Negotiable Instrument Act & Section 138

The main area of focus of this Article is the Negotiable Instrument (NI) which is a combination of two words Negotiable and Instrument with subject to their different meaning as “Negotiable is transferrable” and “Instrument is written document”. Pertaining to this there are two modes are used for the Negotiable Instrument for its transferability, that is,

1. either it can be delivered or
2. through the mode of endorsement, it then passes to the transferee a bona fide title to payment according to its tenor and irrespective of the title, transferor is bearing, under the terms that the person is a bona fide holder for Instrument without any of notice of defect attaching to the instrument or in the title of the transferor, the principle of Nemo dat quod non habit (maxim) does not apply.

In addition, the Negotiable Instrument (NI) should be of as such nature that it should contain in writing, signed by the maker or drawer, an unconditional promise or order to pay, a certain amount of money to be stated, freely transferrable from one person to another person, it should also be payable to order or to bearer, finally, it should be payable on demand or at a definite time.

Let’s us elucidate further on the term NI below:

Negotiable Instrument meaning by the book

In regards to Section 13 of the Negotiable Instrument Act, 1881, NI means a promissory note, bill of exchange or cheque which is payable either through an order or to bearer. Consequently a negotiable instrument (NI) may be made payable to two or more payees jointly, or it could be made payable in the alternative to one of two, or one or some of several payees in terms.

Explanations in case of a promissory note, bill of exchange or cheque:

Illustration (A) - it is payable to order which is expressed to be so payable or which is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable.

Illustration (B) – may be payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank.

Illustration (C) – either originally or by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.

Types of Negotiable Instrument

As mentioned above a NI means a promissory note, bill of exchange or cheque.

Promissory Note: Promissory note are one of those legal document, or an instrument by which certain rights are conferred and a party thus promises to pay a certain or an agreed upon amount of money to another person at a demand of the payee. Therefore, it can be concluded that, Promissory notes is unconditional as to other Instruments and is signed by the maker (let’s look at what is a maker.)

Maker: a maker is a person who makes the Promissory note and promises to pay a certain amount.

Payee: here it is the person to whom the payment is to made.

Therefore it can be understood as under:

Section 4 elucidates that as a “Promissory note” is an instrument in writing (not being a bank-note or a currency-note) containing an unlimited undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.

Essential Ingredients for promissory note are as follows:
• It should be a Promissory Note to be in writing.
• Should be unconditional.
• Should be payable to a definite person.
• Sign on Promissory Note to be done by Maker or Payee.
• Amount to be paid on demand or at a fixed period of time.

Cheques: Cheque is an order given to the bank to pay the certain amount of money to the account of the drawer, Cheque simply crossed in its back to end its negotiability and it is always accepted into the account of the payee.

Section 6 of the Negotiable Instrument Act states cheque that:

A “cheque” is a bill of exchange drawn on a particular banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a cheque and a cheque in the electronic form.

Section 138 of Negotiable Instrument Act

Section 138 of the Negotiable Instrument Act, 1881, sheds light on the dishonorment of cheque for insufficiency, etc., of funds in the account, as it states about the essential ingredients, exceptions, punishment and fine.

Now that we have got all our concepts in place let us stress on the need and importance of such an Act, shall we?

Need for NI Act

One may easily come to the conclusion that the penal provisions contained in Sections 138 to 142 of the Act have come into action in order to ensure that obligations undertaken by issuing cheques, it is used as a mode of deferred payment are honored. Furthermore, Section 138 of the Act provides for circumstances under which a case for dishonor of cheques is filed. The Act comes into play as to promote the efficiency of banking operations and to ensure credibility in transacting business through cheques.

Thus one can rightly say that the objective of Sec 138 of NI Act is to promote the efficiency of banking operations and to ensure credibility in transacting business through cheques.

Section 138 of Negotiable Instruments Act, 1881 states: "Dishonour of cheque for insufficiency, etc., of funds in the account. Consequently, any cheque drawn by a person on an account held by him with a banker for payment of any amount of money to another person from out of that account for the discharge, either in whole or in part, of any debt or other any liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient(not enough) to honor the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, when this takes place, such person shall be deemed to have committed an offence of dishonoring a cheque and shall, without prejudice to any other provision of this Act, be punished with imprisonment for (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.

Click here for Section 138 And Other Linked Sections Of The Negotiable Instruments Act And The Amendments