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
The term Negotiation means transfer. Transfer can be made by two ways:
- 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
- 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
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
The act is mainly based upon
- Independent title
- Right to sue
- Promissory note defined under( section 4) of the act
The ingredients are as follows:
- Must be in Writing and signed by maker.
- Must have Promise undertaking to pay.
- It should be an Unconditional promise.
- It should be only through money.
- There shall be No certain amount of money mention . it should be either
or 5 Rs.
- Name of the Parties to be strictly mentioned.
- Two parties maker and other one payee. Where promise is made for certain
days. Stamp duty is complusary and time limit should be mentioned.
- Bills of exchange is defined under (section 5) of the act
It must be Signed by drawer.
- 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:
The act defines Croosing of cheque in section123,124,130.
A giest of Section 123, 124, 130
- Trucated cheque
- Electronic cheque
- Bearer cheque
- Order cheque
- Cross cheque
Classification of instruments
- 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)
- 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.)
- 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.)
- 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.)
- Location (Inland (section 11) & Foreign Instrument (section 12))
- Payee (Bearer & Order)
- Payment (demand & Time)
- Validity (Inchoate (section 20)& Ambigious (section 17))
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 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.
- Dishonour of cheque for insufficiency, etc., of funds in the
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:
nothing contained in this section shall apply unless:
Ingredients of section 138
- 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;
- 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
- 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 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.
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.
Defence which may not be allowed in any prosecution under section
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.
Offences by companies:
Section142. Cognizance of offences:
- 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
- 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:
- company means anybody corporate and includes a firm or other
association of individuals; and
- director, in relation to a firm, means a partner in the firm.
2 [(1)] Notwithstanding anything contained
in the Code of Criminal Procedure, 1973 (2 of 1974):
- 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;
- such complaint is made within one month of the date on which the cause
of action arises under clause
- 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:
- 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
- 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.
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:
The reasons why the cheque gets dishounred are as above:
- 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.
- 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.
- 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.]
- Insufficient fund
- Fraud in signature
- 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
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:
- Step 1: Bank will inform holder (payee) with the specific reason of why
that particular cheque is dishonoured.
- Step 2: Holdler with the help of his/her Advocate will send legal notice to
drawer within 30 days of the cheque return.
- 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.
- 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
- 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.
The Negotiable Instruments (Amendment) Act, 2018 was amended on September,
2018 wherein, section 143 A was inserted which allows the Court:
Some Important Judgments on section 138
- Time period of 6months changed to 3 months.
- 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.
- This interim compensation is to be paid either in a summary trial or a
- K.Bhaskaran v. Shankaran
The above case had given jurisdiction to initatie the prosecution at any of the
- Where cheque is drawn
- Where payment had been made
- Where cheque is present for payment
- Where cheque is dishonoured
- Where notice is served to drawer.
- 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
- 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.
- 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.
- 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.