3.Negotiable Instrument Act

7/27/2019 3.Negotiable Instrument Act

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Prof. Mayur Malviya


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NEGOTIABLE INSTRUMENTS ACT The word 'negotiable' means transferable from

one person to another. The term 'instrument' means 'any written

document by which a right is created in favor of

some person. Thus, the negotiable instrument is a document

by which rights vested in a person can be

transferred to another person in accordance withthe provisions of the Negotiable Instruments Act,1881.

Prof. Mayur Malviya


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Negotiable instruments

The term 'negotiable instrument' has beendefined as - A 'negotiable instrument' means apromissory note, bill of exchange or cheque

"

.

Negotiable instruments, such as bills of exchange,promissory notes or cheques are pieces of paperrepresenting the ownership of debts and

obligations and are used to settle the debt by anexchange or transfer of credit without the needfor cash.

Prof. Mayur Malviya


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PROMISSORY NOTE

[Section 4]

Definition

A promissory note is an instrument in writing (notbeing a bank note or a currency note) containingan unconditional undertaking, signed by the

,

order of, a certain person or to the bearer of theinstrument

Examples of Promissory Notes

A signs instruments in the following terms:"I acknowledge myself to be indebted to 'B' in Rs.

1000, to be paid on demand, for value received."

Prof. Mayur Malviya


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SPECIMENS OF PROMISSORY NOTES

Bombay, 10th January, 1998

Rs. 5,000/-

ON DEMAND I Promise to pay WILLIM JONES THE

SUCM OF FIVE THOUSAND RUPEES.

Sd/- Henry Brown


ON DEMAND I Promise to pay MOHAN LALVANI the sum

of Rs. 5,000/- (RUPEES FIVE THOUSAND ONLY) FOR

VALUE RECEIVED..

Sd/- SATISH GANDHI


ON DEMAND I romise to a JOSEPH DE SOUZA or order the sum of five

thousand rupees with interest on the said sum at 10% (ten percent) per annumtill payment.

Sd/- PAUL FERNANDES

A promissory note cannot be made payable to the maker himself. Thus, a note in

the form, I promise to pay myself is not a promissory note; but such a note

becomes valid if it is endorsed by the maker, because then it becomes payable to

bearer, if endorsed in blank, or to the endorsee or to, if specially endorsed.

Prof. Mayur Malviya


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CHARACTERISTICS OF PROMISSORY NOTE

In writing - A promissory note must be in writing. Writing includes print andtypewriting.

Promise to pay - It must contain an undertaking or promise to pay. Thus, a mereacknowledgement of indebtedness is not sufficient.

Notice that the use of the word `promise' is not essential to constitute aninstrument as promissory note.

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payable on perfor-mance or non-performance of a particular act or on thehappening or non-happening of an event are not promissory notes.

Signed by the Maker The promissory note must be signed by the maker,otherwise it is of no effect.

Certain Parties - The instrument must point out with certainty the maker and the

payee of the promissory note. Certain sum of money - The sum payable must be certain or capable of being

made certain.

Prof. Mayur Malviya


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CHARACTERISTICS OF PROMISSORY NOTE

Promise to pay money only - If the instrument contains a promise to pay

something in addition money, it cannot be a promissory note.

Number, place, date etc - These are usually found in a promissory note but are notessential in law. If a promissory note does not bear a date, it is deemed to have

been made when it was delivered.

It may be payable in installments

It may be payable on demand or after a definite period - Payable 'on demand'means payable immediately or any time till it becomes time-barred. A demand

promissory note becomes time barred on expiry of 3 years from the date it bears.

It cannot be made payable to bearer on demand or even payable to bearer after

a certain period

It must be duly stamped under the Indian Stamp Act - It means that the stamps of

the requisite amount must have been affixed on the instrument and duly cancelled

either before or at the time of its execution.

Prof. Mayur Malviya


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BILL OF EXCHANGE

A 'bill of exchange' is defined by as an

instrument in writing, containing anunconditional order, signed by the maker,

directing a certain person to pay a certain sum

of money only to or to the order of, a certainperson, or to the bearer of the instrument.

Prof. Mayur Malviya


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CHARACTERISTIC FEATURES OF A BILL OF EXCHANGE

1. It must be in writing.

2. It must contain an order to pay and not a promise or request.

3. The order must be unconditional.

4. There must be three parties, viz., drawer, drawee and payee.

5. The parties must be certain.

6. It must be signed by the drawer.7. The sum payable must be certain or capable of being made certain.

8. The order must be to pay money and money alone.

9. It must be duly stamped as per the Indian Stamp Act.

10. Number, date and place are not essential.

Prof. Mayur Malviya


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Rs. 5000/-

Sixty Days after date, pay to William Smith, the sum of five

thousand rupees only for value received.

ToPaul Jacobson,

40, Mahatma Gandhi Road,

Bombay 400 023.

SPECIMENS OF BILL OF EXCHANGE


Rs. 5000/-

Sixty Days after date pay to John Smith, or order, the sum of

Rupees Five thousand only for value received.

Sd/- RAM GHELACHAND

To

Paul Jacobson,

40, Mahatma Gandhi Road,

Bombay 400 023.

SPECIMENS OF ACCEPTANCE OF A BILL OF EXCHANGE


Rs. 5000/-

ON Demand Pay to William Smith, the sum of Rupees five

thousand only for value received.

Sd/- RAM GHELACHAND

To

Paul Jacobson,

40, m. Gandhi Road,

Bombay 400 023.

Accepted :

S/d- Paul Jacobson


Rs. 5000/-

On Demand pay to William Smith the sum of five thousand

rupees only for value received

To

Paul Jacobson, Sd/-

40, m. Gandhi Road, HENRY BROWN

Bombay 400 023.

Accepted :

S/d- Paul Jacobson

Prof. Mayur Malviya


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CHEQUE

A cheque is defined as 'a bill of exchange drawn

on a specified banker and not expressed to bepayable otherwise than on demand.

,

added features:

(i) it is always drawn on a specified banker; and

(ii)it is always payable on demand and notother-wise.

Prof. Mayur Malviya


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SPECIMENS OF CROSSED CHEQUE

BANK OF INDIA A/C No. 1001 BOMBAY 20th January,

1998

No. SB 7007007

Pay to William Smith or Bearer Rupees Five Thousand Only.

Sd/- Henry Brown

123456

Rs. 5,000/-

SPECIMEN OF CHEQUE

BODY OF THE CHEQUE BODY OF THE CHEQUE

BODY OF THE CHEQUE

BODY OF THE CHEQUE

Prof. Mayur Malviya


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DIFFERENCE BETWEEN CHEQUE AND BILL OF

EXCHANGECheque Bill of Exchange1. It must be drawn only on a banker.

2. The amount is always payable on

demand.3. The cheque is not entitled to days of

grace.

4. Acceptance is not needed.

1) It can be drawn on any person including a

banker.

2) The amount may be payable on demand or

after a. specified time.3) A usance (time) bill is entitled to three days

of grace.

4) A bill payable after sight must be accepted.

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6. Notice of dishonour is not necessary.The parties thereon remain liable, even

if no notice of dishonor is given.

7. A cheque is not to be noted or

protested in case of dishonor.

8. The protection given to the paying

banker in respect of crossed cheques is

peculiar to this instrument.

possible.6) Notice of dishonor is necessary to hold the

parties liable thereon. A party who does

not receive a notice of dishonor can

generally escape its liability thereon.

7) A bill is noted or protested to establish

dishonor.

8) No such protection is available in the case

of bills.

Prof. Mayur Malviya


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DIFFERENCE BETWEEN PROMISSORY NOTE AND BILL OF EXCHANGE

Promissory Note Bill of Exchange There are only two parties the

maker (debtor) and the payee(creditor).

A note contains an unconditionalpromise by the maker to pay thepayee.

There are three parties the drawer,the drawee and the payee- althoughany two of these capacities may befilled by one and the same person.

It contains an unconditional order to thedrawee to pay according to thedrawer`s directors.

A bill payable `after sight` must be.

The liability of the maker or drawer isprimary and absolute.

No notice of dishonour need be

given.

The maker of the note stands inimmediate relation with the payee.

before it is presented for payment. The liability of the drawer is secondary

and conditional upon non-payment bythe drawee.

Notice of dishonour must be given by

the holder to the drawer and theintermediate endorsers to hold themliable thereon.

The maker or drawer does not stand inimmediate relation with the payee.

Prof. Mayur Malviya


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A Promissory note when endorsed becomes a

bill of exchange.

A cheque is a on demand instrument.

T ere is no grace perio given to c eque. Maturity of an instrument is the date on

which it falls due.

Instrument marked at sight or onpresentment means on demand.

Prof. Mayur Malviya


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Dishonour of bill Dishonour by Non acceptance

Dishonour by Non payment

Prof. Mayur Malviya


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Dishonor by Non-Acceptance (Section

91)When the drawee does, not accept it within 48

hours from the time of presentment for

acceptance;when presentment for acceptance is excused and it

remains unaccepted;

w en e rawee s a person ncompe en ocontract;

when the drawee could not be found after areasonable search.

where the acceptance is qualified;

where one or more of the several drawees refuseto accept the bill.

Prof. Mayur Malviya


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Dishonour by non- paymentWhen-

Maker of the note,

Acceptor of the bill

Drawee of the chequemakes default in payment upon being

duly required to pay the same on maturity or

on demand.

Prof. Mayur Malviya


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Important terms and definitions of the

act Holder (sec.8) Holder in due course (Sec.9)

Drawer and drawee in case of need. (sec.7) Payee Acceptor

.

Payment for Honour (Sec.113) Indorsement Presentment Presentment for acceptance

Presentment for payment. Notice of dishonour (Sec.91-98)

Prof. Mayur Malviya


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Dishonor of cheques Section 138 to 142 of the Negotiable Instruments Act provide for

criminal penalties in the event of dishonor of cheques for insufficiency offunds.

The drawer, under Sec. 138, may be punished with imprisonment upto 2years (earlier 1 year) or with a fine up to twice the amount of the chequeor with both

In order to attract the aforesaid penalties, following conditions must besatisfied:

(1) Insufficiency of funds

(2) Payment against an enforceable debt

(3) Cheque should be presented to the paying bank within the validityperiod(generally 6 months from the date on which it is drawn)

(4) Payee to serve Default Notice, demanding payment within 30 days

(5) Drawer liable upon failure to pay within 30 days

Prof. Mayur Malviya


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NOTING Noting is a convenient method of authenticating the fact of dishonor.

Where an instrument is dishonored, the holder, besides giving theabove notice, should get the bill or promissory note 'noted' by thenotary public.

e notary pu c presents t e nstrument, notes own n s reg sterdate of its dishonor and the reason, if any, given by the acceptor. If theinstrument has been expressly dishonored, the reason why the holdertreats it as dishonored and the notary's charges should be mentioned.'Noting' must be made within a reasonable time after dishonor.

Noting is not compulsoryin the case of an inland bill or note, butforeign bills must be protested, if it is required by the law of the placewhere drawn.

Prof. Mayur Malviya


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PROTESTINGThe protest is the formal notarial certificate attesting the dishonour of the

bill and based upon the noting. After the noting has been made, theformal protest may be drawn up by the notary at his leisure. When theprotest is drawn up it relates back to the date of noting.

A protest to be valid must contain the following particulars:

1. The instrument itself, or a literal transcript thereof.

2. The names of the parties against whom the instrument is protested.3. The fact and reason/reasons for dishonour.

4. Place and time of dishonour or refusal to give better security.

5. Signature of the notary public.

6. In the event of an acceptance for honour or of a payment for honour, thename of the person by whom or the person for whom, and the mannerin which, such acceptance or payment was offered and effected.

Prof. Mayur Malviya


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Types of bill Accomodation bill

Fictitious bill

Escrow

Foreign bills

Prof. Mayur Malviya


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Discharge of Parties from liabilities in

NIA

By Payment

Cancellation

Waiver

Qualified acceptance Delay in presentment

Material alteration

Operation of law Insolvency, court verdict.

Prof. Mayur Malviya


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Best of luck for your exams!!

Prof. Mayur Malviya

3.Negotiable Instrument Act

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