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NEGOTIABLE INSTRUMENTS ACT, 1881
NEGOTIABLE + INSTRUMENTS
y Negotiable means something legally transferable
from one person to another for a consideration.
y Instrument means a written document by which
some legal rights are created in favour of some person
What is Negotiable Instrument?
y Sec13. (1) A negotiable instrument means a
promissory note, bill of exchange or cheque payable either to order or to bearer.
CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS 1. Property: The possessor of the negotiable instrument is presumed to be the owner of the property contained there in. A negotiable instrument does not merely give possession of the instrument but right to property also. The property in a negotiable instrument can be transferred without any formality. In the case of bearer instrument, the property passes by mere delivery to the transferee. In the case of an order instrument, endorsement and delivery are required for the transfer of property.
2. Title: The transferee of a negotiable instrument is known as holder in due course. A bona fide transferee for value is not affected by any defect of title on the part of the transferor or of any of the previous holders of the instrument.
3. Rights: The transferee of the negotiable instrument can sue in his own name, in case of dishonor. A negotiable instrument can be transferred any number of times till it is at maturity. The holder of the instrument need not give notice of transfer to the party liable on the instrument to pay.
4. Presumptions: Certain presumptions apply to all negotiable instruments e.g., a presumption that consideration has been paid under it. :It is not necessary to write in a promissory note the words for value received or similar expressions because the payment of consideration is presumed. The words are usually included to create additional evidence of consideration.
5. Prompt payment: A negotiable instrument enables the holder to expect prompt payment because a dishonor means the ruin of the credit of all persons who are parties to the instrument.
PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENT Sections 118 and 119 of the Negotiable Instrument Act lay down certain presumptions which the court presumes in regard to negotiable instruments. In other words these presumptions need not be proved as they are presumed to exist in every negotiable instrument. Until the contrary is proved the following presumptions shall be made in case of all negotiable instruments Freely transferable, by delivery (to bearer) or endorsement (to order) Title of holder-in-due-course free from all defects. Recovery can be made in own name. It presupposes certain presumptions such as consideration is paid, made on date of signature, it is accepted properly, transferred in time, endorsed properly, stamped properly, holder is in-due-course, protest is a proof of dishonor, etc.
holder in due course Definition Legal term for an original or any subsequent holder of a negotiable instrument (check, draft, note, etc.) who has accepted it in good-faith and has exchanged something valuable for it. For example, anyone who accepts a third-party check is a holder in due course. He or she has certain legal rights and is presumed to be unaware that (if such were the case) the instrument was at any time overdue, dishonored when presented for payment, had any claims against it, or the party required to pay it has valid reason for not doing so .Also called protected holder.
TYPES OF NEGOTIABLE INSTRUMENT Section 13 of the Negotiable Instruments Act states that a negotiable instrument is a promissory note, bill of exchange or a cheque payable either to order or to bearer. Negotiable instruments recognized by statute are: (i) Promissory notes (ii) Bills of exchange (iii) Cheques. Negotiable instruments recognized by usage or custom are: (i) Hundis (ii)Share warrants (iii) Dividend warrants (iv) Bankers draft (v) Circular notes (vi) Bearer debentures (vii) Debentures of Bombay Port Trust (viii)Railway receipts (ix) Delivery orders. This list of negotiable instrument is not a closed chapter. With the growth of commerce, new kinds of securities may claim recognition as negotiable instruments. The courts in India usually follow the practice of English courts in according the character of negotiability to other Instruments.
Notes, bills of exchange or cheque
Promissory Note A promissory note is an instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of money only to, or to the order of a certain person or the bearer of the document. document. The person who is promising to pay is the maker. maker. The person to whom the promise has been made is called the payee. payee.
An instrument to be a promissory note must possess the following elements: 1. It must be in writing: A mere verbal promise to pay is not a promissory note. The method of writing (either in ink or pencil or printing, etc.) is unimportant, but it must be in any form that cannot be altered easily. 2. It must certainly an express promise or clear understanding to pay: There must be an express undertaking to pay. A mere acknowledgment is not enough. The following are not promissory notes as there is no promise to pay If A writes: (a) Mr. B, I.O.U. (I owe you) Rs. 500 (b) I am liable to pay you Rs. 500. (c) I have taken from you Rs. 100, whenever you ask for it have to pay .
The following will be taken as promissory notes because there is an express promise to pay: If A writes: (a) I promise to pay B or order Rs. 500 (b) I acknowledge myself to be indebted to B in Rs. 1000 to be paid on demand, for the value received. (3) Promise to pay must be unconditional: A conditional undertaking destroys the negotiable character of an otherwise negotiable instrument. Therefore, the promise to pay must not depend upon the happening of some outside contingency or event. It must be payable absolutely. (4) It should be signed by the maker: The person who promise to pay must sign the instrument even though it might have been written by the promisor himself. (5) The maker must be certain: The note must show clearly who is the person agreeing to undertake the liability to pay the amount. (6) The payee must be certain: The instrument must point out with certainty the person to whom the promise has been made. The payee may be ascertained by name or by designation.
(7) The promise should be to pay money and money only: Money means legal tender money and not old and rare coins. A promise to deliver paddy either in the alternative or in addition to money does not constitute a promissory note. (8) The amount should be certain: One of the important characteristics of a promissory note is certaintynot only regarding the person to whom or by whom payment is to be made but also regarding the amount. However, paragraph 3 of Section 5 provides that the sum does not become indefinite merely because (a) there is a promise to pay amount with interest at a specified rate. (b) the amount is to be paid at an indicated rate of exchange. (c) the amount is payable by installments with a condition that the whole balance shall fall due for payment on a default being committed in the payment of anyone installment. (9) Other formalities: The other formalities regarding number, place, date, consideration etc. though usually found given in the promissory notes but are not essential in law.
Features of promissory note
y Instrument in writing y Not a bank note or currency note y Contains unconditional undertaking y Signed by the maker of the instrument y To pay a certain sum of money only y To or to the order of certain person y Or to the bearer of the instrument.
Illustrations of promissory notes
A signs instruments in the following terms: (a) I promise to pay B or order Rs. 500. (b) I acknowledge myself to be indebted to B in Rs. 1,000, to be paid on demand, for value received. (c) Mr. B, I.O.U. Rs. 1,000. (d) I promise to pay B Rs. 500 and all other sums which shall be due to him. (e) I promise to pay B Rs. 500 first deducting there out any money which he may owe me. (f) I promise to pay B Rs. 500 seven days after my mar-riage with C. (g) I promise to pay B Rs. 500 on Ds death, provided D leaves me enough to pay that sum. (h) I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next.
The instruments respectively marked (a) and (b) are promissory notes. The instruments respectively marked (c), (d), (e), (f), (g) and (h) are not promissory notes.
Bill of exchange
y A bill of exchange 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 or to the order of a certain person or to the bearer of the instrument. instrument. Parties to a bill of exchange:exchange: y Drawer y Drawee (acceptor) y Payee
Essential elements of a bill of exchange.
y It must be in writing. writing. y It must contain an order. order. y The order must be unconditional. unconditional. y There must be three parties. parties. y The sum must be certain. certain. y It must contain an order to pay money only. only. y All other formalities of date, sign and stamp. stamp. y A bill as originally drawn cannot be made payable
to bearer on demand. demand.
Two Parties Maker and Payee Unconditional Promise to Pay The maker of a note is the debtor and he himself undertakes to pay Maker cannot undertake to pay conditionally Liability of the Maker is Primary or Absolute Needs no acceptance Cannot be made payable to the maker himself
Three Parties Drawer, Drawee and Payee Unconditional order to Pay The drawer of a bill is the creditor who directs the drawee (his debtor) to pay Acceptor may accept the bill conditionally because he is not the originator of the bill Liability of the Drawer is Secondary or Conditional Must be accepted by the Drawee The drawer and the Payee may be one and the same person
Maker of a note stands in 1. immediate relation with the payee No provisions apply for 2. notes No such notice is to be 3. given in case of dishonor of a note
The drawer of a bill stands in immediate relation with the acceptor and not the payee. payee. Certain provisions apply to Bills of Exchange In case of dishonor of a bill due notice must be given to all the persons who are to be made liable to pay
Noting And Protest
y Sec. 99
When a promissory note or bill of exchange has been dishonoured by non-acceptance or non payment, the holder may cause such dishonour to be noted by a notary public upon the instrument, or upon a paper attached thereto, or partly upon each. y Such note must be made within a reasonable time after dishonour and must specify the date of dishonour, the reason, if any, assign for such dishonour or if the instrument has not been expressly dishonoured the reason why the holder treats it as dishonoured, and the notarys charges.
Protest for better security is a measure of protection against the consequences of the accepters insolvency. When the accepter of a bill of exchange becomes insolvent all his credit has been publicly impeached, and this has happened before the maturity of the bill, the holder may approach a notary public and ask him to demand from the acceptor a better security than the mere bill. This should be done within a reasonable time. If the acceptor refuses to oblige with any security, the holder should have the fact of refusal noted and certified by the notary. Such a certificate is called a protest for better security. This should be done within a reasonable time after the acceptors refusal to provide security
AT SIGHT, ON PRESENTMENT, AFTER SIGHT In a promissory note or bill of exchange the expressions at sight and on presentment mean on demand The expression after sight means, in a promissory note, after presentment for sight, and, in a bill of exchange, after acceptance, or noting for non-acceptance, or protest for non-acceptance Thus, in case of document after sight, the countdown starts only after document is sighted by the concerned party.
Bill discounting
y While discounting a bill, the Bank buys before it
is due and credits the value of the bill after a discount to the customers account. y The transaction is practically an advance against the security of the bill
Sec 6 Cheque is a bill of exchange drawn upon a specified banker and payable on demand and it includes the electronic image of a truncated cheque & a cheque in the electronic form. Cheque truncation Electronic cheque
Check truncation. To process payments faster and more efficiently, many banks no longer transport paper checks, but replace them with digital images -- called substitute checks -- that can be transferred electronically, in a system called check truncation. When you receive your account statements, the bank may send you substitute checks in place of cancelled checks, each formatted on a separate piece of paper, with the words "This is a legal copy of your check" appearing next to the image. Most banks destroy original checks once they've archived the substitutes. However, many banks send out either a line item statement or an image statement with photocopies of multiple cancelled checks on each page. If you need to verify a payment, you can request a substitute check from your bank. There may be a fee for this service.
(a) a cheque in the electronic form means a cheque which contains the exact mirror image of a paper cheque, and is gener-ated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system; (b) a truncated cheque means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immedi-ately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing. .For the purposes of this section, the expression clearing house means the clearing house managed by the Reserve Bank of India or a clearing house recognized as such by the Re-serve Bank of India.
Bill of exchange Vs. Cheque.
May be drawn on any person, including Bank Must be accepted Entitled to three days of grace May be payable on demand or after the expiry of a certain period Must be duly presented for payment to the acceptor or else he is discharged of his liability Cannot be Crossed Must be stamped Payment cannot be countermanded May be noted or protested for dishonour
Is always drawn on a banker No Acceptance required No days of grace Always payable on demand The drawer of a cheque is not discharged from his liability by delay of the holder in presenting it for payment Can be Crossed Does not require any stamp Payment may be countermanded by the Drawer Not required to be noted or protested for dishonour
Crossing of cheques
y They are two types of cheques:cheques:y Open cheques. y Crossed cheques. y Types of crossing: y General crossing y Special crossing y Restrictive crossing.
CROSSING OF CHEQUE
y General crossing Two parallel lines or with word &
Co. etc. y Special crossing Not negotiable Clearable through a bank named. Two transverse lines are not necessary-the purpose is to instuct the drawee bank to make payment of check only if it is presented for payment through that particular bank y Restrictive crossing A/c payee only or A/c payee Bank of India Bank of India A/c. Nambudiri
Parties to negotiable instrument.
Parties to a promissory note: 1. Maker 2. Payee 3. Holder 4. Endorser 5. Endorsee
y y y y y y y y y
Parties to a bill of exchange Drawer Drawee Acceptor Drawee in case of need. Holder Endorser Endorsee Payee.
y Sec. 7. Drawer, Drawee. y The maker of a bill of exchange or cheque is called
the drawer; the person thereby directed to pay is called the drawee.
y Sec. 7. Acceptor y After the drawee of a bill has signed his assent upon
the bill, or, if there are more parts thereof than one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the acceptor.
y Sec. 7. Payee. y The person named in the instrument, to whom or to
whose order the money is by the instrument directed to be paid, is called the payee.
y Sec. 8. Holder. y The holder of a promissory note, bill of exchange
or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. y Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruc-tion.
Holder in due course
y Sec. 9. Holder in due course means any person
who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, y or the payee or indorsee thereof, if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.
Payment in due course
y Sec. 10. Payment in due course means payment
in accordance with the apparent tenor of the instrument in good faith and without negli-gence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.
Negotiation.
y Sec. 14. When a promissory note, bill of exchange or
cheque is trans-ferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.
Indorsement
y Sec. 15. When the maker or holder of a negotiable
instrument signs the same, otherwise than as such maker, for the purpose of negotia-tion, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intend-ed to be completed as a negotiable instrument, he is said to indorse the same, and is called the indorser.
y Payment in due course of crossed cheque. y Sec. 128. Where the banker on whom a crossed
cheque is drawn has paid the same in due course, the banker paying the cheque, and (in case such cheque has come to the hands of the payee) the drawer thereof, shall respectively be entitled to the same rights, and be placed in the same position in all respects, as they would respectively be entitled to and placed in if the amount of the cheque had been paid to and received by the true owner thereof.
y Payment of crossed cheque out of due
course. y Sec. 129. Any banker paying a cheque crossed generally otherwise than to a banker, or a cheque crossed specially otherwise than to the banker to whom the same is crossed, or his agent for collection, being a banker, shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.
Dishonour of cheque for insufficiency, etc., of funds in the account.
y Sec. 138. Where any cheque drawn by a person on an
account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both:
y Provided that nothing contained in this section shall apply unless y (a) the cheque has been presented to the bank within a
period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier; y (b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and y (c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice. y Explanation: For the purposes of this section, debt or other liability means a legally enforceable debt or other liability.
Important points in dishonour of cheques
Cheque should presented for payment within 6 months from its date or within its validity period. 2) within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid, a demand notice should be given in writing by the payee or holder in due course to the drawer of the cheque. 3) Within 15 days of receipt of above notice, if the drawer fails to make payment, then the holder or holder in due course has right to file a criminal complaint for the offence within 30 days from the date of cause of action (refer to Section 142).
Punishment for the offence of dishonour of cheque
Imprisonment for a term which may extend to two years, ii. or with fine which may extend to twice the amount of the cheque iii. or with both
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