NEGOTIABLE INSTRUMENTS

Course: LLB IISubject : Company Act

Unit: 4

Introduction to the Negotiable Instruments

• Money is the most common medium of exchange in any advanced society.

• The reason for this is that money has the exchange value and is also freely transferable.

• The need for some safe and effective substitute for money leads to the development of the negotiable instrument

Cont…

• Therefore the use of negotiable instruments has become the order of the day in the business transactions.

• The laws relating to Negotiable Instruments is contained in the Negotiable Instruments Act, 1881.

• This law is based almost entirely on the principles of the mercantile law of England.

• The Act applies to persons resident in India whether foreign or Indian.

Object of the Act

• The main object of the Negotiable Instruments Act is to legalize the system by which instruments contemplated by it could pass from hand to hand by negotiation like any other goods.

• The purpose of the Act was to present an orderly and authoritative statement of leading rules of law relating to negotiable Instruments

Definition

• The word negotiable means Transferable by delivery and the word instrument means A written document by which a right is created in favor of some person.

• According to Justice Willis “ A negotiable instrument is one the property in which is acquired by anyone who take it bona fide and for value notwithstanding any defect of title in the person from whom he take it.”

Examples of Negotiable Instruments

• Bill of exchange

• Promissory notes

• Cheques

• Government promissory notes

• Treasury bills

• Dividend warrants

Essential Features of Negotiable Instruments

• Writing and Signature

• Money

• Freely Transferable

• Notice

• Presumption

• Special Procedure

• Popularity

• Evidence

1.Writing and Signature:- NI must be written and signed by the parties according to

the rules relating to Promissory notes, Bill of exchange and Cheques.

2. Money:- NI are payable by legal tender money of India.

3. Freely Transferable:- The property in a NI is freely transferable. They can

transform from one person to another by a simple process. In the case of order instruments two things are required for a

valid transfer endorsement and delivery.

4.Notice:-• It is not necessary to give notice of transfer of Ni to the party liable

to pay. The transferee can sue in his own name.

5.Presumption:-• A NI is always subject to certain presumptions. They will applicable

unless contrary is proved.

6.Special Procedure:-

• It is provided for suits on promissory notes and bill of exchange.

• A decree can be obtained much more quickly than it can be in ordinary suits.

7.Popularity:-

• NI are popular in commercial transactions because of their easy negotiability and quick remedies.

8.Evidence:-

A document which fails to qualify as a NI may nevertheless be used as evidence of the fact of indebtedness.

i.e P writes to Q “I.O.U. Rs. 1500. This is not Promissory note but the document can be used as evidence to show that P is indebted to Q for Rs. 1500.

Classification(Types) of negotiable instrument

• ACCOMODATION BILL

• FICTITIOUS BILL

• INSTRUMENT PAYABLE ON DEMAND

• BEARER AND ORDER INSTRUMENTS

• AMBIGUOUS INSTRUMENTS

• INLAND AND FOREIGN INSTRUMENT

Accommodation bill

This type of bill of exchange most commonly used in Australian financial markets. At present, accommodation bills are a means of providing finance (lending) without necessarily having an underlying trade transaction (whereas trade bills are based on specific transactions).Accommodation party to a bill is a person who has signed a bill as drawer, without receiving value thereof, and for the purpose of lending his name to some other person.' The idea behind the accommodation bill is to lend the weight of the stronger party's name (through accepting/drawing/endorsing the bill) to another party whose name is less marketable.

Illustration:- A is in need of Rs. 5000, approaches friend B to borrow money.- B suggests A to draw bill on him which he accepts.- A gets bill discounted with the banker

FICTITIOUS BILL:

A bill is fictitious when both the drawer and payee are fictitious persons. Where the drawer is also the payee of the bill, without any intention that payment shall be in conformity with the instrument, the instrument is fictitious. Also when payee is non-existing, the instrument is fictitious. A fictitious bill in the hands of a holder in due course becomes a good bill. The acceptor is liable to a holder in due course, if the holder in due course can show that the signature of the supposed drawer and that of the first endorser or payee are under the same hand. The liability of the holder in case of a fictitious bill is only towards the holder in due course.

INSTRUMENT PAYABLE ON DEMAND:

A promissory note, a bill of exchange in which no time for payment is specified and Cheque are payable on demand. Therefore, following are the instruments payable on the demand:1} Bills and promissory notes expressed to be payable ‘on demand’ or ‘at sight’ or ‘on presentment’;2} Bills and notes where no time for payment is specified; and3} Cheque is always payable on demand.

• BEARER AND ORDER INSTRUMENTS:

An instrument is a bearer instrument when the amount payable thereon is payable to the bearer and he as a holder and in lawful possession thereof is entitled to enforce payment due on it.

• AMBIGUOUS INSTRUMENTS:Where an instrument may be construed either as a Promissory Note or bill of exchange, the holder may at His election treat it as either and the instrument shall be then forward treated accordingly.

• INLAND AND FOREIGN INSTRUMENT:

A promissory note, bill of exchange or Cheque drawn or made in India and made payable in, or drawn upon any person resident in India shall be deemed to be an inland instrument. Any such instrument not so drawn, made or made payable shall be deemed to be a foreign instrument.FOREIGN bills of exchange must be protested for dishonour when such protest is required by the law of the place where they are drawn (sec. 104). However, a foreign bill drawn in India need not be so protested. Protest in case of inland bill is optional. In case of foreign bills, it is absolutely essential.

Definition of bill of exchange

• “an instrument in writing containing an un conditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to othe of a,a certain person or to the bearer of the instrument

Features of bill of exchange

1 it must be in writing 2 Order to pay3 Un conditional order4 Signature of the drawer5 Drawee6 Parties7 Certain of amount8 payment in kind is not valid.9 Stamping.10 Can not be made payable to bearer on demand.

Parties to bill of exchange

1 Drawer

2 Drawee

3 payee

Promissory Notes

• Meaning Of Promissory Notes(sec. 4)• A ‘promissory note’ is an instrument in

writing(not a currency note) 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 to the bearer of the instrument.

• The person who makes the promissory note and promises to pay is called the ‘maker’. The person to whom the payment is to be made is called the ‘payee’.

Essential elements of a promissory note

1. It is an instrument in writing.2. It is a promise to pay3. Signed by the maker4. Other formalities5. Definite and unconditional promise6. Promise to pay money only7. Maker must be a certain person8. Payee must be certain9. It cannot be made payable to bearer on demand

Parties to a promissory note

• Maker

• Payee

• holder

Cheque

• According to Sec 6 define that a cheque as “ a bill of exchange drawn on specified banker and not expressed to be payable otherwise than on demand”

• “All Cheque are bill of exchange but All bill of exchange are not a cheque”

Essential characteristics of Cheque

• In writing

• Express order to pay: not request to pay

• Definite & Unconditional order

• Order to pay certain sum: total of money

• Order to pay money only

• Three Parties: Drower,Drawee,Payee

• Drawn upon specified banker

• Payable on Demand(other wise not)

Parties to a Cheque

• Drawer: The person who os depositor of money in bank.

• Drawee: It is a banker on whom the cheque has been drawn.

• Payee: The person who is received the payment of cheque.

Difference between cheque & Bill of exchange

Cheque Bill of exchange

1.Always drawn on bank 1. Usually drawn on person or firm

2. Always pay on demand 2.It may be pay on demand or expiry period

3.It dosen’t require stampe 3.It must require stamped

4.It can be crossed 4.It can’t be crossed

5.Notice of dishonor is not require 5. Notice of dishonor is require

6.Only banker can be drawee 6.Any one can be drawee include banker

Crossing of Cheques

• “A cheque is said to be crossed when two transverse parallel lines with or without any words are drawn across its face of left corner.”

• Crossing may be written stamped or printed.

• Crossing is a direction to paying banker to pay the money to whose name in the cheque not to the holder at counter.

Types of Crossing

1. General crossing:- where a cheque bear across its face two parallel transvers lines with or without any words ‘and company’ or not negotiable written in between two parallel line.

Cont…• 2. Special Crossing: where a cheque bears across

its face an addition of the name of a banker with or without words not negotiable.

• When it done make the payment only to the banker in whose favor it has been crossed.

• Special crossing cheque safe than the general crossing.

Cont…• 3.Restrictive crossing: In recent practices of

crossing a cheque with words ‘Account Payee’ or ‘Account Payee only’.

• This crossing is only a direction to collecting banker that the proceeds are to be credited only to the A/c of payee named in the cheque.

Bank Draft and Demand Draft

• Demand draft is drawn by one branch of the same bank instructing the latter to pay is specified sum of money to a named payee or his order.

Features

1) It is drawn by a bank’s branch on another branch.

2) It cannot be made payable to baearer.

3)It’s payment can’t be stoppal or countermanded.

4) It is always payable on demand.

Discharge of Negotiable InstrumentMode of Discharge of an Negotiable Instrument1) By payment:- If the maker or accepter makes payment to the holder of

the instrument at or after maturity in good faith and without notice, the instrument is discharged.

2) By Canceliation:- If the holder of an instrument cancels acceptor’s name

with intent to discharge him.

3) By party primarily liable becoming Holder:- If the acceptor of a bill exchange becomes its holder at

or after maturity in his own right.

Cont…

4) By Express waiver:-

when the holder of an Negotiable Instrument at or after its maturity absolutely and unconditionally renounces in writing.

5) By Discharge as a simple contract:-

A Negotiable Instrument may be Discharged in the same way as any other contract for the payment of money.

Parties to Negotiable Instrument

• Meaning of Holder• According to section 8 holder means a person,• Who is entitled in his own name to the

possession of the Instrument and• Who has also the Right to receive or recover

the amount due thereon from the parties to thereto

Following Person consider the holder of Negotiable Instrument

• A person whose name appear on an instrument• The endorsee of a cheque is called a holder• Where negotiable instrument is in the name of a

partner of a firm, it becomes holder• Any person who is in the possession of such

instrument is the holder

Following Person not consider the holder of Negotiable Instrument

• A thief or a finder of an instrument is not a holder though he is an possession of an instrument

• A person obtaining the instrument under forgery is not a holder

Holder in due course

• Meaning• For valuable consideration • Becomes the possessor of a negotiable

instrument payable to bearer or the endorsee or payee thereof

• Before the amount mentioned in the document becomes payable

A holder in due course a person must possesses the following qualification

• He must be a holder• He must be a holder for valuable

consideration• He must have become the holder of NI before

its maturity• He must have become holder in good faith

Competence of parties

• Minor• Persons of unsound mind• Joint stock company• Agent• Partnership firm

Liability of parties to negotiable instrument

• Liability of drawer

• Liability of drawee of cheque

• Liability of maker of note and acceptor of bill

• Liability of endorser

• Liability of prior parties to a holder in due course

• Discharge of endorsers liability

References

• Avtar Singh : Contract Act, Eastern• Krishnan Nair : Law of Contact, Orient