Negotiable instrument CA_IPCC students
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- 1. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal The Negotiable Instruments Act 1881 Presented By-: CA. Mayank Mittal ACA, PGDBA, B.com 1
2. Learning Objectives 1 2 3 4 5 6 7 8 9 Discharge of Parties Negotiation & Assignment Accommodation Bills Liabilities of Parties Types of Instruments Cheques Bills of Exchange Promissory Note What is a Negotiable Instrument? 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 2 3. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal According to Section 13(i) a negotiable instrument means a promissory note, bill of exchange or cheque payable either on order or to bearer. DEFINATION It is an instrument- which is transferable (Indefinite times) by delivery, like cash, and is also capable of being sued upon by the person holding for the time being. Characteristics It is freely transferable Better title (even though title of Transferor is defective) Right to sue A negotiable instrument can be transferred any number of times till its maturity Written & Signed NI can be made in favour of one payee or more than one either singly or jointly. 3 4. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Presumptions 1. Consideration : Every negotiable instrument is deemed to have been drawn and accepted , endorsed, negotiated, or transferred for consideration 2. Date : Every negotiable instrument must bear the date on which it is made or drawn 3. Acceptance : Every Bill of exchange was accepted within a reasonable time after the date mentioned therein and before the date of its maturity 4. Transfer : Every transfer should be made before the expiry. 5. A Lost NI is assumed to be dully signed and stamped. 6. Sequence/order of endorsements should be noted. 4 5. In nutshell either by delivery or by an endorsement & delivery. which is transferable from one person to another specified in it -and- entitling a person to a sum of money a written & signed document A Negotiable Instrument is 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 5 6. Definition- A promissory note is an instrument in writing (not being a bank note or currency note) 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. -------Sec. 4 The person who makes the promise to pay is called the Maker. He is the debtor and must sign the instrument. The person who will get the money (the creditor) is called Payee. Promissory Note Essentials Promissory Note 1 It must be in writing 2 Promise to pay 3 Unconditional Promise 4 5 6 Payee must be certain. Certainty about maker & amount It must be signed & Stamped 7 The payment must be in legal money 6 7. Specimens of Promissory Notes One year after date I promise to pay B or order Rs. 500. ---- Sd/X.Y. Date On demand I promise to pay A.B of No.37, College Street or order Rs1000(Rupees one thousand only) with interest at 8 percent per annum, for value received in cash. Sd/X.Y Date Address. I acknowledge myself to be indebted to B in Rs. 1000 to be paid on demand, for value received. Sd/X.Y 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 7 8. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Bill of Exchange 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. ----Sec. 5 Parties to bill of exchange : Drawer The person who makes/orders to pay bill of exchange. Drawee The person who is directed to pay on bill. On acceptance he becomes acceptor. Payee The person to whom the payment is to be made. Drawer & Payee can be the same person. X sells goods worth Rs. 2000 to Y & allow him 3 months time to pay the price. X then draws a bill on Y Three months after date, pay to my order the sum of Rs. 2000 for value received. X is drawer . Y is Drawee. 8 9. Essentials of a Bill of Exchange Certainty regarding amount Certainty regarding parties Duly signed and Stamped Unconditional Order to pay In writing Money Only 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal It should be noted that neither a PN nor a BE can be made payable to Bearer on demand 9 10. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Cheque Section 6, defines it as A cheque is a bill of exchange drawn on a specified banker & not expressed to be payable otherwise than on demand. It is always drawn on a bank It is payable to bearer on demand Parties To Cheque: 1. Drawer who makes the cheque 2. Payee to whom payment is to be made 3. Drawee Bank . Essentials Writing Express Order To Pay Definite & Unconditional Signed Sum must be Certain Parties must be Certain, Always drawn on bank Payable on Demand 10 11. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Basis Bill Of Exchange Cheque Validity Period NoValidity Period 3 Months Stamping Must be Stamped Need not to be Stamped Drawee Any person including Bank Only bank Acceptance Required Not Required Crossing No Crossing Can be crossed Payable on Demand Cant be payable to bearer on Demand Always payable on Demand Liability of Drawer My be Primary or secondary Always Primary Days of Grace Allowed Not allowed Notice of dishonour: A notice of dishonour is required Notice of dishonour is not necessary. Criminal Liability Doesnt Arise Arise 11 12. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Types of Negotiable Instrument Time Instruments An instrument payable after a fixed time or on specified date is termed as time instrument. An instrument payable after happening of a certain event is also called as time instrument. E.g payable on 10th Dec14 or 9 months from now Demand (at sight) Instruments When no time of payment specified, it is payable on demand. When it is expressed to be payable on demand or at a sight or presentation. For e.g Cheque is always payable on demand Order Instrument When it is expressed to payable to a particular person or on his order to a particular person or payable to particular person on his order. 12 13. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Bearer Instruments An NI is said to be a bearer instrument if it is expressed to be so payable; or When the only or last endorsement is in blank. A minor can be a party to a Negotiable Instrument but his Liability will be NILL Whiile determining the maturity date for BOE, add 3 days as Grace period. If afterr adding 3 days the day falls on public day then ek kadam peeche le (preceeding day) and if falls on day which achank se holiday hoo jaye toh ek kadam aage le le (Succeding day) . For eg if it falls on Gandhi jayanti then consider maturity date as 1-oct and if it falls on 10th jan and us din danga ho jata hai taab maturity date will be 1 day succedding that is 11th Jan. Inland Instrument- Instrument which is drawn in India and is payable to a citizen in India. Other than this Instrument every Instrument is Foreign Instrument. Least but thing to remember 13 14. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal NI made , transferred without Consideration Ram ko paise ki jarorat thi usne shyam ko bola, shyam ne apna dimag lagaya aur ek Promissory note Ram ko free fund mai de diya. Ram ne phr who promissionary note lakshman ko free mai diya.laxman ne bhart ko free mai diyaaur bharat ne ravan ko apna karz chukane ke liye de diya.Abhi tak tak free mai game chal raha tha lkn bharat bha sahab ne sab gud gobad kar diya. Abhi tak kisi ki koi liability nhi thilkn bharat ke karnaaome ki wajah se sab ki liabilty arise ho gayi.Let see how- If NI is drawn, accepted, transferred or endorsed without any consideration it creates no lliability between the parties BUT If any party in the chain passes on NI for a consideration then such holder and every holder thereon may recover the amount due on instrument from the Transferor or Prior Parties to Transaction. Mr. A draws a bill (payable to himself) on Mr. B, Mr. B, accepts the bill without consideration just to accommodate Mr. A to enable X to raise money from market by negotiating the bill in the market. This is accommodation bill. Though Mr. B accepts the bill, Mr. A is primary liable to the bill. He can not demand amount from Mr.B However If Mr. A transfer the bill, after maturity to Z for good consideration, and Z becomes the holder in good faith- Z is entitle to recover the amount 14 15. 45 All benefits of holder in due course Liability for subsequent holder for value No obligation for payment No creditor-debtor relation No consideration In Nutshell 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 15 16. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Partial Absence Failure of Money Consideration If NI is made or transferred for a money which is initially not mentioned on it or it has failed in part subsequently then the party standing in immediate relation with such signer is entitled to receive from a sum which is proportionately reduced. Shyam ne aapko bola ki aapke mere upar 500/- udhar hai pichle ek saal se apko yaad nhi tha aapne kaha ha hogasur usse blank cheque de diyalkn baad mai aapko yaad aaya ki aap usse 300/- rupay ek baar de chuke hoapne cheque dishonour kara diya Shyam ne aapko Sue kiyabut u proved that actual amount due was Rs. 200/- only then Mr. Shyam will be liable for remaining Rs. 200/- only. Inchoate Instrument It is an instrument that is signed and duly stamped but otherwise wholly or partially blank. The person signing such Document delivers it to another person. Impact of this Instrument- Only Holder in Due Course can recover anything in excess that intended to be nt exceeding the amount covered by Stamp. 16 17. Example of Inchoate Stamped Instrument Here Z is entiled to recover full amount of the instrument because he is HDC. But Y, being a holder, can not recover the amount because he filled in the amount in excess of his authority Mr. X signs his name on a blank and stamped instrument and gives to Y with an authority to fill up as a note for a sum of Rs 2000 only. But Y fills it for Rs 20000 and then transfers it to Z for a consideration of Rs 20000 who takes it in good faith. 30 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 17 18. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Negotiation Sec- 14 Negotiation is a transfer of an instrument from one person to another in such a manner as to express title & to represent the transferee the holder thereof. In simple words Negotiation means transfer of a NI by one person to another in order to make the transferee the holder of the instrument. Negotiation by delivery- Transfer of Bearer Negotiable Instrument by delivery which should be Voluntary. Negotiation by Endorsement & Delivery- An Order instrument can be negotiated only by way of Endorsement & Delivery. After Effect of Endorsement- 1. Property is transferred to the endorsee 2. Endorsee get right to negotiate the instrument, sue on instrument 18 19. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal When a maker or holder writes the persons name on the face or back of the instrument or on the slip of the paper annexed to NI & puts his signatures thereto for the purpose of negotiation, it is called endorsement. For eg- When an employer signs a check, they are endorsing the transfer of money from the business accounts to the account of the employee. Endorsement Sec- 15 Essentials of valid endorsement 1. On the back or face of the instrument. i.e Writing 2. Must be made by maker or holder. i.e Prepared by Holder 3. Must be properly signed by the endorser.i.e Signed 19 20. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Kinds of endorsement 1. Blank and general endorsement where endorsee simply puts his signature on the back of the instrument without writing name of the person in whose favor the instrument is endorsed (Blank) and where it puts the name of person then it is General Endorsement. 2. Special or full endorsement An endorsement with the direction to pay amount mentioned in the instrument to a specified person or his order & the endorser writes his signature under it. 3. Partial endorsement When an endorser is willing to transfer to an endorsee only a part of the amount of the instrument. Such an endorsement does not operate as a negotiation of the instrument. Not Valid Now 4. Restrictive endorsement An endorsement is said to be restrictive if it prohibits or restricts the further negotiability of the instrument. The holder of such an instrument can only receive the payment but he cannot negotiate it further. An instrument can be made restrictive only by expressed words. 5. Conditional endorsement It limit the liability of the endorser. E.G. Pay A or order on his marrying B. 20 21. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Negotiation Back- sec 90 If a NI is negotiated by the Holder but the Endorser again becomes the holder of Such Negotiable Instrument again then it called Negotiation Back. For e.g A B B C C D D B Here B is the person who is the prior party to the Instrument. The Holder cannot enforce payment against an Intermediary party to whom he was previously liable thus B can not sue C or D but it can sue A Assignment of a NI means transfer of ownership of the instrument from one person to another (assignor to assignee). Assignment 21 22. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Basis Negotiation Assignment Applicable Act Negotiable Instrument act1881 Transfer of Property Act Meaning Negotiation means transfer of a NI by one person to another in order to make the transferee the holder of the instrument. Assignment of a NI means transfer of ownership of the instrument from one person to another (assignor to assignee). Scope For Transferring NI only For Transferring Right Notice No Notice Required Notice must be given by Assignee to Debtor Stamp Duty No Stamp Duty Required Stamp Duty Required Presumption It is Presumed that every Negotiation is made for some Consideration. No such Presumption. Manner It can be negotiated by way of delivery or order or both Valid only if it is made in Writing and Signed Burden of Proof The Other Party has to prove that negotiation was without any consideration The Assignee has to prove that there was some consideration. 22 23. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Holder-sec 8 The holder of a N.I. means any person entitle to the possession of the instrument in his own name and to receive the amount thereon from the parties liable thereto. Basically we can say that 1- He must be entitled to Possession of Negotiable Instrument in his own name 2- He must be entitled to Receive or recover the amount due on such instrument. A Holder in Due Course means a holder- who takes the instrument bona fide- for value -before it is overdue, and without any notice of defects in the title of the person, who transferred it to him. Holder in Due Course-sec 9 Basis Holder Holder in Due Course Consideration Not Necessary Only if he obtains NI for Consideration Maturity Before or After Maturity Only before Maturity Right to Sue Cannot sue all prior parties Can Sue all the prior Parties Privileges Less Privileges' than HDC More Privileges than Holder Good Faith Holder even if he obtains NI other than in Good Faith HDC only if he obtains NI in good Faith 23 24. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Privileges of a Holder in Due Course**IMPT A Holder who derives title from HDC has the same right as that of HDC. (Sec 53) Every prior party to NI is liable to a HDC. (Sec 36) HDC can claim full amount of the NI (Not exceeding amount covered by Stamp) even though such amount is in excess of the amount authorised by the person delivering an Inchoate NI (Sec 20) No Prior party can allege that NI was delivered conditionally or for a special purpose only. (Sec 46) No prior party can set up a defence that the NI was drawn, made or endorsed by him without any Consideration. (Sec 43) The Person liable in NI cannot set up against the HDC the defences that the instrument had been lost or obtained from the former by means of an offence or fraud or unlawful consideration. (Sec 58) 24 25. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Crossing of a cheque is a unique feature associated with a cheque affecting to a certain level the responsibility of the paying Banker and also its negotiable Character. Crossing of a Cheque is a direction to a particular Banker by the Drawer that Payment should not be made across the Counter. The payment on the crossed Cheque 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. Crossing of Cheque Types of Crossing 1. General Crossing:- which bears across its face the words & co. or the words not negotiable. For general crossing two transverse lines on the face of cheque are essential. The paying banker shall pay only to a banker. There are two sloping parallel lines, marked across its face 25 26. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Special or Restrictive Crossing :- When a particular bank's name is written in between the two parallel lines the cheque is said to be specially crossed. Where a cheque bears across its face an addition the name of banker either with or without the words not negotiable. It contains: The name of the banker across the face of cheque. With the words not negotiable In addition to the word bank, the words "A/c. Payee Only", "Not Negotiable" may also be written. The payment of such cheque is not made unless the bank named in crossing is presenting the cheque. The effect of special crossing is that the bank makes payment only to the banker whose name is written in the crossing. Specially crossed cheques are more safe than a generally crossed cheques. 26 27. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Why Crossing of Cheque is being used The important usefulness of a crossing cheque is that it cannot be covered at the counter but can be collected only by a bank from the drawee bank. Crossing provides a protection and safeguard to the owner of the cheque as by securing payment through a banker it can be easily detected to whose use the money is received. Where the cheque is crossed the paying banker shall not pay it except to a banker. In case of not negotiable crossing the person holding such a cheque gets no better title than that of his transfer and cannot suggest a better title to his own transferee. In case of 'account payee' only crossing, a direction is given to the collecting banker to collect cheque and to place the amount to the credit of the payee only. A special crossing makes the cheque more safe than a general crossing because the payee or holder cannot receive payment except through the banker named on the cheque. 27 28. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Protection to Paying Banker- Sec 85 If Cheque is Crossed (Special or General)- Payment is made in due Course and payment is made to the Banker. If Cheque is Payable on Order or to the Bearer- Payment is made on due Course notwithstanding of the fact that any endorsement subsequent turns out be Forgery. Protection to Collecting Banker Sec 131 IMPT A banker who has in good Faith and without Negligence received payment for a customer of a cheque crossed generally or specially to Himself SHALL NOT be liable for any Liability towards the True owner of Cheque in case the Cheque Proves Defective. It is the duty of the banker to pay the cheque provided he has sufficient funds of drawer in his hands and the funds are properly applicable to such payment. If the banker refuses payment without any sufficient cause being shown, he must compensate the drawer any loss caused by such improper refusal The drawee of a cheque is always a banker. Liability of Drawee of Cheque Sec 31 28 29. Mandatory Grounds for Bank to Dishonour Cheque Stop Payment Death of Customer Post Dated Cheque Insolvency of Customer Defect in Title Of Holder Undated Cheque Loss of Cheque Signature Mismatch Stale Cheque Closed Bank Account Insanity of Customer Altered Cheque Defect in Title of Holder OPTIONAL Grounds for Bank to Dishonour Cheque Insufficient Funds Presentation at Different Branch Presentation after Banking Hours Funds Not Applicable. If the drawer has sufficient fund in his bank Account and issues a cheque in favour of Creditor and the Creditor fails to present the cheque for payment within reasonable time and in the meanwhile bank fails (Insolvent) then the Creditor cannot recover the amount from the Drawer. For e.g Mr Ram issue cheque of Rs. 1,00,000 to Miss Sita . Mr Ram had Sufficent Fund in the account with Bank.The Cheque was not presented within reasonable time to the Bank for paymment and the bank in themean time become insolvent. Thus is yhis case Miss Sita cannot recover the money from Mr. Ram. Non Presentation of Cheque within Reasonable Time Sec 84 29 30. Liability of an Endorser (Sec.35) Every endorser who endorsed an instrument before its maturity is liable to the parties that are subsequent to him. And his liability arises only if there is a default by the party who is primary liable to pay the instrument on maturity. 30 31. Liability of Acceptor of a Bill 42) Drawn in a Fictitious Name (Sec Suppose: X uses a fictitious name in drawing a bill upon Z. Then he endorses the bill in the same fictitious name to Y, who presents the bill to Z for acceptance. Now if Z accepts the bill, he will be liable for payment in spite of fact that the name of drawer is fictitious. 31 32. Complaint within 1 month to Court Notice- demanding payment within 15 days; Cheque must be present within validity period; Payment should be for discharge of liability; Dishonour due to Insufficient funds; Bouncing of Cheque sec 138 to 142 Dishonour of Cheque due to Insufficient Fund is an offence. The Drawer is Punishable with Maximum Imprisonment of 2 Years or Amount equal to the two times(Maximum) of Cheque amount or both. However in order to attract following Condition need to be satisfied- 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal If Payment is made otherwise than to Discharge Liability then it will not attract liability u/s 138 . For e.g. a person gift a cheque of Rs. 100000 s a gift and later on the Cheque get bounced. Then it will not attract liability under this section. 32 33. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Material Alteration- sec 87 An alteration (Cherkhani karna) is called as material alteration if it alters- The Legal Effect of NI The Rights and Liabilities of any of the parties of to a NI. Alteration can be- Crossing of Cheque Filling Blanks of Inchoate Instrument Conversion of Blank Endorsement into Full. Conversion of Bearer Instrument into Order Instrument. Conversion of General Crossing into Special Crossing. Effects- All parties to the NI not consenting to the material alterations are discharged and jisne kiya who gaya For eg- A bill payable to Mr A was converted to Payable to Mr A & Mr. B The Holder of Bearer Cheque convert it into A/c Payee Cheque 33 34. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Acceptance- sec 7 When Drawee draws a bill and the Drawee delivers it to the holder of the bill or gives notice of acceptance to the holder of the bill then it is termed as Acceptance. It should be Written Signed Delivery or Intimation to the holder that the bill has been accepted. General Acceptance: When the drawee, while accepting the bill, does not attach any condition or qualification to it, it is called general acceptance. Qualified Acceptance : The acceptance is qualified when it is given subject to some conditions or qualifications The Holder of the bill may object to the Qualified Acceptance resulting in Automatic Dishonour of Bill due to Non Acceptance. If he give his consent to Qualified acceptance then all prior parties not giving consent will be discharged. 34 35. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Dishonour by Non Acceptance- sec 91 Only Bills of Exchange can be dishonoured by Non Acceptance as BOE only required Acceptance. Dishonour by Non acceptance means a case where Bill is presented for acceptance but the same is not accepted. The reasons for the same can be as follows- Not accepted by drawee within 48 hours of presentation; If the bill is not accepted by all the drawees . Drawee is incompetent to contract. Drawee is Fictitious Person Drawee cannot be found even after Reasonable Search Drawee gives QuaIified acceptance but holder does not give. If any of the above Instances is satisfied then the holder gets an Immediate right to Sue all the prior parties before maturity of the bill. 35 36. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Suppose: X uses a fictitious name in drawing a bill upon Z. Then he endorses the bill in the same fictitious name to Y, who presents the bill to Z for acceptance. Now if Z accepts the bill, he will be liable for payment in spite of fact that the name of drawer is fictitious. Liability in case of Fictitious Name sec 42 An acceptor Of BOE which is drawn in FICTITIOUS NAME and Payable to the Drawers Order IS NOT Relieved from the Liability to any HDC by reason that such name is Fictitious. Moti moti baate aisa samajha jaye ki Ram ne shyam ke upar bill draw kiya lkn ram ne apna naam nhi likh kar Sita ka naam kar diya yeh Bill Sita ke order pe payable tha Shyam ne yeh bill accept kar liya.Ram ne yeh bill Ravan ko Endorse kar diya. Ab Shyam apni laibility se bhaag nhi sakta is fact pe ki yeh bill sita ke farzi naam pe bana haikyk usne yeh bill accept kiya haiaur ravan ko usse karz chukana padega 36 37. Rights & Obligations - Finder of Lost Instrument Endorsee of HDC can also recover the amount. Holder in due course can recover the amount; True owner can recover the amount; Finder will not get good title; 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 37 38. Rights & Obligations of Person who had obtained the instrument by Unlawful Means The possessor will not get good title Holder in due course can get good title X steels a bill from acceptor; X does not get any good title of it. If X collected the proceeds of bill, the acceptor can recover it from X If X endorses the bill to Y against value and If Y is HDC, Y can recover the money from X but no from other party 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 38 39. that the acceptance is by writing on the bill. that the acceptance is for the honour of any party already liable on the bill, and The acceptor for honour is not already liable on the bill, Acceptance has been made with the consent of holder, That the bill has been noted or protested for non acceptance or better security, Acceptance For Honour sec 108 Acceptance for honour means the acceptance given by some stranger when the original drawee refuses to accept or to give better security when demanded by a notary. The stranger may accept the bill of the honour of any party already liable thereto. Such stranger is called an acceptor for honour or acceptor supra protest Conditions- The party who accept the bill for honour will be liable to pay the amount if the person on whose behalf he accepts the bill and he can recover the same form that party. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 39 40. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Just as a bill may be accepted for the honour of a party to bill, it may also be paid for the honour of a party liable to pay the bill. After payments he can recover from that person or any party prior to him. Payment For Honour sec 108 Notice OF Dishonour Sec 93 Notice Of Dishonour need to be given by the holder or any of the parties to the instrument. Any party receiving notice must also transmit the same to all prior parties. Otherwise he can not sue any prior party, if notice has not transmitted. Dispensed with by an express waiver, Party charged would not suffer damage Party not found after due search, When drawer is accepter, Accidental omission, In the case of a PN which is not negotiable, Party promises to pay unconditionally. Cases where Notice for Dishonour is not Required- 40 41. To all parties (other than the maker of a note, acceptor of a bill, or drawee of a cheque) to whom the holder seeks to make liable or to their duly authorized agents Where there are two or more persons jointly liable as drawer or endorsers, notice to any one of them is sufficient. In case of death of person, to legal representative and to official assignee in case of insolvency (Sec 97). Notice to Be Given to Noting Noting is the process of recording the fact and reasons of dishonour of a NI by the notary public. It should be done within Reasonable time after dishonour of NI. It is not mandatory. The Dishonoured Bill is presented to Notary Official who in Turn again represent it for acceptance/payment. If the party again refuses then Notary Public records the fact of Dishonour. Protest is a formal certificate of dishonour issued by the notary public to the holder of a bill or note on his demand. Difference between Noting & Protesting is that noting consists of recording the fact and reasons of dishonor of NI upon the instrument; whereas Protest is the certificate as to the fact that instrument has been dishonoured. Protesting 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 41 42. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Discharge of Negotiable Instrument When the party makes the payment in due course at or after maturity (u/s78) , When the holder cancels the instrument with intention to release the party. If it becomes Time Barred- it is Discharged by operation of Law In the case of Negotiation Back When the holder releases or renounces his right against the party primarily on the NI. 42 43. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Discharge of One Or More Parties By cancellation By release By allowing drawee more than 48 hours to accept (Sec 83) By taking qualified acceptance (Sec 86) By not giving notice of dishonour By not presentment for acceptance of bill (Sec 61) By delay in presenting cheque (Sec 84) By negotiating back of a bill 43 44. 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal Hundi Miadi hundi or Muddati hundi Darshani hundi Shah Jog hundi Nam Jog hundi Jokhmi hundi Dhani Jog Hundi Hundi means a BOE drawn in an Local Language. Payable at Sight Payable after Specified period Of Time Payable at Shah Payable to a Party named in Hundi or to his order. Hundi Drawn in respect of goods shipped on the vessel and is payable only when the goods reach their destination. Hundi Payable to the Bearer. 44 45. #1: The undertaking contained in a promissory note, to pay a certain sum of money is---- (a) Conditional (b) Unconditional (c) May be conditional or unconditional depending upon the circumstances (d) None of the above. Answer : (b) Unconditional 2013 Gurukul CA/CS 45 46. # 2: Which of these is not a negotiable Instrumen t Act,1881 as per the Negotiable Instrument (a) Bill of exchange (b) Delivery note (c) Bearer Cheque (d) Share certificate Answer: (d) Share Certificate 2013 Gurukul CA/CS 46 47. # 3: Which of the following is not a payment in due course under NI Act 1881? a) Payment should be made in accordance with the apparent tenor of the instrument b) A payment is made on instrument before the date of maturity c) Payment is made to the possessor of the instrument d) Payment made in good faith & without negligence Answer: b) A payment is made on instrument before the date of maturity 2013 Gurukul CA/CS 47 48. #4 : X drew a bill on Y and sent it to Y for acceptance. In which of the following instances, it is a valid acceptance? a) Y signs on bill and keeps it with him b) He writes accepted on the back of bill but does not put his signature on bill c) He puts his signature on face of bill and returns it to X d) He write accepted on the face of bill but does not put his signature Answer: c) He puts his signature on face of bill and returns it to X 2013 Gurukul CA/CS 48 49. # 5: In which of the following situations could a bill of exchange not be negotiated? Answer: d) All of the above d) All of the above. c) The amount to be paid is the amount owing on account." b) The promise to pay is conditional. a) The time to pay is not determinable. 2013 Gurukul CA/CS 49 50. #6: X made a note payable to the order of his son Y as a birthday gift payable after one month. Y presented the note after 3 months and X refused to pay. Can Y sue for payment? a) Yes, because a note, unlike a cheque, cannot become stale dated b) Yes, because the note is a negotiable instrument that is required to pay c) No, because a note, like a cheque, can become stale dated. d) No, because the note was gratuitous so it is not binding for a lack of consideration. Answer: d) No, because the note was gratuitous so it is not binding for a lack of consideration 2013 Gurukul CA/CS 50 51. # 7: Which of the following is NOT a part of criteria for a holder in due course? the a) The instrument is held by a party immediate to the promisor. b) The instrument is taken by someone, or through someone, has given consideration for it. who c) The instrument is taken complete and regular on its face. d) The instrument is taken before it is overdue and without notice of any dishonour. Answer: a) The instrument is held by a party immediate to the promisor. 2013 Gurukul CA/CS 51 52. # 8: B issued a cheque for Rs 10,000/ in favour of S. B had sufficient funds in his account. The cheque was not presented within reasonable time. In the meantime, bank became insolvent. a) S can recover money from B b) B is discharged from his liability. c) S can recover from official assignee of the bank d) S can sue B and Bank jointly Answer: b) B is discharged from his liability 2013 Gurukul CA/CS 52 53. 53 Q-1 Explain the essential elements of a promissory note. State, giving reasons, whether the following instruments are valid promissory notes: (i) X promises to pay Y, by a promissory note, a sum of ` 5,000, fifteen days after the death of B. (ii) X promises to pay Y, by a promissory note, ` 5000 and all other sums, which shall be due. (iii) X promises to pay Y after Marriage of Y a sum of Rs. 25000/- (iv) X tells B that he will pay him Rs. 5000/-. Q2- What are the essential elements of a valid acceptance of a Bill of Exchange? An acceptor accepts a Bill of Exchange but write on it Accepted but payment will be made when I received the payment from third party. Decide the validity and the impact on the interim party. Q3- Examining the provisions of the Negotiable Instruments Act, 1881, distinguish between a 'Bill of Exchange' and a 'Promissory Note'. Q4- What do you mean by an acceptance of a negotiable instrument? Examine validity of the following in the light of the provisions of the Negotiable Instruments Act, 1881: (i) An oral acceptance (ii) An acceptance by mere signature without writing the word accepted. (iii) A Qualified Acceptance 54. 54 Q5- A draws and B accepts the bill payable to C or order, C endorses the bill to D and D to E, who is a holder-in-due course. From whom E can recover the amount? Examining the right of E, state the privileges of the holder-in-due course provided under the Negotiable Instruments Act, 1881. Q6- Discuss with reasons, whether the following persons can be called as a holder under the Negotiable Instruments Act, 1881: (i) X who obtains a cheque drawn by Y by way of gift. (ii) A, the payee of the cheque, who is prohibited by a court order from receiving the amount of the cheque. (iii) M, who finds a cheque payable to bearer, on the road and retains it. (iv) B, the agent of C, is entrusted with an instrument without endorsement by C, who is the payee. (v) B, who steals a blank cheque of A and forges As signature. Q7- State briefly the rules laid down under the Negotiable Instruments Act for determining the date of maturity of a bill of exchange. Ascertain the date of maturity of a bill payable hundred days after sight and which is presented for sight on 15th July 2013. Q8- What do you mean by an endorsement. Briefly explain the types of an endorsement. Q9- Ram, a major, and Laxman a minor, executed a promissory note in favour of Ravan Examine with reference to the provisions of the Negotiable Instruments Act, the validity of the promissory note and whether it is binding on Ram and Laxman 55. 55 Q 10- State, in brief, the grounds on the basis of which a banker can dishonor a cheque under the provisions of the Negotiable Instruments Act, 1881. Q 11- X draws a bill on Y but signs it in the fictitious name of Z. The bill is payable to the order of Z. The bill is duly accepted by Y. M obtains the bill from X thus becoming its holder in due course. Can Y avoid payment of the bill? Decide in the light of the provisions of the Negotiable Instruments Act, 1881. Q12- A a broker draws a cheque in favour of B, a minor. B indorses the cheque in favour of C, who in turn indorses it in favour of D. Subsequently, the bank dishonoured the cheque. State the rights of C and D and whether B, can be made liable? Q13- Mr. Clever obtains fraudulently from J a cheque crossed Not Negotiable. He later transfers the cheque to D, who gets the cheque encashed from ABC Bank, which is not the Drawee Bank. J, comes to know about the fraudulent act of Clever, sues ABC Bank for the recovery of money. Examine with reference to the relevant provisions of the Negotiable Instruments Act, 1881, whether J will be successful in his claim. Would your answer be still the same in case Clever does not transfer the cheque and gets the cheque encashed from ABC Bank himself? 56. 56 Q14- What do you understand by "Material alteration under the Negotiable Instruments Act, 1881? State whether the following alterations are material alterations under the Negotiable Instruments Act, 1881? (i) The holder of the bill inserts the word "or order in the bill, (ii) The holder of the bearer cheque converts it into account payee cheque, (iii) A bill payable to ' is converted into a bill payable to X and Y Q15- Promissory note dated 1st February, 2001 payable two months after date was presented to the maker for payment 10 days after maturity. What is the date of Maturity? Explain with reference to the relevant provisions of the Negotiable Instruments Act, 1881 whether the endorser and the maker will be discharged by reasons of such delay. Q16- A draws a cheque for ` 50,000. When the cheque ought to be presented to the drawee bank, the drawer has sufficient funds to make payment of the cheque. The bank fails before the cheque is presented. The payee demands payment from the drawer. What is the liability of the drawer. Q 17 (a) A draws a cheque in favour of M ,a minor. M endorses the same in favour of X. The cheque is dishonoured by the bank on grounds of inadequate funds. Discuss the rights of X. (b) A promissory note was made without mentioning any time for payment. The holder added the words on demand on the face of the instrument .Does this amount to material alteration? (c) A draws a cheque for ` 100 and hands it over to B by way of gift. Is B a holder in due course? Explain the nature of his title, interest and right to receive the proceeds of the cheque.