Negotiable Instrument Act, 1881

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Negotiable Instrument Act, 1881

A document or a piece of paper that guarantees payment of a certain amount of money to a specified person (payee) either immediately upon demand or at a predetermined period is known as a negotiable instrument. It is a document made up of a contract that ensures unconditional payment of money that can be paid now or later. In other words, any document that grants ownership over a quantum of money as well as can be transferred by delivery is addressed as a negotiable instrument. To govern the use of negotiable instruments in India, the Negotiable Instrument Act of 1881 was defined. On March 1, 1881, the Act of 1881, came into force and extends to the whole of India. It is “An Act to define and amend the law relating to Promissory Notes, Bills of Exchange and Cheques.” The Negotiable Instrument Act consists of a total of 147 Sections that are spread over 17 chapters. As per the Negotiable Instrument Act of 1881, no phrase appropriately defines ‘negotiable instrument’ whereas Section 13 of the Act states that “A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.” 

Promissory Note

A promissory note is a piece of paper or a document that contains a written promise between the two parties, the payor, and the payee. The payor promises to pay the payee a specific sum of money either immediately or at a specific time in the future. According to Section 4 of the Negotiable Instrument Act of 1881, “A ‘Promissory note’ is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.” The note must be signed, sealed, and written down without conditions as well as must include a commitment to pay just money. Also, the owing amount and maker, payee, or parties involved in the promissory note must be certain. It enables corporations or individuals to obtain financing from a source other than financial institutions or banks. The primary and important information involved in the promissory note includes the specified principal amount, date of issuance, term length, interest rate, and signature of the payor.

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Bills of Exchange

As per Section 5 of the Negotiable Instrument Act of 1881, “A ‘bill of exchange’ is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to be the bearer of the instrument.” The payee, the drawer, and the drawee are the three parties involved in this negotiable instrument. According to Section 31 of the Reserve Bank of India Act, 1934, no one other than the Central Government or the Reserve Bank of India may draw, accept, make, or issue any promissory note or bill of exchange. 

Cheque

A financial document that orders a bank to pay a specific amount of money from one account to another person’s account is termed a cheque. According to Section 6 of the Act, “A ‘cheque’ is a 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.” There are three parties involved in a cheque, the drawer (a person who issues the cheque), the drawee (a person, always a bank, on whom a cheque is drawn), and the payee (a person to whom payment is made). 

Cheque Bounce or Dishonor of Cheques

A cheque bounce or dishonor of a cheque by a financial institution occurs when there are insufficient funds in the bank account of the drawer. Chapter 17 of the Negotiable Instrument Act, 1881, which includes Sections 138-147, mainly deals with the “penalties in case of dishonor of certain cheques for insufficiency of funds in the accounts.” According to Section 138 of the Act of 1881, cheque bouncing is a criminal offence with a punishment of up to one year or a fine of double the amount of a dishonored cheque or both. In the cheque bounce case, the first and foremost thing to be done by the drawer is to deposit the amount required in his account and then request the payee for the cheque resubmission. In India, various other laws govern cheque bounce such as the India Evidence Act, 1872, Bills of Exchange Act, 1882, Criminal Procedure, 1973, Banker’s Book Evidence Act, 1891, the Specific Relief Act, Indian Limitation Act, 1963, the Information Technology Act, 2000, India Contract Act, 1872, the Indian Penal Code, 1860, The Indian Constitution, and various others.

Reasons for the dishonor of cheque

• Lack of sufficient balance in the drawer’s account to meet the amount to be paid. 
• The drawer’s signature is either unclear or mismatches the one stored in Bank’s database or is absent.
• The drawer closes his account before presenting the cheque to the bank.
• Overwriting on different fields (name, amount, account number, etc.) of the cheque.
• Mismatch of the amount entered in figures and digits.
• Payee’s name is not mentioned or is unclear or wrong.
• The account number is not mentioned correctly or in a readable manner.
• Alterations on the cheque which are not approved or verified by the drawer.
• Incorrect or absence of a date, payee’s name, or amount on the cheque.
• Cheque is in a tormented form such as wet or torn.
• If payment of the cheque is stopped by any Court.
• The date mentioned on the cheque expires (the cheque has a duration of three months).

Cheque Bounce Notice

The cheque bounce notice is sent to the payee within 30 days from the cheque bounce date. After receiving the cheque notice, the drawer has 15 days to deposit the required amount into the bank account, if he/she fails to do so, then a complaint is registered in the Magistrate Court having jurisdiction for the same under Section 138 of the NI Act. This notice is sent via registered post to record issuing date of notice formally and include the cheque beneficiary’s name, address and name of the cheque issuer, reasons for return of cheque, the return date of the cheque, and immediate alternate payment request made to the cheque issuer. 

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Legal Implications of Cheque Bounce

• Negative impact on the CIBIL score: A three-digit number ranging from 300 to 900 to determine the financial credibility of an individual to repay a loan on time is the CIBIL score. This number is used by banks as well as other non-banking financial companies. A cheque bounce leads to a negative CIBIL score which may create an issue for the person while applying for a loan in the future from the bank.
• Civil suit or criminal complaint: A cheque bounce may also lead to a lawsuit for dishonesty and cheating under Section 420 of IPC (Indian Penal Code) which must be proved against the drawer during the hearing of the lawsuit.
• NSF (non-sufficient fee) Bank penalty:  In cases related to cheque bounces because of insufficient balance in the account, signature mismatching, or any other issue, the bank imposes a penalty in NSF form depending upon bank account type. 

Moreover, for those who are accused of dishonor of cheques (exceeding 1 crore rupees), a minimum four number of times, the banks will stop issuing chequebooks to those defaulters.

Case Laws

1. Canara Bank vs. Canara Sales Corporation and Ors. (1973) (Forged Signature Case)

Name of the Parties

Appellant: Canara Bank

Respondent: Canara Sales Corporation & Ors.

Bench: Justice V. Khalid and Justice G.L. Oza

Facts of the case: Respondent firm held an account in the Mangalore branch of the bank. The account was handled by MD along with the GM of a subsidiary firm. The second defendant had the ownership of chequebook issued by them to the respondent. Many inconsistencies that pointed toward the misappropriation of cheques were found. It came to the knowledge of the respondent that the signature of MD was forged for the withdrawal of money (Rs. 3,24,047.92).

Issues in the case: Recovery of the said amount as per the forged cheques were not authorized, and Respondent was unaware of the fraud till another accountant discovered it.

Held by the Supreme Court: The Supreme Court bench stated that the bank has to pay the said amount with 6% interest. Also, it was observed that the bank was at fault for accepting forged cheques. The bench further opined that customers don't need to maintain a passbook. In addition, the top Court stated that the bank’s business depends on the trust between customers and banks.

1. Modi Cements vs. Kuchil Kumar Nandi (1998) (Stop Payment case)

Name of the Parties

Appellant: M/S. Modi Cements Ltd.

Respondent: Shri Kuchil Kumar Nandi

Bench: Justice M.K. Mukherjee, Justice K.T. Thomas, and Justice S.P. Kurdukar

Facts of the case: A cheque was drawn in favor of Modi cement by Kuchil Kumar Nandi. After issuing the cheque, he asked the appellants not to present the cheque to the banks and also requested the bank to stop payment. These actions of Kuchil Kumar Nandi were challenged in court.

Issues in the case: The Legality of the cheque returned as unpaid due to the request by the drawer to stop payment.

Held by the Supreme Court: The Supreme Court bench hearing the matter stated that the ‘act of crime is committed’ even if a notice was issued for stopping the payment before the payee deposited the cheque in the bank. Also, the top Court highlighted that “Once the cheque is issued by the drawer a presumption under Section 139 of the NI Act must follow.” Further, the bench stated, “The object of bringing Section 138 on statute appears to be to inculcate faith in the efficacy of banking operations.”

1. M.M.T.C. Ltd., M/s. vs. M/s. Medchl Chemicals and Pharma (P) Ltd. (2001) (Section 139, Section 142)

Name of the Parties

Appellant: M/S M. M. T. C. Ltd. & Anr.

Respondent: M/S Medchl Chemicals & Pharma P. Ltd. & Anr.

Bench: Justice K.T. Thomas and Justice S.N. Variava

Facts of the case: There was a Memorandum of Understanding between the respondent and appellant as the amounts mentioned in the cheques were not paid, and two complaints were filed. Four other cheques issued by the respondent were also dishonored. 

Issues in the case: A complaint under Section 138 could be maintained if the cheque was dishonored for the reason of insufficient funds or if the amount of the cheque exceeds the amount in the account.

Held by the Supreme Court: “The burden of proving that there was no existing debt or liability was on the respondents.”

Conclusion 

Cheque bounce is a serious crime and is punishable with both a fine or a term sentence. In India, the punishment for a Cheque bounce is either imprisonment for up to one year or a fine equal to double the amount entered on the dishonored cheque or both. If the drawer of the cheque pays the amount within 15 days of receiving the cheque bounce notice, then no legal consequences are faced by the drawer. On the other side, if the drawee does not receive any payment within 15 days then the cheque forgery case could be filed by him within a month from the end of cheque bounce notice period.

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