Virtual Negotiable Instruments…A Fantasy?

It was reported in Economic times on the 20 th of this month that the Reserve bank of India is setting up a task force to study and suggest an amendment to the Negotiable Instruments Act-1881(NI Act) to make it feasible for issue of  Negotiable Instruments on the Internet.

It may be recalled that the Information Technology Act-2000 (ITA-2000) has excluded Negotiable Instruments from the provisions of the Act. 

Is it feasible to recognize Virtual Negotiable Instruments under the NI Act? Or Is it only a fantasy?.. Let’s briefly explore.

Negotiable Instruments consist of three types of instruments namely, the Promissory Note, The Bill of Exchange and the Cheque. RBI ‘s jurisdiction is mainly limited to the “Cheque” since it is an instrument drawn payable on a Bank by a Customer.

By definition, (Sec 6 of NI Act), a “Cheque” is a Bill of Exchange drawn on a specified Banker and expressed to be payable not otherwise on demand.

A “Bill of Exchange” (Sec 5) is an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to and to the order of a certain person or to the bearer of the instrument.

If we look at the provisions of the ITA-2000, we observe that the requirement of “Writing” and “Signing” are easily satisfied by the recognition of electronic documents and digital signatures. The other aspects of the above definition are that the drawee should be a Banker and the sum payable and the person to  whom it is payable should be “Certain” and the “Order to pay” should be “unconditional”. These are also possible to be satisfied by the existing provisions of the Act.

But for the exclusion of the Negotiable Instruments by the ITA-2000, it appears that the system of virtual cheques would have become feasible now.

However, will a virtual Cheque be ever equivalent to a “Real Cheque”? depends on the many other hidden features that the Cheque  as we know today and the family of Negotiable Instruments as we know today possess.

A few of  such important features of the Cheque are

1. Transferability
2. System of Crossing and its implications
3. Creation of a Holder in Due Course
4. Protection to a Collecting Banker
5. Wrongful dishonour by the Paying Bank
6. Rights of recovery under Section 138


A Cheque as any other Negotiable Instrument is transferable by “Delivery” in case it is drawn payable to a Bearer and by “Endorsement “ and “Delivery” when made payable to order.

The word “Bearer” has been used in the NI Act as a person who is in the physical possession of the written instrument. 

This aspect of “Delivery” cannot be “constructive” or “implied” in case of Negotiable instruments. Hence it can be fulfilled only in respect of “Written Negotiable Instruments”.

If the Virtual instruments are to be acceptable, perhaps this concept of “Delivery” and “Bearer” as applicable to them have to be redefined.

2.System Of Crossing:

Crossing by definition is again an act of “Writing”. Unless this is redefined, it cannot be applied by extension.

3. Holder in Due Course:

The very essence of a “Negotiable Instrument” is its ability to create a “Holder in Due Course”. Whatever attempt is made to redefine the law and introduce “Virtual Negotiable Instruments” will have to accommodate this feature. Without this, the “Virtual Cheque” can only be another type of a “Quasi Negotiable Instrument”

4:Rights and Liabilities of  Bankers ;

The rights and liabilities of the Collecting and Paying Bankers have been well established in the banking Law and practice and they cannot be extended automatically to the field of Virtual Cheques. Similarly the provisions regarding the recovery proceedings in respect of  dishonour of cheques would also need to be redefined in the virtual context. 

Thus the domain of Negotiable Instruments is too vast to be easily covered by the “Bridging” provisions of the ITA-2000. If any attempt is made in  a halfhearted manner to bring virtual instruments under the ambit of RBI , we may end up with more confusion.

The attempt to provide recognition to Virtual instruments is commendable. But is it to improve the lot of Netizens? Or Is it to provide more powers to RBI to control the Virtual world? ..remains to be seen. What is clear however is that amending the negotiable Instruments Act is not a simple task. The legal position in the Meta society is too deeply embedded in both law and practice. The Cyber Society however has a very brief history of “Practice” which only the Netizens are aware. The lawmakers in India are unfortunately not so conversant with such “Practices” and unless the so-called “Task Force” is of the Netizens, the law cannot be one that would be acceptable by a wide section of the Cyber Society. In that sense the attempt to amend the NI Act may only remain a fantasy.

February 22, 2001
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