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An Overview of Negotiable Instruments and Legal Issues in India
Meaning of Negotiable Instruments
The term negotiable refers to the concept of “transferable by delivery,” while instrument means a written document that creates a right in favor of an individual. Therefore, a negotiable instrument is a written document that is transferable by delivery.
According to Section 13(1) of the Negotiable Instruments Act, 1881 (NI Act), a negotiable instrument includes a promissory note, bill of exchange, or cheque that is payable either to order or to bearer.
Types of Negotiable Instruments
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Negotiable Instruments by Statute
The NI Act mentions three types of negotiable instruments (Section 13):- Promissory Note
- Bill of Exchange
- Cheque
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Negotiable Instruments by Custom or Usage
Some instruments acquire the character of negotiability by trade usage or custom. Examples include Exchequer bills, Bank Notes, Share warrants, and Bills of Lading.
Comparative Analysis of Promissory Note, Bill of Exchange, and Cheque
| Basis of Comparison | Promissory Note | Bill of Exchange | Cheque |
|---|---|---|---|
| Meaning | Unconditional promise by the debtor to pay a sum to the creditor on a specified date. | Unconditional order showing the buyer’s indebtedness to the seller. | A document used for making payments on demand. |
| Defined in | Section 4 of the NI Act | Section 5 of the NI Act | Section 6 of the NI Act |
| Number of Parties | 2 (Drawer and Payee) | 3 (Drawer, Drawee, Payee) | 3 (Drawer, Drawee, Payee) |
| Drawn by | Debtor | Creditor | Debtor |
| Validity Period | Not applicable | Not applicable | 3 months |
| Payable to Bearer on Demand | Not applicable (as per RBI Act) | Yes | Always |
| Can Drawer and Payee be Same Person? | No | Yes (When discounted) | Yes (When payable to self) |
| Stamping | Yes | Yes | No |
| Notice of Dishonour | No notice required | Notice required for dishonour | Notice required for dishonour |
Advantages and Disadvantages of Different Negotiable Instruments
Promissory Note
- Advantages: Simple, straightforward, used in personal transactions, legally binding.
- Disadvantages: Not suitable for complex transactions, no bearer option.
Bill of Exchange
- Advantages: Easily transferable, useful for credit transactions, certain terms.
- Disadvantages: Not binding unless accepted, limited for complex transactions.
Cheque
- Advantages: Convenient, stop payments possible, post-dating allowed.
- Disadvantages: Inconvenient for small amounts, worthless without funds in the account, time-consuming to deposit.
Parties to Negotiable Instruments and Their Liabilities
Under Section 26 of the NI Act, any person capable of contracting (i.e., above 18 years and of sound mind) can be bound by negotiable instruments.
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Maker: Person who makes a promissory note.
- Liability: Bound to pay the amount at maturity.
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Drawer: Person who makes a bill of exchange or cheque.
- Liability: Responsible for compensation in case of dishonour by the drawee.
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Drawee: Person directed to pay by the drawer (for cheque).
- Liability: Must pay the cheque if sufficient funds are available; compensates for default.
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Acceptor: Person who accepts a bill of exchange.
- Liability: Bound to pay the amount at maturity and compensate for any loss in default.
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Payee: Person named to receive the payment in the instrument.
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Holder: Payee or person to whom the instrument is endorsed.
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Holder in Due Course: A person who acquires the instrument for consideration, without any defect in the title.
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Indorsement: The act of transferring a negotiable instrument through a signature on it. The indorser becomes liable until the instrument is satisfied.
Legal Issues Pertaining to Negotiable Instruments
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Payment Banker’s Protection
Section 85 of the NI Act provides protection to the paying banker for payments made on order or bearer cheques unless the cheque is materially altered or the drawer’s signature is forged. -
Banker’s Liability on Altered Instruments
Under Section 89(1), the banker is discharged from liability if a materially altered instrument does not appear altered when presented for payment. However, in the case of electronic truncation of cheques, the exactness of the cheque’s image must be verified. -
Jurisdiction in Case of Dishonour of a Cheque
Section 142 of the NI Act specifies that a cheque bounce case can be filed only in the court at the location of the payee’s bank or drawee’s bank. -
Liability in Cases of Dishonour
The liability for compensation is capped at twice the cheque value, as per the Supreme Court ruling in Somnath Sarkar v. Utpal Basu. -
Period Calculation for Filing Complaints
The period within which a complaint must be made after dishonour of the cheque excludes the day the cause of action arises, as held in Econ Antri Ltd. v. Rom Industries Ltd.. -
Vicarious Liability in Case of Dishonour
Only the drawer of a cheque is primarily liable for its dishonour. Joint account holders are liable only if they have signed the cheque, as established in Aparna A. Shah v. Sheth Developers Pvt. Ltd.
Negotiable Instruments play a pivotal role in the financial and business landscape. Understanding the liabilities and rights of parties involved in promissory notes, bills of exchange, and cheques is crucial for ensuring smooth transactions. Legal issues related to dishonour, jurisdiction, and liability highlight the importance of due diligence and compliance with the Negotiable Instruments Act, 1881.
