Negotiable Instruments: Promissory Notes, Bills of Exchange and Cheques

The Negotiable Instruments Act, 1881 governs three instruments: the promissory note (Section 4), the bill of exchange (Section 5) and the cheque (Section 6). Section 13 makes any of them "negotiable" when it is payable to order or to bearer, which means it can pass from hand to hand with the right to sue on it. The part that reaches court most often is Chapter XVII, where Section 138 makes the dishonour of a cheque for want of funds a criminal offence.

This explainer is for B.A. LL.B. and LL.B. students reading banking law or commercial law, and for anyone who has given or received a cheque. A small trader in Nagercoil who receives a cheque for goods, or a tenant in Madurai who hands over post dated rent cheques, is dealing with this Act whether they know it or not.

What are the three instruments?

• Promissory note (Section 4): a written instrument, other than a bank note or currency note, containing an unconditional undertaking signed by the maker to pay a certain sum of money to a certain person, to his order, or to the bearer. Two parties: the maker and the payee. "I promise to pay Ravi Rs 50,000 on demand" is the classic form.
• Bill of exchange (Section 5): a written instrument containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum to a certain person, to his order, or to the bearer. Three parties: drawer, drawee and payee. The drawee becomes liable only after acceptance.
• Cheque (Section 6): a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. The section also covers the electronic image of a truncated cheque and a cheque in electronic form.

Notice the contrast examiners love: a promissory note is a promise, a bill is an order, and a cheque is a special bill where the drawee is always a bank and payment is always on demand.

Which general rules should every student know?

• Holder in due course (Section 9): a person who takes the instrument for consideration, before it is due, and without sufficient cause to believe the transferor's title was defective. Such a holder gets a better title than the person who passed it on.
• Liability of parties: the drawer (Section 30), the maker and acceptor (Section 32) and the indorser (Section 35) are liable on dishonour, subject to due notice.
• Dishonour and notice (Sections 91 to 94): these define dishonour by non acceptance and by non payment, and say how notice of dishonour must be given.
• Presumptions (Section 118): until the contrary is proved, the court presumes the instrument was made for consideration, and presumes several other facts such as date and order of indorsement.
• Interest (Section 80): where no rate is specified, interest is calculated at 18 per cent per annum.

When does a bounced cheque become a crime under Section 138?

Section 138 applies where a cheque drawn on an account to discharge a debt or other liability is returned unpaid because the balance is insufficient or the amount exceeds the arrangement with the bank. The Explanation limits this to a legally enforceable debt or liability. The punishment is imprisonment up to two years, or a fine up to twice the cheque amount, or both. The offence is complete only when three conditions in the proviso are met:

1. The cheque is presented within six months of its date or within its period of validity, whichever is earlier.
2. The payee or holder in due course sends a written demand to the drawer within 30 days of receiving information from the bank about the return.
3. The drawer fails to pay within 15 days of receiving that notice.

Then the complaint stage begins:

• Time limit (Section 142(1)(b)): the complaint must be filed within one month of the cause of action, which arises when the 15 days expire. The court may condone delay if sufficient cause is shown.
• Which court (Section 142(2)): if the cheque was deposited through an account, the court where the payee's bank branch maintaining that account is located. So the Nagercoil trader who deposits a cheque in his Nagercoil branch files there, even if the drawer banks in Chennai.
• Company cases (Section 141): where a company commits the offence, persons in charge of and responsible for its business can also be liable.
• Procedure: Section 143 provides for summary trial, Section 145 lets the complainant give evidence on affidavit, and Section 147 makes every offence under the Act compoundable, so parties can settle.

Later amendments added provisions on interim compensation (Section 143A) and deposit by an appellant (Section 148). Read the current consolidated text on India Code for the exact percentages and time limits before you quote them. Since 1 July 2024, references in the Act to the Code of Criminal Procedure are read with the Bharatiya Nagarik Suraksha Sanhita, 2023 (BNSS). For example, a petition to quash that was once filed under Section 482 CrPC is now filed under Section 528 BNSS.

How has the Supreme Court read Section 138?

• Rangappa v. Sri Mohan (2010): the leading case on the presumption under Section 139 that a cheque was received for a debt or liability. It is still cited as the starting point.
• Basalingappa v. Mudibasappa, (2019) 5 SCC 418: the accused can rebut the presumption by raising a probable defence. He need not prove his case beyond reasonable doubt.
• Tedhi Singh v. Narayan Dass Mahant (2022): the complainant need not prove financial capacity at the outset unless the accused disputed it in the reply to the notice.
• Rathish Babu Unnikrishnan v. State (NCT of Delhi) (2022): High Courts should be slow to quash a Section 138 complaint before trial, because whether a debt existed is a matter for evidence.
• Renuka v. State of Maharashtra (7 April 2026): once the basic ingredients of Section 138 are shown, the drawer can rebut the Section 139 presumption only at trial. The Court relied on Rangappa and on Rajesh Jain v. Ajay Singh (2023).
• K. Ranganayakulu v. State of Telangana (2026): the treasurer of an NGO, who was authorised under an MoU to sign cheques and make the payments, was treated as the drawer and his conviction was upheld, though the Court modified the sentence.

Look up Madras High Court rulings on the court's own website when you prepare a Tamil Nadu focused answer, and check whether any later Supreme Court decision has changed them.

How should you write about this in an exam?

1. Start with the definition and the section number. One clean sentence beats a paragraph of history.
2. For a distinction question, use a short table or parallel points: parties, promise or order, acceptance, drawee, payable on demand.
3. For a problem on a bounced cheque, test each ingredient in order: legally enforceable debt, presentation in time, bank memo, notice within 30 days, 15 days to pay, complaint within one month, correct court under Section 142(2).
4. Bring in the presumption under Sections 118 and 139 and the probable defence standard from Basalingappa.
5. End with the remedy: compounding under Section 147, or civil recovery as an alternative.

Students who want to see real notices and complaints can volunteer with the college legal aid clinic, where cheque disputes are a common enquiry.

Sources

• India Code: The Negotiable Instruments Act, 1881: official listing of the Act (Act 26 of 1881).
• Indian Kanoon: Negotiable Instruments Act, 1881 full text: section wise text used for Sections 4 to 147.
• Indian Kanoon: Section 138: text of the cheque dishonour offence and its proviso.
• LiveLaw: Tedhi Singh v. Narayan Dass Mahant: report of the 2022 Supreme Court ruling on financial capacity.
• LiveLaw: Renuka v. State of Maharashtra: report of the 2026 Supreme Court ruling on quashing at the pre trial stage.
• LiveLaw: K. Ranganayakulu v. State of Telangana: report of the 2026 ruling on authorised signatories.