NEGOTIABLE INSTRUMENT ACT - ... NEGOTIABLE INSTRUMENT ACT De•nition •e Negotiable...

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Transcript of NEGOTIABLE INSTRUMENT ACT - ... NEGOTIABLE INSTRUMENT ACT De•nition •e Negotiable...

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    NEGOTIABLE INSTRUMENT ACT Denition

    e Negotiable Instrument has not been dened under the Negotiable Intruments Act 1881.However, Section 13 of the Act describes a negotiable instrument to mean a promissory note or a bill of exchange or a cheque payable to order or to bearer.

    Features

    a. Consideration

    It is presumed that every Negotiable Instrument is made or drawn for consideration. e consideration need not be mentioned in the Negotiable Instruments.

    b. Transferability

    A Negotiable instrument may be transferred by:

    (i) endorsement and delivery, if it is an instrument payable to order, and

    (ii) mere delivery, if it is a bearer instrument.

    c. Title

    e transferee, who takes the instrument bonade and for valuable consideration, obtains a good title inspite of any defects in the title of the transferor. To this extent, Negotiable instrument is an exception to the maxim of law ie. nemo dat quod non-habet (no one can transfer a better title than he himself has).

    PROMISSORY NOTE : SEC.4

    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 the person mentioned therein, or to the order of a certain person or to the bearer of the instrument. e words ‘or to the bearer of the instrument” is inoperative in View of Section 31 of the Reserve Bank of India Act, 1934, which provides that no person in India other than Reserve Bank of India or Central Government can make or issue promissory note payable to bearer of the instrument.

    Characteristics of Promissory Note

    a. In writing

    It must be in writing. An oral promise does not result in an instrument. Example: A promises to pay ` 70,000/- to “B”, over telephone. is promise is not a promissory note as it is not in writing.

    b. Promise to pay

    A mere acknowledgement of debt is not a promissory note.

    a) A receipt of ` 50,000/- Not a Promissory Note.

    b) A receipt of ` 50,000/- with a promise to pay in 5 monthly instalments beginning 1st April 2004 - It is a Promissory Note.

    c. Unconditional

    It is to be noted that a promise to pay will be unconditional where it depends upon an event which is certain to happen but the time of its occurrence may be uncertain.

    “I promise to pay to ‘A’ ` 1,000/- 10 days a!er the death of ‘B’.” — "is is not conditional as it is certain that ‘B’ will die though the exact time of his death is uncertain.

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    e promissory note does not lose its character as such merely because it contains a promise to pay at a certain place.

    “I promise to pay to ‘A’ ` 1 Lac a!er the death of ‘B’ provided ‘B’ leaves enough money to pay.”

    d. Certain sum of money only

    Amount promised must be certain and should be in terms of money.

    e instrument must be payable in money and money only. If the instrument contains a promise to pay something other than money or something in addition to money, it will not be a promissory note.

    ‘I promise to pay ` 350 and all other sums which shall be due’ — It is not a valid promissory note.

    ‘I promise to pay ` 1 Lac and 500 bags of rice is not a valid promissory note.’

    In the event of rate of interest not being specied, the amount which would be due on the due date would not be certain.

    e. Signed by the Maker

    e maker must sign the instrument and it is incomplete till it is so signed. e signature may be made on any part of the document.

    f. Certainty of Parties

    e person by whose order and to whom the payment is to be made must be denite. e payee must be a certain person and where the name of the payee is not mentioned as a party, the instrument becomes invalid.

    g. Not payable to maker himself

    A promissory note cannot be made payable to the maker himself. However, it would become valid when it is endorsed to the maker. is is so because it becomes payable to bearer, if endorsed in blank or it becomes payable to endorsee or his order, if endorsed specically.

    BILL OF EXCHANGE : SEC.5

    A Bill of Exchange 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. e words or to the bearer of the instrument is inoperative in view of Section 31 of the Reserve Bank of India Act, 1934, which provides that no person in India other than Reserve Bank of India or Central Government make or issue promissory note payable to bearer of the instrument.

    Characteristics of Bill of Exchange

    1. In writing

    It must be in writing.

    2. Order

    It must contain an order to pay. Order to be made by drawer to drawee to pay money.

    3. Unconditional Order

    e order must be unconditional, ie., the order must not make the payment of the bill dependent on a contingent event. A conditional bill of exchange is invalid. An order does not become conditional by reason of time for payment of the amount being expressed to be on the lapse of a certain period or a!er the occurrence of a specied event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain.

    Where a bill of exchange is in this form: ‘ree months a!er date pay to my order the sum of ` 8001- for value received’. is is not conditional.

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    4. Money only — Certain sum

    e Order must be to pay money and money only. e instrument must be payable in money and money only. e sum of money payable must also be certain.

    Negotiable lnstruments are meant for free circulation and if their value is not apparent on their face, their circulation would be materially impeded.

    In the absence of the rate of interest, the amount which would be due on the due date would not be certain or denite.

    5. Acceptance

    e drawee must sign the instrument, without which the document is ine"ective.

    6. "ree Parties

    e three parties to a bill viz., drawer, drawee and payee are to be specied in the instrument with reasonable certainty. All three persons need not specically be di"erent persons. One can play the role of two persons, ie., a drawer can be a payee.

    7. Stamping

    It must be stamped.

    CHEQUE : SEC.6

    A Cheque is a bill of exchange drawn on a specied banker and not expressed to be payable otherwise than on demand and it includes “the electronic image of truncated cheque” and a ‘cheque in the electronic form”.

    exchange under Section 5.

    on demand - Sec.31 of Reserve Bank of India Act, ie., payable only on demand.

    “A truncated cheque” means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or bank whether paying or recovering payment immediately on generation of an electronic image for transmission, substituting the further physical movement of cheque in writing.

    A physical cheque deposited at Bank, scanned electronically for processing.

    “A cheque in electronic form” means a cheque which contains the exact mirror image of a paper 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.

    On line payment instructions in net banking,

    CROSSED CHEQUE

    When a cheque bears across its face two parallel transverse lines, (usually on the top le! corner of cheque) the cheque is said to be crossed.

    1. Crossing a"ects mode of payment of cheque. Cheque is not payable to payee or holder at Bank. Payment is to be obtained only through Bank. Crossed Cheque can be negotiated.

    2. e objective of crossing is to help tracing the recipient of money, if an unauthorized person receives it.

    Di"erence between Bill Of Exchange & Promissory note?

    Di"erence between Bill Of Exchange & cheque?

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    Types of Crossing

    1. General Crossing : Sec. 123

    Where a cheque bears across its face an addition of —

    2. Special Crossing : Sec. 124

    Where a cheque bears across its face an addition of the name of a banker, either with or without the words ‘not negotiable’, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially.

    Where a cheque is crossed specially, the banker on whom it is crossed shall not pay it, otherwise than to the banker to whom it is crossed or his agent for collection.

    Di"erence : In general crossing the Name of the Bank is not mentioned whereas in special crossing the Name of the Bank is mentioned.

    3. ‘Not Negotiable’ Crossing : Sec.130

    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 cheque other than that which the person from whom he took it had. "e title of transferee of the cheque cannot be better than title of transferor of the cheque. It means that even if transferee has acquired in good faith still his title cannot be defect free if transferor’s title is defective.

    It may be noted that though it is mentioned ‘Not Negotiable’, the cheque can be transferred. e only re