NEGOTIABLE INSTRUMENTS

MODULE THREE

MEANING A written document which creates a right in

favour of some person and which is freely transferable.

Negotiable instrument means a promissory note, a bill of exchange or a cheque.

Negotiable Instruments

A negotiable instrument is one, the legal title of which can be transferred by mere delivery or endorsement and delivery.

The title thus transferred is free from all defects and the transferee can sue in his own name.

Negotiability implies ‘easy transferability from one person to another, in return for consideration.

Free transfer (negotiability): There is no formality to be complied with the transfer of a negotiable instrument. It can be very easily transferred from one person to another, either by mere delivery or by endorsement and delivery.

Features

Transfer free from defects (title): it confers an absolute and good title on the transferee. Even if the transferor has a bad title to the instrument, he can still pass on a good title to any holder who takes it in good faith and without negligence and for valuable consideration

Right to sue (recovery): it confers a right on the holder to sue in his own name, in case of need.

No notice to transfer: the transferor of a negotiable instrument can simply transfer the document, without serving any notice of transfer, to the party who is liable on the instrument to pay.

A negotiable instrument is always subject to certain presumptions:◦ Every NI was drawn, accepted and endorsed,

made or transferred for CONSIDERATION.◦ The date it bears is the date on which it was

made.◦ all endorsements were made before maturity.◦ Every endorsements were made in the same

order they appear.◦ Every holder is a holder in due course.

Presumptions

Holder who has received the instrument, in good faith and for value before its maturity and without any notice as to the defect in the title of a previous holder.

Holder in due course

Promissory Note

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.

characteristics It is an instrument in writing It is a promise to pay : there must be an

express undertaking or promise to pay. Use of the word ‘promise’ is not necessary, if it is

implied.

The payment should not depend upon contingencies which may or may not happen.

I promise to pay Mr. Y after marriage with Ms. X. (marriage may or may not take place).

I promise to pay as soon as possible a sum of Rs. 1000

When able I promise to pay Ms. Brinda or order a sum of Rs. 1000 for value received.

The undertaking to pay is unconditional

Even though written by the promisor, it must be signed by him.

It may be in any part of the instrument. It may be in pencil or ink, a thumb mark or

initials. Can be signed by authorised agent, but

agent must expressly state as to whose behalf he is signing, otherwise he himself may be held liable.

Signed by the Maker

The pronote must show clearly who is the person agreeing to undertake the liability to pay the amount.

In case two or more persons promise to pay, they may bind themselves jointly or jointly and severally.

Maker must be certain

The instrument must point out with certainty the person to whom the promise has been made.

In case there is a mistake in the name of the payee or his designation, the note is valid, if the payee can be ascertained by evidence.

When the name of a dead person is entered in ignorance of his death, his legal representative can enforce payment.

Payee must be certain

A promise to deliver goods either in alternative or in addition to money does not constitute a promissory note.

Promise to pay money and money only

The following are not promissory notes◦ I promise to pay B Rs. 500 and all other sums

which become dueThe sum does not become indefinite merely because of the following reason:

Promise to pay amount with interest specified at a rate.

Amount should be certain

The words ‘value received’ and ‘promise’ are unnecessary .

Date of instrument is material when the promise is to pay money after the expiry of a fixed term.

The Indian stamp act requires the negotiable instrument to be stamped (except cheque). Value of stamp depends on value of the note or bill. It may be stamped before or at the time of execution.

Other formalities

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.

There are usually three parties to a bill◦ Drawer◦ Acceptor or drawee◦ payee

Bill of Exchange

Must be in writing Signed by the drawer Drawer, drawee and payee must be certain. The sum payable must also be certain It should be properly stamped. Must contain and express order to pay

money and money alone. Order must be unconditional

characteristics

I shall be highly obliged if you make it convenient to pay Rs. 1000 to suresh.

Please pay Rs. 500 to the order of A

Number of parties: three and two Promise and order Acceptance: bills after sight requires

acceptance of the drawee before it is presented for payment while a pronote does not.

Nature of liability: primary and absolute in case of pronote.In case of bill its secondary and conditional.

Difference between Bill and Pronote

Maker’s position: In promissory note maker stands in an immediate relationship with a payee, whereas in a bill of exchange the maker stands in immediate relationship with the acceptor and not the payee.

Formalities in the case of dishonour: I. Notice to prior parties

copies

Inland and Foreign Bills

Time and Demand bills

Trade and Accommodation bills

Classification of Bills

SEC 6 defines a cheque as ‘A bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.’

CHEQUE

Cheque is also a bill of exchange with three additional qualifications:◦ It is always drawn on a specified banker◦ It is always payable on demand◦ It includes the electronic image of a truncated

cheque and also a cheque in the electronic form.

Cheque and Bill

Bill drawn on some person or firm; cheque always drawn on bank.

Drawer cannot hold the drawee liable on a bill of exchange unless the latter has accepted it. Cheque does not require acceptance.

Cheque is always payable on demand; bill may be payable on demand or on the expiry of a fixed period.

Difference between Bill and Cheque.

Cheque is payable on demand without any days of grace but in the case of a time bill of exchange three days of grace are allowed from the due date .

Stamp Bill must be presented, else the drawer will be

discharged. Drawer of a cheque is not necessarily discharged from the liability by delay of the holder in presenting it for payment. He is discharged only to the extend of the damage If any suffered by him (holder).

Bill of exchange cannot be crossed Cheques usually are not intended for

circulation but for immediate payment. Payment of a bill cannot be countermanded

by the drawer. A cheque is not required to be ‘noted’ or

‘protested’ for dishonour, but a bill may be ‘noted’.

CONTD..

Demand draft is drawn by one branch of a bank on another branch of the same bank, instructing the latter to pay a specified sum of money to a named payee or to his order.

It is drawn by bank’s branch on another branch.

It cannot be made payable to bearer. Its payment cannot be stopped or

countermanded It is always payable on demand.

Bank draft or Demand draft

It has been introduced by RBI for speeding up the cheque clearing process.

Standardisation of quality/ size, printing of cheques.

The code line contains the following information:◦ First six numbers……cheque number◦ Next three numbers…..city code◦ Next three numbers….bank code◦ Next three numbers…branch code◦ Two numbers……Transaction code

MICR

An instrument, which in form is such that it may be treated as a bill of exchange or as a promissory note.

In the following cases the bill is taken as ambiguous:◦ When drawer and drawee are the same person◦ Where drawee is a fictitious person◦ Where drawee is a person incapable of entering

into a contract.◦ Holder will have to decide once for all.

Ambiguous instrument (sec 17)

Incomplete instrument One person signs and delivers to another

person a stamped incomplete instrument. Holder gets the authority to complete the

instrument up to the value mentioned.

Inchoate Instrument

Drawer: maker of the bill of exchange is called the drawer.

Drawee: the person directed to pay the money.

Acceptor: person who accepts (signed his assent on the bill) the bill is called the accepttor.

Payee: the person named in the instrument, to whom or to whose order the money is directed to be paid is called the payee.

Parties to a bill of exchange

Indorser: when the holder transfers or indorses the instrument to any one else, the holder becomes the indorser.

Indorsee: the person to whom the bill is indorsed is called the indorsee.

Holder: the person who is legally entitled to possession of the negotiable instrument

Drawee in case of need: when in the bill or in any endorsement the name of any person is given, in addition to the drawee, to be resorted to in case of need, such a person is called ‘drawee in case of need’.

If the bill is dishonoured by drawee then it must be presented to ‘drawee in case of need’.

Acceptance for honour: It implies that the bill has been accepted by a third party, who is not having any obligation thereon, to save the honour of drawer or endorser.

Section 15: when the maker or drawer of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to have endorsed the same and is called endorser.

Endorsement

Endorsement in blank/ General Endorsement/ bearer Endorsement

The endorser signs his name only. He does not specify the name of endorsee. The effect is that, the Instrument becomes payable to bearer.

Kinds of endorsement…

Endorsement in full/ Special Endorsement

Signature + direction to pay the amount to, or to the order of specified person.

For ex. A cheque is endorsed in blank by X and delivered to Y. Y, may convert the endorsement in blank into an endorsement in full by writing above X’s signature “pay to Z or order”

Restrictive endorsementThe endorsement may by express words, restrict or exclude the right to negotiate OR may merely constitute the endorsee an agent OR to receive payment for endorser or for some other specified person.

Pat the contents to C onlyPay C for my usePay C or Order for the account of B

Conditional endorsement:  If any condition is added while endorsing the instrument, it is called conditional endorsement or qualified endorsement.

This type of endorsement restricts the liability of the endorser. Conditional endorsement are of the following types-◦ Sans recourse Endorsement ◦ Sans frais Endorsement ◦ Facultative endorsement◦ Liability of endorser depends upon a contingency.

Endorsement ‘Sans Recourse’: an endorser of the negotiable instrument may, by express words in the endorsement, exclude his own liability thereon(sec52)

for example: if R endorses a cheque as follows◦ Pay to X or order at his own risk◦ Pay to C without recourse to me

He will not be liable to X or subsequent employees if cheque dishonours.

But if the endorser who excludes his liability afterwards becomes the holder of instrument, all intermediate endorsers are liable to him.

‘Sans frais’ endorsement Where the endorser does not want the

endorsee or any subsequent holder, to incur any expense on his account on the instrument, the endorsement is ‘sans frais’

Facultative Endorsement: generally the endorsee must give notice of dishonour of the instrument to the endorser.

In facultative endorsement the endorser waives this duty of endorsee by writing in the endorsement ‘notice of dishonour waived’

The endorser remains liable to the endorsee.

Liability of endorser depends upon a contingency

In this type of endorsement, the liability of the endorser depends upon the happening of an event. If the event does not take place, the liability of the endorser does not arise. For example, if Mr. A makes an endorsement as “Pay Mr. B on his arrival”

Crossing is an instruction given to the paying banker to pay the amount of the cheque through a banker only and not directly to the person presenting it at the counter.

A cheque bearing such an instruction is called ‘crossed cheque’.

Others without such crossing are open cheques which may be encashed at the counter of the paying banker.

Crossing of cheque

Where a cheque bears across its face an addition of the words ’and company’ or any abbreviation thereof, between two parallel transverse lines, or two parallel transverse line simply, either with or without the words ‘not negotiable’ that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally.

General crossing

Drawing of two parallel lines constitutes crossing

Line must be on the face of the cheque Parallel to each other In cross direction Inclusion of words ‘& company’ is

immaterial and of no special consequence.

Things to be noted

Cheque must be presented to the paying banker through any banker and not by the payee himself at the counter

The collecting banker credits the proceeds to the account of the payee or the holder of the cheque. The latter may thereafter withdraw the money.

Effect of general crossing

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 as a crossing and the cheque shall be deemed to be crossed specially and to be crossed to that banker.

SPECIAL CROSSING

Drawing of two parallel lines on the face of the cheque is not essential in case of special crossing. In case of general crossing it is a must.

Special crossing on the cheque is a direction to the paying banker to honour the cheque, only when it is presented through the bank mentioned in the crossing and no other bank.

Not Negotiable CrossingA cheque crossed ‘Not Negotiable’ can be transferred like any other cheque, but the transferee cannot obtain a better title than that of the transferor.The object of this type of crossing is to give protection to the true owner of the cheque by preserving his right against any subsequent holder.

These words constitute an instruction to the collecting banker that he should collect the amount of the cheque for the benefit of the payee’s account only, i.e., to credit the amount to the account of the payee only and nobody else.

There is no provision in Law regarding this type of crossing. But this has been developed in practice. If the words, ‘A/C Payee’ are added to a crossing , it becomes an A/C Payee crossing.

A/C Payee Crossing

If the banker to whom cheque is specially crossed, does not have a branch at the place of the paying banker, or if he, otherwise, feels the necessity , he may cross the cheque specially to another banker, who acts as his agent for the purpose of collection of the cheque.

It is essential that the words “as agent for collection” must be included in double crossing.

If crossed to more than one banker then paying banker may refuse payment thereof.

The collecting banker cannot refuse to collect such a cheque.

Double Crossing

If the crossing on a cheque is cancelled, is called opening of the crossing. The cheque there after becomes an open cheque

Only the drawer of the cheque is entitled to open the crossing of the cheque by writing ‘ ‘pay cash’

Opening of crossing

Safety: cheques crossed specially are more safe than the generally crossed cheque.

Evidence of the transaction.

Uses of crossing