NEGOTIABLE INSTRUMENTS ACT, NEGOTIABLE INSTRUMENTS ACT, NEGOTIABLE INSTRUMENTS ACT, NEGOTIABLE INSTRUMENTS ACT,

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Important Topics

MEANING OF NEGOTIABLE INSTRUMENTMEANING OF NEGOTIABLE INSTRUMENTMEANING OF NEGOTIABLE INSTRUMENTMEANING OF NEGOTIABLE INSTRUMENT

• The word negotiable means ‘transferable by delivery’.

• The word instrument means ‘a written document by which a right is createdin favour of some person’.

• Thus, the term “negotiable instrument” means “a written documenttransferable by delivery”.

According to Section 13 (1) of the Negotiable Instruments Act, “A negotiableinstrument means a promissory note, bill of exchange, or cheque payableeither to order or to bearer”.

“A negotiable instrument may be made payable to two or more payees jointly,or it may be made payable in the alternative to one of two, or one or some ofseveral payees” [Section 13(2)].

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FEATURES OF NEGOTIABLE INSTRUMENTSFEATURES OF NEGOTIABLE INSTRUMENTSFEATURES OF NEGOTIABLE INSTRUMENTSFEATURES OF NEGOTIABLE INSTRUMENTS

• Writing and Signature

• Expressed in terms of Money

• Freely Transferable

• Title of the Holder is Free from all Defects

• Notice of Dishonour (some times necessary)

• Presumptions

• Special Procedure

• Evidence

• Stamp where necessary

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TYPES OF NEGOTIABLE INSTRUMENTSTYPES OF NEGOTIABLE INSTRUMENTSTYPES OF NEGOTIABLE INSTRUMENTSTYPES OF NEGOTIABLE INSTRUMENTS

There are two types of Negotiable Instruments:

1. Instruments Negotiable by Statute:

The Negotiable Instruments Act mentions only three kinds of negotiable instruments (Section 13). These are:

1. Promissory Notes

2. Bills of Exchange, and

3. Cheques

Negotiable Instrument Act mainly deals with the above three instruments

2. Instruments Negotiable by Custom or Usage:

There are certain other instruments which have acquired the character ofnegotiability by the usage or custom of trade. For example: Share warrants,Circular notes, Bearer debentures, Dividend warrants, Share certificates withblank transfer deeds, etc.

We need not know these in detail.

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PROMISSORY NOTESPROMISSORY NOTESPROMISSORY NOTESPROMISSORY NOTES

Section 4 of the Act defines,

“A promissory note is an instrument in writing (not being a bank-note or a currencynote) containing an unconditional undertaking, signed by the maker, to pay a certainsum of money to or to the order of a certain person, or to the bearer of theinstruments.”

The person who makes the promissory note and promises to pay is called the maker. The person to whom the payment is to be made is called the payee.

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SPECIMEN OF PROMISSORY NOTESPECIMEN OF PROMISSORY NOTESPECIMEN OF PROMISSORY NOTESPECIMEN OF PROMISSORY NOTE

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Rs. 10,000 33, Satyajit Ray Dharani

Kolkata

April 10, 2016

Three months after date, I promise to pay Shri Kartik Sen (Payee) or to his order the sum of Rupees Ten Thousand,

for value received.

To,

Shri Kartik Sen

B-20, Lenin Sarani ,

Kolkata.

Stamp

Sd/-

Ganesh Pyne

(Maker)

PARTIES TO A PROMISSORY NOTEPARTIES TO A PROMISSORY NOTEPARTIES TO A PROMISSORY NOTEPARTIES TO A PROMISSORY NOTE

• Maker:

Maker is the person who promises to pay the amount stated in the note.

• Payee:

Payee is the person to whom the amount of the note is payable.

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CHARACTERISTICSCHARACTERISTICSCHARACTERISTICSCHARACTERISTICS OFOFOFOF AAAA PROMISSORYPROMISSORYPROMISSORYPROMISSORY NOTENOTENOTENOTE

• It is an Instrument in Writing

• It is a Promise to Pay

• Signed by the Maker

• Definite and Unconditional Promise

• Promise to Pay Money Only

• Maker must be a Certain Person

• Payee must be Certain

• Sum Payable must be Certain

• Stamping

• It may be Payable on Demand or After a Definite Period of Time

• It cannot be Made Payable to Bearer on Demand : Why?

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BILL OF EXCHANGE

According to Section 5 of the act, A bill of exchange is “an instrument in writingcontaining an unconditional order signed by the maker, directing a certain personto pay a certain sum of money only to, or to the order of, a certain person or to thebearer of the instrument”.

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SPECIMEN OF BILL OF EXCHANGESPECIMEN OF BILL OF EXCHANGESPECIMEN OF BILL OF EXCHANGESPECIMEN OF BILL OF EXCHANGE

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Rs. 10,000 B-20, Lenin Sarani ,

Kolkata

April 10, 2016

Three months after date pay me ( Drawer and Payee) or to my order the sum of Rupees Ten Thousand, for value

received.

To,

Shri Ganesh Pyne

33 Satyajit Ray Dharani ,

Kolkata.

Stamp

Sd/-

Kartik Sen

(Drawer)

AcceptedSd/-

Shri Ganesh Pyne

Drawee

PARTIES TO A BILL OF EXCHANGEPARTIES TO A BILL OF EXCHANGEPARTIES TO A BILL OF EXCHANGEPARTIES TO A BILL OF EXCHANGE

• Drawer:

The maker of a bill of exchange is called the drawer.

• Drawee:

The person directed to pay the money by the drawer is called the drawee.

• Payee:

The person named in the instrument, to whom or to whose order the moneyare directed to be paid by the instruments are called the payee.

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ESSENTIAL ELEMENTS OF BILL OF ESSENTIAL ELEMENTS OF BILL OF ESSENTIAL ELEMENTS OF BILL OF ESSENTIAL ELEMENTS OF BILL OF

EXCHANGEEXCHANGEEXCHANGEEXCHANGE

• It must be in Writing.

• Order to pay

• Drawee

• Signature of the Drawer

• Unconditional Order

• Certainty of Amount

• Payment in Kind is not Valid

• Stamping

• Cannot be made Payable to Bearer on Demand

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CLASSIFICATION OF BILL OF EXCHANGECLASSIFICATION OF BILL OF EXCHANGECLASSIFICATION OF BILL OF EXCHANGECLASSIFICATION OF BILL OF EXCHANGE

• Inland and Foreign Bills [Section 11 and 12]

• Inland Bill:

• It is drawn in India on a person residing in India whether payable in or outside India; or

• It is drawn in India on a person residing outside India but payable in India.

• Foreign Bill:

• A bill drawn in India on a person residing outside India and made payable outside India.

• Drawn upon a person who is the resident of a foreign country.

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CLASSIFICATION OF BILL OF EXCHANGE CLASSIFICATION OF BILL OF EXCHANGE CLASSIFICATION OF BILL OF EXCHANGE CLASSIFICATION OF BILL OF EXCHANGE (Cont.…) (Cont.…) (Cont.…) (Cont.…)

• Time and Demand Bills:

• Time Bill: A bill payable after a fixed time is termed as a time bill. A bill payable “afterdate” is a time bill.

• Demand Bill: A bill payable at sight or on demand is termed as a demand bill.

• Trade and Accommodation Bills:

• Trade Bill: A bill drawn and accepted for a genuine trade transaction is termed as “tradebill”.

• Accommodation Bill: A bill drawn and accepted not for a genuine trade transaction butonly to provide financial help to some party is termed as an “accommodation bill”.

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CHEQUECHEQUECHEQUECHEQUE

According to Section 6 of the act, A cheque is “a bill of exchange drawn on aspecified banker and not expressed to be payable otherwise than on demand”.

A cheque is also, therefore, a bill of exchange with two additional qualification:

• It is always drawn on a specified banker.

• It is always payable on demand.

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SPECIMEN OF CHEQUESPECIMEN OF CHEQUESPECIMEN OF CHEQUESPECIMEN OF CHEQUE

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Pay ……………………………………………………………………………………………………………......

……………………………………………………………………………………………………. Or Bearer

Rupees ……………………………………………………………………………………………………………

…………………………………………………………………………………………… Rs.

Nariman Point,

Mumbai

IFSCode:MAHB0000316

A/c No.

“ΙΙ473792ΙΙ” 000240000 000000 10

Biswanath Pandey

SignaturePlease sign above

D D M M Y Y Y Y

PARTIES TO A CHEQUEPARTIES TO A CHEQUEPARTIES TO A CHEQUEPARTIES TO A CHEQUE

• Drawer:

Drawer is the person who draws the cheque.

• Drawee:

Drawee is the drawer’s banker on whom the cheque has been drawn.

• Payee:

Payee is the person who is entitled to receive the payment of a cheque.

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ESSENTIAL ELEMENTS OF A CHEQUEESSENTIAL ELEMENTS OF A CHEQUEESSENTIAL ELEMENTS OF A CHEQUEESSENTIAL ELEMENTS OF A CHEQUE

• In writing

• Express Order to Pay

• Definite and Unconditional Order

• Signed by the Drawer

• Order to Pay Certain Sum

• Order to Pay Money Only

• Certain Three Parties

• Drawn upon a Specified Banker

• Payable on Demand

• Unlike in Promissory Note or Bill of Exchange, no stamp duty needs to be paid on a cheque.

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TYPES OF A CHEQUE & CROSSINGSTYPES OF A CHEQUE & CROSSINGSTYPES OF A CHEQUE & CROSSINGSTYPES OF A CHEQUE & CROSSINGS

• Bearer Cheque : Payable to a Bearer

• Crossed Cheque : Payable only into a Bank A/C ( i.e. Not Payable to a Bearer)

• Cheque Crossed Specially

• Restrictive Crossing (A/c Payee Only)

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NEGOTIATIONNEGOTIATIONNEGOTIATIONNEGOTIATION

According to section 14 of the Act, ‘when a promissory note, bill of exchange orcheque is transferred to any person so as to constitute that person the holderthereof, the instrument is said to be negotiated.’

The main purpose and essence of negotiation is to make the transferee of apromissory note, a bill of exchange or a cheque the holder there of.

Negotiation thus requires two conditions to be fulfilled, namely:

• There must be a transfer of the instrument to another person; and

• The transfer must be made in such a manner as to constitute the transferee theholder of the instrument.

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MODES OF NEGOTIATIONMODES OF NEGOTIATIONMODES OF NEGOTIATIONMODES OF NEGOTIATION

• Negotiation by delivery (Sec. 47):

Where a promissory note or a bill of exchange or a cheque is payable to a bearer, it may be negotiated by delivery thereof.

Example: A the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep it for B. The instrument has been negotiated.

• Negotiation by endorsement and delivery (Sec. 48):

A promissory note, a cheque or a bill of exchange payable to order can be negotiated only be endorsement and delivery.

Unless the holder signs his endorsement on the instrument and delivers it, the transferee does not become a holder. If there are more payees than one, all must endorse it.

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ENDORSEMENT [SECTION 15] ENDORSEMENT [SECTION 15] ENDORSEMENT [SECTION 15] ENDORSEMENT [SECTION 15]

The word ‘endorsement’ in its literal sense means, writing on the back of aninstrument. But under the Negotiable Instruments Act it means, the writing ofone’s name on the back of the instrument or any paper attached to it with theintention of transferring the rights therein. Thus, endorsement is signing anegotiable instrument for the purpose of negotiation. The person who effects anendorsement is called an ‘endorser’, and the person to whom negotiableinstrument is transferred by endorsement is called the ‘endorsee’.

Who may Endorse / Negotiate [Section 51]:

Every sole maker, drawer, payee or endorsee, or all of several joint makers,drawers, payees or endorsees of a negotiable instrument may endorse andnegotiate the same if the negotiability of such instrument has not been restrictedor excluded as mentioned in Section 50.

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ENDORSEMENT ENDORSEMENT ENDORSEMENT ENDORSEMENT ((((ContContContCont….)….)….)….)

Essentials of a Valid Endorsement:

• It must be on the back or face of instrument or on a of paper annexed thereto.

• It must be signed by the endorser.

• It must be completed by the delivery of the instrument.

• It must be made by the holder of the instrument.

Kinds of Endorsement:

• Blank or General Endorsement

• Full or Special Endorsement

• Partial Endorsement

• Restrictive Endorsement

• Conditional Endorsement

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