Bills of Exchange and Cheque under Negotiable Instruments Act, 1881: An Analysis


Bills of exchange, promissory notes, checks, and other negotiable documents are covered by the Negotiable Instruments Act of 1881. Sections 138 to 142 of Chapter XVII were included to instill trust in the effectiveness of banking operations and, as a result, to lend legitimacy to the negotiable instruments employed in all business transactions. A promissory note, bill of exchange, or check payable to order or to bearer is referred to as a “negotiable instrument” in Section 13 of the Negotiable Instruments Act of 1881. So, any written document that can be transferred upon delivery qualifies as a negotiable instrument.

Meaning of Cheque

Cheques are frequently used as forms of payment in all commercial operations. A dated, written, and signed check instructs a bank or other financial institution to pay the bearer a specific amount of money. The funds are taken from the payer’s bank account when a payee delivers a check to a bank or other financial institution, just as if a transfer instruction were provided to move money from the payer’s account to the payee’s account. The “payer” is the one making the payment, while the “payee” is the person to whom it is being made. Typically, checks are made against the account that they are intended to be paid into, but they can also be used to transfer money between savings accounts or any other kind of account.

A “check” is defined as a bill of exchange drawn on a specific banker and not expressed to be payable other than on demand under Section 6 of the Negotiable Instruments Act of 1881. This definition also covers an electronic image of a truncated cheque and a cheque in electronic form. The section further explains that:

  • A “cheque in the electronic form” is one that is created, written, and signed in a secure system that ensures the minimum-security requirements through the use of a digital signature (with or without a biometric signature) and an asymmetric cryptosystem. It contains an exact mirror image of a paper cheque.
  • Truncated checks are those that are cut off during the clearing cycle by the clearing house or the bank, whether they are making the payment or receiving it, just after the creation of an electronic image for transmission, obviating the need for further physical movement of the written check.

Features of a Cheque

Even without a formal acceptance, checks are always drawn from a banker and are cashable upon demand. It might be paid to the drawer directly or to a bearer upon demand. A cheque may occasionally be signed by more than two persons. On the upper left-hand side of the check, you can find the name and contact information of the individual filling it out. The check also includes the name of the bank holding the drawer’s account. The following lines must be filled in by the drawer:

  • The date is on the top–right corner of the cheque.
  • The payee’s name is on the first line at the centre of the cheque by the phrase by giving the name of a person or business.
  • The amount (in words) below the line of the name of the payee.
  • The amount in rupees is in the small box next to the payee’s name.
  • Signature on the bottom right-hand corner of the cheque.

The routing number, identity code, and transit number of the bank where the account is held are indicated at the bottom edge of the cheque, beneath the signature line of the drawer.

Parties to a cheque

A check’s drawer, drawee, and payee are its parties. The person who writes the check is known as the drawer, the banker on whom it is drawn is known as the drawee, and the person who is responsible for paying the check’s amount is known as the payee. A holder, who is typically the initial payee, may additionally exist in addition to these parties.

Types of cheques

Certified cheque

This check guarantees that it won’t bounce and confirms that the drawer’s account has enough money to cover the cheque’s amount. Additionally, it checks to see if the drawer actually signed the document. When the recipient is unsure of the drawer’s creditworthiness or does not want the cheque to bounce, certified checks are utilised.

Cashier’s cheque

This check is issued by a bank or other financial institution and is signed by the bank’s cashier, transferring responsibility for managing the funds to the bank. A cashier’s check is needed when there is a substantial sum of money changing hands, such as when purchasing a large asset or piece of real estate.

Payroll cheque

A payroll check, also known as a pay-cheque, is one that a company provides to an employee as payment for their labour. Hours worked, employee remuneration, and payment distribution are all included. Pay-cheques, however, made way for direct deposit systems and other types of electronic transfer in more recent years.

Bounced cheque

When a check is made for a sum more than what is in the drawer’s bank account, it cannot be negotiated. Because there are not enough funds in the account to process this further, it is known as a “cheque bounce.” A bounced check will inevitably result in penalties for both the drawer and, occasionally, the payee.

Advantages of using cheques


Some businesses, especially small or beginning businesses, find it simpler to accept checks as payment because they don’t have to manage the processing themselves but can instead delegate it to the bank.

Leeway of funds

It takes some time for checks to clear. This is a benefit for small enterprises. The businesses will have some lines of credit to fall back on during this time in the event of a financial emergency. The check can then be cleared by making financial arrangements.

Rectification of wrong transactions

A cheque must typically be processed after it has been written and deposited in a bank. Before the check is cleared, it can be corrected if it turns out that the payment was not authorized or that any of the provided data is inaccurate. However, because instantaneous electronic transaction procedures are used, the process for resolving a problem could take longer.

Widens customer base

It is crucial to keep in mind that many consumers still prefer to pay with checks. They might be experiencing technical issues with their available online payment options. When a company declines to consider prospects like cheque transactions, the consumer base is restricted. A contract’s conclusion could be delayed as a result of restrictions on the accepted payment methods. Your customer base grows as a result of include those who are more at ease with cheque transactions.

Disadvantages of using cheques

Potential fraud

Check fraud still makes up a large share of all financial fraud, notwithstanding the security problems associated with online banking. A check can be easily written and signed, but it can be challenging to locate the author. Once money has been obtained in this manner, whether through the issuance of fictitious checks from the business or the receipt of fictitious checks for payments, it is very difficult to get it back.

Time for clearance

We must wait for the money to arrive in our bank account because it often takes up to five days for checks to clear. This is not the best choice if we need money to keep our business operating.

Cheques may be returned or stopped

This is an important factor to take into account if we are in the selling business. The customer or client may write a check for the purchase and pick up the goods later. They might then decline to pay or their account might not have enough money for the check to clear. The cost of the goods will be your responsibility in that case. Recovery of monies from such clients is typically a drawn-out process.


Every time a check is written, we must record both the account holder’s information and the cheque number. Otherwise, the transaction details won’t appear on our account statement until the check has cleared. However, when we use electronic banking methods, we receive records extremely fast since we will get an SMS or email with a transaction ID and all of the payment information. If a transaction is ever in question, it can be quite helpful.

Reapply for cheque books

If a cheque-book runs out of leaves, we will need to request a new one, especially if there are a lot of transactions. Additionally, we need to personally pick up these checks, or we need to write an authorization letter enabling someone else to do it on our behalf.

Crossing of cheques

A check may be crossed or left open. When submitted by the payee to the paying bank, a bearer cheque payable on the counter is considered to be an open check. A crossed check, on the other hand, is collected through a banker and deposited to the payee’s bank account rather than being payable on the counter. By crossing a check, the paying banker is instructed to pay a specific banker rather than at the counter. This not only secures the payment but also identifies the individual who will be receiving the check. The check’s negotiability must be limited by the use of terms like “Not negotiable” or “Account payee only.” However, a crossed bearer check and a crossed order check can be negotiated by delivery and endorsement, respectively.

The Negotiable Instruments Act’s Sections 123-131A deal with four different kinds of crossing checks:

General crossing

Two more parallel transverse lines added across the check’s face. Between them, say “and Co.” or “not negotiable.” Two parallel transverses are required for this transaction because the money is payable to any banker. The check will also be delivered to the owner via an authorized bank. The phrase “not negotiable” is important because it limits the negotiability and guarantees that the transferee will not receive a title that is superior to that of the transferor.

Special crossing

The phrases “not negotiable” are not necessary when using special crossing, although the banker’s name must still appear on the cheque’s face. The bank making the payment will pay the banker listed in the crossing or his designated agent. As a result, the paying banker has the legal obligation to honour just the bank’s name that is specified in the crossing.

Account payee crossing

The check’s ability to be negotiated is limited by this type of crossing. It directs the banker in charge of collecting payments to only credit the payee’s account or the account of his agent. A collector commits carelessness when he transfers the credit of the cheque-bearing crossing to any other bank account.

Non-negotiable crossing

Cheques with general or special crossings that read “not negotiable” are transferable, but the recipient is not permitted to assign a better title than that of the person from whom the check was originally obtained. However, a non-negotiable crossing check eliminates the key qualities of a person who accepts it in good faith for a value without being aware of the title faults and acquires a good title to the instrument prior to maturity. It guarantees that the titles of the transferor and transferee are both valid and guards against any potential taint.

Section 138 of the Negotiable Instruments Act, 1881  

To ensure that the duties assumed by writing checks are honoured, the penal requirements of negotiable instruments are addressed in Sections 138 to 142 of the Act. The components for bringing a case for cheque dishonour are provided in Section 132. They are:

  • a person must have written a check to pay off a debt or liability; the check must have been presented to the bank within three months;
  • it must have been returned due to insufficient funds or because it exceeds the amount that can be paid from that bank account;
  • the payee must have demanded payment within fifteen days of receiving notification from the bank that the check was returned as unpaid;
  • finally, the payee must have done all of the above; &
  • within fifteen days following the date of the aforementioned notice, the drawer fails to comply with the payee’s demand.

The following steps must be taken in order to comply with Section 138 of the Act:

  1. Within fifteen days of the check being returned unpaid, a legal notice is sent through registered mail to the check’s drawer with all pertinent information. The drawer is allowed a further fifteen days to make the payment; if they do, the dispute is resolved. The drawer shall, however, be subject to criminal prosecution under Section 138 of the Act in a local magistrate’s court if payment is not made.
  2. Then, in order to file the case, the complainant must show up in the witness box and provide information. The accused will then receive a summons from the court to appear before it.
  3. The court may issue a bailable warrant after serving the summons if the accused did not show up. If the accused still does not show up, a non-bailable warrant may then be issued.
  4. Once the drawer shows up, he can submit a bail bond to guarantee his appearance at the trial. The accused’s plea is then officially recorded. If he enters a guilty plea, the judge will determine his sentence. He will receive a copy of his complaint in the event that he denies his charge.
  5. Following then, the accuser and complainant will both provide their respective cases’ supporting paperwork as proof. After this procedure, there is cross-examination.
  6. After closing remarks, the defendant may be found not guilty or guilty. If found guilty, a suitable sentence is delivered. The accused may file an appeal at the Sessions Court if he is not happy with the decision.

Bill of exchange

Cash sales and purchases result in rapid receipt of payment. However, when products are purchased or sold on credit, payment is put off until later. In situations like this, the business typically relies on the buyer. In general, the business depends on the party making payments by the deadline. Some businesses utilise a credit instrument, in which the buyer guarantees to the seller that payment will be made in accordance with the agreed terms, to eliminate the chance of any delay or default. Since the beginning of time, India has utilised instruments of credit called Hundis that are inscribed in Indian languages. Today’s credit instruments are known as bills of exchange and contain a maker-signed, unconditional order to pay a specified amount of money on a specific date. According to the Negotiable Instruments Act of 1881, bills of exchange are governed.

According to Section 5 of the Negotiable Instruments Act of 1881, a “bill of exchange” is a written document with a maker-signed unconditional order directing a specific person to pay a certain amount of money solely to, or to the order of, a specific person or the bearer of the document. These qualities of a bill of exchange can be deduced from this definition:

  • It must be in writing;
  • It is a request for payment or an order to pay;
  • It is unwavering;
  • The maker’s signature is required;
  • The payment that is due must be fully made;
  • It must be payable to a specific individual;
  • It must be properly marked in accordance with the law and
  • It can be paid on demand or at the end of a specified period of time.

Typically, a bill of exchange is drawn by the creditor and served to the debtor. The exchange amount is payable immediately or at the end of a predetermined time period. For example:

  1. A draws a check for Rs. 10,000 payable in three months on R. The draught becomes a bill of exchange if it is acknowledged and signed.
  2. S sells Mr. T products valued Rs. 75,000. Mr. T, however, is unable to pay the amount right away. As a result, Mr. S, the vendor draws on Mr. T, who accepts the same. Therefore, the bill of exchange is drawn for commercial purposes.
  3. H issues a bill of exchange on behalf of Mr. J, who on December 12, 2021, made a credit purchase of goods valued Rs. 50,000. Mr. H, who has also drawn a bill of exchange, is Mr. J’s creditor. However, Mr. Jerry only accepted the measure on December 25, 2022. The day the bill is accepted converts it into a bill of exchange.

Features of a bill of exchange

  • It is a tool for writing;
  • It is drawn on a particular person for a particular sum;
  • Both parties must be certain of it and concur on it;
  • It contains a drawee-specific, unqualified order;
  • The maturity date of the bill was mentioned;
  • The creator (drawer) of the bill has signed it;
  • It includes the bearer of the bill’s name;
  • It fosters confidence between the transaction’s parties;
  • It has a valid revenue stamp;
  • It has to be paid in the nation’s official currency.

Parties to a bill of exchange

A bill of exchange involves the following three parties:


A drawer produces a bill of exchange. A buyer/debtor may get a bill of exchange from a seller/creditor who is entitled to payment from the debtor. The drawer must sign the bill of exchange as its maker after it has been drafted.


The drawee is the one on whom the bill of exchange is drawn. The drawee of a bill of exchange is the purchaser or debtor of the goods upon which it is drawn.


The person who will receive the funds is known as the payee. The drawer of the bill will be the payee if he keeps it with him until the day of payment. The payee may change in the following situations: if the drawer has received the bill discounted, the person who provided the discount assumes that role; if the bill is endorsed in the drawer’s creditor’s name, the creditor of the drawer does.

Types of bill of exchange

Documentary bill of exchange

A documented bill of exchange is a bill of exchange that is always accompanied by evidence that proves the legitimacy of the exchange or transaction between the seller and the buyer. There may be receipts, bills of lading, railroad bills, and other documentation. Documentary bills of exchange fall under the following categories:

Documents against acceptance bills(D/A): Bills of acceptance documents (D/A) Papers that are only issued in exchange for accepting a bill to the drawing are referred to as D/A bills. The bill is void after the documents are transmitted or becomes obvious.

Documents against payment bills(D/P): Bills that require the provision of documents in exchange for payment are known as “documents against payment” (D/P) bills. When the documents are delivered, the banker maintains them until the bill’s maturity date.

Demand bill

Demand bills do not have a payment due date or time; therefore payment can be made whenever the bill is submitted. Demand bills are payable on demand or when they are offered for payment.

Inland bill

A bill issued by an Indian resident in India or any other nation that is only payable in India is referred to as an “inland bill.” In complete contrast to the international bill is the domestic bill.

Usance bill

Because it is a usage bill that specifies the time for payment as the precise time and term shown on the usage bill, it is known as a time bill and is regarded as a time-bound charge.

Clean bill

A clean bill is one that has no supporting materials. Clean bills feature a higher interest rate than standard documentary bills because there are no documentation required.

Foreign bill

Outside of India, a foreign bill of exchange is drawn and settled. A foreign bill is anything that isn’t an inland bill. It is further broken into the following categories:

Export bill: An export bill is a bill of exchange that has been drawn by an exporter for a party outside of India.

Import bill: An import bill is a bill of exchange that was drawn by an exporter outside of India.

Accommodation bill

A bill of exchange that is produced and accepted for mutual help is referred to as a “accommodation bill.” The purpose of this measure is for mutual benefit without any commercial exchange. There are no products or services being sold or bought. This measure includes a commitment from two parties to help others financially.

Trade bill

A trade bill is a written and accepted bill of exchange that settles a trading transaction. This bill of exchange is prepared by the seller and accepted by the buyer.

Supply bill

A supply bill is a check that a supplier or contractor draws on a government agency in order to provide specific items. Supply is used to obtain money from financial institutions in exchange for outstanding payments needed to fulfil financial obligations. This kind of business is typically not accepted by government agencies, but because of its non-negotiable qualities, it is acceptable for cash loans from private banks.

Fictitious bill

A bill is referred to as fictitious if either the name of the party that is the drawer or the drawee, or both, are made up.

Working of a bill of exchange

The drawee receives the bill from the drawer and seals it with an official stamp after signing it. The banknote consequently becomes a traded asset. Now, the creditor can obtain this instrument and sell it for cash by extending a bank or a company in exchange for a fee. Discount is the name of this procedure. The bill may change hands several times prior to the payment due date before the debtor or drawee pays the amount agreed upon between them.

Advantages of a bill of exchange

Because of the following advantages, bills of exchange are frequently employed in commerce as credit instruments:

Relationship structure

A bill of exchange is a tool that offers a framework for facilitating a credit transaction on an equitable basis between the seller, who is the creditor, and the buyer, who is the debtor.

Clarity of terms and conditions

The debtor is completely aware of the deadline by which he must pay the debt, just as the creditor is aware of when he will get the money. This is because the terms and conditions of the debtor-creditor relationship, such as the amount due, the due date, the interest that may be required, and the place of payment, are clearly stated in the bill of sale.

Convenient means of credit

An easy way to obtain credit is through a bill of exchange, which enables a buyer to make purchases on credit and pay off the outstanding sum at the conclusion of the credit period. The products supplier can still get paid quickly even after the credit has been given by discounting the bill with the bank or endorsing it in the name of a third party.

Conclusive proof

The bill of exchange serves as the official record of a credit transaction, indicating that the buyer acquired the items on the seller’s credit throughout the course of the sale and is therefore liable to pay the seller. According to the law, in order for a certificate from a notary to be considered conclusive proof when the debtor refuses to pay, the creditor must request one.

Easy Transferability

A bill of exchange can be used to transfer a debt through endorsement and delivery in order to fulfil it.

Disadvantages of bill of exchange

  • Only large organisations that conduct large transactions can use bills of exchange.
  • They are not thought of as a good option for banking services and are only utilised for short-term services.
  • The drawee must now pay the additional cost of the authorized discount for this instrument.
  • Due to the payment’s predetermined date and time, it is difficult for the drawee to make the payment.
  • The regulatory regulations that apply to all pertinent parties (drawer, payee, and drawee) are frequently very challenging when chains are involved.
  • A contract’s validity must be applied in each local jurisdiction and is based on a number of factors, such as the character of the parties, their location, and others.

Maturity of a bill of exchange

Maturity refers to the day a bill of exchange becomes due for payment. Prior to the instrument becoming payable, the date on which the period of credit ends must be added in order to determine the maturity date. For instance, a bill dated March 5th that is due on April 7, inclusive of the grace period, if it is payable 30 days after the date. The next business day will be the due date for the instrument if the maturity date falls on a weekend or holiday. The maturity date will be April 6 in the event that April 7 falls on a holiday. The date of maturity of a bill of exchange would, however, be the next working day after the holiday if the Government of India announces an emergency holiday in accordance with the Negotiable Instruments Act 1881 on the day that also happens to be the day of maturity. A bill of exchange will mature on April 8 since the Negotiable Instruments Act designated April 7 as a holiday.

Discounting and endorsement of a bill of exchange

The bill’s owner can go to the bank and have the bill cashed before the due date if he needs money. Following a specific amount of interest deduction, the bank will settle the loan (called a discount in this case). Encashing a bill with a bank is the process of discounting it. The bank gets the money from the drawee on the due date. Any bearer may transfer a bill unless it is restricted, that is, the bill has been written with language that prevents transfer. The drawer can initially endorse the bill by signing it and writing the recipient’s name on the back of the document. the process of signing and transferring an exchange bill.

Noting charges

A bill of exchange must be correctly issued for payment by the due date. Incorrect presentation of the bill releases the drawee from his responsibility. On the date of maturity, the bill must be appropriately delivered to the acceptor within regular business hours. To prove beyond a reasonable question that the bill was dishonored notwithstanding correct presentation, it may be preferable to have the bill noted by a Notary Public. The act of noting proves that dishonour exists. For delivering this service, the Notary Public is paid a fee known as Noting Charges. The following are typically noted by the notary:

  1. The time, circumstance, and reason for the dishonour;
  2. The causes for the bill’s non-express dishonored status,
  3. The amount of noted costs, and the same.

Renewal of a bill of exchange

When the acceptor of a bill believes it will be challenging to meet the maturity payment obligation, he or she may get in touch with the drawer and ask for an extension of time to pay. If so, the previous invoice is cancelled and a new one is prepared, accepted, and sent instead, with updated payment terms. Bill renewal is what this is known as. Since the cancellation was agreed upon by all parties, the bill does not need to be disclosed. The drawee may be obliged to pay interest to the drawer for a lengthy credit period. The interest is paid in cash or could be included in the amount of the new bill. On occasion, a new bill may only be drawn for the outstanding balance after a portion of the total owing has been paid. For instance, as agreed upon by the parties, a bill for Rs. 10,000 may be cancelled in return for Rs. 3,000 in cash and the issuance of a new bill for the remaining Rs. 7,000 plus interest.

Retiring of a bill of exchange

In some circumstances, the drawer and the drawee may agree to arrange the retirement of a bill of exchange prior to the due date. When the drawee of the bill has money on hand and asks the drawer or holder to accept payment of the bill before its maturity date, this happens. If the holder consents, the bill is regarded as retired. A bill’s transactions come to a stop when it is retired before its typical tenure has ended. The holder provides a rebate on bills for the time between retirement and maturity in order to encourage this. A portion of the purchase price serves as the basis for the rebate.


An unconditional command to pay a specific amount of money in favour of the person listed in the document is contained in both a cheque and a bill of exchange. A cheque is used in more contexts than only commerce; transactions involving checks are also carried out by individuals, organisations, and government bodies. The most widely used tool for business transactions is a bill of exchange, nevertheless.


Author: Arryan Mohanty,
Symbiosis Law School, Nagpur/Student

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