Negotiable Instruments and Payment Systems
What this domain tests
The exam tests the Negotiable Instruments Act, 1881, cheque handling rules, and the retail payment rails. Expect questions on crossing, endorsement, holder in due course and the s.138 dishonour sequence.
Core rules
- Section 13 recognises three negotiable instruments: promissory note, bill of exchange and cheque. A cheque is a bill of exchange drawn on a specified banker and payable on demand.
- Negotiability: transfer by delivery (bearer) or endorsement plus delivery (order). A holder in due course obtains a good title even if an earlier party had a defective title, and the Act presumes consideration and the date of the instrument.
- Cheque validity: three months from the date of issue; a stale cheque must be returned.
- Crossing: general (two parallel lines) means payment only through a bank; special crossing names a particular bank; 'account payee' restricts collection to the payee's account and is not transferable.
- Material alteration without the drawer's full signature makes the cheque void and the banker must refuse payment.
- Payment systems: NEFT (batch settlement, available 24x7 since December 2019), RTGS (real time, minimum ₹2 lakh), IMPS (24x7, generally up to ₹5 lakh), UPI (NPCI, usually ₹1 lakh), Cheque Truncation System (image-based clearing) and Positive Pay for cheques of ₹5 lakh and above.
- Section 138: on dishonour for insufficiency of funds, the payee must give notice within 30 days of the return memo, the drawer gets 15 days to pay, and a complaint may be filed within the next 30 days.
Worked example
A cheque dated 1 April is presented on 15 August. It is stale and may be returned unpaid. If the same cheque is crossed 'account payee' and endorsed to a third party, collection is refused: the crossing restricts transfer, and only the named payee's account can be credited.
Traps that cost marks
- Confusing 'not negotiable' with 'account payee'.
- Assuming a post-dated cheque is invalid; it is valid but cannot be paid before its date.
- Applying s.138 to a bill of exchange rather than a cheque.