NEGOTIABLE INSTRUMENTS ACT 1881

Negotiable Instrument• The term ‘instrument’ means ‘any written document

by which a right is created in favour of some person’.• The word ‘negotiable’ has a technical meaning

whereby rights in an instrument can be transferred by one person to another.• Thus, a negotiable instrument is a document by

which rights vested in a person can be transferred to another person in accordance with the provisions of the Negotiable Instruments Act, 1881.

Contd-

• An ‘Instrument’ as referred to in the Act is a legally recognized written document, whereby rights are created in favour of one and obligations are created on the part of another.

• The word ‘negotiable’ means transferable from one person to another either by mere delivery or by endorsement and delivery, to enable the transferee to get a title in the instrument.

Contd-• An instrument is called ‘negotiable’ if it possesses the

following features:

i. Freely transferable

ii. Holder’s title free from defects

iii. The holder can sue in his own name

iv. A negotiable instrument can be transferred infinitum, i.e.

v. A negotiable instrument is subject to certain presumptions

Pre- sumption of Negotiable Instrument

Until the contrary is proved, the following presumptions shall be made. (sec 118 & 119).

N.I was made, drawn, accepted, indorsed or transferred for consideration.

NI Bearing a date was made or drawn on that particular date only.

B.O.E was accepted within a reasonable time after its date & before its maturity.

Contd -Contd -Transfer of a N.I were made in order in which they

appear.It is presumed that a lost negotiable instrument is

duly stamped.Holder of a negotiable instrument is a holder in due

course except the case where the instrument has been obtained by fraud

Essential Elements of a Negotiable Instrument

• It must be in writing, which includes, typing, computer print out or engraving.

1. The instrument must be signed by the person who is the maker or a drawer.

2. There must be an unconditional promise or order to pay.3. The instrument must involve payment of a certain sum of money only

and nothing else.4. The instrument must be payable at a time which is certain to arrive. If

it is payable ‘when convenient’ the instrument is not a negotiable one. 5. In case of a bill or cheque, the drawee must be named or described

with reasonable certainty.

Contd-•Forms in which an Instrument must be Payable so as

to Constitute a Negotiable Instrument are: (i) Pay A; (ii) Pay A or order; (iii) Pay to the order of A; (iv) Pay A and B; (v) Pay A or B; (vi) Pay A or bearer; (vii) Pay bearer.

Promissory Note•Rs 10,000 New Delhi – 1100 01• Jan. 10, 2011•On demand [or six months after date] I promise to

pay X or order the sum of rupees ten thousand with interest at 12 per cent per annum only for value received.

•To X Sd/-A•Address……………. Stamp

Parties to a Promissory Note

• The maker

• The payee

• The holder

• The endorser

• The endorsee

Promissory note•A promissory note is an instrument in writing (not

being a bank or a currency note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money to the bearer of the instrument (s.4).

•Essentials of a Promissory Note• A promissory must be in writing.• It must contain an undertaking or promise to pay.• The promise to pay must not be conditional.

Promissory note• The promissory note must be signed by the maker.• The instrument must point out with certainty the

maker and the payee of the promissory note, e.g., son of……. resident of……, etc.

• The sum payable must be certain or capable of being made certain.

• It cannot be payable to bearer on demand (s.31 of R. B. I. Act).

• It cannot be crossed unlike a cheque.

Bill of exchange

Parties to BOE• It must be in writing• It must contain an order to pay•The order must be unconditional•The order must be to pay money only• It must be signed by the drawer, and dated•The drawer, drawee and the payee must be certain• It must be properly stamped

DistinctionPromissory Note Bill of Exchange

1. There are only two parties – the maker (debtor) and the payee (creditor).

There are three parties – the drawer, the drawee and the payee although drawer and payee may be the same person.

2.

A note contains an unconditional promise by the maker to pay the payee.

It contains an unconditional order to the drawee to pay according to the drawer’s directions.

3. No prior acceptance is needed. A bill payable ‘after sight’ must be accepted by the drawee or his agent before it is presented for payment.

4. The liability of the maker or drawer is primary and absolute.

The liability of the drawer is secondary and conditional upon non-payment by the drawee.

5. No notice of dishonour need be given. Notice of dishonour must be given by the holder to the drawer and the intermediate endorsers to hold them liable thereon.

6. The maker of the note stands in immediate relation with the payee.

The maker or drawer does not stand in immediate relation with the acceptor or drawee.

Cheque

Requisites

1. Written instrument

2. Unconditional order

3. On a specified banker only

4. A certain sum of money

5. Payee to be certain

6. Payable on demand

7. Amount of the cheque

8. Dating of cheques

Essential Features Of Cheque:Essential Features Of Cheque:

1. It is always drawn by a bank & not by any other institutions.2. It always payable on demand.3. A cheque can be bearer, order or crossed.4. The drawee, that is, the banker named must honour the cheque by

making payment to the payee when the cheque is presented for payment to the banker at his office during the usual office hours, provided the cheque is properly and validly drawn and the drawer has sufficient funds to his credit.

5. The signature on the cheque must tally with the specimen signature of the concerned drawer.

6. A cheque must be dated.

Crossing of Cheques

• Meaning of Crossing. Crossing is a unique feature associated with a cheque affecting to a certain extent the obligation of the paying banker and also its negotiable character. Crossing on cheque is a direction to the paying banker by the drawer that payment should not be made across the counter.

• Significance of Crossing. As payment cannot be claimed across the counter on a crossed cheque, crossing of of cheques serves as a measure of safety against theft or loss of cheques in transit.

Crossing of chequesCrossing of cheques

• CHEQUE CROSSED GENERALLY - Where a cheque bears across its face an addition of the words “and company” or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines 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. [section 123]

• CHEQUE CROSSED SPECIALLY - 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, and to be crossed to that banker. [section 124].

Contd -Contd -• PAYMENT OF CHEQUE CROSSED GENERALLY OR SPECIALLY - Where a cheque

is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker. Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent for collection. [section 126].

• CHEQUE BEARING “NOT NEGOTIABLE” - 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 than the person from whom he took it had. [section 130].

• Thus, mere writing words ‘Not negotiable’ does not mean that the cheque is not transferable. It is still transferable, but the transferee cannot get title better than what transferor had.

HOLDERHOLDER

Sec.8 The Holder of a Promissory note, B.O.E or CHEQUE means

any person entitled in his own name to the possession thereof, and to receive or recover the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.

HolderHolder1) The person must be entitled to receive payment or receive the

amount by filling a suit in his own name against other parties to negotiate the instrument giving a valid discharge.

2) In case instrument is lost from the person who was entitled to receive the payment, the subsequent finder does not become it’s owner. Only the person who was entitled to receive the payment initially is the real owner.

3) The person must have a legal right to possess the instrument in his own name.

HOLDER IN DUE COURSEHOLDER IN DUE COURSE

Sec.9Any person who for consideration becomes the possessor of the

promissory note, B.O.E or Cheque 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 whom he derives his title.

When does a person becomes a Holder in When does a person becomes a Holder in due coursedue courseBefore the amount mentioned in the instrument becomes payable.1) Without having sufficient cause to believe that any defect exists in

the title of the person from whom, he derives his title2) He becomes a possessor of a promissory note, b.o.e or cheque .3) If it is payable to the bearer.4) Consideration has passed from him.

Illustration:- A is a payee for a valuable consideration of a bill payable to order. He gets this instrument from B without knowledge of any defect in B’s title & its maturity.

In this e g. A is a holder in due course.

Contd -Contd -

A holder of a negotiable instrument will not be a holder in due course if:-

a) he has obtained the instrument by gift or by illegal method. b) he has obtained the instrument after its maturity.

Privileges of Holder in due course1)Inchoate stamped instrument: A person, who has signed

& delivered to another a stamped but otherwise inchoate instrument , is precluded from asserting, as against a holder in due course, that the instrument has not been filled in accordance with the authority given by him, the stamp being sufficient to cover the amount(sec.20).

2) Liability of prior parties: Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied (sec.36).

Contd -Contd -

3) Fictitious payee: Where a bill is drawn payable to the drawer’s order in fictitious name & is indorsed in the same hand as the drawer’s signature, the acceptor is not relieved from liability to any other holder in due course, on the plea that the drawer is fictitious(sec.42).

4) Conditional delivery: If a bill or not is negotiated to a holder in due course, the other parties to the instrument cannot avoid liability on the ground that the delivery of the instrument was conditional or for a special purpose only.

Contd -Contd -5) Instrument cleansed of all defects: Once a negotiable instrument passes

through the hands of a holder in due course, it gets cleansed of its defects provided the holder was himself not a party to the fraud or illegality which affected the instrument in some stage of its journey. Thus any defect in the title of the transferor will not affect the rights of the holder in due course even if he had knowledge of the prior defect provided he himself is not a party to the fraud.

Example: A, by fraud, induces B to make a promissory note in his favour. He indorses the note to C, who take it as a holder in due course. C subsequently indorses the note to A, for value. A cannot sue B on the note as he himself is a party to the fraud .

Difference between Holder and Holder in due course • A holder can obtain an

instrument without consideration

• If an instrument is inchoate, a holder of such instrument cannot get good title in the instrument

• A holder need not bother about the defect, if any in the title of the instrument

• Obtains an instrument with consideration and for value.

• Holder in due course acquires a good title even if the instrument is inchoate.

• Holder in due course who acquires an instrument knowingly the defect of the title.

Capacity of parties

•The capacity to incur liability on negotiable instruments is co-extensive with the capacity to contract.

• If a party is not competent to contract (say if he is a minor), the agreement is absolutely void and inoperative as against him but he can derive benefit under it.

•Thus, a person incompetent to contract cannot make himself liable as party to negotiable instrument, but

Capacity of Parties•he makes the other parties competent to contract

liable , because he can be a promisee or payee as per the Indian Contract Act.

• It follows, therefore, that if some parties to the negotiable instrument are not capable of contracting, the instrument is void only as against such parties are incapable to contract, then the negotiable instrument is a nullity and does not have any legal value whatsoever.

NegotiationNegotiation

•Method of transfer• An instrument is said to be negotiated when a

promissory note,BOE,cheque is transferred to any person so as to constitute that person the holder of the instrument

• Transfer with an intention to transfer the title of the instrument.

Negotiation by delivery Negotiation by endorsement and delivery

Contd-•Meaning of endorsement – An endorsement means

signing the negotiable instrument on the back of ,or face thereof or, or on a slip of paper annexed thereto

PresentmentPresentment

• Presentment of a negotiable instrument is made for two purposes: (i) for

acceptance and (ii) for payment.

• Maturity (Ss.21-25). Cheques are always payable on demand but other

instruments like bills, notes, etc., may be made payable on a specified

date or after the specified period of time. The date on which payment of

an instrument falls due is called maturity (s.22).

• Presentment for Payment. A negotiable instrument must be presented for

payment to the maker, acceptor or drawee thereof, as the case may be,

by the holder or his agent.

Dishonour (s 92)•A negotiable instrument is said to be dishonoured by

non-payment when the maker, acceptor or drawee, as the case maybe makes default in payment upon being duly required to pay the same.▫Dishonour by non payment▫Dishonour by non acceptance

Bouncing of cheques (s 138- s142)Bouncing of cheques (s 138- s142)

• A cheque is said to be bounced or dishonored by non-payment when the drawer of the cheque makes default in the payment upon being duly required by the same.

• If a cheque is dishonoured even when presented before expiry of 6 months, the payee or holder in due course is required to give notice to drawer of cheque within 30 days from receiving information from bank..

• The drawer should make payment within 15 days of receipt of notice.

• If he does not pay within 15 days, the payee has to lodge a complaint with Metropolitan Magistrate or Judicial Magistrate of First Class, against drawer within one month from the last day on which drawer should have paid the amount.

Contd -Contd -

• The penalty can be upto two years imprisonment or fine upto twice the amount of cheque or both. The offence can be tried summarily. Notice can be sent to drawer by speed post or courier. Offence is compoundable.

• It must be noted that even if penalty is imposed on drawer, he is still liable to make payment of the cheque which was dishonoured. Thus, the fine/imprisonment is in addition to his liability to make payment of the cheque.

NotingNoting

•When a cheque is dishonoured generally the bank who refuses payment returns back the cheque gives reasons in writing for the dishonour of the cheque.

• Noting▫The holder cause such dishonour to be noted by a

notary public upon the instrument or upon a paper attached thereto or partly upon each

▫Noting consists in recording the fact of dishonour by notary public

ProtestProtest

• Protest is a formal certificate issued by the notary public certifying the dishonour of the bill or note.

• It has to be done within a reasonable period of time.