Law relating to Negotiable Instruments

As a general rule, the provisions applicable to bills payable on demand apply to cheques. However, there are few distinctions which are as under:

(a)A cheque is a bill of exchange and always drawn on a banker, while a bill may be drawn on any one, including banker.

(b)A cheque can only be drawn payable on demand, a bill may be drawn payable on demand, or on the expiry of a specified period after sight or date.

(c)A bill payable after sight must be accepted before payment can be demanded, a cheque does not require acceptance and is intended for immediate payment.

(d)A grace of 3 days is allowed in the case of time bills, while no grace is given in the case of a cheque, for payment.

(e)The drawer of a bill is discharged, if it is not presented for payment, but the drawer of a cheque is discharged only if he suffers any damage by delay in presentment for payment.

(f)Notice of the dishonour of a bill is necessary, but not in the case of a cheque.

(g)The cheque being a revocable mandate, the authority may be revoked by countermanding payment, and is determined by notice of the customer’s death or insolvency. This is not so in the case of bill.

(h)A cheque may be crossed, but not a bill.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 5(a) (Syllabus 2022).

National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme, individuals, firms and corporates can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme. NEFT is an electronic fund transfer system that operates on a Deferred Net Settlement (DNS) basis which settles transactions in batches. In DNS, the settlement takes place with all transactions received till the particular cutoff time.

Advantages of NEFT l Round the clock availability on all days of the year.

l Near-real-time funds transfer to the beneficiary account and settlement in a secure manner.

l Pan-India coverage through large network of branches of all types of banks.

l The beneficiary need not visit a bank branch for depositing the paper instruments.

l Remitter can initiate the remittances from his / her home / place of work using internet banking, if his/her bank offers such service.

l Positive confirmation to the remitter by SMS / e-mail on credit to beneficiary account.

l Penal interest provision for delay in credit or return of transactions.

l No levy of charges by Reserve Bank of India (RBI) from banks.

l No charges to savings bank account customers for online NEFT transactions.

l The transaction charges have been capped by RBI.

l Besides funds transfer, NEFT system can be used for a variety of transactions including payment of credit card dues to the card issuing banks, payment of loan EMI, inward foreign exchange remittances, etc.

l The transaction has legal backing.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 6A(iii) (Syllabus 2022).

Under the Negotiable Instrument Act, 1881, to be a promissory note, an instrument must possess the following essentials:

(a)It must be in writing. An oral promise to pay will not do.

(b)It must contain an express promise or clear undertaking to pay. A promise to pay cannot be inferred. A mere acknowledgement of debt is not sufficient. If A writes to B “I owe you (I.O.U.) ₹ 500”, there is no promise to pay and the instrument is not a promissory note.

(c)The promise or undertaking to pay must be unconditional. A promise to pay “when able”, or “as soon as possible”, or “after your marriage to D”, is conditional. But a promise to pay after a specific time or on the happening of an event which must happen, is not conditional, e.g. “I promise to pay ₹ 1,000 ten days after the death of B”, is unconditional.

(d)The maker must sign the promissory note in token of an undertaking to pay to the payee or his order.

(e)The maker must be a certain person, i.e., the note must show clearly who the person is engaging himself to pay.

(f)The payee must be certain. The promissory note must contain a promise to pay to some person or persons ascertained by name or designation or to their order.

(g)The sum payable must be certain and the amount must not be capable of contingent additions or subtractions. If A promises to pay ₹ 100 and all other sums which shall become due to him, the instrument is not a promissory note.

(h)Payment must be in legal money of the country. Thus, a promise to pay ₹ 500 and deliver 10 quintals of rice is not a promissory note.

(i)It must be properly stamped in accordance with the provisions of the Indian Stamp Act, 1899. Each stamp must be duly cancelled by maker’s signature or initials.

(j)It must contain the name of place, number and the date on which it is made. However, their omission will not render the instrument invalid, e.g. if it is undated, it is deemed to be dated on the date of delivery.

In the given situation, Amit wrote and signed a document stating, “I promise to pay ₹50,000 to Bharat after six months, provided I receive payment from my client.” This is not a valid promissory note as it is not an unconditional promise to pay and depends on the happening of an uncertain event.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 4(c) (Syllabus 2022).

Under the Negotiable Instrument Act, 1881, in the following cases the authority of the banker to honour customer’s cheque comes to an end, he must refuse to honour cheques issued by the customer:

(a)When a customer countermands payment i.e., where or when a customer, after issuing a cheque issues instructions not to honour it, the banker must not pay it.

(b)When the banker receives notice of customer’s death.

(c)When customer has been adjudged an insolvent.

(d)When the banker receives notice of customer’s insanity.

(e)When an order (e.g., Garnishee Order) of the Court, prohibits payment.

(f)When the customer has given notice of assignment of the credit balance of his account.

(g)When the holder’s title is defective and the banker comes to know of it.

(h)When the customer has given notice for closing his account.

In the following cases, the banker may refuse to pay a customer’s cheque:

(a)When the cheque is post-dated.

(b)When the banker has no sufficient funds of the drawer with him and there is no communication between the bank and the customer to honour the cheque.

(c)When the cheque is of doubtful legality.

(d)When the cheque is not duly presented, e.g., it is presented after banking hours.

(e)When the cheque on the face of it is irregular, ambiguous or otherwise materially altered.

(f)When the cheque is presented at a branch where the customer has no account.

(g)When some persons have joint account and the cheque is not signed jointly by all or by the survivors of them.

(h)When the cheque has been allowed to become stale.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 4A(iii) (Syllabus 2022).

Section 138 of the Negotiable Instruments Act, 1881 provides that where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both.

Provided that nothing contained in this section shall apply unless-

(a)the cheque has been presented to the bank within a period of three months from the date on which it is drawn or within the period of its validity, whichever is earlier;

(b)the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice; in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c)the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Gukesh has a clear remedy under Section 138 of the Negotiable Instruments Act, 1881, provided he follows the below mentioned procedural steps:

1.Present the cheque within 3 months.

2.Send a demand notice within 30 days of dishonour.

3.Wait 15 days for payment.

4.File a complaint within 1 month after expiry of 15 days.

If Neeresh fails to pay despite notice, Gukesh can proceed to file a criminal complaint, and also seek civil remedies like recovery of the cheque amount with interest.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 3(c) (Syllabus 2022).

Section 138 of the Negotiable Instruments Act, 1881 (Act) provides that where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extendto twice the amount of the cheque, or with both.

The proviso to this section provides that nothing contained in this section shall apply unless the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.

In the given situation, the cheque bounced due to insufficient funds in Mahesh’s account as Mahesh hasdrawn a cheque of ₹25,000 on his own account but only ₹ 20,000 was there in his account. But here Mukesh presented the cheque to the bank after six months from the date on which it wasdrawn. Hence, the liability of Mahesh under Section 138 does not arise.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 1(b)(i) (Syllabus 2022).

According to Section 141(1) of the Negotiable Instruments Act, 1881 (Act) if the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence.

Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under Chapter XVII.

Further, Section 141(2) states that notwithstanding anything contained in sub-section(1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

In the given situation, S who was director of R & D Company himself issued a cheque in favour of G Associates for the discharge of the company’s debt. Hence, he would be deemed to be guilty of the offence under Section 138 of the Act and shall be liable to be proceeded against and punished accordingly.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 1(b)(ii) (Syllabus 2022).

According to section 143A(4) of the Negotiable Instruments Act, 1881, if the drawer of the cheque is acquitted, the Court shall direct the complainant to repay to the drawer the amount of interim compensation, with interest at the bank rate as published by the Reserve Bank of India, prevalent at the beginning of the relevant financial year, within sixty days from the date of the order, or within such further period not exceeding thirty days as may be directed by the Court on sufficient cause being shown by the complainant.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 1(b)(iv) (Syllabus 2022).

According to section 144(1) of the Negotiable Instruments Act, 1881 (Act), notwithstanding anything contained in the Code of Criminal Procedure, 1973 and for the purposes of this Chapter, a Magistrate issuing a summons to an accused or a witness may direct a copy of summons to be served at the place where such accused or witness ordinarily resides or carries on business or personally works for gain, by speed post or by such courier services as are approved by a Court of Session.

Further according to section 144(2), where an acknowledgment purporting to be signed by the accused or the witness or an endorsement purported to be made by any person authorised by the postal department or the courier services that the accused or the witness refused to take delivery of summons has been received, the Court issuing the summons may declare that the summons has been duly served.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 1(b)(iii) (Syllabus 2022).

According to Section 4 of the Negotiable Instruments Act, 1881(the Act), a “promissory note” is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money to, or to the order of a certain person or only to bearer of the instrument.

Essentials of a Promissory Note To be a promissory note, an instrument must possess the following essentials:

(a)It must be in writing. An oral promise to pay will not do.

(b)It must contain an express promise or clear undertaking to pay. A promise to pay cannot be inferred.

(c)The promise or undertaking to pay must be unconditional. A promise to pay “when able”, or “as soon as possible”, or “after your marriage to D”, is conditional. But a promise to pay after a specific time or on the happening of an event which must happen, is not conditional, e.g.

“I promise to pay Rs. 1,000 ten days after the death of B”, is unconditional.

(d)The maker must sign the promissory note in token of an undertaking to pay to the payee or his order.

(e)The maker must be a certain person, i.e., the note must show clearly who the person is engaging himself to pay.

(f)The payee must be certain. The promissory note must contain a promise to pay to some person or persons ascertained by name or designation or to their order.

(g)The sum payable must be certain and the amount must not be capable of contingent additions or subtractions. If A promises to pay Rs. 100 and all other sums which shall become due to him, the instrument is not a promissory note.

(h)Payment must be in legal money of the country. Thus, a promise to pay Rs. 500 and deliver 10 quintals of rice is not a promissory note.

(i)It must be properly stamped in accordance with the provisions of the Indian Stamp Act,

1899. Each stamp must be duly cancelled by maker’s signature or initials.

(j)It must contain the name of place, number and the date on which it is made. However, their omission will not render the instrument invalid, e.g., if it is undated, it is deemed to be dated on the date of delivery.

In the given situation, Ravi Enterprises issued a written instrument to Mehta Traders stating: “I owe you (I.O.U.) ₹. 500 and will pay you as soon as possible”. In this statement “I owe you (I.O.U.) ₹. 500”, there is no promise to pay and this is mere acknowledgement of debt and “will pay you as soon as possible” is conditional. Hence, the instrument issued does not qualifies as a valid promissory note under the Act.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 4A(i) (Syllabus 2022).

Forged Endorsement The case of a forged endorsement is worth special notice. If an instrument is endorsed in full, it cannot be negotiated except by an endorsement signed by the person to whom or to whose order the instrument is payable, for the endorsee obtains title only through his endorsement.

Thus, if an instrument be negotiated by means of a forged endorsement, the endorsee acquires no title even though he be a purchaser for value and in good faith, for the endorsement is a nullity. Forgery conveys no title. But where the instrument is a bearer instrument or has been endorsed in blank, it can be negotiated by mere delivery, and the holder derives his title independent of the forged endorsement and can claim the amount from any of the parties to the instrument.

Liability of Acceptor of Forged Endorsement (Section 41 of the Negotiable Instrument Act, 1881)

An acceptor of a bill of exchange already endorsed is not relieved from liability by reason that such endorsement is forged if he knew or had reason to believe the endorsement to be forged when he accepted the bill.

In the present case D, as the holder does not derive his title through the forged endorsement of B, but through the genuine endorsement of A and can claim payment from any of the parties to the instrument in spite of the intervening forged endorsement.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 6(b) (Syllabus 2022).

Section 6 of the Negotiable Instruments Act, 1881 (As amended in 2002 and 2015), provides that a ‘cheque’ is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. Despite the amendment as is evident the basic definition of the cheque has been retained and the definition has only been enlarged to include cheques in the above form as well.

Here in this definition “a truncated cheque” means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing. The expression ‘clearing house’ means the clearing house managed by the Reserve Bank of India (RBI) or a clearing house recognised as such by RBI.

In the given situation, XYZ Bank scanned the cheque and transmitted its electronic image through a Reserve Bank of India’s recognised clearing house. This squarely falls within the definition of a truncated cheque. Hence, the transmission of an electronic image by a recognised clearing house is legally valid. Meena’s objection based on absence of physical movement of cheque has no merit and Ravi’s account can be credited with the amount mentioned in the cheque.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 6(b) (Syllabus 2022).