The Legal Zone

OBJECTIVES OF THE ACT

i. It facilitates the settlement of payments in business as they pass freely from holder to holder due to easy transferability of value of instrument.

ii. It provides legal protection to different mercantile instruments.

iii. It presents orderly and authoritative statement of leading rules of law relating to negotiable instrument.

iv. It provides for the special procedure in case the obligations which have to discharge under the instruments.

v. It regulates the different types of negotiable instruments which include Promissory notes, Bills of Exchange and Cheques.

vi. It explains the capacity and liabilities of the parties to the instrument.

vii. It provides the understanding of different topics under the Act that are negotiation, assignment, endorsement etc.

viii. It inculcates faith in the efficacy of banking operations and credibility in transacting business on the negotiable instruments.

There are 2 different kinds of negotiable instruments.

1. Negotiable Instruments by Statue: Promissory note, Bills of exchange and Cheque.

2. Negotiable Instruments by Usage: Bank note, draft, Share warrants, Bearers, Debentures, Dividend warrants and Treasury bill.

1. Promissory Note- According to sec. 4 of the Act a promissory note is an instrument in writing (not being a bank 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 instrument.

2. Bills of Exchange- According to sec. 5 of the Act 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.

3. Cheque - According to sec. 6 of the Act a cheque is an order by the customer of the bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer.

Law relating to dishonour of cheque is mentioned from sec.138 to 142 of the Act as amended by Negotiable Instruments (Amendment) Act 2015 which is as follows:

• A person must have drawn a cheque on an account maintained by him in a bank for payment of a certain amount of money to another person from out of that account.

• The cheque has been issued for the discharge in whole or in part of any debt or other liability.

• The cheque has been presented to the bank within the period of three months from the date on which it is drawn or within the period of its validity whichever is earlier.

• That the cheque is returned by the bank unpaid, either because of the amount of money standing to the credit of the account id insufficient to honour the cheque or that it exceeds the amount to be paid from that account by an agreement made with the bank.

• The payee or the holder in due course of the cheque makes a demand of the said payment by giving notice in writing to the drawer of the cheque within 30 days of the receipt of the information by him from the bank regarding the return of the cheque as unpaid.

• Drawee fails to make the payment within 15 days of the receipt of the said notice.

• When a cheque is presented in the concerned bank by the drawee within the stipulated time i.e within the three months from the date of issue the drawee bank issue ‘ Check Return Memo’ to the payee mentioning the reason for non – payment.

Reasons for Dishonour of Cheque

• Insufficient Funds

• Signature not matching

• Account Closed

• Cheque was presented after three months

• Payment stopped by account holder

• Disparity in the words and figures mentioned in the cheque

• In case of a joint account where both signatures are required but only one is there

• Death of the customer

• Insanity of the customer

• Crossing limit of the overdraft

Section 138 of the Act is talks about Dishonor of cheque for insufficiency of funds in the accounts and penalties for the same

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 honor 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 provisions of this Act, 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.