A negotiable instrument is a signed document that promises a sum of payment to a specified person or the assignee. In other words, it's a formalized type of IOU: A transferable, signed document that promises to pay the bearer a sum of cash at a future date or on demand. The payee, who is the person receiving the payment, must be named or otherwise indicated on the instrument. Because they're transferable and assignable, some negotiable instruments may trade on a secondary market.
Negotiable instruments are transferable in nature, allowing the holder to require the funds as cash or use them in a manner appropriate for the transaction or according to their preference. The fund amount listed on the document includes a notation on the specific amount promised and must be paid in full either on-demand or at a specified time. A negotiable instrument can be transferred from one person to another. Once the instrument is transferred, the holder obtains a full legal title to the instrument.
These documents provide no other promise on the part of the entity issuing the negotiable instrument. Additionally, no other instructions or conditions are often set upon the bearer to receive the monetary amount listed on the negotiable instrument. For an instrument to be negotiable, it must be signed, with a mark or signature, by the maker of the instrument—the one issuing the draft. This entity or person is understood as the drawer of funds.
The law of negotiable instruments is understood for its sophistication and internal complexity. for hundreds of years, it has provided an effective legal solution for the pertinent needs of domestic and international commerce, facilitating predictability, protection of parties’ justified expectations, and therefore the elimination of the risk involved in the physical carriage of money. the interior balance of its rules, doctrines, concepts, and principles has been achieved through a slow and ongoing evolution. Significant parts of commerce still use negotiable instruments. Payment mechanisms won't disappear in the advancing reality of digitalization. All essential elements of negotiable instruments law—the requirements of writing, possession, and signature—could be functionally adjusted to the present reality (see the Electronic Communications Convention and MLETR). Once this happens, a digital negotiable instrument would become a powerful competitor to credit cards and online methods of payment. After all, this law has the advantage of the accumulated wisdom of centuries, internal sophistication, and a self-reflective process of learning from its own mistakes and deficiencies. Thus, it lacks the deficiency of the web mode of payment under which the transfer of funds from one account to another takes place immediately—which is disadvantageous to consumers. The negotiability feature of this instrument could meet the stress of sophisticated contemporary financial structures and commercialization.
The law associated with negotiable instruments was enacted in India as the Negotiable Instruments Act, of 1881, and came into force on March 1, 1882, within the country. This law is commercial in nature and aims to manage the payment-related settlements of trade and commerce. The Act is governed by the Federal Reserve Bank of India Act, 1934. consistent with section 13 of the Negotiable Instruments Act, of 1881, negotiable instruments can be defined as a “promissory note, bill of exchange or cheque, payable either to order or to bearer”.
According to the Negotiable Instruments Act, of 1881, most negotiable instruments transactions can be categorized into three parts.
However, there are not any explicit statements that it is limited or it must be specified into only three parts. Railway receipts or delivery orders also are common examples of negotiable instruments.
The objective of the Act:
To transfer a specific amount of money to the assigned person.
To pay the sum of money at an assigned future date or on demand as the case may be.
o Promissory note (Section 4): Normally, the debtor and the creditor engage in this business. The instrument is made by the debtor, who promises to pay the agreed-upon sum on the stated date.
Essentials or Characteristics:
Based on the definition, it is obvious that a promissory note must include the following characteristics.
1. Written down - A promissory note needs to be written down. Print and keyboarding both count as writing.
2. Promise to pay - It must include a commitment to pay. Therefore, merely acknowledging debt is insufficient. Keep in mind that a promissory note does not necessarily have to contain the phrase "promise."
3. Unconditional - The payment commitment cannot be subject to any conditions. Promissory notes are not, therefore, instruments due on the performance or non-performance of a specific act or the occurrence or non-occurrence of an event.
4. The Promissory Note Must Be Signed by the Maker - The Promissory Note Must Be Signed by the Maker to Be Effective.
5. Specific Parties - The maker and payee of the promissory note must be identified with certainty in the document.
6. A particular amount of money must be owed; it must also be able to be proved certain.
7. Promise to pay money solely – An instrument cannot be a promissory note if it also contains a promise to pay something else.
8. Number, location, date, etc. - These can be found in a promissory note but are not necessary for legal terms. A promissory note is considered to have been made when it was delivered if it lacks a date.
9. Installments - Payment may be made over time.
10. Paying "on demand" is payable immediately or at any moment up until it becomes time-barred. It may also be payable after a specific amount of time. When three years have passed since the date of a demand promissory note, it becomes time-barred.
11. It cannot be rendered payable to the bearer immediately or even after a specific amount of time.
o Bill of exchange (Section 5): Since this is an instruction from the creditor to the debtor, it is the exact opposite of promissory notes. In this case, the creditor creates the document that tells the debtor to give the payee a specific sum of money. The creditor is the one who prepares the bill.
Characteristics:
1. It must be in writing.
2. It must be accompanied by an order to pay, not a pledge or plea.
3. The directive must be unqualified.
4. The drawer, drawee, and payee must all be present.
5. The parties need to be confident.
6. The drawer must sign the document.
7. The amount due must be either certain or able to be made certain.
8. The request must be to pay with cash alone.
9. According to the Indian Stamp Act, everything must be properly stamped.
10. A number, a date, or a location are not necessary.
Parties to A Bill of Exchange:
Drawer: A bill of exchange's creator is referred to as the drawer.
Drawee: The drawee is the individual who is instructed by the drawer to make the payment.
o Cheque (Section 6): A bill of exchange can take several different forms. Since a bank is a drawee in this instance, such checks are payable upon demand. The debtor gives the bank instructions to make a specific payment to the designated payee.
The Essentials of a Cheque:
1. Written: The check needs to be written. It is not oral.
2. Unconditional: A cheque should be written in a manner that conveys an unconditional order.
3. Maker's Signature: It must bear the maker's signature.
4. A Certain Amount: The check's value must be certain.
5. Specified Payees: It must be made payable to a specific individual.
6. Cash Only: Cash should be the only form of payment.
7. Payable on Demand: Payment must be made immediately.
8. Upon a Bank: This is a depositor's order to a bank.
Parties to a Cheque:
Drawer: The individual who draws the check is known as the drawer.
Drawee: The banker on which the drawer has drawn the check is the drawee.
Payee: The payee of a check is the one who has the legal right to receive payment.
According to usage and custom, other documents, such as hundis, treasury bills, share warrants, etc., are also accepted as negotiable instruments as long as they include this attribute. Legalizing the system of negotiable instruments was the main goal. The majority of the Act's provisions have not changed since it was first put into effect during the British administration. The body in charge of overseeing the system for regulating negotiable instruments is the Ministry of Finance.
A negotiable instrument is a transaction in which one person sends money to another in exchange for legal documentation. According to the law, something is negotiable if it can be delivered from one party to another party with the intention that the title will pass with or without the transferee's endorsement. The other crucial components of the Act have been covered in the material after the notion had been clarified.
Acceptance (Section 7): When a bill is accepted, the drawee is expressing his agreement with the drawer's order. According to Section 7, an acceptance is the drawer's signature after he has handed the bill and signed his assent to it. A drawee who has approved the bill and given it to the holder is said to be an acceptor.
Who may negotiate an instrument (Section 51): A negotiable instrument may be endorsed and negotiated by any solo maker, drawer, payee, or endorsee, as well as by any number of joint makers, drawers, payees, or endorsees.
Instrument obtained by unlawful means or unlawful consideration
(Section 58):
An endorser may reduce his culpability in any of the following ways where a negotiable instrument has been lost or
has been obtained from any maker, acceptor, or holder thereof via dishonest methods, fraud, or for illicit consideration.
By endorsing a sans recourse clause that conditions his obligation on the occurrence of a certain event
Unless the possessor or endorsee is, or any person through whom he claims was, a holder in due course, neither he nor any person claiming through him or her is entitled to receive the sum owing on the instrument from the maker, acceptor, or holder, nor from any party previous to such holder.
2002 AMENDMENT TO THE NEGOTIABLE INSTRUMENTS ACT:
The Negotiable Instruments Act has been timely revised to remove any inconsistencies or other obstacles that would have decreased the effectiveness of the Act. When the system and the populace had generally accepted the extensive use of instruments for any commercial or personal transaction, it became necessary. The reach of the regulations created previously has been constrained by the advancement of electronic data sharing and technology. Agriculture used to be the main industry, and the majority of transactions were made in cash. However, as industries and services expanded, the general people became more aware of the possibilities offered by banking, which led to an increase in the volume of money being transferred through banks.
The primary purpose of the Act was to establish regulations governing checks, bills of exchange, and promissory notes. The legislation was created in order to deal with the specific type of contract and to establish special rules. Because they are among the greatest options for moving money, negotiable instruments have long been utilized extensively in commercial and financial operations. The goal of negotiating instruments has been undermined by certain outdated legislation.
Such changes were required in order to decrease the instances of check dishonouring by adding criminal clauses and strict legal enforcement. The necessity for changes to close the loopholes has been made clear by the rise in cheque dishonoured.
The amendments of 2002 have introduced new sections from Section 143 to Section 147 that has widened the scope and diminished the limitation of the parent Act. The introduction of five new sections and the Amendment Act was brought into force on Feb 6, 2002. The Sections come under Chapter XVII which was primarily for penal provisions as the person can be charged with offenses for dishonoring the cheques in case of deficiency of funds. If we observe the past then there was no timely disposal of cases as it would become burdensome since the procedure of court was time taking and inefficient.
Section 143 states the court authority to deal with the cases that would come under Judicial Magistrate of the first class or Metropolitan Magistrate and the provisions from Section 262 to Section 265 of Code of Criminal Procedure shall be applied as per the facts of the case. It further states that when the case is filed, the hearing should be done on a day-to-day basis until its final disposal of cases and in exceptional circumstances, the court shall state the reasons for not conducting a trial on the following day. The case filed under this Section should be disposed of within six months from the date of filing the complaint. This practice would be consistent with the interest of justice.
Section 144 of the NI Act defines the different modes of summoning. When the Magistrate issues summons to an accused, he may direct a copy of the summons at the place where the accused originally resides or carries business or personally works for the gain by the method of speed post or other courier services which can be authorized by the court of session. The same applies in the case of witnesses also. The acknowledgment of the receipt should be signed by the accused or witness in front of that person who has been assigned by the Postal department. If the accused or witness refuses to accept the delivery of the summons, then the court may implicitly consider that the summons has been duly received.
Section 145 defines the evidence on affidavit as the evidence of the complainant may be given by him on affidavit and it may be subject to all just exceptions that to be read in evidence in any inquiry, trial, or proceedings under the said code. The court, if finds such situations, t can summon any person giving evidence on the affidavit as to the facts.
CASE LAW:
Tathagat Exports (P) Ltd. v/s PEC Ltd, (2020):
The Delhi High Court dismissed the petition filed against the order of the Session Court. It was a review petition that was filed by the petitioners for turning down the orders of the metropolitan magistrate relating to matters involved under Section 138 and Section 141 of the Negotiable Instruments Act,1881 which was against the petitioners.
FACTS OF THIS CASE:
The issue involved here is that there is a respondent company that filed suit against the petitioners in respect of non-payment of money against the four dishonored cheques. The cheques amounting to Rs 16 crores were issued in favor of the respondent company by the petitioner’s company.
The complaint was filed under Section 138 with Section 142 of the NI Act. The Metropolitan magistrate strictly took this matter into cognizance and passed summoning orders to the accused. The aggrieved accused took this matter to the High Court. The petitioners contended that the demand notice that was served was defective as the amount mentioned was more than the amount of the cheque. It was further claimed that the notice was vague and ambiguous.
JUDGEMENT OF THIS CASE:
The High Court rejected the points contended by the petitioners and it was held that the notice should be thoroughly read. After doing the drill-down analysis of the notice, it explicitly stated that the details of the cheque state that it was dishonored so no other way it can be said that the demand was confusing. In addition, the petitioners never denied that cheques were not issued or dishonored due to insufficiency of funds. Now, the question arose whether the petitioners who already availed the remedy under the provisions of the NI Act can file the revision suit under Section 482 CrPC as a substitute for initiating a second revision petition which is barred under Section 397(3) of the CrPC. The section describes that if a person applies to this section in the Session Judge or the High Court Judge then, no further application by the same person shall be entertained by the other of them.
As per the facts and the rules, the High Court stated that there are already mentioned provisions from Sections 142 to Section 147 under Chapter 17 of the NI Act. The special code for the trial of offences has also been briefly discussed under the said provisions. In the present case, the court didn’t find any reasonable grounds to maintain the suit under Section 482 CrPC. Further, the defence given by the petitioners requires valid grounds of evidence to get appreciated, evaluated, and adjudged in the proceedings under Section 482.
Therefore, the petitioner’s suit was not maintainable as there was no violation of any rights or miscarriage of justice. There was no error in the process of law as well and so the petition was dismissed.
Harsh Nitin Gokhale v/s Reserve Bank of India (2020):
A writ petition was filed under Article 32 of the Constitution by the petitioner Harsh Nitin Gokhale for seeking relief to exclude the period of lockdown for calculating the limitation for the presentation of the cheque/demand draft as directed by the Reserve Bank of India vide Notification dated 04.11.2011. The Court stated that they can’t issue any such orders in contravention of the notification issued by the RBI. Therefore, the petition was dismissed.
CONCLUSION:
The Act is a pillar in questions of money and the economy. If it is listed in the Act, it serves as a beacon light for all those who might experience any type of wrongdoing involving financial transactions. After understanding a couple of the regulations, it is clear that the legislation of the nation is quite strict concerning any kind of discrepancies or any voluntary violation perpetrated by the populace. To address the financial issues, the Act was occasionally revised. Because disagreements between parties are less likely and can be settled through the law or another method, the Act also contributes to the growth of commercial accessibility. Some special provisions that were added after the amendment are a boon for diligent persons.
This article is written by Divyesh Sanjay Bajaj of Kishinchand Chellaram Law College, Churchgate, Mumbai.