Negotiable instrument Act 1881

Priya AbrahamFaculty, Dept of Management Studies

VCMCS

Introduction

Definition “Negotiable instrument”Negotiable means transferableInstrument means a written document

A negotiable instrument is a document which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or by indorsement and delivery.

It is a method of transferring a debt from one person to another.

Characteristics Freely transferable Title of holder free from all defects

A person who is holding negotiated instrument he is free from a defect in the title of the transferor

Ex: S sells certain goods to B. B gives a promissory note to S for the price. He refuses to pay the promissory note, claiming that the goods are not according to order. If S sues B on the note, B’s defence is good. But if he negotiates the note to H, a holder in due course, B’s defence will be of no avail.

RecoveryA holder of the negotiable instrument can sue for recovery

of the amount. Presumptions

Negotiable instrument is for consideration Dated Reasonable Time of acceptance Before the maturity it should transferred Stamp when there is a dishonour

Types of negotiable instrument

Negotiable by statue

- Promissory note

-Bill of exchange

-Cheque Negotiable by custom or usage

-Share warrants

-Dividend warrants

-Share certificates

Promissory noteIt is an instrument in writing containing an unconditional

undertaking, signed by the maker,to pay a certain sum of money only to, or to order of, a certain person, or to the bearer of the instrument.

The person who makes the promissory note and promises to pay is called maker

The person to whom the payment is to be made is called the payee.

Essential elements-Writing-Promise to pay-Definite and unconditional-Signed by the maker-Point out the Certain parties-Payment of certain sum of money-Promise to pay money only-Formalities like date, number, place, consideration everything should be there-it may be payable on demand or after a definite period of time

Bill of ExchangeIt 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 order of a certain person or to the bearer of the instrument.

The person who makes the bill is called drawerThe person who is directed to pay is called draweeThe person to whom the payment is made is called payee

Essential element-Must be in writing-Must contain an order to pay-The order must be unconditional-It requires three persons involvement-The parties must be certain-Signed by the drawer-Sum payable must be certain-It should be an order to pay-All the formalities like date, time, place etc., should be there

Distinction between a Note and the Bill of exchange

Note – two parties involved BOE-Three parties involves

Note-Unconditional promise to pay BOE-Unconditional order to pay

Note-Maker is a debtor BOE-maker is a creditor Note-Maker is the acceptor BOE-Maker is not a acceptor Note-Liability of the maker is Primary BOE-Liability of the drawee

is secondary Note-Requires no acceptance BOE-Requires acceptance

of the drawee Note-Cannot drawn as payable to bearer BOE-Drawn as payable to

the bearer Note-Dishonor may not informed to all BOE-Dishonour informed

to all

ChequeA cheque is a bill of exchange drawn upon a specified

banker and payable on demand.

It is the electronic form means it contains the exact mirror image of the proper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature and asymmetric

crypto system. Types

-Open chequeA cheque which is payable in cash across the counter

of a bank-Crossed cheque

It is the one on which two parallel transverse lines with or without the words &Co are drawn.

Types of crossing General crossing

A cheque is said to crossed generally where it bears across its face an addition of the words “&Co”or any abbreviation between two parallel transverse lines either with or without the not negotiable.

Special crossing

Where a cheque bears across its face an addition of the name of a banker,either with or without the words not negotiable the cheque is deemed to be crossed specially.

Restrictive crossing

A cheque which additionally contains the words ‘A/C Payee’ in the general or special crossing cheque with or with out the words not negotiable

Distinction between BOE and cheque

BOE-Drawn on any personCh-drawn only on banker

BOE-Accepted by drawee Ch-No acceptance require

BOE-Not crossed Ch-Can be crossed

BOE-Require stamp Ch-Not require stamp

BOE-Cannot be countermanded Ch-Can be countermanded

Classification of Negotiable instrument Bearer and order instruments

A negotiable instrument is payable to bearer A negotiable instrument is payable to order

• Inland and foreign instrument-Both made and payable in India-not an inland

• Instrument payable on demand-a cheque always payable on demand

• Time instrument-which is payable after a period

• Accommodation bill-a bill drawn,accepted or indorsed for consideration

• Fictitious bill-when the name of the drawer or the payee or both is fictitious in a bill,

the bill is called a fictitious bill• Escrow

-when a negotiable instrument is delivered conditionally or for a special purpose

• Ambiguous instrument-faulty draft instrument

• Inchoate instrument-incomplete instrument

Bills in sets A bill of exchange is sometimes

drawn in parts, especially when it has to be sent from one country to another. This is known as drawing a bill ‘in a set’.

Each bill must be numbered Entire bill is extinguished when the

payment is made The drawer must signed in each

part of the bill

Parties to a negotiable instrument

Capacity of parties Minor Unsound mind person Corporations-upto the limit of MOA Agent Joint family system Partners

PARTIES Parties to a BOE

-Drawer,Drawee,Acceptor,Payee,Holder, Indorser,Indorsee,Drawee in case of need, Acceptor for honour

Parties to Promissory note

-Maker,Payee,Holder,Indorser,Indorsee Parties to a cheque

-Maker,Drawee,Payee,Holder,Indorser,

Indorsee

Maker-The person who makes a Promissory note is maker.

Drawer-The person who makes or draws a bill of exchange or cheque is drawer.

Drawee-The person on whom the BOE or cheque is drawn and who is directed to pay is called the drawee.

Acceptor-In case of a BOE, the drawee becomes the acceptor.

Payee-The person named in the Bill, note or cheque, to whom or to whose order the money is to be paid.

Indorser-the person who indorses the bill, note or cheque to another is called the indorser.

Indorsee-The person to whom the bill, note or cheque is indorsed is called the indorsee.

Drawee in case of need-when in the bill or in any indorement thereon the name of any person is given in addition to the drawee to be referred to in case of need, such person is called a drawee in need.

Acceptor for honour- It a bill is dishonoured by non-acceptance, the holder may nevertheless allow any other person to accept it for the honour of the drawer . The person so accepting the bill is acceptor for honour

Holder and holder in due course

Holder(sec.8)any person entitled in his own name to the

possession thereof and receive the amount from the parties

Holder in due course(sec.9)any person who fulfils the following conditions-he possess the instrument if payable to

bearer, or payable to order-he hold that instrument before the maturity-he hold that instrument in good faith.

Privileges of a holder in due course Inchoate(unclear) stamped instrument

It is prohibited from claim as against holder in due course.

Liability of prior partiesEvery prior party is liable in payment.

Fictitious payeeThe acceptor of a bill cannot say as against the

holder in due course, that the other parties to the bill were fictitious

Conditional deliveryIf a bill or note negotiated to a holder in due

course, the other parties to the instrument cannot avoid liability.

Instrument free from all defects Estoppel against denying the original validity Estoppel against denying the capacity of payee to

indorse

Liability of parties Liability of drawer

Liable in case of dishonour by the drawee

Liability of draweemust pay the bill or cheque when

required Liability of the maker and acceptor

Liable to pay to the holder Liability of indorser

Liable to all subsequent holders for dishonour before the maturity

Liability of prior parties

Presentment of a negotiable instrument

Presentment means showing the instrument to the drawee, acceptor or maker for acceptance.

Three kinds of presentment-Presentment of BOE for

acceptance-Presentment of Note for sight-Presentment of instrument for payment

Presentment for acceptanceEssentials of a valid acceptance It must be in written on the bill It must be signed by the drawee personally or by

an agent The accepted bill must be deliver to the holder

Modes of acceptance General acceptance

accept the bill without any condition Qualified acceptance

Accept with some qualified conditions

-Conditional, Partial, Place, Time, Accepted by some of the parties

Presentment for acceptance submitted to the drawee, drawee in case of need, duly authorised agents, legal representatives, official receiver

It should be submitted before the date of maturity or with in the mention date

It should be submitted in the specified place. Excuses

-when the drawee cannot be found-where the drawee is dead or insolvent-when the drawee is a fictitious person-already the acceptance is refused

Acceptor for honour(conditions)-the bill must have been protested for non-acceptance-made with the consent of the holder-written in the bill-signed by the honour

Presentment for paymentRules Hours-Business hours Presentment of instrument after date or sight-must

be presented for payment at maturity Presentment of promissory note payable by

installments-presented for payment on third day after the date fixed for payment of each installment

Place of presentment-specified or at the drawee place

Present of cheque- presented at the bank Presented the instrument payable on demand-with

in the reasonable time Delay in presentment-accepted when the

circumstances are beyond the control Presentment excused Liability of banker

Dishonor of Negotiable instrument Bill may be dishonored by non-acceptance or by non-payment

but a cheque and Note are dishonored by non-payment only Dishonour by non-acceptance(sec.91)

BOE is dishonoured by non-acceptance in any of the following ways.

-If the drawee does not accept the bill within 48hours from the time of presentment though it is presented for the acceptance

-when the presentment is excused and the bill is not accepted.

-When the drawee incompetent to contract-When the drawee gives qualified acceptance-When the drawee is a fictitious person or he can not be

found Dishonour by non-payment(sec.92)

when the maker or the drawee makes default in payment

Notice of dishonourWhen the negotiable instrument is dishonoured the holder must

give a notice to all the prior parties whom he wants to make liable on the instrument

Object of the noticeinform the party about their liability which accrues as a result of

dishonour. Notice by whom

-Notice by holder or any prior party-chain method of giving notice-Notice by principal or agent

Notice to whom-Notice to all parties whom the holder seeks to make liable-Notice to party or his agent or legal representative or assignee

Form of notice-The notice may be in oral or in written-It must be given within a reasonable time at the place of business

Exceptions for notice(sec.98)-When it is dispensed with by the party entitled thereto-When the drawer countermanded the payment-when the party could not suffer by dishonour-When the party can not be found-in case of promissory note-When the entitled to the notice know the fact

Duties of holder upon dishonour

Notice of dishonor Noting and protesting

Noting means the recording of the fact of dishonor by a Notary public upon the instrument within a reasonable time after dishonor(sec.99)

The certificate of noting is called protest(sec.100). It is a formal notarial certificate attesting the dishonor of instrument

Suit for money Contents of Noting

-The fact of dishonour-The date of dishonour-The reasons-The notary charges

Contents of protest-The instrument-The name of the person against whom it is protested-The reasons of dishoour-The place and time of dishonour-The signature of the notary public

Rules as to compensation(sec.117)The liable party should compensate

all the charges like noting and protesting etc.,-Compensation to holder of the instrument-Re-exchange in case foreign holder of instrument-Compensation to indorser(with 18%interest)-Re-draft

Penalties for dishonored cheques by insufficiency of funds(sec.138)-imprisonment which may extend to 2 years or fine twice the amount or both

Discharge of Negotiable instrumentAn instrument is said to be

discharged when all rights of action under it are completely extinguished and when it ceases to be negotiable.

Modes of discharge By payment in due course By party primarily liable becoming holder

when the maker or the acceptor becomes the holder of the instrument.

By express waiver By cancellation By discharge as a simple contract

Discharge of party or parties By payment By cancellation By release By allowing drawee more than 48 hours By non-presentment of cheque Cheque payable to order Draft drawn by one branch on another Parties not consenting discharged by qualified

acceptance By operation of law By material alteration Discharged by the payment of altered

instrument

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