Law of Negotiable Instruments (1).ppt

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Negotiable Instruments Act,1881



Law of Negotiable Instruments

In business dealings, all the transactions do not take place interms of money.

Due to many reasons, business men adopted a new method ofexchanging documents ( such as bills of exchange, cheques,DD etc. )

Documents used as substitute for money are called negotiableinstruments (NI).

The law relating to Negotiable Instruments is contained in theNI acts of 1881.It extends to the whole of India



Definition of a negotiable instrument

The word negotiable means “transferable by delivery”

Instrument means “ a written document in which a right is

created in favour of some person.

“a written document transferrable by delivery”

Written promise or order to pay money which may be

transferred from one hand to another as a substitute for

money.



It is a piece of paper which entitles a person to a sum of moneymentioned in it, and which is freely transferable from personto person.

It is transferred by:Mere delivery orEndorsement and delivery

section 13 of NI Act:“ A negotiable instrument means a promissory note, bill of

exchange or cheque payable either to order or to bearer”



(a) Payable to order:A bill , note or cheque is payable to order which is expressed to be

payable to a particular person or his order.E.g: Pay A, Pay A or order- It should not contain any words prohibiting transferE.g: Pay to A only

(b) Payable to bearer:Payable to any person whosoever bears it



Note:

NI should be freely transferable A person to whom the NI is transferred becomes entitled toget the money mentioned in it, notwithstanding the defectivetitle in the person who transferred it.But, he should get instrument in good faith and forconsideration



Essential characteristics of negotiable instrument

1.Easily Negotiability

2.Transferee can sue in his own name without giving notice to the

debtor.

3.Better title to a bonafide transferee for value

4.Presumptions

7



Presumptions of negotiable instruments

1.That every negotiable instrument was drawn, accepted and

endorsed, made or transferred for consideration

2. That the date it bears is the date on which it was made.

3.That it was accepted with in a reasonable time after being made

and before maturity.

4.That every transaction was made before maturity.

5.That the endorsements were made in the same order in which

they appear.

6.That the lost instrument was duly signed and stamped.



Reserve Bank of India- Provisions

1.No person in India other than RBI or central Government canmake or issue a promissory note payable to bearer .

2. No person in India other than RBI or central Government can

draw or accept a bill of exchange payable to bearer on demand3.A cheque payable to bearer on demand can be drawn on a

person’s account with a banker.



The effects of provision

1. A promissory note cannot be originally made payable to

bearer, no matter whether it is payable on demand or after a

certain time. It must be made payable to the order initially.

2. A Bill of exchange may be originally made payable to bearer

3. A cheque drawn on a bank can be originally made payable to

the bearer on demand.



Promissory note(PN)Definition:“ A promissory note is an instrument in writing containing an

unconditional undertaking signed by the maker , to pay acertain sum of money only to, or to the order of, a certainperson, or to the bearer of the instrument” .

- The person who makes promise to pay is called the maker

- The person to whom payment is to be made is called the

payee (creditor).



Negotiable instrument in writing containing an unconditionalpromise by one person to pay a certain sum of money to aspecified person.

Specimen:

BangaloreFeb 24, 2012

Three months after date, I promise to pay Mr. Ramesh the sum of Rs.1000/=( Rs. Onethousand only) for value received.

Signature(Mr. Girish)



Essentials

1. It must be in writing

2. It must contain an express promise to pay

3. The promise to pay must be unconditional

4. It must be signed by the maker

5. The maker must be a certain person

6. The payee must be certain

7. The sum payable must be certain

8. The amount payable must be in legal tender money of India

9. Other formalities



Bills of Exchange(BOE)

According to the Act “ A bill of exchange is an instrument in writing containing an unconditional order signed by themaker, directing a certain person to pay a certain sum ofmoney only to or to the order of , a certain person or to the

bearer of the instrument. ”

Parties:- Drawer- person who makes the bill

- Drawee-person who is directed to pay- Payee- the person to whom the payment is to be made.



Specimen:

BangaloreFeb 24, 2012

Three months after date pay to Mr. Suresh or order the sum of Rs. 1000/= ( Rs. Onethousand ), for value received.

To SignatureMr. Gowrish (Mr.Ramesh)



Essentials

1. It must be in writing2. It must contain express order to pay3. The order to pay must be unconditional4. It must be signed by the drawer5. The drawer, drawee and payee must be certain6. The sum payable must be certain7. It must contain an order to pay money only8. Other formalities



Cheque

A "cheque" is a bill of exchange drawn on a specified banker and notexpressed to be payable otherwise than on demand.

It is NI, in writing which contains an unconditional order directing aspecified banker to pay a certain sum of money to the bearer of theinstrument or to a specified person .

Essentials:1. It must have all the essentials of B/E2. It must be drawn on a specified banker3. It must be payable on demand

4.A cheque may be written on a paper or it may be in theelectronic form.



Bank draft

Is an order issued by one bank on another bank or on its own branch instructing the latter to pay a specified sum of money

to a specified person or his order.



Difference btw cheque & BOE

1.A cheque is always drawn on the banker , while a bill may bedrawn on any person , including a banker

2.A cheque can only be drawn payable on demand, bill can be

drawn payable on demand or after the expiry of a certainperiod after sight

3.A cheque payable to bearer on demand is valid , bill payable to

bearer on demand is void



4.A cheque does not require any acceptance by the drawee

before payment can be demanded. Bill requires acceptance5.A cheque does not require any stamp , BOE must be properly

stamped

6. Three days of grace allowed for bill , not for cheque7.Unlike cheques , a bill cannot be crossed.



Crossing of a cheque:• A crossed check is payable only through a collecting banker

and not directly at the counter of the bank.

Types of crossing:

• 1.General-where the cheque bears a cross on its face, two

transverse parallel lines with or without words like “not

negotiable”, and company etc.

• 2.Special-where cheque bears across its face an addition of the

name of banker, either with or without words, “not

negotiable” etc.



Non negotiable crossing (sec. 130):

• The effect of the words “not negotiable” on a crossed cheque isthat the title of the transferee of such a cheque cannot be

better than that of its transferor



Bouncing of the cheque:• A drawer of the bounced cheque shall be deemed to have

committed an offence .• The court have held the following amounting to dishonor for

insufficient funds:

Stop payment instruction to the payee bank.Request Payee to not to present the cheque till furtherintimation.The cheque received from the payee bank with the remarksaccount closed.

Cheque should be presented within validity.The cheque was issued for the discharge of legally enforceabledebt



Conti… The payee is to give notice regarding payment within 30

days.

The drawer is liable only if he fails to pay within the 15 days

of such notice period.

The written complaint to the judicial magistrate of first class

is made within one month of cause of action arised.



Parties to a NI

1. Parties to PNa. Maker b. Payeec. Holderd. Endorsere. Endorsee

2. Parties to B/Ea. Drawer : The maker of a bill of exchange or cheque

b. Drawee : The person thereby directed to pay



Negotiation of NITransfer of a NI is known as negotiation.

Negotiation:

When a promissory note, bill of exchange or cheque is

transferred to any person, so as to constitute the person the

holder thereof, the instrument is said to be negotiated



Modes of negotiation

We know that NIs are of two types: namely (a) bearer instruments (b) orderinstruments.

Accordingly, two modes of negotiation

1. Negotiation by delivery2. Negotiation by endorsement and delivery

1.Negotiation by delivery: NI payable to bearer can be transferred by meredelivery butIt must actually be delivered andThe delivery must be voluntary

Illustration (a) A, the holder of a negotiable instrument payable to bearer, delivers it to

B's agent to keep for B. The instrument has been negotiated.



2.Negotiation by endors0ement and delivery :If NI is payable to a particular person or his orderTwo formalities required:1. The holder must endorse the NI i.e. he must sign his name

on the instrument2. The duly signed instrument must be delivered to the

transferee ( endorsee)

Kinds of delivery1. Actual delivery : Instrument changes hands physically2. Constructive delivery: Instrument is delivered to an agent,

clerk or servant of the transferee who holds it on behalf of T.

3. Conditional delivery : Delivery which is effective on thefulfillment of certain condition or delivery for a specialpurpose



Presentment of NIThe money due on the instrument can be received only after presenting NI to

the parties liable for payment

It is a process of presenting or placing the instrument before the maker,acceptor or drawee

Presentment of a NI is required for any one of the following purposes:1. Presentment for acceptance2. Presentment for sight3. Presentment for payment



The liability of the drawee arises only when the BoE has been validly

accepted by him.

Essentials of a valid acceptance:

1. The acceptance must appear on the BoE itself.

2. The acceptance must be in writing.

3. The acceptance must be signed by the drawee or his duly authorizedagent.

4. The acceptance must be completed either by delivering the accepted

BoE to the holder or by giving notice of acceptance to the holder



Though, in certain cases, it is optional to present the BoE, it is also desirable

1. In order to obtain additional security

2. In order to have an immediate right of recourse against the drawer

and other parties if the bill is dishonored by non-acceptance

Following types of bill of exchange need not be presented for acceptance

1. BoE payable on demand

2. BoE payable on fixed date

3. BoE payable on fixed number of days after date



Need to be presented

1. BOE payable at a given time after acceptance or after sight

2. BOE having express term that it shall be presented for

acceptance before it is presented for payment

3. BOE payable at a place other than the place of residence or business of the drawee



Acceptance: When the drawee of the bill signifies his assent in writing to 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 0f acceptance to the holder, the bill

is said to be accepted.



Kinds of acceptance1. General acceptance- without any condition or qualification.

2. Qualified or Conditional acceptance :Instances of conditional acceptance

a. Acceptance on the happening of an event b. Acceptance of partial amountc. Acceptance for payment at a specified placed. Acceptance for payment at a different timee. Acceptance by some of the drawees onlyf. Acceptance for payment in installments

Rules regarding the presentment of a BoE for



Rules regarding the presentment of a BoE foracceptance:

1. Persons who should present the bill for acceptance : any person

who is entitled to demand the acceptance – Holder or his duly authorized

agent

2. Persons to whom the bill should be presented for acceptance :

person who can accept the same i.e.

The drawee of a BoE or his duly authorized agent

The joint drawees of a BoE

The legal representatives

The official receiver or assigneeThe drawee in case of need

The acceptor for honor



3. Time for presentment for acceptance : stated as under

a) Where the time for presentment is specified

b) Where the time for presentment is not specified

4. Place for presentment for acceptance

a) Where the place for presentment is specified

b) Where the place for presentment is not specified



Cases in which presentment for acceptance is excused

The holder becomes entitled to recover the amount only when

the bill is duly presented for acceptance and the same is

dishonored due to non-acceptance

Sometimes excused, and treat the bill as dishonored : cases

a) When, after reasonable search, the drawee cannot be found

b) When the drawee is a fictitious person or incapable of

contracting

c) When although the presentment is irregular, but acceptance

has been refused on some other ground



Drawees time for deliberation

• The holder can allow drawee 48 hours ( exclusive of publicholidays) to consider whether he will accept the bill.

• The drawee can take time before taking the liability.

• If the drawee does not return the accepted bill within 48hoursthe holder should treat the bill as dishonoured.



2.Presentment for sight:- Is necessary only for a PN , which is made payable at a certain

period after sight , so that the maturity of the note may beascertained.

3.Presentment of NI for payment : After a NI is made ( completed by acceptance or sight, where

required) the next stage is that it must be presented forpayment to the parties who are primarily liable.

Thus, PN, BoE, and cheque must be presented for payment tothe maker, acceptor or drawee respectively

Rules regarding the presentment of NI for payment



Rules regarding the presentment of NI for payment

1. Persons who should present an instrument for payment :

person who can give valid discharge to the debtor

2. Persons to whom the instrument should be presented forpayment

3. Time for presentment for payment :a) Where an instrument is payable after a fixed period of time – note the

delay even of a brief period discharges all parties other than maker or

acceptor of instrument

b) Where an instrument is payable on demand : reasonable time – otherwise discharge from liability



c) Where a PN is payable by installments : presented for paymenton the third day after the date fixed for payment of eachinstallment – if not paid can be treated as dishonored

4. Place of presentment for payment

Effect of non-presentment of NI for payment

Then, except party who is primarily liable, all are discharged

Cases in which presentment of NI for payment is



Cases in which presentment of NI for payment isunnecessary

1.When presentment is intentionally prevented.2.Place of business closed

3.Payer absents from place of payment

4.When the payer cannot be found5.Waiver of presentment

6.Where drawer could not suffer damage.

Dishonour of NI



Dishonour of NI

NI may be dishonored in either of the following ways:1.Due to non-acceptance2.Due to non-payment

1.Dishonor of NI due to non-acceptance : In the followingcases

a. Where drawee or one of the several drawees makes default inacceptance upon being duly required to accept the bill. b. Where the presentment for acceptance is excused and the bill

is not accepted.c. Where the drawee is incompetent to contractd. Where the drawee makes qualified acceptancee. Drawee cannot be found even after reasonable search.

Di h f NI d



Dishonor of NI due to non-payment• PN,BoE,Cheque is said to be dishonoured by non-

payment.

- Notice of dishonor A notice must be given by the holder to all such parties to

whom he wants to make liable on the instrument i.e. from whom he wants to recover the amount.

-Persons by whom the notice of dishonor should be given:By holder or some other party who is liable on the instrument

- party receiving the notice should also give the notice tothe previous parties – if in the hands of agent NI isdishonored

Persons to whom the notice of dishonor should be



- Persons to whom the notice of dishonor should begiven :

- Exception in the case of cheque – holder cannot make bankerliable

- To agent , legal representatives– If death information is not known and notice is given.

Notice of dishonor is not necessary to the maker of PN and tothe drawee or acceptor of BoE and cheque

- Mode of giving notice of dishonor : oral or written

- Time of giving notice of dishonor



Effect of default in giving notice of dishonor All who are entitled to require notice are discharged from their

liability

Cases in which notice of dishonor is excused ( page no 384-385M C Kuchhal)

1.Notice of dishonour waived off2.Drawer of a cheque has countermanded payment3.Where the drawer has closed his account with the bank4.Party entitled to notice cannot be found5.When the drawer also happens to be the acceptor

6.Party promises to pay unconditionally without the notice, thefull amount due on the instrument

Discharge of the instrument and the parties



Party’s liability on the instrument coming to an end - However

Discharge in relation to NI has two meanings1. Discharge of the NI2. Discharge of one or more parties from their liability on the

NI

1.Discharge of NI :- No person related with the instrument has any further claim- Happens when the party who is primarily liable, is discharged

from his liability

W i hi h NI i di h d



Ways in which NI is discharged:

1. By payment in due course

2. By the primarily liable party becoming the holder of the

instrument

3. By renunciation of the rights by the holder

4. By cancellation of the NI

5. By discharge as a simple contract

2.Discharge of one or more parties from their liability



g p yon the NI

Note: NI is said to be discharged only if all the parties to aNI are dischargedOtherwise, it is only a discharge of some of the parties andNI continues to be negotiable

Amount can be recovered from the undischarged parties

A party may be discharged in any one of the following



ways 1.By cancellation of the name of a party

2.By release of a party3.By payment4.By allowing the drawee more than 48 hours to accept the BoE5.By taking qualified acceptance6.By not giving notice of dishonour7.By non-presentment of a BoE for acceptance8. By delay in presenting a cheque for payment9.By material alteration10.By negotiation back of bill.

Law of Negotiable Instruments (1).ppt

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