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5/3/12

LEGAL ASPECTS OF BUSINESS

PREPARED BY

S.POUGAJENDY,MBA,M.Phil,(Ph.D)SL/MBA/SREC

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NEGOTIABLEINSTRUMENTSA Negotiable instrument means

promissory note, bill of exchange, orcheque, payable either to order or tobearer

Freely

Transferable

Absolute Title

In Writing

Unconditional

Certain Sum

Payee must be acertain PersonSignature a must.

Certain Time

Delivery Essential

Stamping isMandatory.

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TYPES OF NEGOTIABLE

INSTRUMENTS

Pro

In writing, signed,stamped

Unconditional promise topay

Money onlyCertain partyOn demand or certain

dateCertain sum

Parties Drawer, payee

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Bill of Exchange

Writing, signed,accepted,

stampedUnconditionalorder to pay

Money onlyCertain partyCertain sumParties Drawer,

Drawee & Payee

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CHEQUES

Writing, signed

Unconditional order

Issued by specifiedbanker, certain

payee On demand

Certain amount

Must bear a date

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5/3/12Nature and requisites of negotiableinstruments

Be in writingBe signed by the maker or drawerBe an unconditional promise or order to

payState a fixed amount of moneyNot require any undertaking in addition

to the payment of moneyBe payable on demand or at a definite

time

Be payable to order or to bearer

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model

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Transfer by Assignment orNegotiation

Transfer byAssignment

The transfer of

rights under acontract.

It transfers the

rights of thetransferor(assignor) to thetransferee

(assignee).

Transfer byNegotiation

The transfer of a

negotiableinstrument by aperson other than

the issuer.The person towhom theinstrument is

transferred

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LIABILITY OF PARTIES

Makers Liability (unconditionalpromise to pay) primarily liable onnote

Drawee Liability (order to pay)Acceptors Liability Primarily liableDrawers Liability secondarily

liable

Endorser's Liability Unqualified endorser secondarilyliable

Qualified endorsement No contract liability

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Secondary liability

Secondary liability refers to theresponsibility of a person or entity thatarises when the party directly liable

fails to perform a duty. Secondaryliability often targets two types ofpersons: 1) those who induce others to

break the law, and 2) those who controlothers who break the law.

Only drawers and indorsers are subject

to secondary liability; and then, only if:

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Holder and due course

Holder defined (S. 8)

The holder of a promissory note, bill of exchange. or cheque

means any person entitled his own name, to the possession thereof,

and to receive or recover the amount due thereon from the parties

thereto. Where the note, bill or cheque is lost or destroyed, its holder isthe person so entitled at the time loss or destruction.

Holder in due course (S. 9)

Holder in due course means any person who for consideration,

became the possessor of a promissory note, bill of exchange, or cheque,

if payable to bearer, or the payee or endorsee thereof, if payable to

order, before the amount mentioned if it became payable, and without

having sufficient cause to believe that any defect existed in the title of

the person from whom he derived his title.

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5/3/12REQUISITES FOR HOLDER IN DUECOURSE

1. He must show that he has paid

valuable consideration. Any

consideration which would support anordinary contract would be sufficient to

constitute the transferee a holder in

due course,

2 .But the donee of a pro-note, who

takes it by way of a gift, is not a holder

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5/3/12REQUISITES FOR HOLDER IN DUECOURSE (ctd)

3. He must prove that he became

the possessor thereof before the

amount due under the instrumentbecame actually payable.

4. He must also show that he

became the possessor thereof without

having sufficient cause to believe that

any defect existed in the title of the

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Discharge of parties

Discharge of instrument and discharge of parties

from liability is not same. Parties may be dischargedfrom liability on a negotiable instrument in any of thefollowing ways:

1. By payment2. By cancellation3. By release4. By default of the holder5. By material alteration6. By holder destroying indorser remedy7. Draft indorsed by payee8. Discharge of drawee of cheque9. By operation of law

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