negotiable instrument act 1881 final

8/3/2019 Negotiable Instrument Act 1881 Final

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NEGOTIABLE INSTRUMENTS ACT 1881

INTRODUCTION:

For a commercial transactions, it is always not possiblefor a businessman to carry huge cash. Businessman, therefore

adopt a new method of exchanging documents as Bills of

Exchange, Cheques etc, in place of money. These documents,

which are used as a substitution for money are known as

negotiable instruments.


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Complex

system,

Confusion,

slow

growth


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What is Negotiable Instrument

The term negotiable Instrument consist of two words Negotiable and

Instrument.

The word negotiable means transferable by delivery and the word

instrument means a written document by which a right is created in

favour of some person.Thus the term negotiable instrument means a written document

transferable by delivery.

According to the Act a negotiable instrument means a :

A promissory Note,

Bill of exchange,

Cheques payable either to order or to bearer.

Judge will defines a negotiable instrument as :


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Cond.

The property which is acquired by anyone who takes it bonafide

for value not withstanding any defect of title in the person from

whom he took it.


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A Negotiable instrument means promissory note, bill of

exchange, or cheque, payable either to order or to bearer

Freely Transferable

Absolute Title

In Writing

UnconditionalCertain Sum

Payee must be a certainPersonSignature a must.

Certain Time

Delivery EssentialStamping is Mandatory.


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What is Negotiation?

When a Promissory note, Bill of exchange or

Cheque is transferred to any person, to make

that person the owner of the negotiable

instruments, then the instrument is said to be

negotiated.


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Characteristics oftheNegotiability

An instrument is negotiable by virtue of the

following features,

1. Transferable by delivery 2. Entitled to receive money

3. Filing a suit


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1.Transferable by delivery:

The instrument is transferable by delivery or by

endorsement and delivery.

2.Entitled to receive money: The legal holder of the instrument is entitled to

receive money mentioned in it.


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3. Filing a suit:

The holder of a negotiable instrument has the

right to file a suit in his name for paymentfrom all or any of the concerned parties.


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Kinds of Negotiable Instruments

Negotiable instrument are of two kinds:

a. Negotiable by statute:

Promissory Note

Bill of Exchange

Cheques

b. Negotiable by custom or usage:

Hundis

Treasury bills

Draft Share warrants

Bearer warrants

Bearer debentures


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Presumptions as toNegotiable

Instrument1. Consideration

2. Date

3. Time of acceptance

4. Transfer

5. Order of endorsement

6. Stamping

7. Holder in due course (holder of NI is a holder in due course)

8. Proof of protest


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Promissory NoteAccording to the Act a promissory

note is

An instrument in writing.

Signed by the maker to pay

certain sum of money only to a

person or to the bearer of theperson.

Bank notes and currency are

not treated as promissory

notes.

The words or to the bearer ofthe instrument are inoperative

in view of the provisions of RBI

which prohibits the issue ofPN

payable to bearer by anybody

other than RBI and the Central

Govt of India.


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Essentials of Promissory Note

1) It must be in writing.

2) It must contain a promise or undertaking to pay.

3) The promise to pay is unconditional.

4) It must be signed by the maker.

5) The maker must be a certain person.

6) The payee must be certain.

7) The amount payable must be legal.

8) Other formalities like proper stamping must be there.


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Illustrations of promissory notes Illustrations

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 ondemand, 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 thereout 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 topay that sum.

h) I promise to pay B Rs. 500 and to deliver to him my black horse on 1stJanuary next.

The instruments respectively marked (a) and (b) are promissory notes. Theinstruments respectively marked (c), (d), (e), (f), (g) and (h) are notpromissory notes.


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Specimen of PN

Alok Singh

R-2/55, Raj Nagar,

Meerut 250001

Rs 10,000/ only

Three months after due date I promise to Pay Arun Kumar (Payee)

or to his order the sum of rupees Ten Thousand for value received.

ToArun Kumar

120 Surya Nagar,

Meerut Alok Singh ( Maker)


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Bill ofExchange

According toMuller, A bill ofexchange is an

unconditional order in writing addressed by one

person to another, signed by the persongiving it,

requiring the person to whom it is addressed to payon demand or at a fixed or determinablefuture

time, a sum certain in money toor to theorder ofa

certain personor to bearer.


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Features or Characteristics ofthe

bill The main characteristics or features ofa bill of

exchange are as follow:

A Bill of Exchange must be in writing.

It must contain an order to pay.

The order to pay must be unconditional. If it is

subject to the happening of some events, it will not

be a bill of exchange. It must be signed by the drawer and properly

stamped.


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bill The parties to the bill, the drawer, the drawee, and

payee must be certain and definite individuals.

The amount payable must be certain.

The payment must be made in money.

The bill payable may be either on demand or after a

specified period.

The bill may be payable either to the bearer or to theorder of payee.


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Parties to theBill ofExchange

According to the definition there are three

parties involved to a bill ofexchange.

Drawer

Drawee

Payee


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(i) Drawer: The drawer is the person who draws the bill. He is

the person who orders to pay a certain sum of

money (In the specimen of the bill Hamid is drawerof the bill)

(ii) Drawee: He is the person on whom the bill is drawn. He is the

person who is ordered to make payment of the bill(In the specimen of bill Rashid Ahmad is the draweeof bill).


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(iii) Payee:

He is the person to whom money is directed

to be paid. He gets the payments of the bill.(In the specimen of bill Kamal Akmal is the

Payee of bill).


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Specimenofa Bill ofExchange

$8,000 Kabul

May 17, 2008

Stamp

Two months after date pay to Mr Kamal or hisorder the sum of Dollar 8,000 only, for valuereceived.

To

Rashid Ahmad

Jalal Abad Hamid Zafar

Afghanistan Signature


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Cheque

What is a Cheque?

A Cheque may be definedas written order of adepositor upon a bank to

pay to or to the order of adesignated party or to thebearer, a specified sum ofmoney on demand.

The person who draws theCheque is called drawer,

the bank on which theCheque is drawn is calleddrawee, and the person towhom payment is to bemade is called Payee.


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Cheque

The main characteristics or features ofa Cheque are

as follow:

It is an order of the customer without condition.

It is drawn upon a certain bank in writing.

The bank has always to pay it on demand.

It is payable to a certain person or to his nominee or to the

bearer of the instrument.


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Types ofCheque

How many types ofCheques we have?

We have two types ofCheques;

Open Cheque Crossed Cheque


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What is openCheque?

OpenCheque:

Open Cheques are those Cheques which are

paid across the counter of the bank. OpenCheques has further two types

Bearer Cheque

Order Cheque


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Types ofOpenCheque

Bearer Cheque: If a drawer orders the bank to pay a stated sum of money to the

bearer, it is called a bearer Cheque.

Any person who lawfully possesses a bearer Cheque is entitled to

receive payment of that Cheque.

Order Cheque: If the Cheque is to the order of a person in whose favour the Cheque is

drawn, it is called order Cheque.

The order Cheque is paid by the bank only when the bank is satisfied

about the identity of the payee.


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Crossed Cheque

What is Crossed Cheque?

Ifa Cheque is crossed by drawing two parallel linesacross thefaceoftheCheque, with or with out the

words & Coor A/c payeeonly, it is called a CrossedCheque.

The crossed Cheque cannot be paid on the counterof the drawee bank. It will be deposited in the

account of a person in whose order or favor it isdrawn.


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Kinds ofCrossing

How many kinds ofcrossing we have?

Legally there are two kinds of crossing;

General crossing

Special crossing


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Kinds ofCrossing

General crossing: The drawing up of two parallel lines on the face of

the Cheque at the top left hand corner with or

without the words & Co not negotiable or Accountpayee only is known as a General Crossing.

The effect of general crossing is that the crossedCheque cannot be paid at the counter of the bank.

Its payment can only be deposited into the payeesaccount only.


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Kinds ofCrossing

Special crossing: ACheque is deemed to be crossed specially

when it bears across its face the name of thebanker either with or without the words notnegotiable.

In case of special crossing the payment can

only be made to the bank named therein theCheque.


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Objectives ofCrossing

TheCheque is crossed to achieve thefollowing

objectives;

It prevent the payment of the Cheque to a wrongful holder

It ensure safe payment to the concerned receiver

It facilitate in tracing the recipient of the payment if the

Cheque is wrongfully crossed

Further it is a guard against any cheating or theft.


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HOLDER Sec 8

According to Act

the holder of a negotiable instrument means any person entitledto the possession of the instrument in his own name and toreceive or recover the amount due there on from the partiesthereto.

Holder in due course: Section 9

A person is called a holder in due course if he satisfies thefollowing conditions:

1. He must be a holder.

2. He must be the possessor of the instrument.


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Cond.

3. He must have obtained the instrument in good faith.

4. He must receive the instrument complete and regular on the face

of it means complete name.

Negotiation: Section 14According to the Act:

When PN, BOE or Cheque is transferred to any person, so as to

constitute that person the holder of the instrument. Thus the

essence of the negotiation is that it must be made with the

intention of transferring a title of the instrument to the transferee.


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Dishonour ofchequefor insufficiency, etc., of

funds in the account.

Sec.138. Where any cheque drawn by a person on an accountmaintained by him with a banker for payment of any amountof money to another person from out of that account for the

discharge, in whole or in part, of any debt or other liability, isreturned by the bank unpaid, either because of the amount ofmoney standing to the credit of that account is insufficient tohonour the cheque or that it exceeds the amount arranged tobe paid from that account by an agreement made with thatbank, such person shall be deemed to have committed an

offence and shall, without prejudice to any other provisions ofthis Act, be punished with imprisonment for a term whichmay extend to two years, or with fine which may extend totwice the amount of the cheque, or with both:


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Provided that nothing contained in this section shall apply unless

(a) the cheque has been presented to the bank within a period of six monthsfrom the date on which it is drawn or within the period of its validity,whichever is earlier;

(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 givinga notice, in writing, to the drawer of the cheque, within thirtydays of thereceipt of information by him from the bank regarding the return of thecheque as unpaid; and

the drawer of such cheque fails to make the payment of the said amountof money to the payee or, as the case may be, to the holder in due courseof the cheque, within fifteen days of the receipt of the said notice.

Explanation: For the purposes of this section, debt or other liabilitymeans a legally enforceable debt or other liability.


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Important points in dishonour of

cheques

1) Cheque should presented for payment within 6 months fromits date or within its validity period.

2) within thirtydays of the receipt of information by him fromthe bank regarding the return of the cheque as unpaid, a

demand notice should be given in writing by the payee orholder in due course to the drawer of the cheque.

3) Within 15 days of receipt of above notice, if the drawer failsto make payment, then the holder or holder in due coursehas right to file a criminal complaint for the offence within

30 days from the date of cause of action (refer to Section142).


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Punishment for theoffenceof

dishonour ofcheque

i. Imprisonment for a term which may

extend to two years,

ii. or with fine which may extend to twicethe amount of the cheque

iii. or with both


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Payment in due courseofcrossed cheque.

Sec.128. Where the banker on whom a crossedcheque is drawn has paid the same in due course,

the banker paying the cheque, and (in case suchcheque has come to the hands of the payee) thedrawer thereof, shall respectively be entitled to thesame rights, and be placed in the same position in allrespects, as they would respectively be entitled to

and placed in if the amount of the cheque had beenpaid to and received by the true owner thereof.


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Presentment Section 61-63

Presentment means placing negitiable instrument before a

drawee for acceptance.

Provisions Relating to Presentment:

a. When presentment is necessary:

Where bill is payable after sight,

Where a bill expressly stipulates that it shall be presented for

acceptance.

2 By Whom:

Presentment for acceptance must be made by the person entitled

to demand acceptance.


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Cond.

3 To Whom:

Presentment must be made to the Drawee of a bill of exchange.

4 Hoursand Day forPresentment:

Presentment for acceptance must be made during business hours

on a business day.

5 Time for Presentment:

The bill must be presented for acceptance within a specified time.

6 Place of presentment:

The bill must be presented at a specified place.


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Cond.

7 Drawee time fordeliberation Section 63

The holder must, if so required by the drawee of a BOE presentedto him allow the Drawee 48 hrs. to consider whether he will acceptit

8 When presentment is excused:

if the drawee cannot found even after a reasonable search.

If the drawee is a fictitious person.

If the drawee is incompetent person.

9. Effect of Non Presentment:

Where the presentment is essential and not made, all partiesliable on the instrument are discharged from the liability on theinstrument to the person making such default.

10 Mode of service of presentment:


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NOTING Section 99-104A

Noting is a mode of authenticating the fact that a bill or note has

been dishonored.

Who does Noting:

Noting is done by a person officially designated for this purpose and

such person is known as Notary Public. Noting public is appointed

by the Central or State govt. The profession of the Notaries is

regulated by the Notaries Act 1952.


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Procedure and contents of Noting

Section 99

A dishonored bill is handed over a notary public who presents it

again for acceptance and if the drawee or acceptor refuses to

accept or pay the bill the notary public records:

The date of dishonor.

The Fact of dishonor.

The reason

Notary charges.


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PROTEST

Protest is a formal certificate issued by the Notary Public about the

dishonor of a bill.

Contents ofProtest: Sec 100

The instrument shall have everything is in written. The name of person for whom the instrument has been protested.

A statement whether accepted or not.

The time place of dishonor.

The subscription of the Notary Public.

The manner of acceptance.

negotiable instrument act 1881 final

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