5 things you didn’t know about Negotiable Instruments and the law

The Delhi High Court has said that after a Director has resigned from a Company, he is no longer responsible for the daily affairs of the Company including the issuance and dishonour of cheques.

1. Which law regulates negotiable instruments?

Negotiable instruments like Promissory Notes, Bills of Exchange and Cheques are regulated by the Negotiable Instruments Act, 1881.

2. What are Negotiable Instruments?

As per the Act, a ‘negotiable instrument’ can be a:

Promissory note – A promissory note is something that contains an unconditional promise by someone to pay a certain sum of money to a specific person, or to the bearer of the note. The promissory note should be in writing and signed by the maker of the note (the person who promises to pay the money). For example, if X signs a written instrument with the terms “I promise to pay B Rs. 500”, this is a promissory note.

Bill of exchange – A bill of exchange is something that contains an unconditional order directing someone to pay a sum of money to a specific person, or to the bearer of the bill. The bill of exchange should be in writing and signed by the maker of the bill (the person who orders the money to be paid).

Cheque – A cheque is a bill of exchange drawn on a specified banker and payable on demand. This includes a cheque in the electronic form.

A negotiable instrument can be payable to two or more payees jointly.

3. Who can be bound by negotiable instruments?

Any person who is capable of entering into a contract under the law i.e., anyone above 18 years of age can be bound by making or accepting a negotiable instrument.

4. Dishonour of cheques

A cheque can be drawn by a person on his bank account and used for paying money to another person for the discharge of any debt or other financial liability. The cheque should be presented to the bank within six months from the date on which it is drawn, or within the period of its validity, whichever is earlier.

The bank may return the cheque as unpaid because of insufficient money in the account of the person who has issued the cheque. When a cheque is returned as unpaid, the bank will notify the payee to whom the cheque has been issued. When the payee has been notified, he has to demand the payment of the money by giving a written notice to the issuer within 30 days of receiving information from the bank about the return of the cheque. If the person issuing the cheque still fails to make the payment within 15 days of receiving the said notice, he can be punished.

5. Punishment for dishonour of cheques

A person whose cheque has been returned unpaid can be punished with imprisonment for up to two years and/or with a fine which may be twice the amount of the cheque.