 SC 145

[7] (2009) 10 SCC 48

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