NEGOTIABLE INSTRUMENTS

Law relating to Cheques, Bills of Exchange and Promissory Notes

TOPICS COVERED

Laws relating to the following:

Promissory Note Bills of Exchange Cheque

The word ‘Negotiable’ means transferable from one person to another

And

term ‘Instrument’ means any written document by which a right is created in favour of some person.

Thus, negotiable instrument is a document by which the right vested in a person can be transferred to another person in accordance with the Negotiable Instruments Act 1881.

MEANING AND CONCEPT

ACCORDING TO THE NEGOTIABLE INSTRUMENTS ACT 1881

The 3 negotiable instruments are as follows:

Promissory Notes Bills of exchange, and Cheques

1. ConsiderationEvery negotiable instrument is deemed to have been drawn and accepted for consideration.

2. DateThat the negotiable instrument was drawn on the date shown on the face of it.

3. AcceptanceEvery Bill of exchange was accepted within a reasonable time after the date mentioned therein and before the date of its maturity.

4. TransferEvery transfer should be made before the expiry

PRESUMPTIONS

PROMISSORY NOTE (SECTION 4)

A promissory note is an instrument in writing 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.

The promise to pay must be unconditional or subject to only such conditions which according to the ordinary experience of mankind is bound to happen.

Example

‘S’ writes “I promise to pay ‘B’ a sum of Rs. 500, seven days after my marriage with ‘C’ “ . Is this a promissory note?

Promissory note can be based on future event. The event should be certain, but the date on which it will happen need not be certain. In this case, the event of ‘S’ marriage with ‘C’ is not certain, as ‘S’ may not marry or marry some other person. Hence, this is not a promissory note.

Example :- (i) ‘X’ promises to pay ‘Y’ by a promissory note, a sum of Rs. 5,000. fifteen days after the death of ‘B’.

(ii) ‘X’ promise to pay ‘Y’ by a promissory note, Rs. 5,000 and all other sums, which shall be due, fifteen days after the death of ‘B’

 Bank note is frequently referred to as a promissory note

BILLS OF EXCHANGE (SECTION 5)

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.

Bill of exchange

Should be in writing

Signed by drawer

Accepted by drawee

Certainty of amount Oder to pay

SPECIAL BENEFITS OF BILLS OF EXCHANGE

1. Double secured instrument: if the drawee fails to honor the order, the holder of the instrument may look the drawer for the payment

2. In case of immediate requirement a Bill may be discounted with the bank

MATURITY DATE

The date on which a bill of exchange falls due for payment

• In the case bill is payable after certain days after sight, the maturity date is calculated by adding 3 days of grace to the period after which the bill is payable. • In the case the date of maturity happens on public holiday including Sunday, the bill falls due for payment on the day preceding the public holiday.

Example :-Ascertain the date of maturity of a bill payable 100 days after sight and which is presented for sight on 4th May 2013.

100 days from 4th May work out as 12th August 2013 + 3 grace days = 15 August 2013, Since 15th August is a public holiday, maturity date of bill will be 14th August 2013

HEADS OF INCOME

Profit and Gain from Business or Profession

CHEQUE (SECTION 6)

“A Bill of Exchange drawn on a specified banker and not expressed to be payable otherwise then on demand”

Therefore,

Cheques are always drawn on specified banker &It is always payable on demand.

TYPES OF CHEQUES (SEC. 123)

Cheques

Open Crossed

General Crossin

g

Special Crossin

g

TYPES OF CHEQUES

1. Open cheque – those which can be encashed across

the counter of the bank.

Liable to great risk if stolen or lost.

Finder can get payment from bank.

2. Crossed cheque – which bears two transverse lines

with or without the words “ & co.”

MEANING OF CROSSING A CHEQUE

• It is a unique feature affecting to a certain level the responsibility

of the paying Banker and also its negotiable Character.

• It is a direction to a particular Banker by the Drawer that

Payment should not be made across the Counter.

• The payment can be collected only through a Banker.

• Crossing of the Cheque is affected by drawing two parallel

Transverse lines

• The Cheque that is not crossed is an open Cheque.

TYPES OF CROSSINGGeneral Crossing

•Where a cheque bears across its face two parallel line without anything

written on it

•The payee may get the cheque collected through a bank of his choice

Special Crossing

•Specification of the name of banker or any other specification on the

face of the cheque.

•Ex. “Account Payee”, specification of any bank name etc.

CROSSED CHEQUE = SAFE CHEQUE

DISHONOUR (SEC. 92)

“ A promissory note, bill of exchange or cheque is said to be dishonour by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same”

Wrongful

Rightful

Dishonour

Wrongful dishonourDishonour of cheque by banker due to negligence or carelessness by its employees.

Rightful dishonourDishonour other then wrongful ex.- stale cheque, sign mismatch etc.

DISHONOUR OF CHEQUE: AN OFFENCE (SEC. 138)

Section 138 of Negotiable Instrument Act states that the return of a cheque by a banker because the money standing to the credit of the accountholder is insufficient to honour the cheque is a criminal offence.

The drawer shall be punishable with imprisonment for the term up to two years or with a fine twice the amount of the cheque or both

PROVISIONS OF SECTION 138 APPLY ONLY IF -

(i) Cheque is presented to the bank within specific validity period

(ii) The payee or holder has given notice demanding payment

within 30 days of receiving information of dishonor

(iii)The drawer does not make payment within 15 days of the

receipt of the notice

NOTE: The complaint can be made only by the payee within one month

POSITION OF A MINOR IN NEGOTIABLE INSTRUMENT ACT

“A Minor may draw, endorse, deliver Negotiable instruments so as to bind all parties” (Section 26)

An instrument does not void just because a minor is party to it. It remains binding on all the other parties except minor.

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