Negotiable Instruments Act, 1881

Negotiable Instrument

• Means a written document in favour of some person and which is freely transferable.

• Section 13 defines a Negotiable Instrument as:“A ‘negotiable instrument’ means a promissory note, bill of exchange or cheque payable either to order or to bearer.” Any other instrument possessing features of a Negotiable Instrument shall also be considered as Negotiable.

Essential Characteristics

• Free Transferability– It’s transferable, by mere delivery where payable to

bearer; and by endorsement and delivery where payable to order.

– An instrument marked non-transferable can never be a negotiable instrument, e.g. FDR.

• Negotiability – i.e., title of the transferee who is a holder in due

course shall be good even if the title of the transferor was defective.

Essential Characteristics

• Transferability Infinitum― A negotiable instrument can be transferred infinite number of

times till its satisfaction.

• Subject to certain Presumptions– Every negotiable instrument is deemed to have been made,

drawn, accepted, endorsed, negotiated or transferred for consideration.

– Every negotiable instrument bears the date on which it is made or drawn.

– Post dated cheques. The holder of the negotiable instrument is a holder in due course.

Types of Negotiable Instruments

• Promissory Note

• Bill of Exchange

• Cheque

Promissory Note

• 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 to, or to the order of, certain person or to the bearer of the instrument (Section 4).

Characteristics of a Promissory Note

• Instrument in writing• Contains promise to pay• Unconditional undertaking• Signed by the maker• Maker must be certain• Payee must be certain• Promise should be to pay money

Characteristics of a Promissory Note

• Amount should be certain• May be payable in installments• May be payable on demand or after a

specified period.• Cannot be drawn payable to bearer by any

person other than RBI/Central Govt. or under authority from RBI/Central Govt.

• Must be duly stamped.

Bill of Exchange

• Section 5 defines a Bill of Exchange as “an instrument in writing containing an unconditional order signed by the maker directing to pay a certain sum of money only to, or to the order of a certain person, or to the bearer of the instrument.

• It is a written undertaking from the creditor to the debtor, to get the payment after a fixed period.

Bill of Exchange

• Contains an unconditional order to pay instead of Promise or Request to pay.

• There are three parties, viz. Drawer, Drawee and Payee.

• Cannot be drawn payable to Bearer on Demand

• May be drawn payable on demand or payable to bearer after a certain period of time

Types of Bills of Exchange

• Inland and Foreign

• Time and Demand

• Trade and Accommodation

Cheque

• Section 6 of the Negotiable Instruments Act, defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Further, the expression includes the electronic image of a truncated cheque and a cheque in the electronic form.

Cheque

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

• A ‘cheque in the 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 (with or without biometrics signature) and asymmetric crypto system.

Cheque

• A cheque is a bill of exchange with additional qualities:– It is drawn on a specific banker– It is payable on demand– Includes electronic image of a truncated cheque

and in electronic form.• All cheques are bills of exchange, however, all

bills of exchanges are not cheques.

Crossing of Cheque

• It’s a direction to the paying banker that payment should not be made across the counter.

• It’s a coded expression represented by two transverse parallel lines simply or with certain words in between like ‘& Co.’, ‘Not-negotiable’, ‘Payee’s A/c only’ or any combination thereof across the face of the cheque. This is also called General Crossing.

• In case of a cheque crossed generally, payment may be collected through any banker.

Crossing of Cheque

• Where a cheque bears across its face name of a particular bank either with or without two transverse parallel lines, it is said to be crossed specially. It may also be accompanied by words like ‘Not-negotiable’, ‘Payee’s A/c only’.

• In case of special crossing, proceeds of the cheque can be collected only through the specified banker and no other. Thus, the payee must have an account with that bank to realize the proceeds of such a crossed cheque.

Crossing of Cheque

• Not negotiable doesn’t render the cheque non-transferable.

• The only effect is that the title of the transferee shall be subject to the title of the transferor, it cannot be superior.

• A/c Payee only Crossing has the effect of rendering a cheque non-transferable.

• Thus, endorsement, if any, on such a cheque shall be ignored.

Crossing of Cheque

• Not Negotiable + A/c Payee only Crossing: Not only that the proceeds be credited to the account of payee only but also the payee is a bonafide rightful holder thereof.

• Opening of Crossing: Crossing may be opened by cancellation of crossing by putting ‘X’ mark and writing the words ‘Pay cash’ under the full signatures of the Drawer.

Cheque Bouncing

• Section 138 provides punishment for bouncing of cheques, i.e., dishonour for insufficiency of funds.

• Punishment provided is imprisonment up to 2 years or fine up to double the amount of the cheque or both.

Cheque Bouncing Conditions

• Insufficiency of funds includes:– stop-payment – closure of account – directing the payee not to present

• Legally enforceable debt or liability.

• Presentment within 6 months from the date on which it is drawn or within the period of validity, whichever is earlier.

Cheque Bouncing Conditions• Payee/holder should have given notice demanding

payment from the Drawer within 30 days of receipt of information of dishonour of cheque from bank.

• The drawer must have failed to pay within 15 days of such period of notice.

• Complaint before Metropolitan Magistrate/ First Class Judicial Magistrate should be made within one month of expiry of aforesaid period of 15 days.

Inchoate Instruments

• Where one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments then in force in India, and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as then case may be, upon it a negotiable instrument, instrument, for any amount specified therein and not exceeding the amount covered by the stamp.

Parties to a Negotiable Instrument

• Bill of Exchange:– Drawer– Drawee– Acceptor– Payee– Indorser – Indorsee – Holder – Drawee in case of Need– Acceptor for honour

Parties to a Negotiable Instrument

• Promissory Note– Maker– Payee– Holder

• Cheque– Drawer – Drawee – Payee

Holder (Sec 8)

• A person is the holder of the instrument if he: – Is entitled in his own name to the possession of

the negotiable instrument and– Is entitled to receive or recover the amount due

thereon from the parties thereto.

• In order to constitute the person a holder of the instrument it is not necessary that he should be in possession of the instrument.

Holder

• Mere right to have possession of the instrument will not constitute the possessor a holder thereof. He should be also entitled to recover or receive the amount. Therefore: – The holder must have obtained the instrument in

a lawful manner.– The holder must have a right to sue in his own

name to recover the amount.

Holder in Due Course (Sec 9)

• Holder in due course means any person who– for consideration– became the possessor of a promissory note, bill of

exchange or cheque if payable to bearer; or the payee or endorsee thereof if payable to order

– before the amount mentioned in it becomes payable

– without having sufficient cause to believe that any defect existed in the title of the person from he derived his title.

Holder in Due Course

• Must qualify these essentials:– Must be a holder for valuable consideration– Must become a possessor of the instrument

before its date of maturity.– He must do so in good faith– Must accept the negotiable instrument in

complete, and regular on the face of it.

Privileges of a Holder in Due Course

• Instrument purged of all defects• Rights not affected in case of an inchoate

instrument• All prior parties liable• No effect of conditional delivery• No effect of absence of consideration or

presence of unlawful consideration

Liabilities of Parties to Negotiable Instruments

• Drawer• Maker of a promissory note or drawee of a bill

of exchange• Bank as the drawee of the cheque• Endorser• Intervening parties

Transfer of Ownership of Negotiable Instrument

• By Negotiation– Means transfer of an instrument from one person

to another, to constitute the person a holder of the instrument.

• By Assignment– Means transfer of ownership in an article by

means of a written and registered document, under the Transfer of Property Act.

Negotiation

• By Delivery– Voluntary transfer of the possession of the

instrument.

• By Endorsement and Delivery– Writing the name of a person on the back of the

instrument, for the purpose of negotiation.

Kinds of Endorsement

• General or Blank• Special or Full• Partial • Restrictive • Conditional – Sans Recourse– Facultative– Sans Frais– Liability dependent upon a contingency

Endorsement

• By Legal Representative

• Intentional Cancellation Of Endorsement

• Negotiation Back

Discharge of Parties

• By Payment• By Cancellation• By Release• By Default of the Holder• By Material Alteration • By Bill being in the hands of Acceptor

Dishonour

• By Non-Acceptance

• By Non-Payment

• By Insufficiency of Funds

Dishonour • Noting: Official proof of presentment and dishonour of

an instrument. Needed for a bill of exchange or promissory note.

• Protesting: Formal certificate of dishonour issued by notary to the holder of the instrument. It contains:– The instrument or its copy– Names of the parties for and against the protest– Fact, time and place of dishonour– Statement that payment was demanded by the notary from

the person dishonouring, and payment was refused.