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Table of contents
Introduction
Everything You Should Know About Negotiable Instruments
Common Characteristics of Negotiable Instruments
Key Features of Negotiable Instruments in the Negotiable Instruments Act of 1881
Difference between promissory note and bill-of-exchange 
Difference between cheque and bill-of-exchange
Difference between holder and holder in due course
Structure of the Negotiable Instruments Act, 1881
Liabilities Under the Negotiable Instruments Act, 1881
Presumptions under Section 118 and Section 119 of the Negotiable Instruments Act, 1881
The penal provisions of the Negotiable Instruments Act, 1881
Section 138 of the Negotiable Instruments Act, 1881 - An Overview
Conditions to Commit an Offense Under Section 138 of the Negotiable Instruments Act, 1881
Recent Developments in the Swift Disposal of Negotiable Instrument Cases
Recommendations for Enhancing the Functioning of the Negotiable Instruments Act, 1881

Introduction

A negotiable instrument is a document that ensures the payment of a specified sum of money, either immediately upon request or at a predetermined future date, with a clearly identified payer. It is essentially a written contract that guarantees the unequivocal payment of money, whether in the present or in the future.

The interpretation of this term can vary depending on its application in different legal systems, as well as the specific country and context in which it is used. The Negotiable Instruments Act of 1881 covers three main types of instruments: promissory notes, bills of exchange, and checks. This act does not encompass terminology related to financial instruments like "hundies" in oriental languages.

With advancements in technology, two additional payment methods have gained recognition: NEFT (National Electronic Fund Transfer) and RTGS (Real Time Gross Settlement). These electronic transfer methods are governed by the Payment and Settlement Systems Act of 2007.

The Negotiable Instruments Act of 1881 was enacted on March 1, 1881, and it applies to the entire country of India. This article explores various aspects of the legislation while highlighting the significant challenges it faces in today's context.

Everything You Should Know About Negotiable Instruments

The term "instrument" refers to a written document that establishes a right in favor of an individual. "Negotiable" signifies that it can be transferred from one person to another in exchange for payment. Hence, any document that grants ownership of a sum of money and can be transferred through delivery, much like currency, qualifies as a "negotiable instrument." Consequently, a document that can be handed over is considered a negotiable instrument. While the Negotiable Instruments Act of 1881 doesn't explicitly define the term "negotiable instrument," Section 13 of the same law implies that it encompasses promissory notes, bills of exchange, or checks payable to order or bearer.

The primary distinction between a negotiable instrument and other documents (or chattels) is that, in the case of a negotiable instrument, the recipient obtains a valid title in good faith and for value, even if the transferor's title has a defect. In contrast, with other documents, the transferee acquires a similar title (or, in other words, no superior title) to that of the transferor.

Common Characteristics of Negotiable Instruments

  • Inherent Transferability: Negotiable instruments can be freely transferred multiple times until they mature. If an instrument is "payable to the bearer," it can be transferred simply by delivery. If it is "payable to order," transfer occurs upon delivery and endorsement. The transferee not only gains the right to the money involved but also the ability to transfer the instrument again.
  • Independent Title: The general rule that no one can convey a better title than they possess doesn't apply to negotiable instruments. Even if the transferor obtained the instrument through fraud, if the transferee acquired it in good faith and for value, they have a valid title regarding that instrument. The transferee's title with respect to a negotiable instrument is distinct from the transferor's title. The principle of "nemo dat quod non habet," which means no one can give what they don't have, doesn't apply in negotiable instrument cases.
  • Presumptions Apply: All negotiable instruments are subject to specific presumptions, as outlined in Sections 118 and 119 of the Negotiable Instruments Act of 1881.
  • Right to Sue: The transferee (payee) of a negotiable instrument is not obligated to inform the party responsible for payment (drawer) about the transfer. In case of dishonor, the transferee can file a lawsuit in their own name without notifying the original debtor of the transfer, i.e., without informing the original debtor that they possess the negotiable instrument.
  • Certainty: A negotiable instrument, like an empty bag, should be clear and concise. It must be written with the fewest words necessary to ensure a straightforward and unambiguous contract. The instrument should not have constraints that significantly impede its circulation. Additionally, it must specify the payment of a definite and specific amount of money, in currency, and at a specific time.

Key Features of Negotiable Instruments in the Negotiable Instruments Act of 1881

Promissory Note (Section 4 of the Negotiable Instruments Act, 1881):

  • Any instrument conforming to the definition in Section 4 of the Act is considered a promissory note.
  • It is a written document (not a banknote or currency note) that includes an unconditional commitment, signed by the maker, promising to pay a specific amount of money to a particular person or the bearer of the instrument.
  • It must be signed, sealed, and in writing.
  • There should be an unequivocal promise to pay.
  • No conditions should be attached.
  • It must explicitly commit to payment in money.
  • The parties, including the maker and payee, must be clearly identified.
  • Payment should be immediate or at a specific future date.
  • The amount owed must be specific and definite.

Bill of Exchange (Section 5 of the Negotiable Instruments Act, 1881):

  • A bill of exchange involves three parties: the drawer, the drawee, and the payee.
  • It must be a written document, properly stamped, and duly accepted by the drawee.
  • A payment order is essential.
  • An unconditional promise or order to pay is required.
  • Both the amount and parties involved must be agreed upon and definite.

Cheque (Section 6 of the Negotiable Instruments Act, 1881):

  • A cheque also involves three parties: the drawer, the drawee bank, and the payee.
  • It should be in writing and bear the drawer's signature.
  • The payee's identity must be clear.
  • Payment is due on demand.
  • It must include a date for the bank to honor it; otherwise, it is invalid.
  • The sum should be stated both in words and numerically, with the worded amount prevailing in case of discrepancies.
  • Truncated cheques can be electronically processed.
  • Only the Reserve Bank of India or the Central Government can issue Bills of Exchange or Promissory Notes payable to the bearer on demand.

Distinction between Cheque and Post-dated Cheque:

  • A post-dated cheque becomes a cheque under Section 138 of the Act on the date specified on its face, with the six-month period calculated from that date.
  • Altering the payment date of a cheque doesn't change it from "payable on demand."
  • Legal action can be taken against the bank if it honors a post-dated cheque before the specified date.

Types of Cheques:

  • Open Cheque: Cash can be obtained from the bank's counter using this cheque.
  • Bearer Cheque: Any person holding the bearer cheque can receive the specified amount.
  • Crossed Cheque: Can only be credited to the payee's bank account, reducing the risk of open cheques.
  • Order Cheque: Made out to a specific person, and the term "bearer" can be canceled.
  • Electronic Cheque: Generated in a secure system with digital signatures and replicates the original cheque.

Difference between promissory note and bill-of-exchange 

  • A bill of exchange contains an unconditional order to pay, but a promissory note contains an unconditional promise to pay.
  • There are only two parties in a promissory note, the maker and the payee, whereas there are three parties in a bill of exchange, namely, the drawer, the drawee, and the payee.
  • In a promissory note, acceptance is not necessary; in a bill of exchange, however, the drawee must accept.
  • In a bill of exchange, the obligation of the drawer is secondary and contingent upon the drawee’s failure to pay; in a promissory note, the liability of the drawer or the note’s manufacturer is main and absolute.

Difference between cheque and bill-of-exchange

  • A bill of exchange can be drawn on anyone, including a banker, unlike a cheque, which is drawn on a banker.
  • According to Section 19 of the Negotiable Instruments Act of 1881, a cheque is always payable immediately; a bill of exchange, however, is either payable immediately or after a certain amount of time.
  • One can cross a cheque to make it non-negotiable, but one cannot cross a bill of exchange.
  • Acceptance is not necessary for a cheque, but it is necessary for a bill of exchange.

Difference between holder and holder in due course

  • Any individual with the legal right to possess a promissory note, bill of exchange, or cheque in his or her own name, as well as to receive or obtain payment from the parties thereto, is referred to as the “holder” of that instrument. A holder who accepts the instrument in good faith, with due care and prudence, for value (consideration), and before maturity is referred to as a “holder in due course.” In the event of a “holder,” payment is not essential, and they are also permitted to purchase the instrument after it reaches maturity.
  • A “holder” does not have any particular rights, but a “holder in due course” does have some specific rights. For instance, a holder in due course cannot use the argument that the amount they filled out on an instrument exceeded the authority granted. It was decided that an endorsement was irregular and that the endorsee (AB and Co.) was not a holder in due course, albeit it might be a holder for value, when a bill was prepared by X in favour of Z and Z further endorsed the bill in favour of AB and Co.
  • The key point is that the holder must have legal custody of the instrument in his own name. The possessor must be entitled to obtain or recoup that sum. An endorsee, payee, or bearer are all examples of holders. If someone has entitlement, it indicates that even if they don’t use it, they are still entitled to it and it cannot be taken away from them. In accordance with Section 8 of the Negotiable Instruments Act of 1881, the holder of an instrument must have a right to the instrument even if he does not possess it.
  • A “holder” does not receive a title superior to that of his transferor; rather, a “holder in due process” receives a title superior to that of his transferor. The status of a “holder” is less favourable than that of a “holder in due course. ” The title of a “holder in due course” becomes free from all equities, meaning that a “holder in due course” cannot raise the defence that can be raised against the prior parties. For instance, if a negotiable instrument is lost and then found by someone through criminal activity (theft), the person who received the instrument through criminal activity is not entitled to any rights regarding any money owed in relation to that instrument. However, if such a document is properly transferred to a person as a holder, he will get a good title.

Structure of the Negotiable Instruments Act, 1881

The Negotiable Instruments Act of 1881, effective from December 9, 1881, comprises a total of 147 sections organized into 17 chapters, which are outlined as follows:

  • Chapter I (Sections 1 – 3): Preliminary
  • Chapter II (Sections 4 – 25): Provisions related to Promissory Notes, Bills of Exchange, and Cheques
  • Chapter III (Sections 26 – 45A): Regulations concerning Parties involved in Promissory Notes, Bills of Exchange, and Cheques
  • Chapter IV (Sections 46 – 60): Details on Negotiation
  • Chapter V (Sections 61 – 77): Guidelines for Presentment
  • Chapter VI (Sections 78 – 81): Information about Payment and Interest
  • Chapter VII (Sections 82 – 90): Discharge from Liability of Promissory Notes, Bills of Exchange, and Cheques
  • Chapter VIII (Sections 91 – 98): Requirements for Notice of Dishonour
  • Chapter IX (Sections 99 – 104A): Provisions regarding Noting and Protest
  • Chapter X (Sections 105 – 107): Defining Reasonable Time
  • Chapter XI (Sections 108 – 116): Acceptance and Payment for Honour, and Reference in Case of Need
  • Chapter XII (Section 117): Compensation
  • Chapter XIII (Sections 118 – 122): Special Rules of Evidence
  • Chapter XIV (Sections 123 – 131A): Regulations for Crossed Cheques
  • Chapter XV (Sections 132 – 133): Provisions for Bills in Sets
  • Chapter XVI (Sections 134 – 137): International Law
  • Chapter XVII (Sections 138 – 147): Penalties in Case of Dishonour of Certain Cheques due to Insufficiency of Funds in the Accounts.

In the case of A.V. Murthy v. B.S. Nagabasavanna (2002), it was established that a negotiable instrument is presumed to be drawn for consideration, and a complaint about a bounced cheque could be dismissed if, at the outset, it is evident that the debt is not enforceable due to, for instance, a significant lapse of time.

The Negotiable Instruments (Amendment) Act of 2017, effective from September 1, 2017, grants the court hearing a case involving a dishonored cheque the authority to order the drawer to pay interim damages to the complainant, not exceeding 20% of the cheque's value, within 60 days of the trial court's order for such payment. This provision applies when the drawer enters a not guilty plea to the allegations in the complaint. The Amendment also empowers the Appellate Court to order the appellant to deposit a minimum of 20% of the fine or compensation granted, in addition to interim damages, when hearing appeals against convictions under Section 138.

Holder in Due Course

A "holder in due course" is an individual who has acquired a negotiable instrument in a manner consistent with good faith and for consideration. Any holder of a negotiable instrument is automatically regarded as a "holder in due course." In the event of a dispute, the burden of proof falls on the party liable for payment to establish that the holder is not the rightful owner of the negotiable instrument.

In any case, the responsibility rests on the holder to prove their status as a holder in due course, for example, by demonstrating that they acquired the negotiable instrument in good faith and for consideration if the parties obligated to make payment assert that the instrument was acquired through unlawful means or fraud. In legal terms, the "burden of proof" pertains to the requirement to establish specific facts.

Dishonour

A negotiable instrument may sometimes be dishonored, signifying that the party responsible for payment fails to fulfill their obligation. After providing the appropriate notice of dishonour, the holder has the right to initiate legal action to recover the amount. Prior to filing a lawsuit, the holder can obtain a Notary Public's certification confirming the dishonour's occurrence, often referred to as a "protest." The court will presume dishonour based on the verification of such a protest.

Presumption of Notice Service

If a notice is sent by registered mail to the correct address of the check's drawer, it is assumed that notice has been served. However, the drawer has the option to challenge this presumption. The Supreme Court has clarified that a notice is considered properly served if it is delivered to the correct address and returned with notations such as "refused," "no one was home," or similar remarks.

Inchoate Instruments

Inchoate instruments pertain to instruments that are not fully completed or stamped as required by the law. Section 20 of the 1881 Act defines the rules regarding inchoately stamped instruments, specifically, promissory notes and bills of exchange, which are explicitly mentioned in the Act. However, despite differences between checks and the instruments recognized in Section 20, some legal judgments consider or treat checks as inchoate instruments if they lack specific essential characteristics of negotiable instruments.

Stamp Requirement

Even though the Act does not explicitly mention the relevance or requirement of stamps, every type of promissory note and bill of exchange must bear a stamp. The Indian Stamp Act of 1899 mandates the affixation of stamps on such documents.

Liabilities Under the Negotiable Instruments Act, 1881

The Act of 1881 establishes various liabilities, which are summarized as follows:

  • Liability of Agent Signing (Section 28): If an agent signs a promissory note, bill of exchange, or cheque without specifying that they are acting as an agent or without indicating their intent not to assume personal liability, the agent becomes personally liable for the instrument. An exception applies if they were misled into signing with the belief that only the principal would be responsible.
  • Liability of Legal Representative Signing (Section 29): A legal representative of a deceased person who signs a promissory note, bill of exchange, or cheque is personally bound unless they explicitly limit their responsibility to the extent of the assets received in their capacity as a legal representative.
  • Liability of Drawer (Section 30): When the drawee or acceptor of a bill of exchange or cheque fails to honor it, the drawer is obligated to compensate the holder, provided that the drawer received the proper notice of dishonour as described below.
  • Liability of Drawee of Cheque (Section 31): The drawee of a cheque must make the required payment, and if they fail to do so, they must reimburse the drawer for any losses or damages resulting from the non-payment, even if the drawee has sufficient funds available for the payment of the cheque.
  • Liability of Maker of Note and Acceptor of Bill (Section 32): The maker of a promissory note and the acceptor of a bill of exchange are required to pay the specified amount at maturity, in line with the note or acceptance's terms. In the absence of a contrary agreement, these obligations stand. Similarly, the acceptor of a bill of exchange, whether at or after maturity, must pay the amount upon demand. Failure to do so results in an obligation to compensate the holder for any related losses or damages.
  • Liability of Indorser (Section 35): Unless an indorser, in their endorsement, explicitly excludes or conditions their own liability, they are bound to compensate any subsequent holder in case of dishonour by the drawee, acceptor, or maker. This liability extends to losses or damages suffered by the holder due to such dishonour. An indorser is accountable as if they were a maker of a demand instrument.
    • Section 40 details the discharge of the indorser's liability. When a holder of a negotiable instrument impairs the indorser's remedy against a prior party without the indorser's consent, the indorser is released from responsibility to the same extent as if the instrument had been fully paid.
  • Liability of Prior Parties to Holder in Due Course (Section 36): Every previous party to a negotiable instrument is liable to a holder in due course until the instrument is appropriately satisfied.

Presumptions under Section 118 and Section 119 of the Negotiable Instruments Act, 1881

In legal proceedings, the plaintiff typically bears the initial burden of establishing a prima facie case in their favor, as per Section 101 of the Indian Evidence Act, 1872. Once the plaintiff provides evidence supporting their prima facie case, the defendant is then required to present evidence that supports the plaintiff's case. The burden of proof may shift back to the plaintiff as the case progresses. Under Section 118 of the Negotiable Instruments Act of 1881, the following presumptions are made unless proven otherwise:

  • Consideration: In the context of a negotiable instrument, the complainant must demonstrate prima facie that they acted in good faith and without receiving payment. Every negotiable instrument is presumed to have been drawn for consideration, and each time such instruments are accepted, drawn, or transferred, it is assumed to have been done in consideration of (or against) value. Consequently, if a complainant files a complaint regarding the dishonor of a check (or other negotiable instruments), the accused party can discharge their responsibility by showing that there is no amount owed to the complainant according to the instrument's terms.
  • Date: It is presumed that a negotiable instrument was executed on the date specified on the instrument's face in the case of such an instrument.
  • Time of Acceptance: Concerning negotiable instruments, it is presumed that they were accepted within a reasonable period after their execution date and before their maturity.
  • Time of Transfer: Every transfer involving a negotiable instrument is presumed to have occurred before the instrument's maturity date.
  • Order of Endorsements: The endorsements on a negotiable instrument are presumed to have been made in the order they appear.
  • Holder in Due Course: A lost promissory note, bill of exchange, or check is presumed to have been properly endorsed, implying the concept of a holder in due course.
  • Stamp: It is presumed that every possessor of a negotiable instrument acquired it willingly and in exchange for value. The accused party must demonstrate that the holder of the negotiable instrument is not a holder in due course.

The Negotiable Instruments Act of 1881 requires that when a promissory note or bill of exchange is dishonored by non-acceptance or non-payment, the holder of such an instrument can have a notary public note the dishonor on the instrument or on an attached paper, or partially on both. Additionally, according to Section 100 of the Negotiable Instruments Act of 1881, the holder of an instrument may have it protested by a notary public within a reasonable time regarding the dishonor of the instrument.

In legal cases such as Chinnaswamy v. Perumal (1999) and Ayyakannu Gounder v. Virudhambal Ammal (2004), it was established that the presumption under Section 118 of the Negotiable Instruments Act, 1881, can be refuted based on the facts of the case. In Bonala Raju v. Sreenivasulu (2006), it was clarified that the presumption regarding consideration under Section 118 applies when the fulfillment of a promissory note is proven.

Under Section 119 of the Negotiable Instruments Act of 1881, the presumption of proof of protest is discussed. It states that in cases related to the nonpayment of a promissory note or bill of exchange, the court will presume that the nonpayment occurred unless and until the acceptor of the promissory note or bill of exchange refutes the claim.

The penal provisions of the Negotiable Instruments Act, 1881

Sections 138 to 142 of the 1881 Act contain criminal penalties designed to ensure the enforcement of contracts involving the use of cheques as a means of deferred payment. The conditions for initiating a complaint for dishonored cheques are outlined in Section 138 of the Act.
To comply with Section 138, the following elements must be met:

  • Cheques are a widely used form of payment, and post-dated cheques are frequently employed in various business transactions. Post-dated cheques are issued to the drawer of the cheque as a matter of convenience. Therefore, it is essential to prevent the misuse of the privileges extended to the cheque's drawer.
  • The Negotiable Instruments Act, 1881, governs the use of negotiable instruments, including cheques, bills of exchange, and promissory notes. Chapter XVII, encompassing Sections 138 to 142, aims to instill confidence in the efficiency of banking operations and validate the use of negotiable instruments in commercial transactions.
  • An individual must have issued a cheque to make a payment to another party, thereby discharging a debt or fulfilling some other obligation.
  • The bank must have received the said cheque within the past three months.
  • The cheque is returned unpaid by the bank due to insufficient funds or because it exceeds the amount specified in an agreement established with the bank for payment from the account.
  • The payee serves a written notice to the drawer, demanding payment of the money, within 15 days of learning from the bank that the cheque was dishonored.
  • The drawer fails to make the payment to the payee within 15 days of receiving the notice.

These provisions are in place to ensure that the use of cheques in commercial transactions is conducted in a legitimate and trustworthy manner. Violations of these conditions can lead to legal consequences under the Act.

Section 138 of the Negotiable Instruments Act, 1881 - An Overview

The Negotiable Instruments Act, originally formulated in 1866 and passed into law in 1881, includes Chapter XVII, comprising sections 138 to 142, which were added in 1988. Section 138 outlines the penalties for the offense of dishonoring a cheque. It defines a "cheque" as a negotiable instrument drawn on a specified banker and not expressed to be payable otherwise than on demand. This section was introduced to provide legal recourse for the payee of a dishonored cheque, both through civil and criminal remedies.

The primary objective of Section 138, as stated in the case of Modi Cement Limited v. Kuchil Kumar Nandi (1998), is to ensure the efficiency of banking operations and instill trust in business transactions that employ cheques. Negotiable instruments like cheques are vital in the commercial world, as they simplify trade and commerce by offering credibility to credit instruments that can be easily converted into cash and transferred.

In a recent case, P Mohanraj vs. M/S. Shah Brothers Ispat Pvt. Ltd. (2021), it was clarified that Section 138 proceedings under the Negotiable Instruments Act should be considered "civil sheep" within a "criminal wolf's clothing," highlighting the dual nature of these proceedings.

Conditions to Commit an Offense Under Section 138 of the Negotiable Instruments Act, 1881

Section 13 of the Negotiable Instrument Act defines "Negotiable Instrument" as a promissory note, bill of exchange, or cheque payable to order or bearer. In simple terms, it is an instrument promising to pay a sum of money on demand or at a future date.
Section 138 provides criminal penalties for dishonoring a cheque and outlines specific conditions for such an offense:

  • The cheque must be drawn by the drawer to pay a debt or fulfill an obligation to another party.
  • The cheque must be presented to the drawee bank, and if it bounces due to insufficient funds or exceeding the arrangement with the bank, it is considered dishonored.
  • The bank should receive the cheque within six months of its issuance or during its validity period, whichever is shorter.
  • The bank must promptly furnish the payee with a "Cheque Return Memo" in case of dishonor.
  • Subsequently, the payee, who is also the cheque holder, must send a demand notice to the drawer within 30 days of receiving the memo.
  • The drawer is obliged to make the payment within 15 days of receiving the notice. Failure to do so allows the payee to file a lawsuit within 30 days after the 15-day period expires.

A case ruling in Shankar Finance Investment vs. State of Andhra Pradesh (2008) emphasized that Section 142 of the Negotiable Instrument Act mandates that a complaint must be filed by the payee or a holder in due course of the cheque. If the payee is a natural person, they can file the complaint; if the payee is a company, it must be represented by a natural person.

Decriminalization of Section 138 of the Negotiable Instruments Act, 1881

In 2020, the government issued a public notice proposing the decriminalization of various offenses, including those under Section 138 of the Negotiable Instruments Act, with the aim of simplifying business processes and reducing the burden on the legal system. However, it is arguable whether decriminalizing Section 138 would achieve these goals. The section serves as a deterrent to ensure that individuals honor their commitments when making payments by cheque.

Decriminalization may lead to an increase in cases in civil courts, as the burden of enforcing contractual obligations will shift from criminal courts to civil courts. Given the existing backlog of cases in magistrate courts, this could further delay the resolution of disputes. The proposal may require careful consideration, balancing the objectives of business facilitation and maintaining the sanctity of commercial transactions through legal enforcement.

Recent Developments in the Swift Disposal of Negotiable Instrument Cases

  • In the case of Dayawati v. Yogesh Kumar Gosain (2017), the Delhi High Court addressed the question of whether mediation could be employed to resolve a criminally compoundable offense under Section 138. Despite the lack of explicit legislative provision, the court ruled that criminal proceedings may be directed toward alternative dispute resolution methods. The Code of Criminal Procedure, 1973, permits and recognizes settlements without prescribing or limiting the means of achieving them. This includes alternative dispute resolution processes like arbitration, mediation, and conciliation (as outlined in Section 89 of the Civil Procedure Code, 1908) for resolving disputes falling under Section 320 of the Code of Criminal Procedure. It was argued that Section 138 proceedings under the 1881 Act differ from other criminal cases and are more akin to civil wrongs with criminal implications.
  • Taking into account the legislative intent behind Section 138 and other provisions in Chapter XVII of the Act, the Supreme Court, in Meters and Instruments (P) Ltd. v. Kanchan Mehta (2017), stated that an offense under Section 138 primarily constitutes a civil wrong. Section 139 places the burden of proof on the accused, with the standard of proof being the "preponderance of probabilities." These cases are typically meant to be tried summarily under the provisions of summary trials in the CrPC, with necessary adjustments for proceedings under Chapter XVII of the Act.
  • As per Section 258 of the CrPC, the court can, upon satisfaction that the cheque amount, along with assessed costs and interest, has been paid, and there is no valid reason for continuing punitive measures, close the case and release the accused. Compounding is encouraged initially and is not prohibited at a later stage, subject to reasonable compensation as agreed upon by the parties or the court. The primary purpose of this provision is compensatory, with the punitive aspect intended to enforce the compensatory element.
  • Cases brought under Chapter XVII of the Act are typically to be tried in a summary manner. Considering that the court, in addition to a prison sentence, can award appropriate compensation with a default sentence under Section 64 of the Indian Penal Code, 1860, and further recovery powers under Section 431 of the CrPC, this strategy provides flexibility. The magistrate may decide, under the second proviso to Section 143 of the IPC, that a summary trial is not desirable if a sentence of over one year might be necessary. Thus, a prison term exceeding one year may not be warranted in every case.
  • The bank's slip serves as prima facie evidence of the dishonored cheque, alleviating the need for additional preliminary evidence. The complainant's evidence can be presented by affidavit, subject to court scrutiny and decision. This affidavit testimony is admissible at all stages of a trial or proceeding.
  • As per Section 264 of the CrPC, the deponent may be examined in a specific manner unless the second proviso to Section 143 of the IPC is invoked, necessitating a sentence of one year or more. In such cases, and when Section 357(3) of the CrPC is considered insufficient due to factors like the cheque amount, the accused's behavior, financial capacity, or other circumstances, the plan is to proceed in a summary manner.

Recommendations for Enhancing the Functioning of the Negotiable Instruments Act, 1881

  • Increase the Number of Magistrates: It is advisable to double the number of Magistrates exclusively assigned to handle cases involving cheque bounces. Special courts can also be established to handle specific cases. Adequate government funding should be allocated to cover the expenses associated with hiring more Magistrates, support staff, and necessary infrastructure. To ensure effective case management, no Magistrate should have more than fifty cases scheduled in a single day, allowing for a reasonable workload.
  • Efficient Case Scheduling: The court's judicial clerk should spend an hour each day for roll calls, considering adjournment requests by consent, and adjourning cases that genuinely require it before the court's session begins, preferably before 11 AM. Matters requiring the Magistrate's judicial attention can be deferred for review with a note from the court clerk. The entire hour of court time starting at 11 AM should be dedicated to recording evidence, potentially saving the court one to two hours daily. Cheque bounce victims should not be required to pay court fees, as they are not bringing a new financial claim.
  • Burden of Proof: As per Section 139 of the Act, it is presumed that the holder of a cheque received it for the discharge of a debt or liability. The accused may rebut this presumption with compelling evidence that no such debt or liability existed. Once the court accepts such rebuttal evidence, the burden of proof reverts to the complainant.
  • Avoidance of Technicalities: Courts should adopt a pragmatic approach in their quasi-judicial proceedings and refrain from becoming mired in technical details. Technicalities should be identified and firmly rejected.
  • Four-Hearing Process: Magistrates should act independently, and a streamlined four-hearing process should be employed. If the accused fails to appear at the initial hearing, a non-bailable warrant must be issued. At the second hearing, the accused should provide justification and present a defense. The third hearing should involve cross-examination, and arguments should be heard at the fourth hearing, followed by a decision.
  • Credit-Based System: Credit relies on trust and confidence. Implementing these reforms promptly will further simplify conducting business in India. The court must ensure that it does not become a party to procrastination tactics, as it is unlawful for individuals who borrow on credit to use Section 138 of the Act to delay payments.

Conclusion

The Indian judicial system faces a significant backlog of cases, with approximately 20% involving cheque bounces, as highlighted in the 213th Law Commission Report. The recent provisions have breathed new life into the dormant sections of the Negotiable Instruments Act of 1881. While cheque bounce cases are of a penal nature and entail criminal offenses, the introduction of bail provisions has made them closely resemble civil matters. Implementing these new restrictions can proactively safeguard the integrity of cheques. Depositing a substantial sum by the accused or appellant, in the case of an appeal, would make them take the matter more seriously. While progress has been made, additional efforts are required to make cheque bounce cases more efficient and give true meaning to summary trials, ensuring that the criminalization of cheque bounces remains relevant.

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Negotiable Instruments Act

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Previous Year Questions with Solutions

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1881 | Law Optional Notes for UPSC

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Important questions

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