Negotiable Instrument Act is enacted on 9 December 1881, to define and amend laws relating to promissory note, bills of exchange and cheque. This Act is applicable to whole of India including Jammu and Kashmir.  This act came into force on 1st March 1882.

Negotiable Instrument-The word Negotiable means transferability and the word Instrument means piece of paper or any document. Negotiable instruments are written contracts whose benefits can be transferred from the original holder to the new holder. In other words, a negotiable instrument is a document that promises payment to the assignee (the person to whom the instrument is transferred/given) or to a designated person. These instruments are negotiable signed documents, promising to pay the holder/holder the amount on demand or at any time in the future.

As mentioned above, these instruments are transferable. The holder ultimately receives the funds and can use them as needed. This means that when an instrument is transferred, the holder of that instrument will have full legal ownership of that instrument. The definition of Negotiable Instruments has been discussed under section 13 of The Negotiable Instrument Act 1881.

Features of the Negotiable Instrument:

  1. It is a written document.
  2. A Negotiable Instrument payable to bearer is transferable merely by delivery where as a Negotiable Instrument payable to order is transferable by endorsement and delivery.
  3. The holder of a Negotiable Instrument can sue upon it in his own name.
  4. Its works in the same manner as money and like money it may also be transferred from one person to another.
  5. The transferor does not need to give notice to any person at the tie od transferring the instrument.
  6. It is the simplest and most convenient mode of assignment of a debt.
  7. The title to the instrument received by a bona fide by defect in the title of the transferor.


Types of negotiable instruments

  1. Promissory Note:

A promissory note refers to a written promise made by an organization or individual to its holder to pay a certain amount of money on a predetermined date. Promissory note is defined under section 4 of the Negotiable Instrument Act 1881. In other words, a promissory note states the amount of money someone owes you or you owe someone along with the interest rate as well as the payment date.

For example: X purchases goods worth INR 10,000 from Y. If X is unable or unwilling to pay for the purchase in cash, then X can give Y a promissory note. It is a promise by X to pay Y on a specified date or on demand. In another possibility, X may have a promissory note issued by Z. He can endorse this promissory note and give it to Y and get rid of his debt in this way. However, the seller is not required to accept the promissory note. The buyer's reputation is of great importance to the seller when deciding whether to accept a promissory note.

  1. Bill of Exchange

 A bill of exchange refers to a legally binding written document that requires one party to pay a predetermined amount of money to a second party (the other party). Some invoices may indicate that the amount is due at a specific future date or that payment is due on demand. Bills of exchange are used in transactions related to goods and services. Bill of Exchange is defined under section 5 of the Negotiable Instrument Act 1881. It is signed by a party who owes money (called the payer) and given to a party entitled to receive the money (called the payee or seller), and so it can be used to Execute the payment contract. However, the seller can also endorse a bill of exchange and give it to someone else, thereby transferring that payment to another party.

It should be noted that when bills of exchange are issued by financial institutions, it is often called a bank draft. And if it is issued by an individual then it is often called a commercial bill of exchange. The bill of exchange plays a major role as a bill of exchange in international trade; The exporter or seller, in the transaction, sends a bill of exchange to the importer or buyer. Third parties, usually banks, are a party to certain bills of exchange that act as security for these payments. This helps minimize any risks that are an integral part of any transaction.

  1. Cheques

Cheque refers to a written instrument containing an unconditional order, addressed to the banker and signed by a person who has deposited his money with the banker. This order requires the banker to pay only a certain amount on demand to the check holder (bearer) or any other person specifically payable in accordance with the instructions given. Cheque is defined under section 6 of the Negotiable Instrument Act 1881.Cheques can be a good way to pay different types of bills. Although check usage is decreasing over the years due to online banking.

Individuals still use checks to pay loans, school fees, car EMIs, etc.

Cheques are also a good way to keep track of all paper transactions.

On the other hand, checks are a relatively slow payment method and can take some time to process.

Negotiable Instruments (Amendment) Bill,2017

The Negotiable Instruments (Amendment) Bill, 2017 was introduced in the Lok Sabha earlier this year on January 2, 2018. The Bill seeks to amend the existing law. Invoices identify promissory notes, promissory notes, and cheques. The bill also specifies penalties for dishonored cheques and various other offences related to negotiable instruments.

According to a recent circular, an individual will have to pay up to INR 10,000 along with interest at 6-9% in case the check is dishonored. The bill also includes a provision allowing the court to order interim compensation to those whose checks were returned by a dishonest party (individual/entity default). This temporary compensation shall not exceed 20 percent of the total value of the cheque.


When a negotiable instrument is dishonored, its holder must notify all previous parties of the dishonor to take responsibility. A negotiable instrument may be dishonored for non-acceptance or non-payment. Checks and drafts can only be dishonored for non-payment, but bills of exchange can be dishonored for non-acceptance or non-payment.

Article 91:Dishonour by non-acceptance

Article 92:Dishonour by non-payment

Article 138:Dishonour of cheque for insufficiency, etc., of funds in the account.

Nature of offence under Section 138 NI Act

Section 138 of the Negotiable Instruments Act 1881 (NI Act) prescribes penalties for a person who issues a check dishonored due to insufficient funds in his bank account or for any other reason . This article also provides the procedures to be followed in such cases.

  1. The nature of the offence under section 138 of the NI Act is quasi-criminal in nature. This means that although this is not a purely criminal offense, it has some characteristics of a criminal offence.
  1. The offence under Section 138 of the NI Act is not a pure criminal offense as it is not included in the Indian Penal Code (IPC), which is the main criminal law in India. Rather, it is a special provision of the NI Act, relating to negotiable instruments such as cheques, bills of exchange and promissory notes.
  2. However, an offence under section 138 of the NI Act has certain characteristics of a criminal offence. For example, there must be an intention to commit a crime. Mere dishonoring a check is not enough to establish an offense; There must be an intention of the person issuing the check to deceive the other party.
  3. Furthermore, the penalty prescribed for an offense under section 138 of the NI Act is the same as that for a criminal offence. Penalties include imprisonment of up to two years or a fine of up to twice the amount of the check, or both.
  1. The procedure for trying offenses under section 138 of the NI Act is similar to that for criminal offences. This procedure includes the injured party filing a complaint, summoning the defendant, and holding a trial.
  1. Another feature of the offense under section 138 of the NI Act that gives it its quasi-criminal nature is that it is a compoundable offence. This means that the parties can reach a settlement and the complainant can withdraw his claim, subject to certain conditions.

Procedure to filing complaint

  1. Notify the check drawer to pay the check amount within 15 days from the date of receipt of the notice.
  2. Within 30 days from the date of return of the check, the drawer must send notice of dishonor and must claim the amount of the check within 15 days from the date of receipt of the notice. If 30 days have passed, the drawee can re-present the check to the bank within the specified time.
  3. File a suit under section 138 of the Negotiable Instruments Act, 1881
  4. If the drawer fails to pay the amount of the check within 15 days from the date of receipt of the notice, he can file a criminal complaint under section 138 of the Negotiable Instruments Act, 1881 within month to the court where the cause of action arose. .It is best to send the notice through an attorney.

Documents for filing a complaint under Section 138 of the Negotiable Instruments Act, 1881

  1. Memo of Parties
  2. Complaint U/S 138 Negotiable Instruments Act, 1881
  3. Evidence before summons / by affidavit
  4. List of witnesses
  5. List of documents attached to the document

List of documents to be submitted under section 138 of the Negotiable Instruments Act, 1881:

  • Copy of the resolution authorizing Complainant's Attorney (in case of Company, firm etc).
  •  Original dishonored cheques
  •  Returning memo dated _____.
  •  Copy of legal notice dated _______
  •  Postal Receipt No. ______ dated ______
  •  UPC Dated _____
  •  Limitation Document (This is required in some court, attach, If applicable)
  • Vakalatnama

Format of Legal Notice

Registered AD/Speed Post


Mr. ________________



Sear Sir,

Under instructions and authority from our client M/s. ______________________ we serve upon you the following legal Notice.

That our client is a Private Limited Company engaged in trading of Computers, Laptops, Computer Parts and Accessories the name of _________________________________ having office at ____________________________________.

That in the year _______________you have approached our client through E-mail communication of your employee __________________ to purchase ________________for your office. Subsequently you have issued purchase order dated _________________amounting to Rs. ______________for _____________

That you have promised our client to pay the cost of the product in the form of Current Dated Cheque as mentioned in the purchase order.

That our client had relied on your promise and as instructed by you delivered the ___________ at your office at _______________ vide Invoice No. __________dated ___________.

That you have issued Cheque No. _____________dated ____________for Rs. _________/- (Rupees ____________only) drawn __________________________ towards payment against the Invoice.

That the aforesaid cheques No. _____dated ________for Rs. _______/- was presented by our client M/s._____________________ on _____ to your Bankers i.e. _____________________________________.

Our clients shock and surprise the said cheque had been dishonoured by your bankers with the reason "Fund Insufficient" which was intimated to our client by their ________________________________ through their cheque return memo dated ____________

That thereafter inspite of many telephonic reminders by our client, you failed to make the payment due to our client.

That now it is clear that you had dishonest intention at the time of purchasing _____ from our client and deceived our client to the tune of ____________.

Our client states that you have issued the above said cheques only with an intention to cheat our client which amounts to an offence punishable under section 138 of Negotiable Instruments Act.

Under the circumstances, we call upon you to pay of Rs.____________ /- within a period of 15 (fifteen) days from the date of receipt of this notice, failing which our client will be constrained to take legal action against you in a court of law for an offence punishable under section 138 of Negotiable Instruments Act for which you will be liable for all costs and consequences.

This is without prejudice to all other legal rights and remedies available to our client for the above-stated purpose.

You are liable to pay a sum of Rs. __________/- as necessary cost and expenses of sending the present legal notice to you.

Copy of this legal notice is also kept at our office for further ready reference it required in future.

For______, Advocates

_____________, Advocate


Article written by

Muskan Jha 

Intern at Corpzo