4.Negotiable Instrument Act

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Transcript of 4.Negotiable Instrument Act

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    NEGOTIABLE INSTRUMENT

    ACT

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    Negotiable Instrument

    General Definition: Documents commonly used in monetary dealings

    and commercial transactions.

    A special kind of contract Indian act: Negotiable instrument act, 1881

    Definition by act: A bill of exchange, promissory note or cheque

    either to order or bearer.

    Negotiable- transferable by delivery

    Instrument- written document by which a

    right is created in favor of some one

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    Negotiable Instrument- Evolution

    City A City B

    Trader X Trader Y

    X sells goods to Y

    for 1000 Rs. At a

    common place

    Chance of theft and

    discomfort of takingmoney

    Trader X

    Trader Z

    Trader Y

    X sells goods to Y

    and Z buys goods

    from Y for 1000 Rs.

    At a common place

    Negotiable instrument

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    Properties

    Freely transferable

    Payable to bearer

    Payable to order Property

    Defects in title

    Payment

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    Presumptions

    Consideration

    Is presumed

    Instrument drawn or transferred withoutconsideration (e.g.)

    Consideration that fails in part (e.g.)

    Date Time of acceptance

    Order of endorsement

    Holder in due course

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    Kinds of Negotiable Instrument

    Instruments payable to order or payable tobearer Payable to order:

    when expressed to be so payable or payable to aparticular person

    Prohibiting transfer

    Payable to order of a specified person

    Payable to him/ his order at his option Payable to bearer

    When expressed to be so payable or on which theonly or last indorsement is in blank

    It is transferable by mere delivery

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    Kinds of Negotiable Instrument

    Inland and foreign instruments A promissory note, bill of exchange or cheque

    which is

    Both drawn or made in India and payable in India,or

    Drawn upon any person resident in India

    An instrument, which is not inland instrument

    is deemed to be a foreign instrument. Example:

    A bill drawn in Delhi on a merchant in Kolkata andpayable at Mumbai or London- Inland Bill

    A bill drawn in Delhi on a merchant in New Yorkand payable at London is a foreign bill

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    Kinds of Negotiable Instrument

    Time and Demand Instrument: Time Instrument:

    A bill or note which payable a) after a certain

    period or b) on a specified day or c) after sight ord) on the happening of an event which is certain tohappen.

    Demand Instrument: The following instruments are payable to demand: A cheque is always payable on demand

    A bill or note is payable on demand when-

    No time for its payment is specified or

    It is expressed to be payable on demand, at sightor on resentment.

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    Kinds of Negotiable Instrument

    Documentary bill and clean bill:

    Documentary bill is one to which documents oftiltle to the goods and other documents such as

    invoice etc are annexed, such documents aredelivered to the buyer only on acceptance onpayment.

    When no such documents are attached, it isclean bill.

    Trade and accommodation bill:

    A bill drawn accepted, drawn or indorsed for

    consideration is called a genuine trade bill

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    Kinds of Negotiable Instrument

    Incomplete Instrument:

    An instrument which is incomplete in somerespect

    Example:

    A draws a bill payable to.or order. Any holder in

    due course may fill in his name as payee in the blankand recover the money.

    Ambiguous Instrument:

    When an instrument owing to its faulty draftingmay be treated either as a promissory note or bill

    of exchange.

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    Kinds of Negotiable Instrument

    Hundis: A regional version of negotiable instrument in a

    vernacular language. Can be a promissory note

    or bill of exchange. Escrow:

    Negotiable instrument delivered conditionally orfor a special purpose as a collateral security or

    for safe custody and not for the purpose oftransferring.

    The liability to pay on escrow does not arise untilthe purpose for which the instrument was

    delivered is not satisfied.

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    Promissory Notes

    An instrument in writing containing an unconditional undertaking,signed by the maker, to pay a certain sum of money only to or to theorder of a certain person or to the bearer of the instrument.

    Parties to a Promissory Note

    Primarily two parties The Maker or Drawer - makes the note and promises to pay the

    amount stated therein. The Payee - whom the amount is payable.

    Other Parties involved may be The Endorser - The person who endorses the note in favour of

    another person. The Endorsee - The person in whose favour the note is negotiated

    by endorsement.

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    Features of Promissory Note

    Writing: in writing, duly signed by its maker and properlystamped

    Undertaking to Pay: an undertaking or promise to pay. Mere

    acknowledgement of indebtedness is not enough.

    Unconditional promise to pay

    Promise to pay money and money alone.

    The parties to a promissory note, i.e. the maker and the payee

    must be certain .

    A promissory note may be payable on demand or after a

    certain date.

    Specific Sum: Sum to be paid must be certain and Specific

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    Bill of Exchange

    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.

    Parties to a Bill of Exchange

    The Drawer - The person who makes the order for making

    payment.

    The Drawee The person to whom the order to pay is made.

    The Payee The person to whom the payment is to be made.

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    Features of Bill of Exchange

    Writing : in writing, duly signed by its drawer, accepted by its

    drawee and properly stamped

    3 parties to be there: Drawer, Drawee and Payee

    It must contain an order to pay. Words like please pay Rs 5,000/-on demand and oblige are not used.

    Order by the drawer to the drawee to pay

    Unconditional: payable under all events and circumstances

    Only money

    The sum payable mentioned must be certain or capable of being

    made certain.

    Certain parties (Drawer, Drawee and Payee) to a bill.

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    Promissory Note Bill of Exchange

    2 Parties-Maker andPayee

    Unconditional

    promise to pay No acceptance is

    required

    Note cannot be made

    payable to the maker.

    3 Parties-Drawer,Drawee and Payee Unconditional order

    to pay

    Payable by otherperson directed. SoAcceptance isnecessary

    Drawer and the

    payee may be oneand the same person

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    Cheque

    The Negotiable Instruments Act, 1881 defines acheque as a bill of exchange drawn on aspecified banker and not expressed to bepayable otherwise than on demand. Actually, a

    cheque is an order by the account holder of thebank directing his banker to pay on demand, thespecified amount, to or to the order of the personnamed therein or to the bearer.

    Most commonly used Negotiable Instrument

    A cheque may be regarded as a bill of exchange;the only difference is that the bank is always thedrawee in case of a cheque

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    Parties Involved

    There are three parties involved in a bill of exchange.

    They are as follows:

    The Drawer The person who makes the order formaking payment.

    The Drawee The person to whom the order topay is made. He is generally a debtor of the

    drawer. Always Bank in case of Cheque The Payee The person to whom the payment is

    to be made.

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    Features Of Cheque

    A cheque must be in writing and duly signed by the drawer.

    It contains an unconditional order.

    It is issued on a specified banker only.

    The amount specified is always certain and must be clearlymentioned both in figures and words.

    The payee is always certain.

    It is always payable on demand.

    The cheque must bear a date otherwise it is invalid and shall notbe honoured by the bank.

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    Types of Cheque

    Open cheque

    Crossed cheque

    Bearer cheque Order cheque

    Ante dated cheque

    Stale cheque Mutilated cheque

    Post dated cheque

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    Types of Cheque

    Open cheque: A cheque is called Open when it is possible toget cash over the counter at the bank. The holder of an opencheque can do the following:-

    Receive its payment over the counter at the bank.

    Deposit the cheque in his own account. Pass it to someone else by signing on the back of a cheque.

    Crossed cheque: Since open cheque is subject to risk of theft,

    it is dangerous to issue such cheques. This risk can beavoided by issuing other types of cheque called Crossedcheque. The payment of such cheque is not made over thecounter at the bank. It is only credited to the bank account ofthe payee. A cheque can be crossed by drawing two

    transverse parallel lines across the cheque, with or without thewriting Account payee or Not Negotiable.

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    Types Of Cheque

    Bearer cheque:

    A cheque which is payable to any person who presents itfor payment at the bank counter is called Bearer

    cheque. A bearer cheque can be transferred by mere

    delivery and requires no endorsement.

    Order cheque:

    An order cheque is one which is payable to a particularperson. In such a cheque the word bearer may be cutout or cancelled and the word order may be written. The

    payee can transfer an order cheque to someone else bysigning his or her name on the back of it.

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    Other Types of Cheques Ante-dated cheques: Cheque in which the drawer mentions the date

    earlier to the date of presenting if for payment. For example, acheque issued on 20th May 2003 may bear a date 5th May 2003.

    Stale Cheque:

    A cheque which is issued today must be presented before at bank

    for payment within a stipulated period. After expiry of that period,no payment will be made and it is then called stale cheque. Find

    out from your nearest bank about the validity period of a cheque.

    Mutilated Cheque:

    In case a cheque is torn into two or more pieces and presentedfor payment, such a cheque is called a mutilated cheque. Thebank will not make payment against such a cheque withoutgetting confirmation of the drawer. But if a cheque is torn at thecorners and no material fact is erased or cancelled, the bank may

    make payment against such a cheque.

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    Other Types of Cheques

    Post-dated Cheque: Cheque, on which drawer mentions a date, that is

    subsequent to the date on which it is presented, iscalled post-dated cheque. For example, if a cheque

    presented on 8th May 2003 bears a date of 25th May2003, it is a post-dated cheque. The bank will makepayment only on or after 25th May 2003

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    Differences between a Cheque and a Bill ofexchange

    Cheque Bill of Exchange

    1. It is drawn only on a banker. 1. It can be drawn on anybody

    including a banker.

    2. The amount is always

    payable on demand.

    2. The amount is payable on

    demand or after a specified

    period.

    3. It can be crossed to end its

    negotiability.

    3. It cannot be crossed.

    4. Acceptance is not required. 4. Acceptance is a must.

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    Crossed Cheque

    A crossed cheque is one on which twoparallel transverse lines with or without the word &co. not negotiableetc. are drawn. A crossedcheque is not payable across the counter of the

    bank. It must be collected through a bank. It is paidinto the bank account of a person and cannot beencashed at the counter of the bank. By crossingcheques safety is ensured and the person to whompayment is eventually made can be traced becausesuch a cheque is always paid into a bank account. Acrossed cheque provides protection not only to theholder of the cheque but also to the receiving andcollecting bankers.

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    Kinds of Crossing

    General Crossing Special Crossing

    Restrictive Crossing

    Non negotiable Crossing

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    Definition of General Crossing

    Sec 123 of the Negotiable Instruments Act1881 defines general crossing as follows:

    Where a cheque bears across its face, anaddition of the words; and company or anyabbreviation thereof. Between two paralleltransverse lines or of two parallel transverse

    lines simply, either with or without the wordsnot negotiable, that addition shall bedeemed to be a crossing, and the chequeshall be deemed to be crossed generally.

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    Significance of General Crossing

    The effect of general crossing is that it gives adirection to the paying banker.

    The direction is that the paying banker shouldnot pay the cheque at the counter.

    If a crossed cheque is paid at the counter incontravention of the crossing:a. He has no right to debit his customers account,

    since , it will constitute a breach of his customersmandate,

    b. He will be liable to the drawer for any loss, whichhe may suffer,

    c. He will be liable to the true owner of the chequewho may be the third party.

    The main intention of crossing a cheque is toive rotection to it.

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    Special Crossing

    Sec 124 of the Negotiable Instruments Act of1881 defines

    where a cheque bears across its face, anaddition of the name of a banker, with orwithout the words Not Negotiable, thataddition shall be deemed a crossing, and thecheque shall be deemed to be crossed

    specially, and to be crossed to that banker

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    Essentials of Special Crossing

    Two parallel transverse lines are not at allessential for a special crossing.

    The name of a banker must be necessarilyspecified across the face of the cheque. Thename of the banker itself constitutes specialcrossing.

    It must appear on the left hand side,preferably on the corner.

    The two parallel transverse lines and thewords not negotiable be adedd to a specialcrossing.

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    Significance of Special Crossing

    It is a direction to the paying banker. A special crossing gives more protection the

    cheque than a general crossing.

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    Restrictive Crossing

    It constitute a direction to the collectingbanker to collect the cheque and credit theproceeds to the account of the payee only.Such a crossing is known asRESTRICTIVE CROSSING. The collectingbank has to credit the account of the payeein whose favour the cheque is drawn.

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    Non Negotiable Crossing

    It makes the cheque non transferable butthe effect of such a crossing is that whenthe holder to a cheque transfers it to anyother person the transferee does not get abetter title than the transferor had eventhough the transferee is a bonafide personwho takes the instrument for a validconsideration and before the maturity of

    the instrument.

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    Dishonour Of Cheques

    Dishonour of cheque for insuffiency offunds in the account(Sec.138 the Negotiable Instruments

    Act,1881)

    The Provisions of Section 138 of the actwould

    be attracted when:a)Insufficiency of fundsb)Issue of Cheque for reasons other

    than discharge of a debt or liability

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    When Dishonour OF Cheque Is AnOffence?

    Existence of a live account Presentation of the cheque within 6 months

    or within the period of its validity.

    Return of the cheque unpaid for reason ofinsufficiency of funds

    Issue of the notice of dishonour demanding

    payment within 30 days of receipt ofinformation as to dishonour the cheque Failure of the drawer to make the payment

    within 15 days of the receipt of notice

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    Time Line During Dishonour OfCheque

    CONDITION TIME DURATION

    Presentation of Cheque to banks for encashment 6 Months from the date mentioned on the

    cheque(includes post dated cheques)

    Number of times a cheque can be presented for

    encashment in a bank(in case of dishonour)

    a)Any number of times till NO legal notice of

    dishonour and demand of cheque amount is madeb)Once a Legal notice about dishonour of cheque and

    demand of cheque amount is made,the cheque

    cannot be presented again

    Issuance of Legal notice for dishonour of cheque and

    demand

    30 days from date of intimation of dishonour of

    cheque by bank to customer

    Payment of Dishonoured cheque amount by Drawer 15 days from date of receipt of legal notice of demand

    Filing criminal complaint before court After 15 days but within 45 days from date of receipt

    of legal notice of demand by drawer if no payment of

    cheque amount is made

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    Some Commonly faced Issues

    When a cheque is dishonoured,what is the legal action thatcan be taken? Ans: Firstly a statuatory notice is liable to be given to the

    other party. Then one can file a suit for recovery of chequeamount along with cost and interest under order XXXVII of

    code of civil procedure 1908.A criminal complaint can also befiled u/s 138 of NIA act.

    I have been given blank cheques by a partnership firm,sincethey owe me some money .Now the partnership firm has

    been closed Can I deposit the cheques now and raise a claimon them? Ans: Yes,you can fill the cheques and present for

    encashment.The partnership firm and partners are liableeven after the firm is dissolved.First a notice must be given

    within 15 days of dishonouring and still if no payment is madea complaint must be made within 30 days thereafter.

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    Contd

    When drawer of a dishonoured cheque is a company orfirm or group:Ans: Every Director,secretary,manager,partner etc shallbe deemed to guilty and punished unless the personproves that offence was committed without his

    knowledge or he had excercised due diligence to preventcommission of such offence

    A large number of cases fail in court because of defectsand mistakes in legal notice

    Mode of making demand for payment is by giving noticein writing to drawer of cheque which can be of any form Stopping payment of post dated cheques issued by a

    person to discharge is debt or liability would amount topenal offence

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    Penalty

    The drawer may be punished with imprisonment for aterm which may extend to two years ,or

    Fine which may extend to twice the amount of thecheque,or

    With Both

    However a Magistrate can award any sum as

    compensation to alleviate the grievance of complainantusing section 357(3) of the code

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    Where can the complaint be filed?

    Where the Cheque was drawn

    Where the Cheque was presented forencashment

    Where the Cheque was returned unpaid by thedrawee bank

    Where notice in writing was given to drawer ofCheque demanding payment

    Where drawer of Cheque failed to makepayment within 15 days of receipt of notice

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    Discharge of an Instrument

    By Payment [Section 82 (a)] By Release [Section 82(b)] By Cancellation [Section 82(c)]

    By default of holder: Allowing drawee more than 48 hours [Section83] Delay in cheque presentment & drawer

    damage [Section 84] Parties not consenting to qualified/limitedacceptance [Section 86] Delay in presentment of payment

    Failure to give notice of dishonor

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    Discharge of an Instrument

    By material alteration [Section 87-89] There are both permissible alterations andimpermissible alterations. Alterations that make instruments void:

    Date of the instrument Amount on the instrument Time or place of the paymentAddition of place of payment without acceptorsassent

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    Discharge of an Instrument

    When cheque is an electronic image [Section 89(2) & (3)]By holder destroying indorsers remedy [Sector40] Draft indorsed by payee [Section (85A)] Discharge of drawee of a cheque [Section 85] By operation of law

    By an order of insolvency When debt merged into judgment debt By remedy becoming time barred

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