Law Project- The Negotiable Instrument Act- RevisedV1

The Negotiable Instrument Act 1881 2010

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Business Law

The Negotiable Instrument Act 1881

Submitted to:Dr. Devnani. G. N

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Submitted By:

Sr No Roll No Name Sign

1 MM-10-01 Mrs. Kajal P. Ajani

2 MM-10-03 Mr. Nilesh Chavan

3 MM-10-04 Mr. Sachin H. Dhabolkar

4 MM-10-05 Mr. Abhijit Dalvi

5 MM-10-06 Mr. Rajesh Dave

6 MM-10-07 Ms. Supriya Desai

7 MM-10-08 Mr. Amit J. Dhas

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Acknowledgement

We take this opportunity to express our sincere gratitude to each

and every person who has directly or indirect helped us through

this project. Our experience has been fulfilling and rewarding.

We also extend our sincere thanks to our

Director Prof. (Dr.) Dinesh D. Harsolekar, Librarian Mrs.

Madhura Deodhar, Course Coordinator Prof. Jagdale &

Coordinator Mrs. Vidya & most importantly our faculty Dr.

Devnani. G. N for giving us the opportunity to work on this

topic and carry out our project work. It is our pleasure to express

our sincere gratitude for his continuous support and guidance

which helped us in accomplishing this project successfully. We

thank him for providing his invaluable time, support, and

cooperation to complete the project work.

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“LAW OF NEGOTIABLE INSTRUMENTS”

(The Negotiable Instruments Act, 1881)

SR.NO. CONTENTS

PAGE NO.

1. Introduction.

2. Meaning of Negotiable Instruments

3. Negotiable Instrument.

4. Characteristics\Features of Negotiable Instrument.

5. PROMISSORY NOTES.

6. BILLS OF EXCHANGE

7. CHEQUE

8. “Criminal Action against Dishonour Cheque”

9. ENDORSEMENT 33

10 Conclusion

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“LAW OF NEGOTIABLE INSTRUMENTS”

(The Negotiable Instruments Act, 1881)

“ Case Studies”

SR.NO. CONTENTS

PAGE NO.

1. S.Raju v C. Sathammai –

2. Goa Plast (P) Ltd. Vs. Chico Ursula D'souza

3. M/s. Rahul Builders v M/s. Arihant Fertilizers & Chemical and another -

4. Jagdish Bagri v Rajendra Kumar Luhariwala and another- -

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INTRODUCTION

Exchange of goods and services is the basis of every business activity. Goods are

bought and sold for cash as well as on credit. All these transactions require flow of

cash either immediately or after a certain time. In modern business, large numbers of

transactions involving huge sums of money take place every day. It is quite

inconvenient as well as risky for either party to make and receive payments in cash.

Therefore, it is a common practice for businessmen to make use of certain documents

as means of making payment. Some of these documents are called negotiable

instruments. In this lesson let us learn about these documents.

The history of the present Act is a long one. The Act was originally drafted in 1866 by

the India Law Commission and introduced in December, 1867 in the Council and it

was referred to a Select Committee. Objections were raised by the mercantile

community to the numerous deviations from the English Law which it contained. The

Bill had to be redrafted in 1877. After the lapse of a sufficient period for criticism by

the Local Governments, the High Courts and the chambers of commerce, the Bill was

revised by a Select Committee. In spite of this Bill could not reach the final stage. In

1880 by the Order of the Secretary of State, the Bill had to be referred to a new Law

Commission. On the recommendation of the new Law Commission the Bill was re-

drafted and again it was sent to a Select Committee which adopted most of the

additions recommended by the new Law Commission. The draft thus prepared for the

fourth time was introduced in the Council and was passed into law in 1881 being the

Negotiable Instruments Act, 1881 (26 of 1881)

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Meaning of Negotiable Instruments

To understand the meaning of negotiable instruments let us take a few examples of

day-to-day business transactions. Suppose Pitamber, a book publisher has sold books

to Prashant for Rs 10,000/- on three months credit. To be sure that Prashant will pay

the money after three months, Pitamber may write an order addressed to Prashant that

he is to pay after three months, for value of goods received by him, Rs.10,000/- to

Pitamber or anyone holding the order and presenting it before him (Prashant) for

payment. This written document has to be signed by Prashant to show his acceptance

of the order. Now, Pitamber can hold the document with him for three months and on

the due date can collect the money from Prashant. He can also use it for meeting

different business transactions. For instance, after a month, if required, he can borrow

money from Sunil for a period of two months and pass on this document to Sunil. He

has to write on the back of the document an instruction to Prashant to pay money to

Sunil, and sign it. Now Sunil becomes the owner of this document and he can claim

money from Prashant on the due date. Sunil, if required, can further pass on the

document to Amit after instructing and signing on the back of the document. This

passing on process may continue further till the final payment is made.

In the above example, Prashant who has bought books worth Rs. 10,000/- can also

give an undertaking stating that after three month he will pay the amount to Pitamber.

Now Pitamber can retain that document with himself till the end of three months or

pass it on to others for meeting certain business obligation (like with sunil, as

discussed above) before the expiry of that three months time period.

You must have heard about a cheque. What is it? It is a document issued to a bank

that entitles the person whose name it bears to claim the amount mentioned in the

cheque. If he wants, he can transfer it in favour of another person. For example, if

Akash issues a cheque worth Rs. 5,000/ - in favour of Bidhan, then Bidhan can claim

Rs. 5,000/- from the bank, or he can transfer it to Chander to meet any business

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obligation, like paying back a loan that he might have taken from Chander. Once he

does it, Chander gets a right to Rs. 5,000/- and he can transfer it to Dayanand, if

required. Such transfers may continue till the payment is finally made to somebody.

In the above examples, we find that there are certain documents used for payment in

business transactions and are transferred freely from one person to another. Such

documents are called Negotiable Instruments. Thus, we can say negotiable instrument

is a transferable document, where negotiable means transferable and instrument

means document. To elaborate it further, an instrument, as mentioned here, is a

document used as a means for making some payment and it is negotiable i.e., its

ownership can be easily transferred.

Thus, negotiable instruments are documents meant for making payments, the

ownership of which can be transferred from one person to another many times before

the final payment is made.

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Negotiable Instrument Act, 1881:

DEFINITION:

Section 13 of the Negotiable Instrument Act, 1881, defines a

negotiable instrument as: “A negotiable instrument means a promissory note,

bill of exchange or cheque payable either to order or to bearer.” [Sec. 13(1)].

Explanation: A promissory note, bill of exchange or cheque is payable to order,

which is expressed to be so payable, or which is expressed to be payable to a

particular person, and does not contain words prohibiting transfer or indicating an

intention that it shall not be transferable.

‘Negotiable’ literally means ‘transferable’. ‘Instrument’ means a

‘document.’ Therefore, negotiable instrument means an ‘a transferable document’.

However, it does not mean that an instrument in order to be valid must be

negotiable. Instruments may be marked ‘not negotiable’ yet they are valid

instruments and governed by the provisions of the Act.

The Act narrows down the meaning of instrument. It regulates only

three types of instruments, viz., Promissory Notes, Bills of Exchange and Cheques.

A negotiable instrument is one which entitles the holder to the receipt

of money. It gives him the right to transfer the same by mere delivery or

endorsement thereon. The negotiability of the instrument continues till its maturity.

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Characteristics\Features of Negotiable Instrument:

These are the following characteristics of a negotiable instrument:

1. Property:

The possessor of the instrument is the holder and owner thereof. A

negotiable instrument does not exactly give possession of the instrument, but right

to property. Whosoever gets possession of the instrument becomes its owner and is

entitled to the sum mentioned therein as the holder. The complete right of

ownership in a negotiable instrument passes by mere delivery where instrument is

payable to bearer. Where instrument is payable to order, right of ownership passes

by endorsement and delivery.

2. Good Title to the Instrument:

The holder is good faith and for value called the ‘holder in due

course’ gets the instrument free from all defects of any previous holder.

3. Rights of Holder in Due Course:

The holder in due course is not affected by certain defences

which might be available against previous holder, for example, fraud, criminal,

smugglers, to which he is not a party.

4. Writing & Signature:

According to the Rules of Negotiable Instrument, it must be

written and signed by all the parties according to the rules relating to the promissory

notes, bills of exchange, and cheques.

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5. Payment:

A negotiable instrument may be made payable to two or more payees

jointly, or it may be made payable in the alternatives to one or two, or some of

several payees [Sec. 13(2)].

6. Payable by legal Tender Money of India:

Negotiable Instruments are payable to legal tender

money of India. The liabilities of the parties of negotiable instruments are fixed in

terms of legal tender money only.

7. No Need of giving Notice:

It is not necessary to give notice of transfer of a

negotiable instrument in his own name for the recovery of the amount mentioned

therein. Consideration in the case of a negotiable instrument is presumed.

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PROMISSORY NOTES;

Suppose you take a loan of Rupeess Five Thousand from your friend Ramesh.

You can make a document stating that you will pay the money to Ramesh or the

bearer on demand. Or you can mention in the document that you would like to pay

the amount after three months. This document, once signed by you, duly stamped

and handed over to Ramesh, becomes a negotiable instrument.

Now Ramesh can personally present it before you for payment or give this

document to some other person to collect money on his behalf. He can endorse it

in somebody else’s name who in turn can endorse it further till the final payment

is made by you to whosoever presents it before you. This type of a document is

called a Promissory Note.

DEFINITION:

Section 4 defines a promissory notes as under: “A ‘promissory

note’ is an instrument in writing (not being a bank-note or a currency-note),

containing an unconditional undertaking, signed by the maker, to pay a certain

sum of money only to, or to the order of a certain person, or to the bearer of

the instrument.”

Essentials Characteristics of a Promissory Note:

1. All kinds of negotiable instruments, including a promissory note, must be in

writing:

The promissory note must be in writing. In a oral form or promise is

made, they all are excluded from this. Whatever the words may be used, it is not

compulsory writing by using pen or pencil or ink pen or even may be printed or

cyclostyled. But the important thing is that the words should be visible. Intention of

writing, it should be clear.

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2. The instrument must contain an express or unconditional promise to pay:

It is not necessary to use the word “promise” but the intention must

clearly show an ‘unconditional undertaking’ to pay the amount. It was held that

absence of the word promise does not mean that a document is not a promissory

note, provided it should fulfills the requirements of this section and there is clear

intention on the part of the parties to treat the document as a promissory note.

ILLUSTRATIONS:

This are the promissory notes:

“I acknowledge receipt of Rs. 1,000 for value received.”

“I promise to pay B Rs. 1,000 on demand.”

“I promise to pay B or order Rs. 1,000 on demand.”

“I acknowledge myself to be indebted to B in Rs. 1,000 to paid on demand, for

value received.”

“Received from X Rs. 1,000, which I promise to pay on demand with interest”.

This are not the promissory notes:

“I acknowledge receipt of Rs. 1,000.”

“I owe you Rs. 1,000.”

“Mr. Prakash Rs. 1,000.”

A document which is a receipt for money paid by cheque and which

incidentally contains a promise to repay the amount is not a promissory note, as

there is no intention of creating a negotiable instrument at all.

3. Unconditional:

The undertaking to pay must be definite and unconditional. If the

promise is uncertain or conditional, the negotiable instrument is not valid. Hence,

promissory notes, payable on the death of a person or persons, or at a particular

place, or after a specified time, are valid notes, under Section 5 (2). At a particular

place or at a specified time. A promise given for an executed consideration. Any

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promise to pay an instrument on lapse of certain period, after a specified event

which is certain to happen.

Valid Conditional Promissory Notes:

“I promise to pay B Rs. 1000, three days after the death of X.

“I promise to pay B Rs. 1000 at Mumbai.”

“I promise to pay B Rs. 1000 on 31st December 1977.”

4. The promissory note must be signed by the maker, otherwise, it is incomplete

and of no effect with free consent:

Person must sign the instrument with the physically and

mentally act with an intention to sign without the signature the instrument is not

valid person must sign with a free consent.

5. Both the drawer and the payee must be indicated or designated with certainty

on the face of the promissory note:

Where two or more persons sign the promissory note, their

liabilities will be joint and several.

Two distinct persons should fill in the role of a maker and

payee. A note cannot be made payable to the maker himself. However, if the maker

endorses the note, it is then valid. A note may be made payable to two or more

persons jointly. Payee must be a certain person. If he is capable of being ascertained

where he is misnamed or wrongly described, he will be a certain person.

For example:

A promissory note payable to “my only niece living in England” is a

valid promissory note.

6. Specific Sum:

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The sum payable must be certain and must not be capable of

contingent subtractions or additions.

Illustrations:

I promise to pay A Rs. 1000 and all other sums due to him.

I promise to pay A Rs. 2000 together with the fine according to the rule.

The sum payable under a promissory note is certain in the following cases:

When it is payable with interest. However, if the rate of interest is not

mentioned in the instrument, it is not a promissory note.

When it is payable by installments, with a provision that on default of payment

of an installment, the balance unpaid shall become due (Sec. 5).

Thus, the act does require that the amount should be stated in both words and

figures form.

7. Promise to pay must be money only:

A promissory note should contains only payment of

money rather than anything else or other than the money.

Illustrations:

“I promise to pay B Rs. 100 in cash and Rs. 199 worth of cosmetics.”

“I promise to pay B Rs. 299 and to deliver him my black horse.”

“I promise to pay B Rs. 999 in Government Bonds.”

“These above are all invalid promissory notes.”

8. Stamping:

As in every instrument which is legal, there are certain formalities

which are compulsory should be included and such formalities are date, place,

consideration, etc should be mentioned in the instrument. Without all this

formalities, the instrument is said to be invalid.

Types of Promissory Notes:

There are four kinds of promissory notes, and they are

1. Promissory notes payable on demand;

2. Promissory notes payable after date;

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3. Joint promissory notes; and

4. Joint and several promissory notes.

1. Promissory notes payable on demand:

When the drawer or you can say the maker gives an

unconditional undertaking, under his signature, to pay on demand certain sum of

money to the payee, it is called a promissory note payable on demand. In such a

note, no time is fixed for payment.

Specimen of a Promissory Note Payable on Demand

2. A Promissory Note Payable after Date:

When the maker or drawer promises, under his

signature to pay certain sum of money to the payee, at a future date, say for

example, three months after date, it is called a promissory note, payable after date,

or at a future date.

Specimen of a Promissory Note Payable after Date

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Mumbai,Rs. 5,000/- 1st June, 1999

On Demand, I promise to pay Prakash or order the sum of rupees five thousand with interest at 18 per cent per annum, for value received.

Sd/-

ToPrakash,Empty Stomach,Mumbai 400 052.

StampXYZ


Three months after date, I promise to pay Srichand Rohra or Bearer/Order the sum of rupees five thousand, for value received.

Sd/-

Stamp XYZ

ToSrichand Rohra,Jai Palace,Mumbai 400 052.


3. Joint Promissory Notes:

When a promissory note is made by two or more

persons jointly, it is known as a joint promissory note. In such a case, the liability of

the makers (Promisers) is joint and collective towards the payee, i.e., in case of a

default, the payee can take legal action one or all of them. If he elects to take action

against one of the promisers, it is deemed to be action against all of them. He

cannot, in that case, take action against the remaining promisers. The payee has only

one right of action.

Joint promissory notes may be payable on demand or

after date. Following is a specimen of a joint promissory note:

Specimen of a Joint Promissory Note

4. Joint and Several Promissory Notes:

When a promissory note is made by two or more

persons jointly and severally, it is called a joint and several promissory notes. The

promisers of such a promissory note are not only collectively liable to the payee but

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We jointly promise to pay on demand to the Bank of India, or order, the sum of Rs. 5,000/- (Rupees five thousand) only for value received with interest at 10 per cent per annum.

Sd/-1. Signature:

Address:

2. Signature:

Stamp

Address:

Stamp


they are also separately and individually liable to him. In other words, the payee has

more than one right of action against the promisers. He can take action-

a. Against all the promisers simultaneously, or

b. Against any one of them, or

c. Against one promiser after another till the full amount of the note is recovered.

A joint and several promissory note may be payable on

demand or after date. In India, there is no difference in practice between a joint

promissory note and joint and several promissory notes. A holder of a joint promissory

note may, therefore, treat it as a joint and several promissory note and accordingly

proceed as (1) against any one of the promisers, or (2) against all of them

simultaneously, or (3) against one promiser after another till the full amount of the note

is recovered.

Specimen of a Joint and Several Promissory Notes

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We jointly and severally, promise to pay on demand to the Bank of India, or order, the sum of Rs. 5,000/- (Rupees five thousand) only for value received with interest at 10 per cent per annum.

1. Signature………… Address…………..2. Signature………… Address…………..3. Signature………… Address…………..


We jointly promise to pay on demand to the Bank of India, or order, the sum of Rs. 5,000/- (Rupees five thousand) only for value received with interest at 10 per cent per annum.

Sd/-1. Signature:

Address:

2. Signature:

Stamp

Address:


Promissory Note Fabricated Case Study: S.Raju v C. Sathammai –

The respondent-defendant instituted the suit on the basis of a promissory note, dated

November 11, 2004, for Rs.1,50,000/- along with interest at the rate of 25% per

annum allegedly signed by the appellant in the presence of two witnesses.

On behalf of the appellant, it was stated that the promissory note, forming the basis of

the defendant s claim was completely sham and fabricated. It was further stated that

he was an uneducated and illiterate person, engaged in the work of civil construction,

as a contractor. He lived in the same locality and had agreed to build the house of the

appellant s son. He completed the construction of the house at a relatively much

cheaper rate of Rs.430/- per square ft. The defendant-respondent/her son used to take

his signatures on blank stamp papers telling him that those were for receipts of the

payments made to him and were required for income tax purposes. Being a simple,

uneducated person he put his signatures on blank papers without any question and in

good faith. It was alleged that one of the signatures made by him was later used to

forge the promissory note for filing the suit. It was also stated on his behalf that the

alleged signatures on the promissory note were not his signatures as would be

apparent from the fact that there were two signatures on the promissory note, one in

English and the other in Telugu.

The trial court noted that the contentions raised by the appellant for defending the suit

were quite inconsistent. On the one hand, he denied the signatures on the promissory

note as his signatures and, on the other hand, it was stated that his signatures were

obtained on blank stamp papers on the pretext that those were to be made into receipts

for payments made to him and one of those signatures was used for creating the

promissory note.

Verdict: The trial court accordingly rejected the petition filed by the appellant under

Order 37, Rule 3, CPC. Against the order passed by the trial court, the appellant

moved the High Court in revision but the High Court dismissed the revision and

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affirmed the order passed by the trial court primarily on the ground that there was an

inherent inconsistency in the case of the appellant.

BILLS OF EXCHANGE:

Suppose Rajiv has given a loan of Rupees Ten Thousand to Sameer, which Sameer

has to return. Now, Rajiv also has to give some money to Tarun. In this case, Rajiv

can make a document directing Sameer to make payment up to Rupees Ten Thousand

to Tarun on demand or after expiry of a specified period. This document is called a

Bill of Exchange, which can be transferred to some other person’s name by Tarun.

DEFINITION:

“Section 5 defines a bill of exchange as 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.”

Essentials\Characteristics of Bill of Exchange:

The following are the essentials of a bill of exchange:

1. Writing:

A bill of exchange, is like a promissory note, must be in writing. It

may be written in any language and in any form. It should be with the requirements

of Section 5. The provisions of promissory notes relating to writing, as discussed

above, are also applicable to bills of exchange.

2. Parties:

There are generally three parties to a bill of exchange, known as:

a) Drawer,

b) Drawee and

c) Payee.

a) Drawer:

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The drawer is a person, who makes the bill of exchange, or who gives

the order to the drawee to pay a certain sum of money to the payee.

b) Drawee:

The drawee is a person, who is directed by the drawer to pay the

money to the payee.

c) Payee:

According to the section 7 of the Act defines ‘Payees’ as the person

named in the instrument, to whom or to whose order the money is, by the instrument

directed to be paid.

All these parties must be named or otherwise indicated with

reasonable certainty. Sometimes the drawer and the payee are the same persons, as

for example, where a bill is drawn “pay to me or my order.” But the drawer and the

drawee cannot be the same, because there cannot be an order to oneself.

3. Drawee and Acceptor:

The drawer or the payee, who is in possession of the bill, is

called the holder. The holder must be present the bill to the drawee for his

acceptance. When the drawee accepts the bill, he becomes the acceptor. Which

means one person can plays the two roles at a time of drawee and acceptor.

4. Order to Pay:

The bill of exchange must contain an order by the drawer to

drawee to pay certain sum of money under any circumstances. The order must be

imperative; it should not be in a request form.

5. An Unconditional Order to Pay:

The bill of exchange must contain an order for promise to pay

certain amount it should be unconditional. If there is conditional order which is

invalid means their should not be like that if this event is happen then only I will

pay to you, it is invalid. Conditional bill should not be their because it is invalid.

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6. Signed by Drawer:

The bill of exchange must be signed by the drawer.

7. Payee must be certain:

It must be payable to a definite person or his order. The payee

must be certain. Bill may be made payable to two or more payees jointly or in the

alternative.

8. Stamping:

Bill of exchange is chargeable with stamp duty.

Types of Bills of Exchange:

There are five types of bills of exchange namely, (1) bill

of exchange payable on demand. (2) bill of exchange payable after date, (3) inland

bill of exchange, (4) foreign bill of exchange, and (5) accommodation bill of

exchange.

1. A Bill of Exchange Payable on Demand:

When a bill is made payable on demand, or at sight, or

on presentment, it is known as a bill of exchange payable on demand.

Following is a specimen of a bill of exchange payable on demand:

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Mumbai,Rs. 20,000/- 20th August, 1999

Stamp

On demand, pay to Prof. P.P. Prakash, or order, a sum of rupees twenty thousand only for value received.

For Airedale & Company,Sd/-

Partner420, P.P. Road, Mumbai 400 004.

ToProf. P.P. Prakash,25, Raja Mahan, AcceptedMumbai 400 001. Sd/-

R S T 21-8-1999


A bill of exchange payable to bearer on demand is

illegal under Section 25 of the Indian Paper Currency Act and also under Section

31(2) of the Reserve Bank of India Act, 1934. Hence, such a bill cannot be drawn

by a firm or an individual.

2. A Bill of Exchange Payable After Date:

When a bill is made payable after the expiry of a stipulated

period, or payable so many days after sight, it is known as a bill of exchange

payable after date, or a time bill.

Following are a couple of specimens of bills of exchange payable after date and after sight:

In the above bill, A.G. Joshi is the drawer; B.K. Shah is the

drawee who has accepted the bill; therefore acceptor; and M.N. Patel is the payee.

The bill is made payable after date.

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Mumbai,Rs. 20,000/- 20th August, 1999

Stamp

Three months after pay M.N. Patel, 12 V.P. Road, Surat, or order, the sum of rupees ten thousand only for value received.

Sd/- A.G. Joshi,

245, Mahatma Gandhi Road,Mumbai 400 001.

ToM.N.Patel15, Netaji Subhash Lane, AcceptedSurat. Sd/-

B.K. Shah 10-6-1999


3. An Inland Bill of Exchange:

An Inland Bill of Exchange is one, which is—

a. Drawn and made payable in India, or

b. Drawn in India on a resident of India though the place of payment may be

outside India.

For example, a bill of exchange, drawn by a merchant in Mumbai upon

another merchant in Calcutta, made payable in India, is inland bill. Similarly, a bill

of exchange, drawn by a merchant in Chennai upon another merchant in Delhi and

payable in Washington, is an inland bill.

4. A Foreign Bill of Exchange:

A foreign bill of exchange is one, which is –

a. Drawn in India and made payable in some other country other than India.

b. Drawn upon a person who is a resident of a foreign country.

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CHEQUE:

Cheque is a very common form of negotiable instrument. If you have a

savings bank account or current account in a bank, you can issue a cheque in

your own name or in favour of others, thereby directing the bank to pay the

specified amount to the person named in the cheque. Therefore, a cheque may

be regarded as a bill of exchange; the only difference is that the bank is always

the drawee in case of a cheque.

Definition:

Section 6 defines a cheque as under: “A cheque is a bill of

exchange, drawn on a specified banker and not expressed to be payable

otherwise than on demand.”

Definition:

“Cheque is an instrument in writing containing an unconditional order,

addressed to a banker, sign by the person who has deposited money with the banker,

requiring him to pay on demand a certain sum of money only to or to the order of

certain person or to the bearer of the instrument.

Essentials\Characteristics of a Cheque:

1. Instrument in Writing:

A cheque must be writing. It can be written in ink, ball

point pen, typed or even printed. The ink used for writing the cheque should not be

easily erasable. Any overwriting or alteration will make the cheque dishonor. Oral

orders are not considered as cheques.

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2. Unconditional Order:

In cheque there must be an order by a depositor

(drawer) on its bank (drawee) for paying money to the holder (payees) and order

should be unconditional. A cheque containing conditional order is dishonoured by

the bank.

3. Payable on Demand:

A cheque when presented for payment must be paid on

demand. If cheque is made payable after the expiry of certain period of time then it

will not be require.

4. Certain Sum of Money:

Cheque must be for money only and it must be written

in words and figures. If the amount in words and figured will differ from each other

or if there will be insufficient balance in the account then the cheque will be

dishonoured.

5. Payee must be Certain:

The payee of the cheque should be certain person i.e.

either real person or artificial person e.g. Joint Stock Company. The name of payee

must be written on the cheque or it can be made payable to bearer.

Types of Cheques:

There are two types of cheques:

1) Those which are uncrossed are popularly known as “bearer” or open cheques;

and

2) Crossed Cheques.

1) Bearer Cheques or Open Cheques:

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Bearer or open cheques are payable at the

counter of drawee banker on presentment. As the bearer cheques carry risk of being

lost or stolen and the finder may be able to get it encashed, crossing of cheques

avoids such a contingency and secures payment.

2) Crossed Cheques:

Crossing of cheques is of different types:

I. Cheques crossed generally (Sec. 123 &126).

A cheque is crossed generally when;

A. It has two parallel lines marked across its face; or

B. It bears an abbreviation “& Co.” between the parallel line; or

C. It bears the words “not negotiable” between the two parallel lines (Sec. 123).

A cheque crossed generally will be paid to the banker through

which it is presented. It is a direction to the drawee banker to pay the sum only

through a banker. Where a cheque is crossed generally, the banker on whom it is

drawn shall not pay it otherwise than to a banker (Sec. 126).

Specimens of General Crossing

II. Cheques crossed specially (Secs. 124 & 126):

When a cheque is crossed by two parallel

transverse lines and also the name of the banker is written between the two parallel

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lines, with or without the words, ‘not negotiable’ it is called “special crossing” (Sec.

124). It is to be payable to that person only on which the bill is drawn which means

it is not a risky document as Bearer Cheque is. The banker on whom it is drawn

shall not pay it otherwise than to the banker to whom it is crossed or his agent for

collection (Sec. 126). It will paid only when presented by the banker.

Specimens of Special Crossing

Payment of cheque crossed especially more than once (Sec. 127):

A cheque cannot be crossed more than once

specially, except the banker on whom it is crossed specially can cross it again to his

agent for purpose of collection only. If the cheque is crossed especially more than

once, the banker has a right to refuse payment thereof.

III. Cheques crossed ‘A/c. Payee’:

Often cheques are crossed with two parallel

transverse lines and in between the two parallel lines the words “a/c payee” or “a/c

payee only” are written. This means that the proceeds of the cheque are to be

credited to the account of the payee only. This type of crossing is also called

“Restrictive crossing”. Insertion of words “A/c. Payee” does not restrict its

negotiability. It serves a good protection to drawer from loss or theft.

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Specimens of Cheques Crossed A/c Payee

Or Restrictive Crossing

IV. Cheque bearing ‘Not Negotiable’ (Sec. 130):

A cheque crossed generally or specially may bear

additional words ‘not negotiable’. A person taking a cheque crossed generally or

specially bearing in either case the words ‘not negotiable’ shall not have and shall

not be capable of giving a better title to the transferee than that which the person

from whom he took it had.

It will be observed that writing the words ‘not

negotiable’ is a type of special crossing or general crossing. Cheques crossed

generally or specially, can be added with the words “not negotiable”. The words

“not negotiable” are not the same thing as special crossing, because in a special

crossing, the banker on whom it is drawn shall not pay it otherwise than to the

banker on whom it is crossed or his agent for collection. When the cheque is marked

with the words “not negotiable” in addition to the special crossing, it deprives the

cheque of its main feature of negotiability.

V. Crossing after issue (Sec. 125):

Crossing of cheque other than that authorized by the act

is unlawful. The following crossings are permissible:

a. Where a cheque is uncrossed, the holder may cross it generally or specially.

b. Where a cheque is crossed generally, the holder may cross it specially.

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c. Where a cheque is crossed generally or specially, the holder may add the words “not

negotiable.”

d. Where a cheque is crossed specially, the banker to whom it is crossed may again

cross it specially to another banker or his agent, for collection.

“Criminal Action against Dishonour Cheque”

1. Imprisonment, or Fine, or Both, for dishonour of Certain Cheques for

Insufficient Funds (Sec. 138):

Sec. 138 lays down that where any cheque, drawn by a

person, on an account, maintained by him with a banker, for payment of any amount

of money to another person, from and out of that account, for the discharge, in

whole or in part, of any debt or other liability, is returned by the Bank unpaid

because –

I. The amount of money, standing to the credit of that account, is insufficient to

honour the cheque or,

II. It exceeds the amount, arranged to be paid from that account by an agreement

made with that Bank, or,

III. Instructions were issued to the bank for stop payment, such person shall be

deemed to have committed an offence and shall, without prejudice to any other

provision of this Act, be punished –

a. With imprisonment for a term extending to one year, or,

b. With fine, which may extend to twice the amount of the cheque, or.

c. With both.

The following three conditions, however, are required to be fulfilled to

constitute the said offence under Sec. 138.

I. The cheque must have been presented to the bank within a period of six months

from the date, on which, it was drawn, or, within the period of its validity,

whichever is earlier

II. The payee, or the holder in due course of the cheque, as the case may be must have

made a demand for the payment of the said amount of money, by giving a notice, in

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writing, to the drawer of the cheque, within fifteen days of the receipt of

information by him from the bank, regarding the return of the cheque as unpaid; and

III. The drawer of such cheque must have failed to make the payment of the said

amount of money to the person within fifteen days of the receipt of the said notice.

2. Presumption in Favour of Holder (Sec. 139):

It shall be presumed, unless the contrary is proved, that the

holder of a cheque received the cheque of the nature, referred to in section 138, for

the discharge, in whole or in part, of any debt, or their liability.

3. Defence, which may not be allowed in Any Prosecution, Under Section 138:

Sec. 140 lays, down that it shall not be a defence in a

prosecution for an offence under section 138 that the drawer had no reason to

believe, when he issued the cheque, that the cheque may be dishonoured on

presentment for the reasons, stated in section 138.

4. Such Offences by Companies:

If the person, committing an offence under section 138, is a

company, every person, who at the time of commission of the said offence, was in

charge of and was responsible to the company for the conduct of the business of the

company, as well as the company, shall be deemed to be guilty of the offence and

shall be liable to be proceeded against and punished accordingly [Sec. 141(1)].

5. Liability of Director, Manager, Secretary, or other Officer of the Company

[Sec. 141(2)]:

Notwithstanding anything contained in sub-section (1), where

any offence, under this Act, has been committed by company and it is proved that

the offence has been committed, with the consent or connivance of, or is attributable

to any neglect on the part of any director, manager, secretary, or other officer of the

company, such director, manager, secretary, or other officer, shall also be deemed to

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be guilty of that offence and shall be liable to be proceeded against and punished

accordingly.

6. Cognizance of Offences:

Sec. 142 says that notwithstanding anything contained in the

Code of Criminal Procedure, 1973 (2 of 1974), --

I. No court shall take cognizance of any offence punishable under Section 138

except upon a complaint, in writing, made by the payee, or as the case may be, the

holder in due course of the cheque.

II. Such complaint is made within a period of one month of the date, on which, the

cause of action arises, under clause (c) of the provision to section 138.

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Case Study On Cheque Fraud: Canara Bank vs. Canara Sales Corporation and

Others

The company has a current account with the bank which was operated by the

Company’s Managing Director. The Company’s account in whose custody the cheque

book was, forged the signature of the Managing Director in 42 Cheques totaling

Rs.326047.92 over a period of time. This was detected by another accountant. The

company immediately on detected of the fraud demanded the amount from the bank.

The bank refused payment and therefore the company files a suit against the bank.

The bank lost the suit and took the matter up to the Supreme Court.

Judgment:

The Supreme Court dismissed the appeal of the bank and held that:

Since the relationship between the customer and the bank is that of a creditor and

debtor, the bank had no authority to make payment of a cheque containing a forged

signature. The bank would be acted against the law in debiting the customer with the

amount of the forged cheque as there would be no mandate on the bank to pay. The

Supreme Court pointed out that the document in the cheque form on which the

customer’s name as drawer was forged was a mere nullity. The bank would succeed

only when it would establish adoption or estoppel.

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Case Study On Cheque Stop Payment: Goa Plast (P) Ltd. Vs. Chico Ursula

D'souza

An appeal was filed before the Hon’ble Supreme Court seeking whether Section 138

of the Negotiable Instruments Act is applicable when cheque is dishonored by the

bank due to stop payment instructions issued by the payer.

The apex court underlined that the relationship between the drawer and the drawee is

not material when the liability is admitted and it is not necessary that there should be a

mercantile or commercial relationship between the drawer and the drawee. Hence

stopping the payment of a post-dated cheque, issued to discharge debt or liability, is a

criminal offence under the Negotiable Instruments Act.

Judgment:

Hon’ble Supreme Court held that a person who issues a cheque could not stop

payment by the bank on the ground that the payment was not due and the amounts

were disputed. He would be covered by Section 138 of the Negotiable Instruments

Act and would be liable to imprisonment and fine. The Apex Court was of the view

that when a cheque is issued it is a sufficient evidence to prove that there was liability

and according to the presumption under Section 139, this is admission of liability.

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Case Study On Cheque Dishonor: M/s. Rahul Builders v M/s. Arihant Fertilizers & Chemical and another -

Appellant is a partnership firm. Respondent No. 1 entered into a contract with it for

construction of a building and factory premises. Appellant executed the said contract.

It submitted bills for execution of contractual work for a sum of Rs. 26,46,647/-.

Respondent No. 1 had made payments of Rs. 17,74,238/- and a balance of Rs.

8,72,409/- was said to be outstanding. A cheque for a sum of Rs. 1,00,000/- drawn on

Federal Bank Limited, Indore was issued by Respondent No. 1 in favour of the

appellant. Upon presentation of the said cheque, it was not honoured on the ground

that Respondent No. 1 had closed its account with the bank. A notice dated

31.10.2000 was sent by it to Respondent No. 1 stating:

"Your cheque No. 693336 dated 30/4/2000 for Rs. 1,00,000/- has also been returned

unpassed by the bank authorities with the plea that A/C No. 1461 has already been

closed. Hence the undersigned is now free to take up any legal step against you to get

the amount of my pending bills.

In view of the above, you are requested to remit the payment of my pending bills

within 10 days from the date of receipt of this letter otherwise suitable action as

deemed fit will be taken against you."

As despite receipt of the said notice, Respondent No. 1 did not make any payment, a

complaint petition was filed on 11.12.2000. An application was filed by Respondent

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No. 1 for rejection of the said complaint inter alia on the ground that the notice issued

by the appellant was not a valid one. The said application was rejected. A revision

application filed there against before the District and Sessions Judge, Neemuch was

also dismissed.

Judgment:

The High Court, however, by reason of its impugned order, in exercise of its

jurisdiction under Section 482 of the Code of Criminal Procedure (Code), has quashed

the criminal proceedings pending against it holding:

(i) 15 days' notice having not been served upon Respondent No. 1, the same was not

valid in law.

(ii) The complainant by reason of the said notice having demanded a sum of Rs.

8,72,409/- as against the cheque which was for a sum of Rs. 1,00,000/- only, the

notice was vague and did not serve the statutory requirements of Provisos (b) and (c)

of Section 138 of the Act.

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Jagdish Bagri v Rajendra Kumar Luhariwala and another- -

A sum of Rs.2,30,000/- was payable to the complainant-respondent No.1 herein by

the present appellant -accused and since the payment was not made there was an

agreement between the parties to stipulate the mode of payment. A sum of

Rs.2,30,000/- was to be paid in 8 installments and the first instalment was of a sum of

Rs.50,000/- payable by 22.6.2002 and the 8th instalment of Rs.10,000/- was payable

by 28.2.2003. As a security for the payment, the appellant issued three cheques. One

of the cheques was of Rs.1 lakh and that is the subject matter of present controversy.

Stand was taken that since the cheque was issued as a security; the provisions of

Section 138 of the Negotiable Instruments Act, 1881 (in short the `Act') had no

application.

Judgment:

The High Court noticed that the appellant failed to pay Rs.2, 30,000/- in 2 instalments

as agreed to and therefore because of default of payment cheque of Rupees one lakh

was presented. In that sense there is no question of any security.

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Endorsement - (Section 15)

The N.L act of 1881 defines endorsement as "when the maker or the

holder of the N.I. signs the same otherwise that as maker for the purpose of

negotiation on the back or on the face thereof or on a slip of paper annexed there to or

so sign for the same purpose a stamp paper intended to be completed as an negotiable

instrument, he is said to have endorsed the same & he is called a endorser

A-person who endorses a negotiable instrument is endorser. A person

in whose favour endorsement is made is called endorsee. & the act of signing a

negotiable instrument for the purpose of negotiation is called endorsement.

:

Following are condition for valid endorsement:-

1) A endorsement can only made by maker or holder of a negotiable instrument. They

include following parties to the instrument. Drawer of BOE , payee or endorsee of

N.I., holder in due course.

When the there are more than one drawer or holder who are not partner, all of them

are required to sign the document jointly .However, when a partnership firm is the

holder of a negotiable instrument any partner who-is duly authorized can endorsed a

negotiable instrument.

2) It must be signed by the maker, as holder otherwise than as maker i.e. otherwise

then in the capacity of a maker.

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3) An endorsement should be made on the back or on the face of instrument or on a

slip of paper annexed there to which is called allonge or on a stamp paper which is

intended to be completed as a negotiable instrument.

4) It should be made with an intention to transfer not only the document in favour of

endorsee but also to transfer all rights to the document in favour of endorsee

including the rights to recover the amt. mention in the document

5) Endorsement is complete only on delivery of instrument to endorsee.

6) The N.L act has not prescribed any particular form of writing for an endorsement

The only requirement in that the words used for it must clearly indicate intentions of

endorser to transfer the instrument in favour of endorsee together with all rights of

instrument. '

On the endorsement, being duly completed by delivery of instrument it not only

transfers instrument in favor of transferee but also confesses upon transferee all rights

of instrument and also the right to further transfer the instrument

However, the endorser may by specific words restricts or exclude some of the rights of

endorsee.

KINDS OF EDORSEMENT:-

1) GENERAL OR BLANK ENDQRSEMENT

An endorsement is said to be blank or general when the endorser signs the document

for the purpose of negotiation without writing the name of endorsee (transferee).

A N.I. endorsed in blank is like a bearer instrument & any person who is in possession

of such an instrument is entitled to receive the amount mentioned in the document.

In other words a N.I. endorsed in blank, is payable to the bearer of the instrument

even if it was originally an order instrument

FOR E.G.:- A B.O.E. which is payable to ' B’ can be endorsed by 'B', by making a

blank endorsement as under i.e. without writing the name of the transferee which will

have the effect of converting an order doc. in to a bearer doc.

TRANSFER TO Mr.__________

SD/ - (B )

A N.I. which is endorsed in blank can be converted into full or special endorsement

by the endorsee without making any fresh endorsement & without signing the

40 | P a g e


instrument just by adding the name j of the transferee in the blank space above the

signature of the endorser who has made blank endorsement.

Thus, in the above e.g. if Mr. C is in the possession of the BOE with the blank

endorsement made by Mr. B , he can transfer the same to Mr. D without making a

fresh endorsement just by adding the name of Mr. D above die signature of Mr. B.

TRANSFER TO Mr.____________

SD/ - (B )

2) FULL OR SPECIAL ENDORSEMENT

When a maker or a holder of a N.I . signs the N.I. for the purpose of negotiation &

also gives a specific direction to pay the amt. mentioned in the instrument to a

specified person or his order, it is called

full or special endorsement.

In other words, full or special endorsement is one in which the maker or the holder in

addition to his signature & the writings also specifies the name of the person in whose

favor the instrument is endorsed i.e. the name of the endorsee for e.g. a BOE which is

payable to Mr. B can be endorsed by Mr. B by making frill endorsement i.e. by

writing the name of the transferee.

For e.g. Mr. C

Transfer to Mr. C

SD / - (B )

When a negotiable instrument is endorsed in full, the amt of the instrument cannot be

claimed by any person except by the person in whose favor it is validly transfer by the

endorsee.

Thus, a N.L which is a bearer instrument can be converted into an order instrument by

making full or special endorsement

A N.I. which is endorsed in blank can be converted in full or special endorsement by

the endorsee without making any fresh endorsement and without signing the same

just by adding the name of the transferee in die blank space above the signature of

the endorser who has made the blank endorsement

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3) PARTIAL ENDORSEMENT

No form of writing in the nature of endorsement is valid if it only transfer a right to

receive part of the amt mentioned in the instrument. However, the instrument is partly

paid and the fact of such payment is recorded on the instrument it can be endorsed for

the balance amt of the instrument which remain^ unpaid.

4) RESTRICTIVE ENDORSEMENT - (R .&)

R.E. is one which prohibits further negotiation of the instrument Thus, an

endorsement is R.E. when it by expressed words restricts the negotiability of the

instrument. The effect of R.E. is that it puts an end to the negotiability of the

instrument and the person in whose favour it is endorsed can only recover the amt of

the instrument

For e.g.: Transfer to Mr. A only.

5) CONDITIONAL OR QUALIFIED ENDORSEMENT

An endorsement is said to be conditional or qualified when it is subject to certain

conditions.

The most common type of conditional or qualified endorsement is called " SAN

RECOURSE ENDORSEMENT

San recourse means without recourse. By writing such words the endorser makes it

very clear to the endorsee that he will be not be held liable in the event the instrument

is dishonoured.

Thus, when the instrument is endorsed with San recourse endorsement, & it is

dishonour the holder of such instrument cannot make the endorser who had made San

recourse endorsement liable on the instrument. Thus by making a San recourse

endorsement the endorser excludes his liability on the instrument

6) FACULTATIVE ENDORSEMENT:- (F.E.)

When an endorser expressly gives up some of its rights on the negotiable instrument,

by making endorsement, the endorsement is called facultative endorsement.

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For e.g.:- When an endorser by an endorsement gives up his right to receive

the notice of dishonour it called as F.E. Because under N.1 act he has right to receive

the notice of dishonour when the instrument is dishonour* But by making such an

endorsement, the endorser gives up some of his rights to receive the notice of

dishonour a thereby relieves, the endorsee from his duty to give notice of dishonour,

to other words, endorser increases his liable on the; endorsement. Therefore it is

called F.E.

Conclusion: What is a negotiable instrument? Negotiable means transferable. Instrument means

a document. Negotiable instrument, therefore means a transferable document.

Negotiable instrument entitles holder to the receipt of money therein. It also gives

him the right to transfer the same by delivery or by endorsement thereof. The Act

deals with only three types of negotiable instruments, i.e., promissory notes, bills of

exchange and cheques.

Characteristics of a negotiable instrument:

(1) The possessor is the holder and owner thereof.

(2) The holder in good faith and for value called the holder in due course receives the

instrument free from all defects.

(3) The holder can sue upon the instrument in his own name.

(4) The instrument may be payable either to the order or to the bearer.

(5) It may be made payable to either or more payees jointly.

(6) Consideration is presumed.

Types of Negotiable instrument:

(1) Promissory notes

(2) Bills of exchange

(3) Cheques

Promissory note:

Essentials:

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(1) It must be in writing;

(2) it must contain an undertaking to pay;

(3) such undertaking must be unconditional;

(4) the maker and payee must be certain and definite persons;

(5) the sum promised to pay must be certain and specific sum;

(6) it must be a promise to pay money only;

(7) it must bear the proper stamp.

Bill of exchange:

Essentials:

(1) It must be in writing;

(2) it must have three parties, the drawer, the drawee and the payee;

(3) it must contain an order by the drawer to the drawee to pay;

(4) it must be unconditional;

(5) it must be signed by the drawer;

(6) the drawee must be certain;

(7) the order must be to pay money only;

(8) payee must be certain ;

(9) the sum payable must be certain;

(10) it must bear proper stamp duty.

Cheque:

Types of cheques: Cheques are of two types

(1) bearer or open cheques;

(2) crossed cheques. Crossing of cheques may be of following types:

(a) Cheques crossed generally;

(b) Cheques crossed specially.

A cheque may be crossed specially more than once. Cheques may be crossed account

Payee. Cheques may bear the words “not negotiable” Such a cheque shall not be

capable of giving a better title to the transferee that which the person from the tool it

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had. Cheques crossed with the words “not negotiable” is a type or general crossing. In

a special crossing the banker on whom it is drawn shall not pay it otherwise than to

the banker on whom it is crossed. Cheque marked with the words “not negotiable” is

deprived of the main feature of negotiability.

Cheques may be crossed after the issue under certain circumstances only. The

crossing of cheques other than those that are authorised by the Act is unlawful.

Banker and customers: The Act gives protection to the banker while receiving and

making payments. When the banker receives the payment on behalf of the customer

and the customer’s title is defective, the banker will not be liable to the true owner. It

shall be the duty of the banker who receives payment based on electronic image of

truncated cheque to verify the genuiness of the cheque. The relation between the

banker and the customer arises out of a contract. It is that of creditor and a debtor. The

banker has to take special care while making the payment from the customer’s funds.

Banker will be protected when the payment of the cheque is made in due course. In

case where the banker makes the payment otherwise than in due course, the banker

shall be liable to the true owner for any loss he may sustain. If the banker dishonours

the cheque wrongfully, he is bound to compensate the drawer for loss or damages

suffered by the drawer. It shall be the duty of the bank to ensure the exactness of the

apparent tenor of electronic image of the truncated cheque while truncating and

transmitting the image. The banker is liable only to the drawer and not to the holder of

the cheque. The holder has a remedy against the drawer of the cheque only. However,

the holder may proceed against the bank when the drawer is discharged because the

holder does not present it for payment within reasonable time and drawer suffers

actual damages through delay or when the banker makes the payment of the crossed

cheque out of the due course. The banker, under circumstances, is justified in

dishonouring the cheque, for example, if the funds of the drawer are insufficient or the

cheque is not properly presented.

Maturity of an instrument: The maturity of a promissory note or a bill of exchange

is the date on which it falls due. Every promissory note and bill of exchange payable

at sight and on presentation means payable on demand. Instrument which is not

expressed to be payable on demand, matures on the third day, that is, it is entitiled to

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three days of grace. Bills and notes payable on a specified date or a t certain period

after the date or after sight, enjoy three days grace.

Endorsement:

When the maker or holder signs the instrument on the back or the face of it or on slip

of paper called “allonage” or signs stamp paper for that purpose, he is said to have

made a valid endorsement. Every sole maker, drawer payee or endorser may endorse

and negotiate the instrument. Only a person who is a holder of the instrument can be

endorse and negotiate the instrument.

Effects of Endorsement: it transfers to the endorsee the property therein with the

right of further negotiation.

Kinds of endorsement: There are six kinds:

(i) General or Blank Endorsement; If the endorsee signs his name only, the

endorsement sis said to be blank or general endorsement

(ii) Full or Special Endorsement; Endorsee signs his name and adds direction to pay

the amount mentioned in the instrument. The endorsement s then said to be if full.

The holder of an instrument may convert the endorsement in blank to endorsement in

full

(iii) Partial Endorsement; where a part amount is paid and the note to that effect has

been endorsed on the instrument, the instrument may be negotiated for the balance

amount.

(iv) Restrictive Endorsement; It restricts or prohibits further negotiation of the

instrument. It puts an end to the negotiability.

(v) Conditional or Qualified Endorsement; the endorser may express words in

endorsement, excludes his own liability thereon an make such liability or right of

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endorsee to receive the amount therein depending upon the happening of the specified

even although such event may never happen. When the endorser excludes his liability

and subsequently the instrument comes back in his hands, all the intermediate party to

whom he was previously liable. Only where prior endorsement was made without

recourse, the holder can enforce payment against intermediate parties. This is called

negotiation back. The party who gets back the instrument may further negotiate the

bill. This is called taking up of the bill.

(vi) Facultative Endorsement; by this, the endorser abandons some right or increases

his liability under an instrument.

Bibliography:

Business Law For Management- Bhulchandani

www.google.com

www.vakilno1.com

www.indianlawcds.com

www.icmrindia.org

http://chddistrictcourts.gov.in

www.dateyvs.com

www.indianlawcds.com

www.wikipedia.org

www.legalserviceindia.com

www.manupatra.com

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http://www.manupatra.com/

http://www.legalserviceindia.com/

http://www.wikipedia.org/

http://www.indianlawcds.com/

http://www.dateyvs.com/

http://chddistrictcourts.gov.in/

http://www.icmrindia.org/

http://www.indianlawcds.com/

http://www.vakilno1.com/

http://www.google.com/


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Law Project- The Negotiable Instrument Act- RevisedV1

Documents

Transcript of Law Project- The Negotiable Instrument Act- RevisedV1