09 - Negotiable Instruments Act

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The Negotiable Instruments Act,

1881.


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The Negotiable Instruments Act, 1881 came intoforce on 1stMarch,1881.

The Act deals with the Law relating to three

specific classes of Negotiable instruments.

Classes of Negotiable instruments

Promissory

NoteBill of

Exchange

Cheque


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The word negotiable means transferable by

delivery,and the word instrumentmeans a written

document by which a right is created in favour of

some person.

According to Section 13 of the Negotiable Instruments

Act, a negotiable instrument means a promissory

note, bill of exchange or cheque payable either to order

or to bearer.

Thus, the term negotiable instrument literally

means a written document transferable by delivery.

A negotiable instrument may be made payable to two

or more payees jointly, or it may be made payable in

the alterative to one of two, or one or some of several

payees.


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Essential characteristics of a negotiable instrument

Freely transferable

No notice to the debtor

Better title to a Bonafide' transferee

Presumptions


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Promissory note

A promissory note is an instrument in writing

containing an unconditional undertaking, signedby 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 (Sec 4)

Essential elements

Writing

Promise to payDefinite and unconditional

Certain parties

Certain sum of money


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Signed by the maker

Promise to pay money only

It cannot be payable to bearer on demand

Formalities to be followed


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Writing An order to pay

Unconditional order

Three parties

Signed by the drawer.

Amount payable must be certain

Order to pay only money

Not payable to bearer on demand

Payable to bearer on demand

Formalities to be followed

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 (Sec 5)

Bill of exchange


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Distinguish between a bill of exchange & a promissory note

Bill Note1. There are 3 parties to it

(drawer drawee & Payee)1.There are 2 parties (the maker &

the payee)

2. It contains an

unconditional order to

pay

3.It can be acceptedconditional

4.The liability of the drawer

is secondary andconditional

5.The drawer & payee,sometimes may be one &

the same person

6.The drawer of the bill is

the creditor who directs

the drawer to pay.

2.It contains an unconditional

promise to pay

3.It cannot be made conditional

4.The liability of the maker is

primary and absolute

5.A note cannot be made payable to

the maker himself

6.The maker of the note is the

debtor & he himself undertakes

to pay


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7.A bill payable after sight

or after a certain period

must be accepted by the

drawee

Notice of dishonour must be

given to the drawer &

the prior endorsers

7.A note requires no

acceptance as it is signed

by the person who is liable

to pay Such notice is

necessary

Bill Note


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A cheque is a bill of exchange drawn on

a specified banker and not expressed to be

payable otherwise than on demand.

Its characteristics are:

In writing

Definite and unconditional order

Signed by the drawer

Order to pay

Order to pay money only Certain three parties

Drawn upon a specified banker

Payable on demand


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Distinguish between a Cheque and a Promissory note

Cheque Promissory Note1. It contains an order

to pay

2. Cheques are crossed

3. There are 3 parties toit

4. Cheques are exempt

from stamping

5. Cheques can be

made payable tobearer

1. It contains a promise to

pay

2. Promissory note need

not be crossed3. There are only 2 parties

to it

4. Promissory notes

require stamping

5. Promissory note ispayable only to the

payee or his order


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Types of Crossing

General

Crossing

Special Crossing

Restrictive

Crossing

Not negotiable crossing


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Various types of negotiable instruments

Bearer and order instruments

Inland and foreign instruments

Instruments payable on demand

Time instruments

Accommodation bill

Fictitious bill

Documentary bill & clean bill

Escrow


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Different parties to a negotiable instrument

Maker/ Drawer

Drawee, Acceptor

Payee

Endorsee

Drawee in case of need

Holder

Holder in due course


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Rules for calculating maturity

Sections 23 to 25 lay down the following rules for calculating

the maturity of a time bill or note:

If it is made payable a stated number of months afterdate or after sight, or after a certain event, it matures (or

becomes payable) three days after the corresponding date

of the month after the stated number of months.

If the month in which the period would terminate has no

corresponding date, the period shall be held to terminate onthe last day of such month.

If it is made payable a certain number of days after date orafter sight, or after a certain event, the maturity is calculated

by excluding the day on which the instrument is drawn or

presented for acceptance or sight or on which the eventhappens. Note that only one day is to be excluded.

If the date on which a bill or note is at maturity is apublic holiday, the instrument shall be deemed to be due on

the next preceding business day.


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If an instrument is payable by instalments, three days

of grace are to be allowed on each instalment (Sec. 67).

The expression public holiday includes Sundays and anyother day declared by the Central Government, by

notification in the Official Gazette, to be a public holiday.

Thus, if the maturity of an instrument falls on an emergency

holiday, the instrument shall be deemed to be due on the

next succeeding business day.


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Distinguish between negotiation and assignment

Formalities: Negotiation requires mere delivery of a bearer

instrument and endorsement and delivery of an orderinstrument to make a transfer. Assignment requires a

written document signed by the transferor irrespective of

whether the instrument is a beareror order

Notice of transfer: In the case of assignment a notice of transfer of

debt is required to be given by the assignee to the debtor inorder to complete his title. No such notice is required to be

given in the case of negotiation.

Title: In the case of negotiation if the transferee takes the negotiable

instrument for value and in good faith, i.e., as holder in due course, hetakes it free from all defects in the title of the previous transferors.

But in the case of assignment, the assignee takes the instrument

subject to the defects in the title of his assignor, even though he took

the assignment for value and in good faith.


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Consideration: Consideration is always presumed in the case of

transfer by negotiation, whereas there is no such

presumption in the case of transfer by assignment, where the

burden of proof of consideration lies upon the assignee.

EndorsementSection 15 defines endorsement as follows:

Whenthe maker or holder of a negotiable instrument signs thesame, otherwise than as such maker, for the purpose of

negotiation, on the back or face thereof or on a slip of paper

annexed thereto, or so signs for the same purpose a stamped

paper intended to be completed as negotiable instrument, he is

said to indorse the same, and is called the endorser.Thus, an endorsement consists of the signature of the holder

usually made on the back of the negotiable instrument with the

object of transferring the instrument. If no space is left on the

back of the instrument for the purpose of endorsement, further

endorsements are signed on a slip of paper attached to theinstrument.


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Kinds of Endorsements

Blank or general endorsement

Endorsement in full or special Endorsement

Partial Endorsement

Restrictive endorsement

Conditional endorsement

Facultative endorsement

Wh t i t t f t ?


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What is presentment for acceptance?

Presentment for acceptance is necessary in case of bills of

exchange only. The following bills, however, must bepresented for acceptance in order to charge the parties with

liability:

A bill payable at a specified period after sight. Such a bill

must be presented to the drawee for sight or acceptance in

order to fix the maturity of the bill. (Sec. 61)

A bill in which there is an express stipulation that it shall be

presented for acceptance before it is presented for payment.

When the drawee of the bill signifies his consent in writingto the drawers order in the bill, by signing across the face of

the bill with or without the word accepted and delivers

back the bill to the holder or gives notice of acceptance to

the holder, the bill is said to have been accepted.


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Types of Acceptance

An acceptance on the bill may be either

(i) general acceptance, or

(ii) qualified acceptance.


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Notice of dishonour

Notice of dishonour means formal communication of the fact

of dishonour. It is given to the party sought to be made liableand, therefore, it serves as a warning to the person to whom

the notice is given that he could now be made liable. Such a

notice also serves the purpose of enabling the person so

notified to protect himself against his prior parties.

Notice by whom?

Notice of dishonour must be given by the holder or by some

party to the instrument who remains liable thereon (Sec.

93). Further, any party receiving notice of dishonour mustalso transmit the same within a reasonable time to all prior

parties in order to render them liable to himself.


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Mode of giving notice

According to Section 94 the notice of dishonour may be oral or

written. If it is written it may be sent by post. A notice duly

addressed and posted is good even though it may be miscarried.

The notice may be in any form but the language used must

indicate that the instrument has been dishonoured and in what

way dishonoured, and that the recipient will be held liable

thereon.


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According to Section 99, when a promissory note or a 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. For this the holder takes the bill

or note to the notary public who makes a demand for

acceptance or payment upon the drawee or acceptor or makerformally and on his refusal to do so notes the same on the bill

or note. Thus notingmeans recording the fact of dishonour

and must specify: (i) the date of dishonour; (ii) the reason

assigned for such dishonour; and (iii) the notaryscharges.

Noting

Noting is the authentic and official proof of presentment anddishonour of a negotiable instrument. The question of noting does

not arise in the case of dishonour of a cheque.

P


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Protest

1) Define ProtestProtest is a formal certificate of dishonour issued by

the notary public to the holder of the bill or note, on his

demand (noting is merely a record of dishonour on the

instrument itself) (Sec.100)Contents of Protest (Sec. 101)The protest must contain the following particulars:1. The instrument itself or a literal transcript of theinstrument and of everything written or printedthereupon.2. The name of the person for whom and againstwhom the instrument has been protested.3.


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The fact and the reasons for dishonour, i.e., a statement

that payment or acceptance, or better security, as the casemay be, was demanded by the notary public from the

person concerned and he refused to give it or did not

answer, or that he could not be found.4. The place and time of dishonour.5. The signature of the Notary Public.6. In the case of acceptance for honour or payment forhonour, the names of the persons by whom and for whom it

is accepted or paid.


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Discharge of an instrument and a party

Mode of discharge of instrument

By payment indue course

By partyprimarily liable

becoming holder

By cancellation

By Release


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Mode of discharge of parties

By Payment

By Cancellation

By Release

By Non-presentment of cheque within reasonable time

By Allowing drawee more than 48 hours to accept

By Qualified acceptance

By Material alteration

By Operation of law


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Dishonour of cheque

A person issuing a cheque will be punishable with

imprisonment for a term up to 2 years or with fine twice the

amount of cheque or both, if the cheque is dishonoured due to

insufficiency of funds.

Conditionsa) Cheque should have been in discharge of liability,

ie., it does not indicate gift cheques.

b) Cheque should be presented within period of

validity / 6 months whichever is earlier.

c) Cheque should have been deposited and intimation

of dishonour received stating insufficiency of funds

as reason for dishonour.

d) The holder or payee in due course should give

notice demanding payment within 15 days of hisreceiving notice of intimation of dishonour.

e) If the drawer fails to make payment within 15 days

for receipt of notice, then a person could proceed

for prosecution.

f) Prosecution / complaint to be made only by payee

09 - Negotiable Instruments Act

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