Negotiable Instrumentsacts

8/10/2019 Negotiable Instrumentsacts

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NEGOTIABLE

INSTRUMENTS ACT , 1881

In India only three kinds of instruments are

recognized as negotiable instruments viz.,

promissory notes, bills of exchange and cheques.


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Negotiable Instruments

Documents of a certain type, used in

commercial transactions and monetary

dealings, are called Negotiable instruments.

Negotiable means transferable by deliveryand instrument means a written document

by which a right is created in favour of some

person.

Thus, negotiable instrument means a

document transferable by delivery


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Negotiable Instruments

Definition:

Negotiable Instruments Act , 1881 states that,

A negotiable instrument means a promissory

note, bill of exchange or cheque payableeither to order or to bearer.

---Sec. 13(1)


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Promissory Note

(Pro-Note or Hand-Note)

Definition:

A promissory note is an instrument in writing (not

being a bank note or currency note) containing an

unconditional undertaking signed by the maker, topay a certain sum of money only to , or to order of a

certain person, or to the bearer of the instrument.

-------Sec. 4

The person who makes the promise to pay is calledthe Maker. He is the debtor and must sign the

instrument.

The person who will get the money (the credito r) is

called Payee.


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Essential Elements of a

Promissory Note1. The instrument must be in wr i t ing.

2. It must be s igned by th e maker of i t. The signature or mark may be

placed anywhere on the instrument, not necessarily at the bottoms. It

may be at the top or at the back of the instrument.

3. It must contain a promise to pay. It must be expressed not implied or

inferred.

e.g. Mr. Sen I.O.U. Rs. 1000. Here I.O.U. stands for I owe you.This is

only an admission of indebtedness and not a promise to pay. So its

not a promissory note.

4. The promise to pay must be uncondi t ional. If it is coupled with a

condition , it is not a promissory note.e.g. I promise to pay B Rs.300 on Ds death provided D leaves me

enough to pay this sum.

Prom ise to pay at a specif ied t ime or at a specif ied place or after

the occurrence of an event which is cer ta in to occur or payment

after calculat ing in terest at a certain rate

---------are not regarded as conditions.


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5. The makerof must be certain and defin i te.

6. It must bestamped according to the Indian Stamp Act.

7. The sum of money to be paid must be certain.

e.g. I promise to pay some money on the occasion of his marriage

8. The payment must be in the legal tender money of India and certainquantity of goods or foreign money.

9. The money must be payable to a definite person or according to his

order i.e. payee is indicated by his official designation.

10. It must be payable on demand or after a certain definite period of

time.11. The Reserve Bank Act prohibits the creation of a promissory note

payable on demand to the bearer of the note, except by the Reserve

Bank or the Government of India.

Essential Elements for a

Promissory Note


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Specimens of Promissory Notes

One year after date I promise to pay B or order Rs.

500. ---- Sd/X.Y.

Date

On demand I promise to pay A.B of No.37, CollegeStreet or order Rs1000(Rupees one thousand only)

with interest at 8 percent per annum, for value

received in cash. Sd/X.Y

Date

Address.

I acknowledge myself to be indebted to B in Rs.

1000 to be paid on demand, for value received.

Sd/X.Y


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Specimen of a Promissory Note

Rs 1,000 New Delhi, 25 Aug11

One month after date I promise to pay to Mr.

A.K.Jha or order the sum of rupees onethousand only, for value received.

Sd/X.Y.RevenueStamp


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Bill of Exchange

Definition:

A Bill of Exchange is 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, orto the order of a certain person or to the bearer of the

instrument.

----Sec . 5

e.g. To A.B. Six months after date pay P.Q. or order Rs. 1000

Sd/X.Y.

Date..

Stamp


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

The person who is directed to pay is called the

Drawee. The person who will receive the money is

called the Payee.

When the payee has custody of the bill, he is called

the Holder. It is the holdersduty to present the bill to

the drawee for acceptance. The drawee becomes the

Acceptor after signing on the bill.

Sometimes the name of another person is mentionedas the person who will accept the bill if the original

drawee does not accept it. Such a person is called

the Drawee in case of Need.

Bill of Exchange


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Essential Elements of a Bill of

ExchangeA Bill of Exchange to be valid must fulfill the followingrequirements:

1. The instrument must be in writing.

2. It must be signed by the drawer.

3. It must contain an order to pay, which is express andunconditional.

4. The drawer, drawee and the payee must be certain and definite

individuals.

5. The amount of money to be paid must be certain.6. The payment must be in the legal tender money of India.

7. The money must be payable to a definite person or according

to his order.

8. It must be properly stamped.


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9. The bill may be payable on demand or after a definite period of

time. But no one except the Reserve Bank and the

Government of India can draw a bill payable on demand to the

bearer of the bill.

If any of the requirements mentioned above is not fulfilled, thedocument is not a bill of exchange.

e.g. Please let the bearer have Rs. 1000 and oblige.

We hereby authorize you to pay on our account to the order

of X, Rs 6000.

Essential Elements of a Bill of

Exchange


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Specimen of a Bill of Exchange

Rs 1,000 New Delhi, 25 Aug11

One month after date pay to Mr. A.K.Jha or

order the sum of rupees one thousand only,

for value received.

To

Satyender12 miles

MIM, Ranchi Sd/Ritesh.

RevenueStamp


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Cheque

Definition:

A cheque is a bill of exchange drawn upon a

specified banker and payable on demand.

----Sec. 6Specimen of a cheque

Cheques are usually printed in the form shown below.

e.g.

DatePay A.B. or order (or bearer) the sum of Rupees Five Hundred only

Rs. 500/-

To

X.Y. Bank Sd/C.D.


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A cheque must be dated. A banker is entitled to refuse to pay a

cheque which is not dated. A cheque becomes due for payment on

the date specified on it.

A cheque drawn with a future date is valid but it is payable on and

after the date specified. Such cheques are called post-datedcheques.

A cheque may be presented for payment after due date but if there

is too much delay the bank is entitled to consider the circumstance

suspicious and refuse to honour the cheque. The period after

which a cheque is considered too old or stale varies according tocustom from place to place. It is usually 6 months in Indian cities.

In some circumstances the bank is not bound to pay the cheques

Essential Features of Cheque


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Types of Cheques

Two Types:

1. Open Cheques:An open cheque is one which is payable in

cash across the counter of the bank

2. Crossed Cheques:A crossed cheque is one which has twoshort parallel lines marked across its face. It can be paid only to

another banker.

The advantage of crossing is that it reduces the danger of

unathorised persons getting possession of a cheque and

cashing it. A crossed cheque can only be cashed through a bank of which

the payee of the cheque is a customer.


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Modes of Crossing a Cheque

1. General Crossing: The simplest mode of crossing is to put twoparallel lines across the face of the cheque.This is called General

Crossing.

A cheque crossed generally will be paid to any bank through which it

is presented.

2. Special Crossing:When the name of bank is written in between the

parallel lines, it is called Special Crossing.

A cheque crossed specially will be paid only when it is presented for

collection by the bank named between the parallel lines.

In addition to general or special crossing, a cheque may maintain

various remarks written on it to restrict payment in certain ways.

The usual remarks are Account Payee Onlyand Not Negotiable


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Inchoate Stamped Instrument(Sec 20)

An inchoate stamped instrument is a paper signed and

stamped in accordance with the law relating to negotiable

instruments and either wholly blank or containing an

incomplete negotiable instrument.

When one person gives to another such a document, the latter

is prima facie entitled to complete the document and make it into

a proper negotiable instrument up to the value mentioned in the

instrument, or up to the value covered by the stamp affixed on it.

The person signing the instrument is liable on it to any holder in

due course.

e.g. Vikas signs his name on a blank but stamped instrument and gives the

paper to Jitender with authority to fill it up as a promissory note for Rs

500 only. But Jitender fraudulently fills the paper for Rs.1000, the

stamp put on it being sufficient to cover this amount. He then hands it

to Ritesh for Rs 1000 who takes it in good faith for value. Can Ritesh

recover the whole amount?


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Parties to Negotiable Instruments

Holder:

The holder of a negotiable instrument means any person

entitled in his own name to the possession thereof and to

receive or recover the amount due thereon from the parties

there to.----Sec.8

In order to be called as a holder a person must satisfy the

following two conditions:

He must be entitled to the possession of the instrument in his

own name. He must be entitled to receive or recover the amount due

thereon from the parties liable thereto.


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Holder in due course

The holder of a negotiable instrument is called the holder in due

course if he satisfies the following conditions.----Sec 9

1. He must be a holder.

2. He obtained the instrument for valuable consideration i.e.lawful consideration

3. He became holder of the instrument before its maturity, i.e.

before the amount mentioned in it became payable.

4. He had no cause to believe that any defect existed in the title

of the person from whom he derived his titlee.g. A post dated cheque does not indicate any defective title and

therefore the transferee of such a cheque may be a holder in

due course if the other conditions are satisfied.

Parties to Negotiable Instruments


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Capacities of Parties

Every person capable of contracting ,

according to the law to which he is subject,

may bind himself and be bound by making,drawing, acceptance, indorsement, delivery

and negotiation of a promissory note, bill of

exchange or cheque------------Sec. 26


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Different Cases of Incapacity

Minor: Sec 26 declares that a minor may draw, indorse, deliver and negotiate

a negotiable instrument so as to bind all parties except himself. He does not

incur any liability but other adults parties do remain liable. He can be a

indorsee or payee.

Insolvent: He is not competent to draw, make, accept or indorse

Corporation: A company cannot incur liability under negotiable instrumentunless expressly or impliedly permitted by the Memorandum of Association

or Article of Association. But can be a payee or indorsee.

Agent: Every person capable of binding himself or being bound, by a

negotiable instrument, may so bind himself or be bound by a duly

authorised agent acting in his name.-----Sec 27

Legal Representative (Sec.29): He can deal with the negotiable instruments

belonging to the deceased to the same extent as the deceased could have

done.If he signs , he must use words to indicate that he is not personally

responsible.

Joint Hindu Family: The Karta can bind the joint family by executing

negotiable instrument provided its for the benefit of family, other membersare not liable personally.


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Liability of the Parties

Maker and Acceptor: The maker of the promissory note and the

acceptor of a bill of exchange are primarily responsible for the

payment due. ---------Sec 32

Drawer: The drawer of a bill of exchange or cheque , case of

dishonour by the drawee or acceptor thereof, to compensate the

holder, provided due notice of dishonour has been given to, or

received by the drawer.----------Sec.30

Drawee of a Cheque: The drawee of a cheque having sufficient

funds of the drawer, in his hands, properly applicable to the payment

of such cheque must pay the cheque when duly rquired to do so,

and, in default of such payment, must compensate the drawer for any

loss or damaged caused by such default.----- Sec. 31

Indorser: He is liable to all subsequent parties in case of dishonour

of the instrument provided due notice of dishonour has been given

to him.-----------Sec. 35 contd


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Nature of liability of Various prior

parties.

A bill drawn by P on Q in favour of R is made payable

three months after date. It is indorsed by R in favour

of X, by X in favour of Y, and by Y in favour of Z. The

bill has been accepted by Q, and Z presents it onmaturity for payment to Q who duly pays the amount

and indorses the fact of payment of the bill. On

payment by Q the bill is duly satisfied. But if payment

had not been made, Z could sue P, Q, R, X, Yall or

any of them; Y could sue P,Q,R,X; and so on


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Negotiation

Definition:

Negotiation of an instrument is the process

by which the ownership of the instrument is

transferred from one person to another.

When a promissory note, bill of exchange or

cheque is transferred to any person, so as toconstitute the person the holder thereof, the

instrument is said to be negotiated.

----------Sec. 14


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Delivery (Sec. 46)

The making acceptance or indorsement of a

promissory note, bill of exchange or cheque is

completed by delivery.Delivery may be actual or constructive.

Actual delivery means giving actual

possession. Constructive delivery happens when a

negotiable instrument is delivered to an agent,

clerk, or servant on his behalf.

Negotiation


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Negotiation by Delivery (Sec 47)

Subject to the provisions of Section 58, a promissory note, bill of exchange

or cheque payable to bearer is negotiable by delivery thereof. [Sec. 58

deals with instrument obtained by unlawful means or for unlawful

consideration]

Negotiation By Indorsement (Sec. 48)Subject to the provisions of Section 58, a promissory note, bill of exchange

or cheque payable to order, is negotiable by the holder by indorsement and

delivery thereof.

Who may negotiate?

The sole maker, drawer, payee or endorsee and all of them jointly cannegotiate an instrument, provided its negotiability has not been restricted or

excluded by a term used in the instrument.------Sec. 51

Duration of Negotiability (Sec. 60)

Instrument is negotiable till payment or satisfaction by the maker, drawee or

acceptor at or after maturity, but not after such payment or satisfaction.

Negotiation

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