Introduction
In the concluding part of our series on India’s Negotiable Instruments Act, we explore several critical aspects that govern the realm of negotiable instruments such as promissory notes, bills of exchange, and cheques. This instalment covers acceptance and payment for honour, reference in case of need, compensation, penalties, and special rules of evidence under the act.
As the final segment of this comprehensive guide, we aim to provide a thorough understanding of the intricate provisions and mechanisms that safeguard the interests of all parties involved in negotiable instrument transactions. By examining these crucial elements, we gain valuable insights into the robust framework that underpins the smooth functioning of commercial activities in India.
Acceptance & Payment For Honour And Reference in Case of Need
When a bill of exchange (a written order to pay a specific amount of money) is dishonoured, either due to non-acceptance or non-payment, there are provisions in the law that allow third parties to step in and accept or pay the bill, thereby protecting the honour and credit of the parties involved.
Acceptance for Honour:
If a bill of exchange is dishonoured due to non-acceptance or lack of adequate security, any person who is not already a party to the bill can, with the consent of the holder (the person entitled to receive payment), accept the bill “for the honour” of any party to the bill. This is done by writing on the bill, declaring that they are accepting it under protest for the honour of a specific party, such as the drawer (the person who issued the bill) or a particular endorser (a person who has transferred the bill).
If the acceptance does not specify for whose honour it is made, it is considered to be made for the honour of the drawer.
By accepting for honour, the acceptor binds themselves to pay the amount of the bill if the original drawee (the person on whom the bill is drawn) does not pay. The party for whose honour the acceptance is made, and all prior parties, are liable to compensate the acceptor for any loss or damage sustained due to such acceptance.
Payment for Honour:
If a bill of exchange is dishonoured due to non-payment, any person can pay the bill for the honour of any party liable to pay it. However, before making such a payment, the person (or their agent) must declare before a notary public the party for whose honour they are paying, and this declaration must be recorded by the notary.
The person paying for honour becomes entitled to all the rights of the holder at the time of payment and can recover from the party for whose honour they paid, all sums paid, along with interest and expenses incurred in making the payment.
Drawee in Case of Need:
Sometimes, a bill of exchange may name a “drawee in case of need,” which is an alternative person on whom the bill can be drawn if the original drawee refuses to pay or accept the bill. In such cases, the bill is not considered dishonoured until it has been dishonoured by the drawee in case of need. This drawee can accept and pay the bill without any previous protest (formal declaration of dishonour).
These provisions allow for the preservation of honour and credit in commercial transactions, even when the original parties fail to fulfil their obligations. They provide a mechanism for third parties to step in and ensure the smooth flow of commerce by accepting or paying the bill, thereby protecting the interests of all parties involved.
Compensation under The Negotiable Instruments Act
When a promissory note, bill of exchange, or cheque is dishonoured (not paid) by the party liable to pay it, the holder or endorsee (the person to whom the instrument is payable) is entitled to compensation. The Negotiable Instruments Act lays down specific rules for determining this compensation.
- Amount Due: The holder is entitled to receive the full amount due on the instrument, along with any expenses incurred in presenting, noting (recording the dishonour), and protesting (formally notifying the dishonour) the instrument.
- Exchange Rate: If the person liable to pay resides in a different place than where the instrument was payable, the holder can claim the amount due at the current exchange rate between the two places.
- Indorser’s Claim: If an endorser (a person who transferred the instrument by endorsement) has paid the amount due, they are entitled to claim the amount paid, along with interest at 18% per annum from the date of payment until realisation, and any expenses incurred due to the dishonour and payment.
- Indorser’s Exchange Rate: If the person liable and the endorser reside in different places, the endorser can claim the amount at the current exchange rate between the two places.
- Drawing a Bill: The party entitled to compensation can draw a bill (a new negotiable instrument) on the party liable for the amount due, along with expenses. This bill must be accompanied by the dishonoured instrument and the protest (if any). If this new bill is also dishonoured, the party dishonouring it becomes liable to compensate in the same manner as the original bill.
In essence, the Negotiable Instruments Act ensures that the holder or endorsee of a dishonoured instrument is compensated for the amount due, expenses incurred, and interest, considering any differences in location between the parties involved. This compensation can be claimed by drawing a new bill on the liable party.
Penalties Under The Negotiable Instruments Act
If you issue a cheque that gets dishonoured or bounced by the bank due to insufficient funds in your account, you can face legal penalties under The Negotiable Instruments Act, 1881 of India. This Act lays out provisions related to negotiable instruments like cheques and holds bounced cheque issuers accountable.
What Constitutes an Offence?
Section 138 of the Act states that dishonouring a cheque for insufficiency of funds is an offence if:
1) The cheque was issued to discharge any debt or liability, either fully or partially.
2) The bank returned the cheque unpaid due to inadequate balance in your account or the cheque amount exceeded the arranged overdraft limit based on your agreement with the bank.
However, certain conditions must be met for the offence to be valid:
- a) The payee (recipient) deposited or presented the cheque to the bank within 6 months from the cheque date or before its validity period, whichever is earlier.
- b) Within 30 days of receiving intimation from the bank about the dishonoured cheque, the payee issued a written notice to you (the drawer) demanding payment.
- c) You failed to make payment to the payee within 15 days of receiving the notice.
Penalties for Bounced Cheques
If found guilty under Section 138, you can face the following penalties:
1) Imprisonment up to 2 years
2) Fine up to twice the cheque amount
3) Both imprisonment and fine
The quantum of punishment is decided by the court based on facts and circumstances of each case.
In Case of Companies
If the drawer is a company, then as per Section 141:
- The company itself can be prosecuted and punished
- Every person in charge of and responsible for the conduct of the company’s business at the time of offence, is deemed guilty unless they prove otherwise
- Directors/officers who had no knowledge or exercised due diligence are exempt from prosecution
Government-nominated directors are also exempt from personal liability.
Court Process and Compounding
As per Sections 142, 143, 144, 145:
- Only the cheque payee or holder can file a case within 1 month of the cause (15 day notice period ending)
- The case is tried by courts at the level of Metropolitan Magistrate or higher
- Summary trial procedures apply to expedite the case within 6 months if possible
- The payee’s evidence can be taken by affidavit
- The offence is compoundable i.e. charges can be withdrawn if a settlement is reached before conviction
The provisions aim to prevent dishonest issuance of cheques and maintain the integrity and credibility of these negotiable instruments in transactions. Both drawers and payees must understand these legal implications to avoid penalties and resolve disputes effectively.
Special Rules of Evidence under The Negotiable Instruments Act
Negotiable instruments, like promissory notes, bills of exchange, and cheques, are crucial financial tools that facilitate transactions and enable the smooth flow of money. However, disputes can arise, and to ensure fairness and protect the interests of all parties involved, the Negotiable Instruments Act has established specific rules of evidence. These rules are designed to simplify legal proceedings and promote trust in the negotiable instruments system.
Let’s break down these special rules of evidence into two main categories: presumptions and estoppels (legal prohibitions).
Presumptions:
Think of presumptions as commonly accepted facts that are assumed to be true unless proven otherwise. These presumptions help avoid the need to provide evidence for certain widely accepted aspects of negotiable instruments, making legal proceedings more efficient.
- Consideration: When you receive a negotiable instrument, such as a cheque or a promissory note, it is presumed that it was given to you in exchange for something of value, like goods, services, or money. This presumption applies even if the instrument has been transferred or endorsed (signed over) to someone else.
- Date: The date written on the negotiable instrument is presumed to be the actual date it was created or drawn.
- Timely Acceptance: For bills of exchange (a type of negotiable instrument), it is presumed that the person who accepted the bill did so within a reasonable time after the date on the bill and before the due date (maturity).
- Transfer before Maturity: It is presumed that any transfer or endorsement of a negotiable instrument happened before the due date (maturity).
- Order of Endorsements: The signatures (endorsements) on the back of a negotiable instrument are presumed to have been made in the order they appear.
- Stamp Duty: If a negotiable instrument is lost, it is presumed that the required stamp duty (a type of tax) was paid on it.
- Holder in Due Course: The person currently holding the negotiable instrument is presumed to have acquired it in good faith and for valuable consideration (something of value exchanged). However, if the instrument was obtained through fraud or unlawful means, the holder must prove that they acquired it legitimately.
Estoppels (Legal Prohibitions):
Estoppels are legal restrictions that prevent parties from denying certain facts related to negotiable instruments in court. These estoppels protect the rights of legitimate holders and ensure the smooth negotiability (transferability) of these instruments.
- Denying Original Validity: If you are the maker of a promissory note, the drawer of a bill of exchange or cheque, or the acceptor of a bill of exchange, you cannot deny the original validity of the instrument in a legal suit brought by a legitimate holder (someone who acquired the instrument in good faith and for valuable consideration).
- Denying Payee’s Capacity to Endorse: If you are the maker of a promissory note or the acceptor of a bill of exchange payable to a specific person (order instrument), you cannot deny that person’s capacity (legal ability) to endorse (sign over) the instrument at the time it was created in a suit brought by a legitimate holder.
- Denying Signature or Capacity of Prior Party: If you have endorsed (signed over) a negotiable instrument, you cannot deny the signature or legal capacity of any party who endorsed the instrument before you in a suit brought by a subsequent holder.
These special rules of evidence aim to create a fair and efficient legal framework for resolving disputes related to negotiable instruments. By establishing presumptions and estoppels, the Negotiable Instruments Act streamlines legal proceedings, promotes trust in the negotiable instruments system, and protects the rights of legitimate holders who acquired these instruments in good faith and for valuable consideration.
Conclusion
The Negotiable Instruments Act stands as a towering pillar, fortifying the foundation of commercial activities within India’s dynamic economic landscape. Throughout this comprehensive exploration, we have delved into the intricate workings of this act, uncovering its multifaceted nature and its pivotal role in facilitating seamless transactions involving negotiable instruments.
From the intricate definitions and classifications of negotiable instruments to the intricate web of rights, liabilities, and responsibilities bestowed upon various parties, the act meticulously outlines a robust framework. Its provisions govern every aspect of negotiable instrument transactions, ensuring clarity, transparency, and accountability at every juncture.
Moreover, the Negotiable Instruments Act has proven its resilience by adapting to the ever-evolving nature of commerce. Through its provisions on electronic negotiable instruments and the integration of modern technologies, the act remains relevant and equipped to tackle the challenges of the digital age.
The act’s comprehensive coverage of critical aspects such as negotiation, endorsement, dishonour, and discharge of negotiable instruments underscores its pivotal role in facilitating the smooth flow of commercial activities. Furthermore, its robust mechanisms for dispute resolution, including special rules of evidence and provisions for compensation and penalties, fortify its stance as a guardian of fairness and justice.
As India’s economy continues to thrive, the Negotiable Instruments Act will undoubtedly remain a cornerstone, upholding the integrity and efficiency of negotiable instrument transactions. Its comprehensive nature, coupled with its ability to adapt to changing times, solidifies its status as an indispensable legal framework that fosters trust, encourages investment, and propels commercial growth.
This article is just for educational and informational purposes only.
References
https://lddashboard.legislative.gov.in/actsofparliamentfromtheyear/negotiable-instruments-act-1881
https://lddashboard.legislative.gov.in/sites/default/files/A1881-26.pdf