AN OVERVIEW OF NEGOTIABLE INSTRUMENTS ACT, 1881 - BY A.M.S SAI RAM

INTRODUCTION

Negotiable Instruments Act, 1881 is a special act. In India Negotiable Instruments Act started during the tenure of British Empire. To meet the commercial activities. During rule of the British Empire in India there was no concept of rules relating to negotiation and hence the law of Negotiable Instruments Act of England was applied in Indian courts. Later the British Empire drafted the negotiable instruments Act in 1866 by the law commission of India and introduced in the council in 1867 and further referred to a select committee. The objectives of the act were raised by several business communities to the deviations contained in British law. Later the bill has been redrafted in 1877 but opposed by the local government and in the year 1880 by the order of the secretary of the state the bill had been referred to the new law commission and sent to the new selected law committee. Later Negotiable Instruments Act was implemented in the year 1881 in India by British Empire. At present the act is based on English act with certain modifications. The act extends to whole of India except to the state of Jammu and Kashmir. The act came into force on 1^st march 1882 .

OBJECTIVES OF THE ACT

· The Act facilitates the transfer of payments in business and trade as they pass freely from holder to holder due to easy transferability.

· The Act regulates the various types of negotiable instruments such as Promissory notes, Bills of Exchange and Cheques.

·  The Act explains the rights and liabilities of the parties for the instrument.

· The Act implants the faith in the banking operations and the credibility in transaction business of the negotiable instruments.

VARIOUS TYPES OF NEGOTIABLE INSTRUMENTS

There are two types of negotiable instruments which are negotiable and not negotiable. Promissory notes, Bills of exchange, Cheques, Bank drafts, Hundis, etc are negotiable. Money order, Pay order, deposit receipt, debentures, etc are not negotiable.

ESSENTIAL CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS

AS FOLLOWS:

1. The instruments must be in writing which includes type, printing and engraving.

2. The instrument must be signed by a drawer or maker.

3. The instrument must contain an unconditional promise to pay.

4. The instrument must be called for payment of certain amount of money.

5.  The instrument must be payable at a specified time. If it is not paid in a certain time it is not negotiable.

6.  The instrument must be in a certain state that it can be transferred like cash or by simple delivery.

PROMISSORY NOTE, BILL OF EXCHANGE, CHEQUE

Section 4 of the Act defines, A promissory note is an instrument in writing (note being a bank-note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to or to the order of a certain person, or to the bearer of the instruments. An instrument to be defined as a promissory note must be in the form of writing and it must certainly an express promise or clear understanding to pay. Maker is the person who promises to pay the amount stated in the note. Payee is the person to whom the amount is payable. Holder is the payee or the person to whom the note might have been endorsed. Section 5 of the Act defines, “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 the bearer of the instrument.                                                                                                                  

There are usually three parties to a bill of exchange drawer, acceptor, payee, endorser, endorsee, and holder. The maker of a bill of exchange is called the ‘drawer’. The person who has to pay the money by the drawer is called the ‘drawee’. Acceptor is a person who accepts the money in place of the drawee then he is called the ‘acceptor’. Payee is the person to whom the money is to be paid. Where he signs his name and makes the instrument payable to some other person, the other person does not become the payee. When the holder transfers the instrument to someone else, the holder becomes the ‘endorser’. The person to whom the bill is indorsed is called an ‘endorsee’. Section 6 of the Act states that a cheque is a bill of exchange drawn on a specified banker, and not expressed to be payable otherwise than on demand”. The parties to a cheque are drawer, drawee, payee. Drawer is the person who draws the cheque who deposits the money from the bank. Drawee is the person on whom the cheque has been drawn from the bank. Payee is the person who is entitled or subjected to receive the payment of cheque. According to section 6(a) and 6(b) defines about the cheques in an electronic form and truncated form. Electronic form means a cheque drawn in electronic form by using any computer resource and signed in a secure system with digital signature (with or without biometrics signature) and a symmetric crypto system or with electronic signature. Truncated form means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.

PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTS

Sections 118 and 119 of the Negotiable Instrument Act, 1881. Lay down certain presumptions which the court presumes in regard of the negotiable instruments. The following presumptions shall be made in case of all negotiable instruments Consideration, Date, Time of acceptance, Time of transfer, Order of endorsement, Stamp, Holder in due course, Proof of protest.

DISHONOUR OF A CHEQUE

When a negotiable instrument like cheque is dishonoured, the holder of the instrument must give a notice of dishonour to all the previous parties in order to make them liable. A negotiable instrument can be dishonoured either by non-acceptance or by non-payment. A cheque and a promissory note can only be dishonoured by non-payment but a bill of exchange can be dishonoured either by non-acceptance or by non-payment. The dishonour of cheque is discussed in 138 of Negotiable Instruments Act, 1881. 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 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. The act shall not apply unless. The cheque has been presented to the bank within a period of three months from the date on which it is drawn. 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, [within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid. 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. A cheque is dishonoured when there are insufficient funds, difference in the signature, cheque presented after three months of the date, when payment is stopped by account holder, death of the customer, etc.

DISHONOUR OF A CHEQUE FOR INSUFFICIENCY OF FUNDS IN THE ACCOUNT

According to section 138 to 143 and 143(A) of Negotiable Instruments of Act, 1881. Speaks about the consequences of dishonour of cheque, there are certain remedies for a payee to be followed whenever a cheque is dishonoured. In a sum up since inception of the Negotiable Instruments Act, 1881, most of the honest drawers, drawees /payees have been utilising the system promulgated under the act in banking, to develop their business and other money transactions in a smooth manner. The legislature also has been making required amendments from time to time till the year 2015, to meet the needs of honest drawers and to punish the un-scrupulous drawers, and there by maintaining its efficacy in the business community.