Importance of NI

8/14/2019 Importance of NI

1/45

Importance of NI

Facilitates payment and settlements in the businesses

Easy transferability of value of instrument

It has been amended in 1988

(Dishonor of Cheques and for penalties and 2002 (modified

for requirements as per the electronic commerce)

The payments through the NI are widely accepted

throughout the world.


2/45

Meaning and characteristics of NI

NI means a promissory note, bill of exchange or cheque

payable either to order or to bearer

Free transferability

*by delivery (payable to bearer) or

*by endorsement and delivery

(payable to order)

Holder presumed to be the owner

Holder in due course gets the title from all defects, if the title

is acquired with good faith and for consideration. Canalso sue for recovery of the sum

The instrument transferable till maturity.


3/45

Kinds of NIso Negotiable by statute- NI Act only recognizes three kinds

of NI i.e.

PN, BOE and Cheque

o Negotiable by custom or usage- certain instruments which

have acquired the characteristics of the NI by usage andcustom of trade.

E.g. the Government PN, Bankers Draft, Pay orders,

hundies, delivery orders , railways receipts for goods are

all held to be NI.


4/45

Presumptions relating to NI

o Sections 118 and 119 of the NI act has certain presumptionsin order to facilitate business transactions:

o It shall be presumed that every NI is drawn for consideration

o Every bill is accepted within a reasonable time before itsmaturity

o The instruments are endorsed in the order, in which theyappear on it.

o Every holder is presumed to be a holder in due course

All the above presumptions are rebuttable by evidence tothe contrary.

The burden of proof lies on the defendant and not uponthe plaintiff


5/45

Classification of the NI

Bearer Instruments- payable to bearer

Order Instruments- expressed to be payable to order

Inland Instruments- drawn and made in India upon any

person resident in India, even though payable in a foreign

country Foreign Instruments- Not an Inland Instrument, must be

drawn outside India and made payable outside or inside

India

Demand Instruments- Time for payment is specified in PN

and BOE/ payable at sight

Ambiguous Instruments- which can be treated as PN or BOE

by the holder


6/45

Continued

Inchoate or incomplete instruments- when the person signs and

delivers a instruments which is wholly blank or incomplete

and gives the authority to make it complete to the holder

Accommodation Bills-A bill drawn , accepted or endorsed

without consideration a) Party lending his name to oblige to the other party is

Accommodating or accommodation party

b) The party so obliged is called the party accommodated

Trade Bills- When a bill is drawn, accepted or endorsed for

consideration it is called a genuine trade bill

Escrow- When the NI is delivered conditionally or for special

purpose as a collateral security or for safe coustody only

and not for transferring the absolutely.


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Promissory Notes ( Section 4)

PN is an instrument in writing not being a bank note or acurrency note

It contains an unconditional undertaking

Signed by the makerto pay a certain sum of money only

To or to the order of certain person, or to the bearer of theInstruments

Parties to the PN- a) Maker- the person making or executing the note

promising to pay the amount stated therein b) Payee- The person to whom the amount is payable To comply with other formalities like date, place,

consideration, stamp etc


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Bill of Exchange (Section 5)

BOE 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 orderof

Certain person or to the bearer of the instrument


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Distinction between PN and BOE

In a PN there are only twoparties- maker and thepayee

It contains anunconditional promiseby the maker to the

payee No acceptance is

necessary The liability of the maker

or drawer is primaryand absolute

The maker stands inimmediate relationshipwith the payee

No notice of dishonorneed to be given.

In a BOE, there are threeparties- drawer, the draweeand the payee

It contains an unconditional orderto the drawee or his agent topay according to the drawersdirections.

A bill has to be accepted if it is abill payable after sight

The liability of the drawersecondary i.e. when there isnon payment by the drawee.

Notice of dishonor to be given bythe holder to the drawer

The maker and the drawee donot stand in immediaterelationship.


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Parties to a Bill of Exchange

Drawer- Person who draws the bill

Drawee- the person on whom the bill is drawn

Acceptor- person who accepts the bill ( he may be the drawee

or a stranger on behalf of drawee)

Endorser- person who endorses the bill in favour of another

person

Endorsee- person in whose favour the bill is endorsed

Bill in sets They are usually drawn in set of three, which are

called as Via. The whole set constitutes only one bill


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Cheque

Signed by the drawer

Contains an unconditional order to a specified banker topay on demand

A certain sum of money to or to the order of a specified

person or the bearer of the instrument Therefore all cheques are bills of exchange but

whereas all bills of exchange are not cheques. It can be ante-dated or post dated

In case of a cheque till it becomes stale ( on expiry of 6

months from the date of issue). It may be made payableto two or more or one of two alternatively or some ofseveral payees.


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Differences between Cheque and BOE

BOE

The drawee liable only after it isaccepted

Days of grace (three) are allowedin case of a bill except for

payment on demand Drawee may be any one including

the banker

It should be presented forpayment, otherwise it maydischare the liability of the

drawer BOE cannot be crossed

A notice of dishonor has to begiven to the drawer

Cheque

A cheque does notrequire acceptanceand it is intended forimmediate payment

No days of grace The drawee is always a

banker

Delay in presenting doesnot discharge thedrawwer from his

liability It may be crossed


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Crossing of Cheques

A cheque can be an open or crossed cheque

Open cheques can be encashed directly across the counterby presenting to drawee bank. But if it is lost or stolen itcan be encashed by any body unless countermanded(stop payment)

Crossing of the cheque was introduced with a view to avoidthe losses that may result from the open cheques

Crossing is a direction to the bank to pay the moneygenerally to a bank or to a particular bank

It is made with the intention to make the payment secured

Its negotiability is not affected unless Not Negotiable is inserted but it is still transferable


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Modes of Crossing

Where a cheque bears across it face an addition of words

"and company or any abbreviation thereof, between two

parallel traverse lines, or of two parallel simply, the

addition shall be deemed a crossing and it is known as

general crossing. General Crossing- In general crossing it is the responsibility

of the drawee bank not to make payment otherwise than

a bank

continued.


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Other modes

Special Crossing -Across its face it bears an addition of thename of a banker with or without the words NotNegotiable.

Restrictive Crossing- Account payee are added to thegeneral or special crossing. The amount has to becredited to the account of the payee. They are notnegotiable.

Not Negotiable Crossing- It means that the title of thetransferee cannot be better than the transferor. It iscrossed so, as a protection to the drawer or holder of

the cheque against miscarriage or dishonesty in thecourse of transit by making it difficult to get cashed, untilit reaches its destination.


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Crossing after issue of the cheque

If the cheque is not crossed, the holder of the cheque may

cross it either generally or specially.

If the cheque is crossed generally, the holder may cross it

specially

The holder may add the words "Not Negotiable to the

crossing

If it is crossed to specified banker, it may be again crossed

to another specified banker, or agent for collection.


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Parties to a Negotiable Instrument Capacity of parties- Every person capable of contracting may

bind himself and be bound by the making, drawing,acceptance, indorsement, delivery and negotiation of the NI

The capacity of the party to a NI is co-extensive with thecapacity of his or her contract capacity to contract

Minor can draw, indorse, deliver and negotiate suchinstruments as to bind all other parties other than himself.

Minor can also acquire all rights under it, and if he is a holderhe is entitled to sue all the prior parties to the instruments.

If minor is one of the parties and all others are adults, then

other than the minor all are liable. Adults are not dischargedfrom liability even if the minor is discharged.


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Holder ( Sec 8)

A person who is entitled to hold the negotiable instruments

in his own name, to possess the instrument and to

recover or receive its amount due from the parties

thereto is called a holder.

To be a holderthe person must be named in the instrumentas a payee, or the endorsee or a bearerthereof


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Holder in due course (HDC)

If a person proves that he acquired the instrument

for a valuable consideration, then he is known

as holder in due course.

The holder in due course should show that for

consideration he became the payee or indorseeof the instrument , if it is payable to the order.

In such cases, the instrument should have been

indorsed and delivered to him, as his title to the

instrument will be incomplete without delivery.


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Other essentials to be a holder in duecourse

The HDC should have acquired the instrument any time

before the amount became payable.

If a person takes the instrument after the day the amount

becomes payable, such a person cannot take the place

of HDC, and the rights acquired by him are only co-extensive with that of his immediate transferor.

The HDC should have acquired the title without notice of the

defect in the title


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Privileges of a HDC

The presumption is that the HDC obtains title to the

instrument free from equity.

If the instrument is stamped but otherwise inchoate, the

person who has signed and delivers is prevented from

asserting against the HDC as the stamp in itself is

sufficient to cover the amount, though the instrument

was incomplete

Until the instrument is duly satisfied, every prior party to a NI

is liable thereon to a holder in due course.

Cont.


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Continued..

If the bill or note is negotiated to a HDC , then the

negotiating parties cannot avoid liability if there was a

condition or special purpose attached to it.

Once the NI passes through the hands of the HDC, the NI

get cleansed of all its defects, provided the holder is nota party to the fraud

No defence can be set up against the holder in due course

The validity of the instrument as originally made or drawn

cannot be denied by the maker/ drawer/ acceptor for

honor The endorser cannot deny the signature or capacity to the

contract of any prior party to the instrument


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Liabilities of Parties (Drawer)

Liability of the drawer- the drawer is liable to compensate incase of dishonor by the drawee or acceptor, provideddue notice has been given to or received by the drawer.

The liability of the drawer in case of bill is secondary in

nature. It is the acceptor who is primarily liable to makethe payment.

By drawing a bill, the drawer undertakes that onpresentment of the same to the acceptor, it will beaccepted and duly honored and

If it is dishonored by the acceptor or not accepted, thedrawer will compensate to the holder or the indorser,provided due notice is given to him.

Cont..


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Liability of the Drawee

The relationship between the banker( drawee) and customer isthat ofdebtor and creditor.

The banker has to undertake to honor the customers cheque untilthe funds are available with the bank in the customers

account. Banker can refuse to honor the customers in certain instances

like, a) bankers lien, b) no amount to honor in the customers account,

c) post dated fund presented before the date, d) if the instrument is ambiguous, e) if the customer been declared insolvent, f) if the customer has countermanded the cheque, g) if the bankers receives the notice of death or insanity


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Liability of the Drawee Bank forWrongful Dishonour

Cheques to be presented during the usual banking hours.

If there is sufficient fund in the customers fund and still the

bank does not honor the cheque , it has to fulfill the

monetary loss of the customer and also the injury to

reputation of the customer.

This remedy against the bank is available only to the

drawer of the cheque and not the holder of the cheque.


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Liability of the Drawee Bank Where theDrawers Signature is Forged

If bank honors a cheque which is forged, the bank cannot

get the statutory protection, even if the sign could not be

distinguished.

The Act provides protection to the drawee bank paying a

cheque that carries a forged indorsement. This section applies if the bank pays a cheque that carries a

forged indorsement and it is payable to order and it

purports to be indorsed by or on behalf of the payee.

..

If the bank on which is drawn , makes the payment in

due course, then the bank is discharged from its liability

even if the signature of the payee might be forged.


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Liability of the Maker of the note andAcceptor of the bill

Both the maker and the acceptor are liable to make the

payment.

The liability of the maker in case of note and acceptor in

case the bill is absolute, Unconditional and primary. The

liability exists only when he signs and delivers the note

But to make the acceptor liable only signature is not

enough, it has to be accepted i.e. notice of acceptance

should be given and the bill has to be delivered.

As the acceptor is not the originator of the bill as in case of

the note, the acceptor can have an option to give a

qualified acceptance.


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Liability of endorser

Every indorser after dishonor is liable as upon an instrumentpayable on demand to every subsequent holder.

The indorser is in a position of a new drawerand the liabilityof the indorser is conditional.

By endorsing the bill the endorser undertakes that the

instrument will be accepted and paid as per the tenor ofpresentment.

If it is dishonored, he will compensate the holder orsubsequent indorsers who is compelled to pay for itsubject to due notice of dishonor.

The indorsers liability as per this provision (sec 35) will not commence until the indorsed instrument

is delivered to the transferee. The indorser has to make goodthe loss but he can make qualified indorsement by usingsans recourse indorsement


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Liability of the other parties

Every prior party to the indorsement will be liable to the

subsequent party until the instrument is duly discharged or

satisfied.

If the indorser knows that bill was forged, he cannot later deny

the liability by pleading forgery as a reason. The indorser cannot challenge the holders title. He will be

liable twice. One to the holder and the other to the true

owner of the instrument.

Acceptor of the bill drawn in fictitious nameand payable to the

drawers order is not, by reason that such name is fictious,relieved from liability to any holder in due course.


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Negotiation

Negotiation of an instrument may be either by delivery or byindorsement. Delivery of NI is an essential ingredient inorder to bind the parties as they are incomplete andrevocable.

The delivery should be with an intention to passingof theproperty . A PN , BOE or Cheque is considered to becompleted only when it is delivered i.e., actual orconstructive

As between the immediate parties, delivery to be effectual mustbe made by the party making , accepting or indorsing the

instrument or by a person authorized by such person For other parties, other than HDC it has to been shown that the

instrument was delivered conditionally or for specialpurpose only and not for the purpose of transferringabsolutelythe property therein. All the NIs are negotiableby delivery after indorsement.


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Endorsements / Indorsements

A bearer instrument is defined as an instrument where the

only or last indorsement is an indorsement in blank.

Partial Indorsement- No writing on a negotiable instrument

is valid for the purpose of negotiation if such writing

purports to transfer only a part of the amount appearingtobe due on the instrument, .

But where such amount has been [partly paid, a note to that

effect may be indorsed on the instrument, which may

then be negotiated for the balance ( This is called partial

indorsement)


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Features of indorsement

Intention should be there for negotiating the instrument.

Effected by the signature of drawer or holder of a negotiable

instrument.

Indorsement can be made on the back or face of instrument

generally it can be made on a plain paper or on a

stamp paper)

The person who signs is called Indorser/endorsor

The person in whose favour it is made is called-

Indorsee/endorsee. The additional slip pf paper, if used for indorsement is called

as allonge


34/45

Legal aspects of endorsement

Negotiation

The endorsee acquires the property or interest in theinstrument as a holder. He can further pass the titlenegotiation, other than for restrictive endorsement

(Transfer) It can be negotiated till the payment is made

Endorsement in part is invalid

If the endorser dies before delivery, endorsement becomesinvalid.

Presumption- Endorsement made in the order it appears Endorsers signature-Not to be in block letters

Endorser should spell his name in the same way as itappears on the cheque.

Need not include prefixes and suffixes


35/45

Kinds of endorsement

Endorsement in blank: If there is only name of the endorser

( payable to bearer)

Endorsement in full- If it made to a specified person, A

blank endorsement may be converted into full.

Sans recourse endorsement- Exclude his personal liabilityby limiting the liability.

Conditional endorsement- If a condition is specified by the

endorser

Restrictive endorsement- if it specified to one person only

Facultative endorsement-If the provisions ofgiving notice of

dishonor is waived by the endorse


36/45

Difference between Assignment andNegotiation

Assignment should be inwriting

Notice of transfer ofactionable claims must be

given by the transferee tothe debtor in case if theassignment in order tocomplete the title

The title is subject to all thedefects, equities of theassignor

Transferee to proveconsideration for transfer

Negotiation by delivery /

endorsement and

delivery

No notice of such kind

required in negotiation The title of the transferee

is better than the

transferor

Consideration is presumed

in negotiation


37/45

Instruments obtained by unlawfulmeans

Stolen instruments- Acquires no title

Instruments obtained through fraud or coercion- usually not

liable , but liable if due and reasonable care not taken

Instruments obtained for unlawful consideration- Does not

create a legal obligation but HDC obtains good title

Forged instruments- Generally it cannot convey title

Forged endorsement-depends of the different situations


38/45


39/45

Presentment when excused

Presentment is excused and the instrument can be treated

as dishonored in the following circumstances-

a) When the drawee cannot be found after

reasonable search

b) Where the drawee is a fictitious person or

incapable of contracting

c) Where the presentment is irregular,

acceptance has been refused on some

other ground. d) Where the drawee becomes bankrupt or is dead


40/45

Dishonor of a NI

Non-acceptance of the bill or non- payment results in

dishonor of the instruments.

Dishonor by non- payment happens when the maker,

drawee of the cheque or acceptor of the bill makes adefault in payment upon being duly required to pay the

same.

It is considered to be dishonored by non-payment when the

presentment for payment is excused and the overdue

remains unpaid


41/45

Dishonor continued

Dishonor by non- acceptance happens in thefollowing ways:a) When the drawee does not accept within 48 hours of

presentment

b) when presentment for acceptance is excused and thebill remains unaccepted.c) When the drawee is incompetentd) When the acceptance by the drawee is qualifiede) when the drawee is fictitious person or cannot be found

after reasonable search A notice of dishonour is a must to all prior parties whom

the holder wants to make liable except in those cases wherethe law considered it as unnecessasry.


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43/45

Dishonor of cheques ( Sec 138-142)

> After the Amendment Act of 1988, the NI Act provide

forcriminal penalties in the event of dishonor of cheques for

insufficiency of funds.

> The drawer may be punished under sec 138 with

imprisonment fortwo years (after 2002 Amendment Act) orwith fine which may extend to twice the amount of the

cheque or with both.

> (The Amendment has inserted five new sections 143-

147 for the procedure to be followed for the trial)


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Conditions to attract criminal penaltyunder sec 138 are:

The cheque is dishonored due to insufficiency of funds

The payment for which the cheque was issued was for thedischarge of a legally enforceable debt or liability inwhole or part of it. ( If it is a gift , then the liability will notarise)

The cheque has to be presented to the paying bank withinsix months from the date that it was drawn.

The payee or the HDC should have been given a notice ofdishonor of the cheque from the bank.( The court to takecognizance of the complaint, if it given by the payee or

the HDC) The drawerwill be liable only if he fails to make the payment

within days of such notice period.

The payee or HDC of the cheque should have made awritten complaint within one month of cause of action.


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Discharge of a Negotiable Instrument

Discharge of parties a) By cancellation b) Release c) Payment

d) If the holder gives more time to the draweethan 48 hours

e) by default in presenting the cheque within areasonable time

f) Dissenting parties discharged by qualified or

limited acceptance g) Material alteration etc..

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