Negotiable Instruments: Cheques, Bills and Promissory Notes
Negotiable Instruments: Cheques, Bills and Promissory Notes
This domain tests the Negotiable Instruments Act, 1881: the three instruments, transfer, crossing, dishonour and the Section 138 remedy. Expect definition-based and date-based questions.
Core rules
- Promissory note (Section 4): an unconditional written promise by the maker to pay a certain sum to a specified person or bearer. Two parties; no acceptance is needed.
- Bill of exchange (Section 5): an unconditional written order by the drawer to the drawee to pay a certain sum to the payee. Three parties; acceptance by the drawee is required.
- Cheque (Section 6): a bill of exchange drawn on a specified banker and payable on demand. It includes an electronic image of a truncated cheque.
- Negotiability: transfer by endorsement and delivery (or delivery alone for bearer instruments); a holder in due course takes free of prior defects.
- Cheque validity: three months from the date on the cheque; a stale cheque is returned.
- Crossing: general crossing, special crossing, account payee and not negotiable crossings restrict payment or transfer.
- Section 138: dishonour for insufficiency of funds or exceeding arrangement; notice within 30 days of receiving the return memo; payment within 15 days; complaint within one month; punishment up to two years or fine up to twice the cheque amount, or both.
Worked example
A cheque dated 1 January is presented on 5 May. Three months from 1 January ends on 31 March or 1 April depending on the bank's counting convention; by 5 May it is stale. The bank returns it for validity, not for insufficiency of funds, so Section 138 is not attracted. The payee must obtain a fresh cheque.
Traps
- Cheque validity is three months, not six.
- A post-dated cheque is not invalid, but it is payable only on or after its date.
- Account payee restricts negotiation; it does not make the cheque non-transferable by operation of law.
- A holder may not be a holder in due course.
- Section 138 requires a written demand notice; a phone call is insufficient.