negotiable instruments(2)

7/31/2019 Negotiable Instruments(2)

1/82

NEGOTIABLE INSTURMENTS

NEGOTIABLE INSTRUMENTS ACT, 1881


2/82

INTRODUCTION Money is the most common medium of exchange in

modern business. This is because money has theexchange value and also freely transferable.

In commercial transactions, it is not always possible fora businessman to carry huge amounts of cash with

him. It is inconvenient and sometimes risky. Therefore, the need for some safe and effective

substitute for money lead businessmen to adopt amethod of exchanging documents Bills of Exchange,cheques, etc. , in place of money.

These documents, which are used as a substitute forhard cash (money) are known as negotiableinstruments.

The law relating to negotiable instruments is contained

in the Negotiable Instruments Act, 1881.


3/82

WHAT IS A NEGOTIABLE

INSTRUMENT?

NEGOTIABLE means transferable by deliveryor by endorsement and delivery.

INSTRUMENT means a written document by

which a right is created in favor of some personor entity.

Thus, NEGOTIABLE INSTRUMENT means awritten document transferable by delivery.

According to NI Act, A negotiable instrumentmeans a promissory note, bill of exchange orcheque payable either to order or to bearer.


4/82

CHARACTERISTICS OF A NEGOTIABLE

INSTRUMENT

Freely transferable The property in a negotiable instrumentpasses from one person to another by delivery, if the instrument ispayable to bearer, and by endorsement and delivery if it is payableto order.

Title of holder free from all defects A person taking aninstrument bona fide and for value, known as a holder in duecourse, gets the instrument free from all defects in the title of thetransferor. He is not in any way affected by any defect in the title ofthe transferor or of any prior party. He is also not affected bycertain defenses which might be available against previous holders,for example, fraud, provided he himself is not a party to it.

Recovery The holder in due course can sue upon a negotiableinstrument in his own name for the recovery of the amount.

Notice The transferee of the instrument need not give notice oftransfer to the party liable to pay.


5/82

KINDS OF NEGOTIABLE INSTRUMENTSTwo kinds:

1. Negotiable by statute: The NI Act mentions only threekinds of instruments, i.e., Promissory note, Bill ofExchange and Cheque.

2. Negotiable by custom or usage: Though the NI Act speaks

of only three kinds of negotiable instruments, it does notmean that there cannot be any other negotiableinstruments. Example: Hundi, treasury bills, bankersdraft, share warrants, bearer warrants, bearerdebentures, etc., are negotiable instruments recognizedby the custom, usage or Company Act. However, postalorder, money order, deposit receipt, bills of lading,railway receipts, dock warrants, etc., are not negotiableinstruments although these documents are transferableby delivery and endorsement, but they cannot give abetter title to the transferee.


6/82

PRESUMPTIONS

Presumptions Certain presumptions apply to all negotiableinstruments, unless contrary is proved. [S. 118 and 119]

Consideration: Every negotiable instrument is presumed to havebeen made, drawn, accepted, indorsed, negotiated or transferred

for consideration. This would help a holder to get a decree from acourt without any difficulty.

Date: Every negotiable instrument bearing a date is presumed tohave been made or drawn on such date.

Time of acceptance: When a bill of exchange has been accepted, it

is presumed that it was accepted within reasonable time of its dateand before its maturity.

Time of transfer: Every transfer of a negotiable instrument ispresumed to have been made before its maturity.


7/82

Order of endorsement: The endorsements appearing upon anegotiable instrument are presumed to have been made in theorder in which they appear thereon.

Stamp: When an instrument has been lost, it is presumed that itwas duly stamped.

Holder in due course: Every holder of a negotiable instrument ispresumed to be a holder in due course.

Proof of protest: In a suit upon an instrument which has beendishonored, the court, on proof of the protest, presumes the fact ofdishonor, unless and until such fact is disproved.

The above presumptions are rebuttable by evidence.

If anyone challenges any of the presumptions, he has to prove hisallegation.

These presumptions would not arise where an instrument has beenobtained by any offence, fraud or unlawful consideration.


8/82

NEGOTIABLE INSTRUMENTS NOT

DULY STAMPED

The effect of the negotiable instruments not

being duly stamped or of non-cancellation of

their adhesive stamps is that the same is

inadmissible in evidence.


9/82

PROMISSORY NOTE (S.4)

A promissorynote is an instrument in writing (not being a

bank note or currency note) containing an unconditionalundertaking signed by the maker, to pay a certain sum ofmoney only to, or to the order of a certain person, or to thebearer of the instrument.

Bank notes and currency notes are not treated as promissory

notes. The word or to the bearer of the instrument in the definition

of the promissory note are inoperative in view of theprovisions of the Reserve Bank of India Act which prohibitsthe issue of a promissory note payable to bearer by anybody

other than the Reserve Bank or Central Government. The person who makes the promissory note is called the

maker.

The person to whom the payment is to be made is called thepayee.


10/82

ESSENTIALS OF A PROMISSORY NOTE

It must be in writing.

It must contain an express undertaking or promise topay.

The promise to pay should be unconditional.

It must be signed by the maker.

The parties, i.e., the maker and the payee, must becertain.

The sum payable must be certain.

It must contain a promise to pay money. It must bear the necessary stamp under the Indian

Stamp Act, 1899.


11/82

SPECIMEN OF A PROMISSORY NOTE

Sri. Ram Mohan,R 7/25, Raj Nagar,

Meerut 250001

April, 15,2008

Rs. 20,000/- only

Three months after date I promise to pay to Prakash Rao or to hisorder the sum of rupees Twenty Thousand for the value received.

To StampSri. Prakash Rao MAKER

140 Divya Nagar, Signature

Meerut 250001 Ram Mohan

PAYEE


12/82

PROMISSORY NOTE - ILLUSTRATIONS. NO INSTRUMENT REMARKS

1. I owe B Rs. 1000. Acknowledges debt but

no promise to pay.

2. I am liable to pay A Rs.1000. -do-

3. I have borrowed Rs. 5000 from Y. -do-

4. I promise to pay B Rs.1000 after receiving money

from Y.

Conditional promise to

pay.5. I promise to pay B Rs.1000 as soon as I am able to. -do-

6. I promise to pay B Rs.1000 after his successful

completion of studies.

-do-

7. I promise to pay B Rs.500 and other charges. Payable sum is uncertain.

8. I promise to pay Rs.500 but after deducting money

owed by him.

-do-

9. I promise to pay B or his order Rs.500. Promissory Note.

Payable sum certain.

10. I acknowledge myself to be indebted to B in Rs.1000

to be paid on demand, for value received.

Promissory Note.


13/82


14/82


15/82

Bombay, July 10, 1987

Rs. 500

Three months after date pay to Ram or order the

sum of five hundred rupees, for value received.

To Accepted

Sham Sham Sd/-

235, Subhash Marg, Stamp

Delhi 110 006 Krishan Sd/-

PAYEE

DRAWEE/ACCEPTOR

DRAWER


16/82

ESSENTIALS OF BILL OF EXCHANGE

It must be in writing.

It must contain an order to pay.

The order must be unconditional.

It requires three parties, i.e., drawer, drawee andpayee.

It must be signed by the drawer.

The sum payable must be certain.

It must contain an order to pay money. It must bear the necessary stamp under the

Indian Stamp Act, 1899.


17/82


18/82


19/82


20/82


21/82

SPECIMENS OF GENERAL CROSSING


22/82


23/82

SPECIMEN OF SPECIAL CROSSING


24/82

RESTRICTIVE CROSSING

In addition to the two statutory types of crossing

(general or special) discussed above, there isanother type which has been adopted bycommercial and banking usage.

In this type of crossing the words A/cPayee areadded to general or special crossing.

The words A/c Payee on a cheque are adirection to the collecting banker that the

amount collected on the cheque is to be creditedto the account of the payee. A/cPayee chequesare negotiable.


25/82

SPECIMEN OF RESTRICTIVE CROSSING


26/82

NOT NEGOTIABLE CROSSING (S.130) The effect of the words notnegotiable on a crossed cheque is that

the title of the transferee of such a cheque cannot be better than

that of its transferor. The addition of the words not negotiable does not restrict the

further transferability of the cheque.

The object of crossing a cheque not negotiable is to affordprotection to the drawer or holder of the cheque against

miscarriage or dishonesty in the course of transit by making itdifficult to get the cheque so crossed cashed, until it reaches itsdestination.

Example: W drew a cheque cross not negotiable in blank andhanded it to his clerk to fill in the amount and the name of thepayee. The clerk inserted a sum in excess of her authority, and

delivered the cheque to P in payment of a debt of her own. Held,that the clerk had no title to the cheque and as such P had nobetter title and therefore W was not liable. [Wilson & Meerson v.Pikering, (1946) K.B. 422]


27/82

BOUNCING OF CHEQUE (S.138)

A drawer of a dishonored (bounced) chequeshall be deemed to have committed an

offence.

For this offence, the punishment provided inthe Act is imprisonment upto two years or

with fine which may extend to twice the

amount of the cheque or with both.


28/82

CONDITIONS TO BE FULFILLED FOR

DISHONOR OF CHEQUE

Cheque should have been dishonored due toinsufficiency of funds. The court have held thefollowing amounting to dishonor for insufficiency offunds:

i. Stop payment instructions to the payee bank.ii. Request to payee not to present the cheque till further

intimation.

iii. Cheque received back from the payee bank with the remarksAccountClosed.

iv. However, remarks Refer to Drawer will not constitute dishonorfor insufficiency of funds because a cheque may be referred to adrawer for reasons other than insufficiency of funds.

The cheque should be presented within 6 months orwithin the period of validity.


29/82

The cheque was issued for the discharge of legallyenforceable debt or other liability (not for charity,marriage or birthday presents).

The payee is to give notice demanding payment,within thirty days, from the drawer, on receipt ofinformation of dishonor of cheque from the bank.

The drawer is liable only if he fails to make paymentwithin fifteen days of such notice period.

A written complaint is made to a MetropolitanMagistrate or a Judicial Magistrate of the first class ismade within one month of cause of action (a claim inlaw and fact sufficient to demand judicial attention)arising.


30/82

DISHONOR OF CHEQUE OFFENCES

BY COMPANIES (S.141)

The word company means any bodycorporate and includes a partnership firm, orother association of individuals.

Every person who at the time when theoffence was committed, was in-charge of, andwas responsible to, the company forconducting it business, shall be deemed to be

guilty as also the company itself of theoffence.


31/82

Persons in-charge not liable if they can provethat:

The offence was committed without theirknowledge, or

They had exercised due diligence to prevent thecommission of such offence.

The remedy available to the payee (or anyother holder) of a cheque dishonored for thereasons mentioned in S.138 of the Act is an

additional remedy. Since, the amount of thecheque dishonored basically constitutes adebt, the holder of the cheque can sue thedrawer under the civil law to claim his debt.


32/82


33/82

BEARER AND ORDER INSTRUMENTS

A negotiable instrument is payable to bearer

When it is expressed to be so payable, or (anyperson who is in lawful possession of aninstrument payable to bearer, as a holder, isentitled to enforce payment due on it)

When the only or last endorsement on theinstrument is an endorsement in bank. S.13,Exp.2

A negotiable instrument is payable to order

When it is expressed to be so payable, or

Example: Pay to A or order, Pay to the order of A. When it is expressed to be payable to a particular

person, and does not contain words prohibiting orrestricting its transfer. S.13,Exp.1 (Pay A One

Hundred Rupees)


34/82


35/82

DEMAND AND TIME INSTRUMENTS A promissory note or bill of exchange is payable

on demand When it is expressed to be payable ondemand or at

sight or onpresentment, or

When no time for payment is specified in it.

A cheque is always payable on demand.

A bill or note is a time instrument if it is stated tobe payable At a fixed period after its date, or

At a fixed period after sight (i.e., after it has been

shown to the maker), or On a specified day, or

On the happening of an event which is certain tohappen.


36/82

ACCOMMODATION BILL A bill drawn, accepted or endorsed without any

consideration.

Example: A is in need of Rs.1000. He approaches his friendB for borrowing the amount. B is not in a position to lend,but he suggests that A might draw a bill on him which hewould accept. If the credit of A is good, he would get thebill discounted with his banker. On the due date, A wouldpay Rs. 1000 to B who would meet the bill. The bill is anaccommodation bill.

A is the accommodated party.

B is the accommodating party. B signs the accommodationbill as drawer, acceptor, or endorser without receiving

value for it and for lending his name to some other person.He is liable on the bill to the holder, and it is immaterialwhether, when such holder took the bill, he knew suchparty to be an accommodating party or not.


37/82

ESCROW (S. 46, Para 3)

When a negotiable instrument is delivered conditionally orfor a special purpose as a collateral security or for safecustody only, and not for the purpose of transferringabsolutely property therein, it is called Escrow.

Example: A and B enter into an agreement on sale of acottage owned by B at Vagamon. Both, A and B agree thatthe cheque of Rs. 5 Lakhs as consideration for the cottageshall be delivered by A to C, a reputed person in thelocality, on the condition that C will deliver the cheque toB only after As lawyers verify the documents of theproperty and certify that B has a clear title. The delivery ofcheque to Cs safe custody by A is called Escrow and hehas to deliver the cheque to B after the conditions of theagreement are fulfilled, otherwise not.


38/82

AMBIGUOUS INSTRUMENT (S.17)

Is an instrument which owing to it faulty

drafting can be interpreted either as a

promissory note or a bill of exchange.

Example: A bill is drawn Pay A or order the

sum of one thousand rupees. In the margin,

the amount stated is Rs.100. This is a bill forRs.1000.


39/82

INCHOATE INSTRUMENT (S.20)

An instrument which is incomplete in some respect.

When a person signs and delivers to another a blank orincomplete stamped paper, he authorizes the other personto make or complete upon it a negotiable instrument forany amount not exceeding the amount covered by stamp.

The person so signing is liable, in the capacity in which he

signed the same, to any holder in due course for suchamount.

Example: A bill is drawn payable to . or order. Anyholder in due course may write his own name as payee inthe blank and sue upon the instrument.

Example: A owes B Rs. 1000. He gives B a blankacceptance on a bill which is sufficiently stamped to coverany amount upto Rs.2000. B endorses the bill to H, aholder in due course. H who fills up the amount asRs.2000 can recover the amount.


40/82


41/82


42/82

PAYMENT IN DUE COURSE

It means payment in accordance with the

apparent tenor of the instrument in good faith

and without negligence to any person in

possession thereof under circumstances whichdo not afford a reasonable ground for

believing that he is not entitled to receive

payment of the amount therein mentioned.S.10


43/82

CAPACITY OF PARTIES

The capacity of a person to incur liability as aparty to a bill of exchange, promissory note or

cheque is co-extensive with his capacity tocontract.

Minor: A minor may draw, indorse, deliver and

negotiate a negotiable instrument so as to bindall parties except himself that is; he mayoperate as a cannel to convey title and liabilitybut not to originate it.

Persons of unsound mind: Bills and notes drawnor made by persons of unsound mind are void asagainst them (though the other parties areliable).


44/82


45/82

HOLDER AND HOLDER IN DUE

COURSE

Holder is any person entitled in his own name To possession of an instrument, and

To receive or recover the amount due thereon fromthe parties thereto. S.8

Holder in due course is any person who forconsideration became the possessor of a promissorynote, bill of exchange or cheque, if payable to bearer,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 thatany defect existed in the title of the person fromwhom he derived this title. S.9


46/82

PRIVILEGES OF A HOLDER IN DUE

COURSE

He can fill in an inchoate stamped instrument for anyamount provided the stamp is sufficient to cover theamount. S.20

Every prior party to a negotiable instrument is liablethereon to him until the instrument is duly satisfied.S.36

If a bill or note is negotiated to him, the other partiesto the bill or note cannot avoid liability on the ground

that the delivery of the instrument was conditional orfor special purpose only. S.46

Once a negotiable instrument passes through hishands, it gets cleansed of all its defects. S.52


47/82


48/82


49/82

INDORSEMENT

It means writing of a persons name on an

instrument for purpose of negotiation. The

person who endorses the instrument is called

the endorser and the person to whom it isindorsed is called the endorsee.


50/82


51/82


52/82

RESTRICTIVE


53/82

RESTRICTIVE

An endorsement is said to be restrictive when

it prohibits or restricts the furthernegotiability of the instrument.

It merely entitles the holder of the

instrument to receive the amount on theinstrument for specific purpose.

Example: (Restrictive) Pay the contents to C

only, Pay C for my use, Pay C or order for theaccount of B.

Example: (Does not restrict) Pay C, Pay C

value in account with the Canara Bank.


54/82


55/82


56/82


57/82


58/82

FORGED INSTRUMENTS


59/82

FORGED INSTRUMENTS

Forgery is the fraudulent making or alteration

or a negotiable instrument to the prejudice ofanother mans rights.

If any of the signatures on the instrument is

forged, the signature in question is whollyinoperative and no person, even if acting ingood faith, can acquire rights under it.

Example: A bill is endorsed Pay John Brownor order. John Brown must endorse the bill,and if his signature is forged, the bill isworthless.


60/82


61/82


62/82

PRESENTMENT OF A NEGOTIABLE


63/82

PRESENTMENT OF A NEGOTIABLE

INSTRUMENT

Presentment means showing the instrument

to the drawee, acceptor or maker for:

Acceptance, or

Sight, or

Payment


64/82


65/82


66/82


67/82

PRESENTMENT FOR ACCEPTANCE


68/82

PRESENTMENT FOR ACCEPTANCE

EXCUSED

Presentment for acceptance is excused where: The drawee is fictitious or incompetent person.

He cannot after reasonable search be found.

He is dead or insolvent.

Although the presentment has been irregular,acceptance has been refused on some other ground.

Acceptor for honor-Normally a stranger to a billcannot accept it, but he may, with the consent of theholder accept the bill in place of the drawee, for thehonor of some party liable on the bill. Such anacceptor is known as acceptor for honor.


69/82


70/82

PRESENTMENT FOR PAYMENT

Promissory notes, bills of exchange and

cheques must be presented for payment to

the maker, acceptor or drawee thereof

respectively, by or on behalf of the holder. Ifdefault is made, the parties other than the

parties primarily liable are discharged of their

liability. S. 64


71/82

PRESENTMENT FOR PAYMENT TO


72/82

PRESENTMENT FOR PAYMENT TO

WHOM

Presentment for payment may be made To the duly authorized agent of the drawee,

maker or acceptor, as the case may be;

Where the drawee, maker or acceptor has died,or his representative;

Where he has been declared insolvent, to hisassignee.

Delay in presentment for payment is excused if itis caused by circumstances beyond the control ofthe holder.


73/82


74/82


75/82


76/82

NOTING AND PROTESTING


77/82

NOTING AND PROTESTING Noting means the recording of the fact of

dishonor by a Notary Public on a dishonored

bill, or upon a paper attached thereto or

partly upon each. S.99

When a promissory note or bill of exchange

has been dishonored by non-acceptance or

non-payment, the holder may, within a

reasonable time, cause such dishonor to be

noted and certified by a Notary Public. Suchformal certificate by the Notary Public is called

protest. S. 100


78/82

DISCHARGE OF NEGOTIABLE


79/82

INSTRUMENT

An instrument is said to be discharged when

all rights of action under it are completely

extinguished and when it ceases to be

negotiable.

If one or more of the parties (excepting the

party who is ultimately liable to pay) is

discharged from liability the instrumentcontinues to be negotiable and the other

parties continue to be liable on it.


80/82

An instrument is discharged

By payment in due course. S.81

By maker or acceptor becoming the holder. S.90

By express waiver.

By cancellation.

It may also be discharged like a contract for the

payment of money.


81/82


82/82

negotiable instruments(2)

Documents