Updated: Sep 10, 2020


Sanya Shah, Pravin Gandhi College of Law Mumbai

Neha Pandey, NLU Shimla

Ashwathi Menon, Dr. D.Y Patil College of Law

Sakshi Belwal, Assam University Silchar

Editor: Jasmine Emmanuel, GLC Thrissur

A Brief History

The Indian Law Commission originally drafted the act in 1866 and this was introduced in December, 1867 in the council and then referred to a select committee. The draft was amended several times and was introduced into council and passed into law in 1881, and called as the Negotiable Instrument Act, 1881. In the coming times several amendments were implemented. This act came into force on 1st March 1882.[1]

Important Sections of the Act

- The term negotiable instruments mean a written document which entitles a person to a sum of money. According to Sec. 13 of the Act, negotiable instrument means ‘a Promissory Note, Bills of Exchange or Cheque payable either to order or to bearer’.

- According to section 4 of the act- A promissory note is an unconditional undertaking, written and signed by the maker to pay a certain sum of money only to or to the order of a certain person. It does not include a bank note or currency note. In other words, the promissory note should contain a promise to pay money and money only which is the legal tender money. According to the mentioned order in the note, the money must be payable to a definite person. It may be payable on demand or after certain definite period of time. And, a promissory note should bear sufficient stamp. It should also be dated, and the rate of interest per annum must be mentioned.

- According to section 5 of the act-A bill of exchange is an unconditional written order signed by the drawer, directing a certain person to pay a certain sum of money to the specified person or to his order or to the bearer of the bill.

- Section 6 gives the meaning of “cheque”, it says that -“A cheque is a bill of exchange drawn on a specified banker and payable only on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.”

- A bill of exchange is made between three parties namely the drawer, drawee and payee. A person on who makes the bill of exchange is called drawer. The person whom bill drawn is called a drawee and to whom the amount mentioned in the bill of exchange of payable is called the payee.[2]

- Section 8 (Holder): A person who is legally entitled to the possession of the negotiable instrument in his own name and to receive the amount thereof, is called a ‘holder’.

What are the Modes of Negotiation

a) Negotiation by mere delivery

b) Negotiation by endorsement and delivery.

Section 15 explains the endorsement of instrument -when the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation on the back or face thereof or on a slip of paper annexe thereto, or so signs for the same purpose a stamp paper intended to be completed as a negotiable instrument, he is said to endorse the same, and is called the “endorser.”

An endorsement is said to be completed when the instrument is delivered to the endorsee.[3]

· Section 18 explains when the amount stated is different in figures and words: If the amount undertaken or ordered to be paid is stated differently in figures and in words, the amount stated in words shall be the amount undertaken or ordered to be paid.

· Section 22 “Maturity”- The maturity of a promissory note or bill of exchange is the date at which it falls due.

· Section 25, Explains when day of maturity is a holiday: When the day on which a promissory note or bill of exchange is at maturity is a public holiday, the instrument shall be deemed to be due on the next preceding business day.

· Section 30 of the Act, define the liability of the drawer of a bill or cheque- “The drawer of a bill of exchange or cheque is bound in case of dishonour by the drawee or acceptor thereof, to compensate the holder, provided due notice of dishonour has been given to, or received by, the drawer as hereinafter provided.”


Presentment is simply a demand for the payment or acceptance of a negotiable instrument; Chapter 5, or Sections 61 to 77, discuss presentment.

Kinds of Presentment:

a) Presentment of Acceptance, as described in Section 61;

b) Presentment of Promissory Note for Sight, as described in Section 62;

c) Presentment of Payment, as described in Section 64;

d) Presentment of Cheque to Charge the Drawee Bank, as described in Section 138.

Section 61 says that a bill of exchange payable after sight must be presented to the drawee for acceptance, which means that the drawee is required to sign the bill in order to accept it. If the drawee cannot be found after reasonable search, the bill is automatically dishonored. If the bill is directed to the drawee at a particular place, it is required that it be presented at that place only, and if the drawee cannot be found there on the due date, the bill is dishonored.

Section 62 states that no doubt arises when it comes to the acceptance of promissory notes, as the maker is liable himself. A note that is payable only at a certain period ‘after sight’ must be presented to the maker in order for its maturity to remain intact.

Section 64 holds that promissory notes, bills of exchange, and cheques must all be presented to the maker, acceptor, or drawee for the purposes of a payment by the holder. Also, the other persons/parties involved are not liable to the holder.[4]

Interest Rates

The topic of interest rates and payments are discussed from Sections 78 to 81 in Chapter 6 of the Act.

Sections 78 and 79 lay out the foundation of whom the interest should be paid to and how they payee would go about it if a specific interest rate is mentioned. In case of no specified interest rate, Section 80 states thats the interest should be calculated at the rate of 18% per year, from the date the amount should have been paid by the party to the date the payment is made. If dishonored, the party is only liable to pay interest from the date that he receives the notice of dishonor.

Discharge from Liability

This topic is covered in Chapter 7 from Sections 82 to 90.

Section 82 states that the maker of the instrument can only be discharged from liability by:

a) cancellation

b) release

c) payment

By cancellation refers to when a holder cancels the acceptor’s name in order to discharge him and all parties. By release means that the party who has rights under the contract forgives and releases the party who is obligated to pay. By payment means that if the instrument is payable to bearer and the maker makes the payment in the appropriate time, he is discharged of all liabilities.

Section 84 says that when a cheque is not duly presented and the drawer suffers damages, he is discharged immediately due to the damage and inconvenience caused to him. When a cheque is not presented for payment within an appropriate amount of time after its issue and the drawer suffers damage due to the delay, but only if the drawer is a creditor of the bank to amount larger than what he would have been had the cheque been paid.

Notice of Dishonour

Chapter 8, or Sections 91 to 98, discuss this topic.

Section 91 discusses dishonour by non-acceptance. A bill of exchange can be categorized as ‘dishonoured’ under this Section when the drawee makes a default in acceptance or when the bill is not accepted and the presentment is excused. In addition, the bill may be dishonoured when the drawee is not competent to contract.

Section 92 discusses dishonour by non-payments. A promissory note, bill of exchange, or cheque is said to be ‘dishonoured’ when the maker of the note, acceptor of the bill, or drawee of the cheque makes an error in the payment.

Section 94 states that a notice of dishonour may be given to the authorized agent of the person, whether it be the person himself, his legal representative, or his assignee. This notice must inform the party that the instrument has been labeled as ‘dishonoured’ in express terms or by reasonable intendment; it should mention how the person will be held liable moving forward. This notice must be served within a reasonable time from the issuance of the notice.

Chapter IX: Of Noting and Protest

(Section 99-104)

Noting is a convenient mode of authenticating the fact that a bill or note has been dishonored. When non- acceptance or non-payment have dishonored a note or a bill, the holder causes that such dishonour to be noted by a Notary public. It is a minute recorded by a notary public on the instrument dishonored.

When an instrument is dishonoured, and to note the same, it is taken to Notary public. The notary public presents it again for acceptance or payment, as the case may be. If drawee still refuses to accept or pay the bill noted, then a minute is prepared containing the date, reason for dishonour and the facts on the instrument. It means that the Notary Public notes the cause of non- acceptance with date and fee on the promissory note or bill of exchange. It is necessary that noting must be made in a reasonable Time after dishonour. Noting is not essential for the cheque and are optional for inland bills.


A protest is a formal record of dishonour signed by the notary public, and copy of the bill is also included in it. It is necessary to maintain the holders right against the drawer and the endorser. After the instrument is dishonoured, the holder may note down the cause, but also it is necessary to be certified by a Notary Public stating that the bill is dishonoured. Such a certificate is called as 'Protest'.

Chapter X: Of Reasonable Time

(Section 105-107)

REASONABLE TIME in negotiable instrument act is defined in sec 105 to 107. These section determines what is the reasonable time for presentment for acceptance or payment, or for giving notice of dishonour and for noting.

Reasonable time of giving notice of dishonour-

If the holder and the party to whom notice of dishonour is given carry on business or live (as the case may be) in different places, such notice is given within a reasonable time if it is dispatched by the next post or on the day next after the day of dishonour

Chapter XI: Of Acceptance of Payment for Honour and Reference in the Case of Need

(Section 108-116)

Acceptance for honour: If a bill has been dishonoured by non-acceptance and has been duly noted or protested for such dishonour, any person, before it is overdue, who is not a party already liable under the bill may, with the consent of the holder of the bill, by writing on the bill, accept the bill for the honour of any of the parties liable on it. The object of such an acceptance for honour is to protect the credit of the party liable on the bill, and to prevent legal proceedings being taken against him.

Conditions for valid acceptance for honour:

(i) That the bill has been noted or protested for non-acceptance or better security:

(ii) That such an acceptance has been made with the consent of the holder,

(iii) That the acceptor for honour is not a party already liable on the bill,

(iv) That the acceptance is for the honour of any party already liable on the bill; and

(v) That the acceptance is by writing on the bill.

Payment for honour: It is a payment which is made by any person for the honour of any party liable on the bill after it has been protested for non-payment. The condition essential for such payment are,

That the bill must have been noted or protested for non-payment

That the person paying or his agent declares before Notary Public the party for whose honour he pays;

That such declaration has been recorded by such Notary Public;

That the payment must be made for the honour of any party liable to pay the bill and

That the payment may be made by any person whether he is already liable on the bill or not.

CHAPTER XII: Of Compensation

(Section 117)

In this section the compensation payable in case of dishonour of a promissory note, bill of exchange or cheque, by any party liable to the holder or any indorsee,

(a) The holder is entitled to the amount due upon the instrument, together with the expenses properly incurred in presenting, noting and protesting it;

(b) When the person charged resides at a place different from that at which the instrument was payable, the holder is entitled to receive such sum at the current rate of exchange between the two places

CHAPTER XIII: Special Rules of Evidence

(Section 118-122)

Chapter 13 can be divided into two: Presumptions and Estoppels

Presumptions as to Negotiable Instruments

Sections 118 and 119 of the Negotiable Instrument Act lay down certain presumptions which are presumed by the Court to exist in every negotiable instrument and the same need not be proved.

According to section 118, until the contrary is proved the following presumptions shall be made in case of all negotiable instruments:

1. It shall be presumed that every negotiable instrument was made, drawn, accepted or endorsed for consideration. It is also presumed that, consideration is present in every negotiable instrument until the contrary is proved.

In the case of Narayanan Gangadhara Panicker v. T.R. Haridasan[1], it was held by the Kerala High Court that if the execution of the instrument is in question, the plaintiff has to prove both execution as well as the passing of the consideration.

2. It shall be presumed that the indorsements appearing upon a negotiable instrument were made in the order in which they appear thereon. It shall be presumed that a lost promissory note, bill of exchange or cheque was duly stamped. There is also a presumption of dishonour.

3. When a plaintiff institutes a pro note as a holder in due course, the presumption under s. 118(g) is that that he has given valuable consideration and the burden of proving the contrary is on the defendant, as held in the case of M. Chokalingam Chettyar v. R.N.Subramania Pillay[2]

Rules of Estoppel Applicable to Instruments

The maker and the drawer, by their agreements are directly responsible to bring the relevant documents into existence. Additionally, if at all the position of one of them acting on the agreement is altered, they should not be allowed to deny the validity of the bill originally drawn by them. Section 120, presupposes the existence of an instrument which the court has looked into before applying the estoppels under the section.

A famous case with respect to this principle is Young v. Grot, where the plaintiff left blank signed cheques with his wife when he went away. His wife, unaccustomed to business matters, passed one to the clerk to fill out, who filed it out in such a way that he could later fraudulently raise the amount to be cashed. The court held that the “gross negligence” of the customer estopped him from claiming that the bank should not debit his account, and he was held to be liable for the loss.

There is also estoppel against denying capacity of payee to indorse and against denying signature or capacity of prior party.

Chapter XIV: Crossed Cheques

(Section 123-131)

Where a cheque bears across its face an addition of the words "and company" or any abbreviation thereof, cheque is deemed to cross generally and when it bears the name of a banker, is deemed to cross specifically. In generally crossed cheques the banker on whom it is drawn shall not pay it otherwise than to the banker and in specifically crossed cheques the agent also can be made the payment to.

A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment.[3]

Chapter XV: Set of Bills

(Section 132&133)

Bills of exchange may be drawn in parts, each part being numbered and containing a provision that it shall continue payable only so long as the others remain unpaid. All the parts together make a set; but the whole set constitutes only one bill, and is extinguished when one of the parts if a separate bill, would be extinguished.

Chapter XVI: International Law

(Section 134-137

This chapter deals with international laws in relation to negotiable instruments. It states that a drawer of a foreign promissory note, cheque, bill of exchange is subject to the laws of the place where he makes the instrument. If a promissory note, cheque, or bill of exchange is made payable in a different place from that in which it is made or endorsed.

In such cases, the law of the place where the negotiable instrument is payable determines the definition of dishonour. It also determines the rules pertaining to sufficient notice of dishonour.[4] It is presumed that the law regarding negotiable instruments in any foreign country is the same as that of India. This is unless and until there is proof of the contrary.

Chapter XVI: Penalties in Case of Dishonour of Cheque Due to Insufficiency of Funds

(Section 138-147)

S. 138 of the Act states that Where any cheque drawn by a person is returned by the bank unpaid owing to the insufficiency of funds in the account then such a person shall be deemed to have committed an offence and shall be punished with imprisonment for a term which may extend to one year, or with fine which may extend to twice the amount of the cheque, or with both. However, it is provided with certain conditions. This is one of the most important penal provision under the Act. If such an offence is committed by the company then the person responsible for conducting the business of the company at that time will be held responsible and punished accordingly. The chapter also lists the procedure to be followed to register a complaint under s.138.

S.142 states the court of judicial magistrate of fist class and metropolitan magistrate courts shall have the authority to deal with the offences under this chapter. All the offences under the act are compoundable in nature.

In 2017, Delhi High Court in Dayawati v. Yogesh Kumar Gosain took into account the question whether an offence under Section 138, which is a criminally compoundable case, could be settled by mediation. The Court held that even though an express statutory provision enabling the criminal court to refer the complainant and accused persons to alternate dispute redressal mechanisms has not been specifically provided by the Legislature, there is no bar to utilizing the alternate dispute mechanisms including arbitration, mediation, conciliation etc.[5]

[1] 1992 73 CompCas 398 Ker [2],accepted%20or%20endorsed%20for%20consideration. [3] [4] [5]

9 views0 comments

©2020 by JURIS COGNITIONIS. Proudly created with