RECENT AMENDMENT IN NEGOTIABLE INSTRUMENT ACT 1881

BANKING LAW

SUBMITTED TO:
Ms. BHUSHRA QUASMI

Submitted by:
POOJA GUPTA
2016070
VI SEMESTER

DAMODARM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM

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 ACKNOWLEDGMENT

I have taken efforts in this project. However, it would not have been possible without the kind
support and help of many individuals and organizations. I would like to extend my sincere thanks
to all of them.

I am highly indebted to Ms. BHUSHRA QUASMI for their guidance and constant supervision as
well as for providing necessary information regarding the project & also for their support in
completing the project.
I would like to express my gratitude towards my parents & member of organization for their kind
co-operation and encouragement which help me in completion of this project.
I would like to express my special gratitude and thanks to the Judges, Magistrate, and court room
officer for giving me such attention and time.
My thanks and appreciations also go to my colleague in developing the project and people who
have willingly helped me out with their abilities.

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CERTIFICATE

This is to certify that I Pooja Gupta a student of IV semester has successfully completed the
report on this project topic i.e RECENT AMENDMENTS IN NEGOTIABLE
INSTRUMENT ACT, 1881 under the guidance of Ms. BHUSHRA QUASMI during the
year of 2018-19.

Student signature Faculty signature

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TABLE OF CONTENT:

PAGE
SL.NO TITLE NO.
1. SYNOPSIS 5
Chapter-1 INTRODUCTION 6
Chapter-2 NEGOTIABLE INSTRUMENTS PLAYS A MAJOR ROLE 7

Chapter-3 ADVANTAGES OF A NEGOTIABLE INSTRUMENT 10

Chapter-4 AMENDMENTS 14
Chapter-5 SIGNIFICANCE OF THE AMENDMENT ACT 16
Chapter-6 STATEMENT OF OBJECTS AND REASONS 18
Chapter-7 CONCLUSION 20

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SYNOPSIS

OBJECTIVES OF THE STUDY:

The purpose of the study is to:

 Understand the concept of Negotiable Instrument, the amendments.

 Throw light on the committee which are formed and the suggestion or simplification
given by them in Negotiable Instrument.
 Further there will be discussion about any new reform can be introduced into it or not.

SIGNIFICANCE OF THE STUDY:

This research would enable the student to avail a better understanding of the Negotiable
Instrument as well its amendments and advantages, reform and simplification, and the present
efforts to curb these disadvantages.

SCOPE OF THE STUDY:

The scope of this project would be limited to the Negotiable Instrument act of Indian and its
recent amendments and the relevant cases do to which the amendments came and some other
adjoining considerations.

RESEARCH METHODOLOGY:

The research would be doctrinal in nature, and the researcher would be referring to both primary
resources such as Indian cases, as well as secondary resources such as various commentaries,
books, Scholarly articles and web journals.

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INTRODUCTION

The Negotiable Instruments Act 1881

Negotiable instruments, it is seen have a great significance over the modern business world. It
has to be noted that these instruments have gained significant prominence as the principle
instruments for paying and discharging business obligation.

So what essentially is a negotiable instrument:- A negotiable instrument is any transferable

document which satisfies certain conditions. These instruments pass freely from hand to hand
and thus form an integral form part this modern businesses instruments. It also has to be noted
that in our country, the law relating to negotiable instruments, is governed by the Negotiable
Instruments Act 1881.

This Negotiable Instruments Act, does not in specific define what a negotiable instrument is, it
merely states that a negotiable instrument means “a promissory note, bill of exchange or cheque
payable either to the bearer.” 

Section 13 of the Act,1 does not indicate the characteristics of a negotiable instrument but only
states that three instruments-cheque, bill of exchange and a promissory note, are negotiable
instruments. Thus these three instruments are therefore negotiable instruments as per the statute.
But it has to be noted that S.13, does not prohibit any other instrument which satisfies the
essential features of negotiability, to be treated as a negotiable instrument.

Thomas, defines the negotiable instrument as an instrument is negotiable which it is, by a legally
recognized custom of trade or law, transferable by delivery or by endorsement and delivery,
without notice to the party liable, in such a way that a. a holder of it may for the time being may
sue upon it in his own name .The property in it passes on to a bona fide transferee for value free
from any defect in the title of the person from whom he obtained it.

Very simply putting it, a negotiable instrument is a transferable document either by the
application of the law or by the custom of the trade concerned.

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NEGOTIABLE INSTRUMENT ACT.

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Thus it has to be noted that a negotiable instrument, firstly is easily transferable from person to
person and the ownership of the property may be passed on by mere delivery. Secondly, a
negotiable instrument confers absolute faith and good title on a transferee, provided that he takes
it in good faith for value and without notice of the fact that the transferor had defective title
thereto.

It is seen that negotiable instruments can be essentially classified in to two major types:-

 Negotiable instruments by statute: The three instruments, cheque, bill of exchange and
promissory notes are negotiable instruments by statute
 Negotiable instruments by custom or usage: Some instruments, have acquired the
character of negotiability by custom or usage of trade. Section 137 of the Transfer of
Property Act, 1882, also recognized that an instrument may be negotiable by law or
custom. Therefore we have case of promissory notes, delivery order and hundis being
held as negotiable instruments.

NEGOTIABLE INSTRUMENTS PLAYS A MAJOR ROLE

Negotiable Instruments plays a major role in the trade world. We can also see the use of
negotiable instruments in the international trade. We can assume that the international trade is
also developing with the negotiable instrument. The nature of negotiable instrument is an area of
law which has major influence on any person in his professional field. Negotiable instrument
plays a major role in different part of the world in raising the economy. “The term negotiable
instrument does not have a statutary definition. To define the term the concept of ‘instrument’
and ‘negotiability’ requires a separate consideration. Thus any definition must be drawn from the
common law.”

“According to professor Goode, instrument is described as a document of title of money”

Therefore an instrument is a document which physically expresses the payment obligation. An
instrument will be in deliverable state only if it is signed by the possessor or it should be with the
authority of that person. The instrument clearly states the contractual right to payment and the

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right will be transferred only after the complete delivery. The person who has that entitlement
and posses the instrument is consider as the true owner.

The negotiable instrument is of contractual in nature and it characterizes the fact that it is
negotiable. The instrument can be transferred in a special manner which is established by the law
merchant i.e. by negotiation.

“According to Blackburn J, a negotiable instrument has two characteristics namely 1. It is

transferable, like cash, by delivery (which assumes it is in a deliverable state) so that the
transferee can enforce the rights embodied in it in his own name. 2. The transferee being a
bonafide holder for value can acquire a better title to it than that of his transferor.”

Negotiable Instrument is moreover a document of title which clearly explains the rights towards
the payment of money or a security for money which is transferable by delivery either by custom
or by legislation. The use of negotiable Instrument is mainly to facilitate payment for exports and
imports of trade. The rapid growth of technology has revolutionized the world with computer,
which is used in every field of profession. This has reduced the use of negotiable instrument and
in future it may decline more. Even though the electronic revolution has got more advantages it
may be considered as the next step because the world needs time to get used to it. But, the
negotiable instrument are still in use.

Classes Of Instrument
Instruments can either be negotiable or non-negotiable. Negotiable and Non-negotiable
instrument have many classes in them but all the instruments will come under one of the two
categories namely,

 “An undertaking to pay a sum of money

 An order to another to pay a sum of money”

“A negotiable instrument is one which, by statute or mercantile usage, may be transferred by

delivery and endorsement to a bona fide purchaser for value in such circumstances that he takes
free from defects in the title of prior parties.

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A non negotiable instrument is one which, though capable of transfer by delivery (with any
necessary endorsement) in the same way as a negotiable instrument, can never confer on the
older a better right than vested in the transferor.”

How Instruments Come To Be Negotiable

The documents can be recognized as negotiable instruments in two ways i.e.

 Statute

 Mercantile usage

 Statute-

 statute is a formal written enactment which is made by a legislature, which

governs the state or city for the statute to become a law. It must be agreed by the
highest authorities in the government, and finally it is published by the court. The
term statute is an alternate word for law. In most of the cases, the statutory
recognition of negotiability altogether confirms the earlier judicially acceptance
of a mercantile usage which recognizes an instrument as negotiable.

 The instruments like bills of exchange and cheques were accepted as negotiable
by the courts before they were recognized as a negotiable instrument by the Bills
of Exchange Act, 1882.

 Mercantile usage-

 Through judicially recognized mercantile usage, an instrument may be regarded as

negotiable. The above mentioned statement can be made stronger if we refer to the
important case

Goodwin V/s Robarts: Here Cockburn CJ said that “the instruments have derive their
negotiability from the law merchant had their origin, and that no very remote period, in
mercantile usage , and were adapted into the law by courts as being in conformity with the usage
of sale.”

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For the court to recognize the instrument through mercantile usage it must fulfill the below
mentioned conditions like:

 The usage must be well known, definite and fair mercantile usage.

 The mercantile usage should be general in nature i.e it should not be confined to any
mere custom which is used only to a particular section of the commercial world

ADVANTAGES OF A NEGOTIABLE INSTRUMENT

Before 1874 in common law it was not permitted that the assignment of a promise to pay money
negotiable instrument comes into being because the transfer of promise to pay money was not
permitted in common law. At the end the negotiable instrument achieved it. The important
advantages of the negotiable instruments are as follows

 “the transferee of a negotiable instrument can sue his own name even though there has
been no assignment in writing or notice to the obligator or even if the transfer is not
absolute as required for assignment under the statue.

 The transferee of a negotiable instrument who takes it for a value and in good faith
acquires a good title free from equities, whereas an assignee under the statue always takes
subject to equities”

 The negotiable instrument helps to provide investment.

 Bills Of Exchange

Bills of exchange can be considered as the most popular negotiable instrument

which is not only used in foreign trade but It is also used in domestic trade. The
bills of exchange act 1882 is the primary source of law of bills of exchange. Sir
Mackenzie Charmers drafted the bills of exchange act 1882. Section 3 of bills of
exchange 1882 defines bills of exchange as “ A bill of exchange is an
unconditional order in writing, addressed by one person to another , signed by the
person giving it, requiring the person to whom it is addressed to pay on demand or

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at a fixed or determinable future time a sum certain in money to or to the order of a
specified person, or to bearer”

The common terms which are used in the bills of exchange are:

 Drawer – the person or a seller who issues the bill ordering to pay

 Drawee – the person or any party upon whom the bill is drawn

 Payee – the person to whom the amount mentioned in the bill is to be

paid.When the bill is delivered to a payee he becomes the first holder.

 Acceptor – the person who accepts the bill

The bills of exchange are used in 2 context associated with international trade

 Documentary credit

 Acceptance credit

The instrument to be a bill of exchange has to fulfill certain requisites. They are

 The order given by the drawer to the drawee should be an unconditional order

 The unconditional order given by the drawer to the drawee should be written
and it should include print.

 The drawer should sign the instrument personally or to his agent. If the
instrument is forged and if the drawer is arguable, then the instrument cannot
be treated as the bills of exchange.

 The instrument can be treated as bills of exchange only if it addressed by one

person to another

 The name of the drawer and the payee should be clearly mentioned and also
who are the parties

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  “The instrument should contain the exact amount payable in it to be a bill of
exchange. If the amount is mentioned as upto or not exceeding or atleast”,
then it cannot be a bill of exchange.

 The instrument should be drawn at a fixed time or at a ascertainable future

time if is drawn on a demand.

To enforce the bill and to claim payment from the drawer and endorser, the holder
has to follow a number of duties which are

 “A duty to present the bill for acceptance

 A duty to give notice of dishonor by non- acceptance or non – payment to the

drawer and prior endorser.

 A duty to protect a foreign bill if dishonored for non – acceptance or non –

payment.”

If the holder fails with these duties, he will release the drawer and endorser from
their liability on the bill. Bill of exchange is an order made by one person to
another to pay money to a third person.

 Cheques
 Cheques are considered as an important negotiable instrument in international
sales. Cheques are primarily a payment direction and it is not a credit instrument.
Cheque plays an important role in the mechanism of banking. Therefore, cheques
are deeply rooted in the relationships of the bank and the customer. “Section 73 of
the Bills of Exchange Act, 1882, defines cheques as Bills of Exchange drawn on a
banker payable on demand.”
 The nature of the cheque is that when it is presented, the payment is almost
immediately made.
 the cheques can be paid only to the named payee or his endorsee.

 The cheque cannot be negotiated to a third party

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  The crossed cheque must be presented through a bank account for payment; the
holder of a crossed cheque cannot present it in person for cash. The bank does not
accept the cheque on which they are drawn.

 The cheque may be considered as a debit instrument. For the payment, the cheque
must be presented to the paying bank i.e. the bank where the drawer keeps his
account. The cheque when it is presented for payment goes through a clearing
system where the collecting bank is entrusted to collect the amount of the cheque
on behalf of the customer and later credits it to his own account. Cheques play a
fundamental part in the banking field. Normally, the cheques are not discounted.

 Promissory Note
 Promissory note is also one of the important negotiable instruments in
international sales. Section 83 (1) of the Bills of Exchange Act, 1882, defines
promissory notes as “a promissory note is an unconditional promise in writing
made by one person to another signed by the maker, engaging to pay, on demand
or at a fixed or determinable future time, a sum certain in money, to, or to the
order f a specified person or to bearer.”
 A promissory note is just a promise to pay and it is not an order to pay. Therefore,
in a promissory note, there is no drawee. The maker of the promissory note is
termed as a ‘promissor’ and he corresponds with the acceptor of a bill. The note
can be negotiated by endorsement by the payee. “The maker of a promissory note
by making it
 Engages that he will pay it according to his tenure.

 Is precluded from denying to a holder in due course, the existence

of the payee and is then capacity to endorse.”

 According to Section 89 (1) (2), the indorser of a promissory note has to follow
the same duties and liabilities which an indorser of a bill under Section 55 (3)
follows. But, there is no reference to the accepted. If the drawer and the drawee
are the same, the bill holder has the option of treating it as a promissory note.

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  In international trade, promissory notes are mainly used in forfeiting transactions.
Here, the importer makes the promissory notes and the exporter will indorse to a
forfeiter at a discount. The forfeiter also bears all the credit risk, economic risk
and political risk and he must obtain the payment of the instrument. The forfeiter
can also rediscount the promissory note in the secondary market. In domestic
trade, promissory note has two functions

 They provide more security if made by a debtor or hirer

 Unlike in international trade, they facilitate the refinancing of transactions in

which the notes can be discounted to a financial institution.

 The negotiation of a promissory note can pass a title which is free from any
defects in the title of previous parties. This is the reason which makes promissory
notes the main negotiable instruments which are used as security for inland
transactions.

 Bank Note
 Bank note is a kind of negotiable instrument. These bank notes are a special form
of promissory notes which are made by a bank, which engages to pay the bearer
on demand the sum which is expressed in the note. These bank notes are used as
money. They are also governed by the Bills if Exchange Act, 1882. The bank
notes, after delivery, can be transferable. If the bank notes are lost or destroyed, a
duplicate can also be demanded from the Bank of England by providing a
satisfactory indemnity. The bank notes are issued by Bank of England, Bank of
Scotland and Bank of Northern Ireland. In many jurisdiction, bank notes are legal
tender.

AMENDMENTS

The Negotiable Instruments Act, 1881 was implemented with the intention of amending the law
related to promissory notes, bills of exchange and cheques. The Act has been amended time and

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again to ensure and enhance the trust in negotiable instruments. In furtherance to this, an
amendment to the Act has been passed by introducing the Negotiable Instruments (Amendment)
Bill, 2017 which was given the Presidential assent on the 2nd of August 2018, making the
Negotiable Instruments (Amendment) Act, 2018 (“Amendment Act“) come into existence. In
furtherance to the assent, the Amendment Act has become effective from the 1 st of September
2018, after being notified in the official gazette.

INTRODUCTION OF SECTIONS 143A AND 148

The Amendment Act contains two significant changes – the introduction of Section 143A and
Section 148. These sections provide interim compensation during the pendency of the criminal
complaint and the criminal appeal.

Section 143A of the Amendment Act

In accordance with section 143A of the Amendment Act, any court while trying an offence for
dishonour of a cheque can now direct the drawer, who is the issuer of the cheque, to pay interim
compensation to the complainant. This amendment has been made in line with Section 138 of the
Act which refers to the bouncing of cheque due to insufficiency of funds in the account or the
amount as mentioned in the cheque exceeding the amount arranged to be paid from the bank
account.

Under this section of the Amendment Act, the court now has the authority to direct such interim
compensation in circumstances of a summary trial or a summons case wherein the drawer pleads
to be not guilty and upon the framing of any other charge. The amount of compensation payable
cannot exceed 20% of the amount as stated in the cheque. This amount has to be paid within a
stipulated time period of 60 days from the date of the order passed by the court, or further within
the extended period of 30 days, as may be directed by the court on showing sufficient cause for
the delay caused.

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On acquittal of the drawer, the court will consequentially direct the complainant to pay the
drawer the prescribed amount along with the interest. The interest will be levied at the rate which
was prevalent at the beginning of the financial year. As per the section such recovery of the
payment has to be made within a time period of 60 days in furtherance to a delay of 30 days.

It has to be further noted that the final compensation if awarded to the complainant on the
disposal of the case, will be after the deduction of the interim compensation.

Section 148 of the Amendment Act

The protection that has been provided in Section143A of the Amendment Act extends during the
period of appeal as well. Section 148 of the Amendment Act provides that in the event of the
conviction of the drawer of the cheque, if the drawer proceeds to file an appeal, the appellant
court has the power to order the drawer of a cheque to deposit an amount. This deposited amount
has to be a minimum of 20% of the fine or compensation awarded by the Magistrate Court in the
appeal preferred against his/her conviction. This amount can be ordered anytime during the
pendency of the appeal. The procedure relating to payment of the above stated fine and refund of
the same if the appeal succeeds, is similar to what has been laid down in Section 143A of the
Amendment Act.

SIGNIFICANCE OF THE AMENDMENT ACT

Though the Act has been amended various times to help with the speedy disposal of cases
relating to the offence of dishonour of cheques, there has been dissatisfaction regarding the
pendency of such cases.This delay leads to erosion of the faith of the public at large in the usage
of cheques as a mode of instrument for their day to day transactions. Moreover, it is an injustice
to the payee who has to invest time and money in the court proceedings in order to realise the
value of the cheque. To overcome this, the above stated clauses have been passed, which provide
temporary relief to the aggrieved until a final verdict has been passed in the court, thus
discouraging frivolous litigation. The statement of objects and reasons of the Negotiable
Instruments (Amendment) Bill, 2017 states that the amendment had been introduced “with a
view to addressing the issue of undue delay in final resolution of cheque dishonour cases so as
to provide relief to payees of dishonoured cheques and to discourage frivolous and unnecessary
litigation which would save time and money”.

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The President of India has promulgated the Negotiable Instruments (Amendment) Ordinance,
2015 (6 of 2015) on 15th June 2015. The amendments to the Negotiable Instruments Act, 1881
(“The NI Act”) are focused on clarifying the jurisdiction related issues for filing cases for
offence committed u/s 138 of the NI Act.

A three Judge Bench of the Hon’ble Supreme Court in Dashrath Rupsingh Rathod vs. State of
Maharashtra  held that a Complaint of dishonour of cheque can be filed only
to the Court within whose local jurisdiction where the cheque is dishonoured by the bank on
which it is drawn.

This judgment overruled the earlier two Judge Bench Judgment of the Hon’ble Supreme Court
in K. Bhaskaran v. Sankaran Vaidhyan  Balan.

The Hon’ble Supreme Court in the matter of Dashrath, directed that the complaints u/s 138 NI
Act should be returned to the Complainant to presented within 30 days from the date of such
return before the Court having jurisdiction where the cheque is dishonoured by the bank on
which it is drawn.

The amendment of 2015 inserted Section 142(2) in the Principal Act. The amendment reads
as follows:

“(2) The offence under Section 138 shall be inquired into and tried only by a court within whose
local jurisdiction –

      (a)      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

      (b)      If the cheque is presented for payment by the payee or holder in due course otherwise
through his account, the branch of the drawee bank where the drawer maintains the account, is
situate.

Explanation – For the purpose of clause (a), where the 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

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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.”

The Negotiable Instruments (Amendment) Act, 2018 was notified on 02-08-2018.

The following amendments have been made —

 Section 143 — now introduces a new proviso 143A, giving power to a Court to try an
offence under S. 138 to order the drawer of cheque to pay interim compensation to the
complainant in summary trials/summons case where he pleads not guilty to the
accusations in the complaint. Furthermore, the interim compensation shall not exceed 20
% of amount of the cheque and shall be payable within 60 days from date of the order.
 Recovery of fine shall be same as under Section 421 of the Code of Criminal Procedure,
1973.
 In cases of acquittal, the Court is now empowered to direct the complainant to repay to
the appellant the amount so released, at interest rates as prescribed by RBI.
 Section 148  — now empowers the appellate court, for appeals against conviction under
S. 138, to direct the appellant to deposit a minimum 20 % of the fine/compensation
awarded, in addition to interim compensation paid under S. 143A.

STATEMENT OF OBJECTS AND REASONS

1. The Negotiable Instruments Act, 1881 (the Act) was enacted to define and amend the law
relating to Promissory Notes, Bills of Exchange and Cheques. The said Act has been amended
from time to time so as to provide, inter alia, speedy disposal of cases relating to the offence of
dishonour of cheques. However, the Central Government has been receiving several
representations from the public including trading community relating to pendency of cheque
dishonour cases. This is because of delay tactics of unscrupulous drawers of dishonoured
cheques due to easy filing of appeals and obtaining stay on proceedings. As a result of this,
injustice is caused to the payee of a dishonoured cheque who has to spend considerable time and
resources in court proceedings to realise the value of the cheque. Such delays compromise the
sanctity of cheque transactions.

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2. It is proposed to amend the said Act with a view to address the issue of undue delay in final
resolution of cheque dishonour cases so as to provide relief to payees of dishonoured cheques
and to discourage frivolous and unnecessary litigation which would save time and money. The
proposed amendments will strengthen the credibility of cheques and help trade and commerce in
general by allowing lending institutions, including banks, to continue to extend financing to the
productive sectors of the economy.

3. It is, therefore, proposed to introduce the Negotiable Instruments (Amendment) Bill, 2017 to
provide, inter alia, for the following, namely:—

(i) to insert a new Section 143A in the said Act to provide that the Court trying an offence under
Section 138 may order the drawer of the cheque to pay interim compensation to the complainant,
in a summary trial or a summons case, where he pleads not guilty to the accusation made in the
complaint; and in any other case, upon framing of charge. The interim compensation so payable
shall be such sum not exceeding twenty per cent. of the amount of the cheque; and
(ii) to insert a new Section 148 in the said Act so as to provide that in an appeal by the drawer
against conviction under Section 138, the Appellate Court may order the appellant to deposit
such sum which shall be a minimum of twenty per cent. of the fine or compensation awarded by
the trial court.

4. The Bill seeks to achieve the above objectives.

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CONCLUSION

The above discussion makes clear that the negotiable instruments plays a major role in the
commercial world. These instruments can either be negotiable or non negotiable. But, they must
come under one of the two categories. An instrument becomes negotiable either by statute or by
mercantile usage. Among all other negotiable instruments, bills of exchange, cheque and
promissory notes are the three important negotiable instruments which are widely used in
international trade. Even though electronic revolution has brought about many changes in the
present world, but negotiable instruments are still in use. The electronic revolution is considered
as the next major step which replaces the negotiable instruments. For this the future could
improve and develop the problems which prevail in e- revolution. In the present world, people in
all fields of profession are getting used to e- revolution. The present world, need to be trained to
get used to this system of working with e- revolution. It still takes time for the next generation to
be ready to use the e- revolution with no difficulties.

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