Negotiable Instruments Act-1

8/8/2019 Negotiable Instruments Act-1

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KAMAL K JINDALManaging Director

Global Management ServicesNew DelhiEmail [email protected]


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Negotiable Instruments

All promissory notes, bills of exchange, cheques or other instruments

in writing

unconditional order

signed by any person

who promises to pay money, or

acknowledges money to be due,

shall be negotiable by delivery/endorsement and delivery thereon,

so as to vest the property thereof in each endorsee successively

Negotiable Instruments Act - MBIC 2


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What is a Negotiable Instrument:

Negotiable means the quality of transferabilityby delivery or by endorsement and delivery.

Instrument means a written document by whicha right is created in favor of some person.

In general terms, Negotiable Instrument meansa written document, which is freely transferable

and which creates a right in favor of someperson to receive specific sum of money.



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What is a Negotiable Instrument:

The Act besides three negotiable instrumentsrecognizes any other instrument satisfying thecharacteristics of negotiability, as Negotiable

Instrument.

For Example

I. Dividend Warrants

II. Share WarrantsIII. Bearer Debentures

IV. Government Promissory Notes etc.



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Features Of Negotiable

Instruments1. A negotiable instrument is freely transferable

2. Negotiability confers absolute and good titleon the transferee

3. A negotiable instrument must be in writing

4. In every negotiable instrument there must bean unconditional order or promise for payment

5. The instrument must involve payment of acertain sum of money only and nothing else



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Features Of Negotiable

Instruments6. The time of payment must be certain

7. The payee must be a certain person

8. A negotiable instrument must bear the

signature of its maker

9. Delivery of the instrument is essential

10. Stamping of Bills of Exchange andPromissory Notes is mandatory



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Law of Negotiable Instrument

The object and purpose of this Act is to legalize the systemunder which claim on certain mercantile instruments aretreated like ordinary goods passing from hand to hand.

This Act regulates the issue and negotiations of Bills of

exchange, Promissory Note and Cheque.

In the absence of any express provisions in this Act, thegeneral rules contained in the contract Act are applicable tosuch instruments, as to obligations of parties to thenegotiable instruments are contractual in nature.

The Act does not declare what consideration is sufficientand valid for a Bill of Exchange, Promissory Note andtherefore, any consideration which will support a simplecontract will support a bill of exchange or promissory note.



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Drawer Drawee

Drawer:The maker of a bill of exchange orCheque

Drawee:The person thereby directed to pay

"Drawee in case of need ": When the bill or in anyendorsement thereon the name of any person isgiven in addition to the drawee to be resorted to incase of need such person is called a "drawee incase of need".



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Acceptor Payee

"Acceptor": After the drawee of a bill has signedhis assent upon the bill, or given notice of suchsigning to the holder or to some person on hisbehalf, he is called the "acceptor"

"Payee":The person named in the instrument, towhom or to whose order the money by theinstrument is directed to be paid, is called the"payee"



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Holder

The "holder" of a promissory note, bill of exchangeor cheque means any person entitled in his ownname to the possession thereof and to receive orrecover the amount due thereon from the partiesthereto.



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Capacity to make Negotiable

Instruments Every person capable of contracting, according to

the law to which he is subject, may bind himselfand be bound by the making, drawing,acceptance, endorsement, delivery andnegotiation of a promissory note, bill of exchangeor cheque.

Minory A minor may draw, indorse, deliver and negotiate such

instruments to as to bind all parties except himself.



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Liability of drawer

The drawer of a bill of exchange or chequeis bound in case of dishonour by thedrawee or acceptor, to compensate the

holder, provided due notice of dishonourhas been give to, or received by, thedrawer as herein after provided.



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Liability of drawee ofcheque

The drawee of a cheque having sufficientfunds of the drawer in his hands properlyapplicable to the payment of such cheque

must pay the cheque when duly requiredso to do, and, in default of such payment,must compensate the drawer for any lossor damage caused by such default.



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Delivery

The making, acceptance or endorsement of apromissory note, bill of exchange or cheque iscompleted by delivery, actual or constructive.

For delivery to be effectual, it must be made by theparty making, accepting or indorsing theinstrument, or by a person authorised by him.

A cheque payable to bearer is negotiable by thedelivery thereof.



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Definition

A promissory note is an instrument inwriting (not being a bank-note or acurrency-note) containing an unconditional

under-taking, signed by the maker, to pay acertain sum of money only to, or to theorder of, a certain person, or to the bearerof the instrument. [Section 4].



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Features

Must be in writing,duly signed and

properly stamped asper Indian Stamp

Act.

It must contain anundertaking orpromise to pay.

The promise to paymust not beconditional.

It must contain apromise to pay

money only.

The parties to apromissory notemust be certain.

The sum payablementioned must becertain or capable ofbeing made certain.

May be payable ondemand or after a

certain date.



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Illustration: Not Promissory Notes

"Mr. B, I.O.U Rs.

1,000."

"I promise to pay BRs. 500 and all

other sums whichshall be due to him."

I promise to pay BRs. 500 first

deducting there outany money whichhe may owe me."

"I promise to pay BRs. 500 and to

deliver to him myblack horse on 1stJanuary next."

"I promise to pay BRs. 500 on D's

death, provided Dleaves me enoughto pay that sum,"

"I promise to pay BRs. 500 seven daysafter my marriage

with C."



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Components

Date of thenote

Name of theparties

Address towhere

payment willbe sent

Interest Rate

Due dates for

payment ofprincipal and

interest



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Specimen of a Promissory Note

PAYEE

MAKER/DRAWERNegotiable Instruments Act - MBIC 24


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Specimen of a PN



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Specimen of a cheque



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Parties to a Cheque

Drawer

Drawee

Holder



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Presentment

Cheques must be presented for payment to thedrawee, by the holder himself or on behalf or theholder as hereinafter provided.

If this is not so, the other parties are then not liablethereon to such holder.

Presentment for payment must be made duringthe usual hours of business and, if at a bankers,within banking hours.

A cheque must, in order to charge the drawer, bepresented at the bank upon which it is drawn



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Presentment of instrument

payable on demand

A negotiable instrument payable on demand mustbe presented for payment within a reasonable timeafter it is received by the holder

Delay is excused if it is caused byy Circumstances beyond the control of the holder

y Actions not imputable to his default, misconduct ornegligence

When the cause of the delay ceases to operate,

presentment must be made within a reasonabletime.



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To whom payment should be

made

Subject to the provisions of section82,clause (c),

payment of the amount due

must be made to the holder of theinstrument

in order to discharge the drawer



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Delivery of instrument on payment

or indemnity in case of loss

Any person liable to pay, and called upon bythe holder thereof to pay, the amount due isbefore payment entitled to have it shown

On payment entitled to have it delivered up tohim

If the instrument is lost or cannot be producedhe is entitled to be indemnified against any

further claim against him



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Cheque payable to order

Where a cheque payable to order purports to beendorsed by or on behalf of the payee, the draweeis discharged by payment in due course.

Where a cheque is originally expressed to bepayable to bearer, the drawee is discharged bypayment in due course to the bearer thereof,notwithstanding any endorsement whether in fullor in blank appearing thereon, and notwithstanding

that any such endorsement purports to restrict ofexclude further negotiation.



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Affect of material alteration

Any material alteration of a negotiable instrumentrenders it void

Alteration by endorsee:- And any such alteration, ifmade by an endorsee, discharges his endorserfrom all liability to him in respect of theconsideration thereof.



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Dishonours by non-payment

Dishonour by non-payment is when thedrawee of the cheque makes default inpayment upon being duly required to do so



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By and to whom notice should be

given

When a cheque is dishonoured by non-payment, the holder, or some party whoremains liable, must give notice that the

instrument has been so dishonoured to allother parties whom the holder seeks to makeliable

It is not necessary to give notice to the maker

of the dishonoured cheque



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Mode in which notice may be

given

Notice of dishonour may be given to a dulyauthorized agent of the person to whom it isrequired to be given, or , where he has died, to hislegal representative, or, where he has beendeclared an insolvent, to his assignee

It maybe oral or written

It may, if written, be sent by post, and in any form



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Contd

It must inform the party, either in clear terms thatthe instrument has been dishonoured, and in whatway, and that he will be held liable

It must be given within a reasonable time afterdishonour, at the place of business or at theresidence of the party

If the notice is duly directed and sent by post andmiscarries, it does not render the notice invalid



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Payment in due course of

crossed cheque Where the banker on whom a crossed cheque is

drawn has paid the same in due course, the bankerpaying the cheque, and the drawer thereof, shallrespectively be entitled to the same rights, and beplaced in the same position in all respects, as they

would respectively be entitled to and placed in if theamount of the cheque had been paid to and receivedby the true owner thereof

The banker and the drawer in case the cheque iscrossed would be entitled to same rights as theoriginal owner of cheque

That is the same rights as when the true ownerwould have drawn the cheque



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Cheque bearing "not negotiable"

A person taking a cheque crossedgenerally or specially, bearing in eithercase the words "not negotiable", shall not

have and shall not be capable of giving, abetter title to the cheque than that whichthe person from whom he took it had.



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Penalty in case ofDishonour

If a cheque is returned by the bank unpaid,either because

y The amount of money standing to the credit ofthat account is insufficient to honour the cheque

y It exceeds the amount arranged to be paid from

that account by an agreement made with thatbank



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The person shall be deemed to havecommitted an offence and shall be

y punished with imprisonment for a term whichmay extend to two years

y fined as much as twice the amount of the

cheque, or with both



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Conditions

The cheque has been presented to the bank within aperiod of six months from the date on which it is drawnor within the period of its validity, whichever is earlier.

The payee makes a demand for the payment of the

said amount of money by giving a notice, in writing, tothe drawer, of the cheque, within thirty days of thereceipt of information by him from the bank regardingthe return of the cheques as unpaid, and

The drawer of cheque fails to make the payment of the

amount of money to the payee or holder in due courseof the cheque, within fifteen days of the receipt of thenotice



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Cheque crossed specially

Where a cheque bears across its face an additionof the name of a banker, either with or without thewords "not negotiable", that addition shall bedeemed a crossing, and the cheque shall be

deemed to be crossed specially, and to be crossedto that banker.



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Characteristics ofBill of

Exchange Bill of Exchange must contain an Order - It must in

imperative terms direct the drawee to "pay to A" the sumspecified. A request to pay, or an authority to collectmoney due, is not an order, though it is often hard to tell

from the language used just what is meant.

A Bill Of Exchange "Must Be Payable On Demand Or At AFixed Or Determinable Future Time.

An instrument is payable on demand (1) where it is

expressed to be payable on demand, or at sight, or onpresentation; or (2) where no time of payment is stated.


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The amount to be paid must be certain -If the bill reads "$500 and accruedtaxes," then it would not be negotiable,

for the amount payable at maturity isuncertain.

The order to pay must be to pay money.

The money must be that of the countrywhere the order is payable.


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Important Terms

DRAWER, DRAWEE AND PAYEE - Themaker of a bill of exchange or cheque is calledthe drawer;

the person thereby directed to pay is called the

drawee The person named in the instrument, to whom,

or to whose order the money is by theinstrument directed to be paid, is called thepayee

However, a drawer and payee can be oneperson as he can order to pay the amount tohimself.


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A bill of exchange is payable on demandwhen it is expressed to be payable ondemand, or at sight, or on presentation or

when notice for payment is expressed. Incalculating the maturity of bills payable ata future time, three days, called days of

grace, must be added to the nominal duedate of the bill


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Negotiable Instruments Act-1

Documents

Transcript of Negotiable Instruments Act-1