Negotiable Instruments Act, 1881
History of Negotiable Instruments Law and the Major Amendments
Negotiable instruments are older than the statutes that govern them. Merchants in Asia and Europe used bills and notes for centuries, governed by custom, before legislatures wrote the rules down. India's own tradition of the hundi predates the colonial period. This note traces how the Negotiable Instruments Act, 1881 came to be enacted, and how it has been amended, above all by the creation and reform of the offence of cheque dishonour since 1988.
1. Before the Act
- The law merchant: in Europe, the rules on bills of exchange developed as part of the lex mercatoria, the customary law of merchants, and were later absorbed into English common law.
- Hundis in India: Indian bankers and traders used hundis, instruments in Indian languages, for remittance and credit, governed by the customs of the trading communities (Topic 5).
- English law in colonial courts: the courts in the Presidency towns applied English law to bills and notes; elsewhere, courts applied custom and justice, equity and good conscience.
2. The Making of the Act
Year | Event |
|---|---|
1866 | The Third Indian Law Commission prepared a draft bill on negotiable instruments |
1867 | The bill was introduced in the Council and referred to a Select Committee |
1867 to 1877 | Mercantile bodies objected to departures from English law; the bill was redrafted, including in 1877 |
1880 | The bill was referred to a new Law Commission, whose recommendations shaped the final text |
9 December 1881 | Passed as Act No. 26 of 1881 |
1 March 1882 | Came into force |
The long gestation reflects a genuine tension: the drafters wanted a code suited to India, while merchants wanted rules matching those of London, India's main trading partner. The result follows English law closely in substance. Notably, the Indian Act preceded the English Bills of Exchange Act, 1882, which codified English law the following year (Topic 57).
3. The Civil Law Since 1882
The civil provisions of Chapters I to XVI have changed little. Section 2 (repeal of enactments) was itself repealed by the Amending Act, 1891. Later amendments inserted provisions such as Section 45A (duplicates of lost bills), Section 85A (bank drafts) and Section 131A (crossed drafts), and adapted references after independence. The most significant modern change to the civil law came in 2002, when the definition of cheque was expanded to include electronic cheques and truncated cheques.
4. The Major Amendments
Amendment | Key changes |
|---|---|
Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (Chapter XVII in force from 1 April 1989) | Inserted Chapter XVII (Sections 138 to 142), making dishonour of a cheque for insufficiency of funds an offence, with presumptions in favour of the holder and liability of companies and their officers |
Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 (in force 6 February 2003) | Defined electronic cheque and truncated cheque; increased the maximum punishment under Section 138 from one to two years; extended the time to give notice of dishonour from 15 to 30 days; allowed courts to condone delay in filing complaints; inserted Sections 143 to 147 on summary trial, service of summons, evidence on affidavit, bank slips as evidence, and compounding |
Negotiable Instruments (Amendment) Act, 2015 | Reversed the effect of Dashrath Rupsingh Rathod (2014) on territorial jurisdiction by inserting Section 142(2) (complaint where the payee's bank branch is located, for cheques delivered for collection) and Section 142A (validation and transfer of pending cases); refined the definition of electronic cheques |
Negotiable Instruments (Amendment) Act, 2018 (in force 1 September 2018) | Inserted Section 143A (interim compensation of up to 20 per cent of the cheque amount during trial) and Section 148 (appellate court may order the convicted drawer to deposit at least 20 per cent of the fine or compensation) |
5. Why Chapter XVII Dominates
Before 1988, a holder of a dishonoured cheque had only a civil remedy: a suit for recovery, often slow. Chapter XVII gave payees a powerful criminal remedy, and cheque dishonour cases multiplied. Section 138 cases now account for a very large share of pending criminal cases in magistrates' courts. Each later amendment, and a long line of Supreme Court judgments culminating in the 2021 suo motu proceedings on expeditious trial, has tried to speed up these cases and encourage settlement (Parts J and K).
⚠ Note Since 1 July 2024, the procedural references in Chapter XVII to the Code of Criminal Procedure, 1973 operate through the Bharatiya Nagarik Suraksha Sanhita, 2023, and references to offences under the Indian Penal Code through the Bharatiya Nyaya Sanhita, 2023. |
⚠ Key point Negotiable instruments grew from the law merchant and Indian hundi custom. The Act was drafted by the Third Law Commission (1866), introduced in 1867, redrafted after merchant objections, passed on 9 December 1881 and brought into force on 1 March 1882, a year before the English Bills of Exchange Act. The civil law has changed little. The criminal law of cheque dishonour was created in 1988 (Chapter XVII), strengthened in 2002 (electronic and truncated cheques, two years' imprisonment, 30 days for notice, Sections 143 to 147), adjusted in 2015 (jurisdiction, Sections 142(2) and 142A) and 2018 (interim compensation and appeal deposits, Sections 143A and 148). |
6. Related Topics and Provisions
- Object, scope and scheme (Topic 1)
- Hundis and customary instruments (Topic 5)
- Origin and object of Section 138 (Topic 41)
- The NI Act and the English Bills of Exchange Act (Topic 57)