SWOT ANALYSIS

ECONOMICS REPORT
STRENGTHS
Negotiable Instruments Act, 1881: Legal and Economic Analysis

1. INTRODUCTION :
According to Section 13 (a) of the Act, Negotiable instrument means a promissory note, bill
of exchange or cheque payable either to order or to bearer, whether the word order or
bearer appear on the instrument or not. In the words of Justice, Willis, A negotiable
instrument is one, the property in which is acquired by anyone who takes it bonafide and for
value notwithstanding any defects of the title in the person from whom he took it. Thus, the
term, negotiable instrument means a written document which creates a right in favor of some
person and which is freely transferable. Although the Act mentions only these three
instruments (such as a promissory note, a bill of exchange and cheque), it does not exclude
the possibility of adding any other instrument which satisfies the
Following two conditions of negotiability:
1. The instrument should be freely transferable (by delivery orby endorsement. and delivery)
by the custom of the trade; and
2. The person who obtains it in good faith and for value should get it free from all defects,
and be entitled to recover the money of the instrument in his own name.
As such, documents like share warrants payable to bearer, debentures payable to bearer and
dividend warrants are negotiable instruments. But the money orders and postal orders, deposit
receipts, share certificates, bill of lading, dock warrant, etc. are not negotiable instruments.
Although they are transferable by delivery and endorsements, yet they are not able to give
better title to the bonafide Transferee for value than what the transferor has.
2. AIMS & OBJECTIVE :
According to Section 13 (a) of the Act, Negotiable instrument means a promissory note, bill
of exchange or cheque payable either to order or to bearer, whether the word order or
bearer appear on the instrument or not.
Describe the meaning and marketing of cheques, crossing of cheques and cancellation of

crossing of a cheque;
Explain capacity and liability parties to a negotiable instruments; and

Understand various provisions of negotiable instrument Act, 1881 regarding negotiation,

assignment, endorsement, acceptance, etc. of negotiable instruments.

The instrument should be freely transferable (by delivery or by endorsement. and

delivery) by the custom of the trade; and

The person who obtains it in good faith and for value should get it free from all defects,

and be entitled to recover the money of the instrument in his own name.
3. ASSUMPTIONS :
A large number of cases are reported to be pending under sections 138 to 142 of the
Negotiable Instruments Act in various courts in the country. Keeping in view the large
number of complaints under the said Act pending in various courts, a Working Group was
constituted to reveiw section 138 of the Negotiable Instruments Act, 1881 and make
recommendations as to what changes were needed to effectively achieve the purpose of that
section.
The recommendations of the Working Group along with other representations from various
institutions and organizations were examined by the Government in consultation with the
Reserve Bank of India and other legal experts, and a Bill, namely, the Negotiable Instruments
(Amendment) Bill, 2001 was introduced in the Lok Sabha on 24th July, 2001. The Bill was
referred to Standing Committee on Finance which made certain recommendations in its
report submitted to Lok Sabha in November, 2001.
Keeping in view the recommendations of the Standing Committee on Finance and other
representations, it has been decided to bring out, inter alia, the following amendments in the
Negotiable Instruments Act,1881, namely:
(i) to increase the punishment as prescribed under the Act from one year to two years;
(ii) to increase the period for issue of notice by the payee to the drawer from 15 days to 30
days;
(iii) to provide discretion to the Court to waive the period of one month, which has been
prescribed for taking cognizance of the case under the Act;
(iv) to prescribe procedure for dispensing with preliminary evidence of the complainant;

(v) to prescribe procedure for servicing of summons to the accused or witness by the Court
through speed post or empaneled private couriers;
(vi) to provide for summary trial of the cases under the Act with a view to speeding up
disposal of cases;
(vii) to make the offences under the Act compoundable;
(viii) to exempt those directors from prosecution under section 141 of the Act who are
nominated as directors of a company by virtue of their 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;
(ix) to provide that the Magistrate trying an offence shall have power to pass sentence of
imprisonment for a term exceeding one year and amount of fine exceeding five thousand
rupees;
(x) to make the Information Technology Act, 2000 applicable to the Negotiable Instruments
Act,1881 in relation to electronic cheques and truncated cheques subject to such
modifications and amendments as the Central Government, in consultation with the Reserve
Bank of India, considers necessary for carrying out the purposes of the Act, by notification in
the Official Gazette; and
(xi) to amend definitions of "bankers' books" and "certified copy" given in the Bankers'
Books Evidence Act,1891.
4. OBSERVATIONS :
The Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial
Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein a new
Chapter XVII was incorporated for penalties in case of dishonour of cheques due to
insufficiency of funds in the account of the drawer of the cheque. These provisions were
incorporated with a view to encourge the culture of use of cheques and enhancing the
credibility of the instrument. The existing provisions in the Negotiable Instruments Act, 1881,
namely, sections 138 to 142 in Chapter XVII have been found deficient in dealing with
dishonour of cheques. Not only the punishment provided in the Act has proved to be

inadequate, the procedure prescribed for the Courts to deal with such matters has been found
to be cumbersome. The Courts are unable to dispose of such cases expeditiously in a time
bound manner in view of the procedure contained in the Act.
The proposed amendments in the Act are aimed at early disposal of cases relating to
dishonour of cheques, enhancing punishment for offenders, introducing electronic image of a
truncated cheque and a cheque in the electronic form as well as exempting an official
nominee director from prosecution under the Negotiable Instruments Act, 1881.

5. ANALYSIS OF OBSERVARTION :
Negotiable instruments, it is seen have a great significance over the modern business world. It
has to be noted that these instruments have gained significant prominence as the principle
instruments for paying and discharging business obligation. It also has to be noted that in our
country, the law relating to negotiable instruments, is governed by the Negotiable Instruments
Act 1881.

THREAT
In the following cases an instrument may be treated as an ambiguous instrument, where the
holder may treat the instrument either as a bill of exchange or as a promissory note:
I.

Possibility of frauds: The transporter issuing a railway receipt or bill of landing

certifies that the goods have been received by him but he does not certify the contents
or quality of the packages delivered to him. An unscrupulous merchant may easily
deceive the banker by giving a false description of the goods in the documents of title
which are pledged with the bank. The banker will have no remedy against the carrier
if the packages contain worthless stuff, which is quite different from what they are
supposed to contain. Moreover, the documents may be forged also or the figures
therein may be raise fraudulently.

II.

Not negotiable documents: The documents of title to goods are Not negotiable
instruments like cheque, bill of exchange, or promissory note. The transferee of such
instruments cannot obtain a better title than that of the transferor. So, if the person

who pledged the instrument has only defective title the banker does not acquire a
better title and he obtains only a defective title.
III.

Unpaid vendors right of stoppage in transit: Under Section 50 of the sale of goods
Act, 1930, the unpaid vendor who has parted with possession of the goods has the
right of stoppage in transit if the buyer becomes insolvent before the goods are
delivered to him and in that case he can instruct the carrier not to deliver the goods at
any time before delivery. If such a right is exercised by the unpaid vendor, the banker
cannot obtain the goods and his security becomes worthless.

IV.

Obtaining delivery on the basis of indemnity bond: The borrower may pledge the
documents of title with the bank and, on the other hand, mange to obtain the delivery
of goods on the basis of indemnity bond or some other device. Thus, the bankers risk
increases. The bunker, however, can avoid this danger by giving notice to the carrier
regarding his interest as a pledge.

6. SUGGESTION:

Negotiable Instruments are money/cash equivalents. These can be

converted into liquid cash subject to certain conditions. They play an important role in
the economy in settlement of debts and claims. The transactions involving the Negotiable
Instruments in our country are regulated by law and the framework of the Statute which
governs the transaction of these instruments is known as The Negotiable Instruments Act.
This act was framed in our country in the year 1881 when the British ruled our country.
Prior to 1881 the transactions governing Negotiable Instruments were regulated under the
cover of Indian Contract Act 1872. This act has been amended as many as 23 times to
meet the needs of the time. The last amendment was made in 2002.
7. CONCLUSION:
The essence of this liabilities being imposed upon the parties, is nothing by an act to
being upon greater sense of responsibilities on the part of the parties. The Sections
provided here, are rather comprehensive and cover a rather broad range of parties to a
negotiable instrument, and also impose penal sanctions on them, if they turn offenders.
Although prior to the various amendments, there was no criminal liability imposed on
parties, the amendment of 2002, imposed upon a greater sense of responsibility as it
brought upon more stringent measures to counter the offending parties.
DESH DEEPAK SHEKHAWAT

2015013
3rd semester