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The Negotiable Instruments Act, 1881.

By :

Dr. Vilas Kulkarni.

Godwill Management Company.

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Introduction

• The law relating to negotiable instruments is contained in the Negotiable Instruments Act. 1881 which applies and extends to the whole of India.

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Definitions

The word negotiable’ means “transferable by delivery” and instrument means “a written document by which a right is created in favor of some person or persons.

Thus, the term negotiable instrument literally means a written document which creates a right in favor of somebody and is freely transferable.

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Continued…

• A negotiable instrument is a piece of paper which entitles a person to a certain sum of money and which is transferable from one to another person by a delivery or by endorsement and delivery.

Eg - Promissory note, Cheque and a Bill of exchange, documents such as Railway or ST Receipts; Dividend, warrants; Railway Bonds payable etc.

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Characteristics of negotiable Instruments• Free transferability or easy negotiability

Negotiable instrument is freely transferable.

• Title of holder is free from all defects A person who takes negotiable instrument bona-fide and for value gets the instrument free from all defects in the title. The holder in due course is not affected by defective title of the transferor or of any other party.

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Presumptions:

• Of consideration : that every negotiable instrument, was made or drawn for consideration.

• As to date : that every negotiable instrument bearing a date was made or drawn on such date.

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Continued…

• As to time of acceptance : that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity.

• As to time of endorsements : that the endorsements appearing upto negotiable instrument were made in the order in which they appear thereupon.

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Continued…

• As to stamps : that a last promissory-note, bill of exchange or cheque was duly stamped.

• As to a holder in due course : that every holder of a negotiable instrument is holder in due course.

• As to time of transfer : that every transfer of a negotiable instrument was made before its maturity.

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Types of Negotiable Instruments

Negotiable instruments are of two types which areas follows:

• Negotiable Instruments recognized by status: e.g. Bills of exchange, cheque and promissory notes.

• Negotiable instruments recognized by usage or customs of trade: e.g. Bank notes, exchequer bills, share warrants, bearer debentures, dividend warrants, share certificate.

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Bill of Exchange

• 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, or to the order of a certain person or to the bearer of the instrument.

Eg - Mr. X purchases goods from Mr. Y for Rs. 1000/-

Mr. Y buys goods from Mr. S for Rs. 1000/-

Then Mr. Y may order Mr. X to pay Rs. 1000/- Mr. S which will be nothing but a bill of exchange.

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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 only to or to the order of a certain person or the bearer of the instrument.

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Specimen of a promissory note

Rs. 5000/- Pune November 25, 2008

Three moths after the date, I promise to pay Mr. X of Mumbai or order a sum of Rupees Fifty Thousand for value received.

To

Mr.

Address………..

…………… Stamp

Mumbai Signature of Mr Y

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Essential characteristics of a Promissory Note

• Promissory note is a negotiable instrument

• It must be in writing

• It is a promise to pay money only.

• It must be definite. The promise to pay must be definite.

• It must be unconditional. Undertaking to pay must be unconditional.

• It must be signed by the maker.

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Continued…

• Maker of the promissory note must be a certain person and the payee must also be certain.

• Amount of the promissory note must be certain.

• Other formalities like number, date, consideration, place etc. are generally found in the promissory notes but they are not essential in law.

• Promissory note must be properly stamped according to the provisions of the Indian Stamp Act, 1899.

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Cheque

“A cheque is a bill of exchange drawn on a specified banker and expressed to be payable otherwise than on demand.”

The maker of a bill of exchange or Cheque is called the “Drawer"; the person thereby directed to pay is called the "Drawee".

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Essential characteristics of a Cheque

• A cheque is a negotiable instrument.• It is a bill of exchange.• It is always drawn on a specified banker.• It is always payable on demand. • A cheque can be bearer, order or crossed

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Continued…

• A cheque requires no acceptance in the ordinary course of business as it is intended for immediate payment.

• In case of a cheque, a drawee is always a specified bank, a drawer is a person who draws a cheque and who has an account in the bank ad payee is a person to whom the amount of cheque is made payable.

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Negotiation

“It is a process of transferring the ownership, right, title, interest of a person in a negotiable instrument to another person so as to give a good title to the transferee and make a transferee a holder of such instrument.”

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Continued…

Negotiation does not mean a simple transfer. Simple transfer may not necessarily involve the transfer of property in the negotiable instrument but negotiation implies the transfer of property or ownership.

Eg -X hands over a cheque to Mr. Y here Mr. X has negotiates the instrument.

But if he hands over a cheque to Mr. Y asking him to keep the same in his safe, the cheque is not negotiated to Mr. Y, Mr. Y does not become its holder but only a bailee.

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Essentials of negotiation

• There must be transfer of a negotiable instrument to another person.

• As a result of such transfer, the transferee must become the holder of the instrument.

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Modes of negotiation:

• Negotiation by delivery – The negotiable Instrument is transferred by delivery, actual or constructive.” It is physical act of delivering the instrument or handing over the delivery, actual possession of the instrument is not passed.

• Negotiation by endorsement and delivery – The negotiable Instrument payable to order is negotiable by the holder by endorsement and delivery thereof.

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Endorsement

“Literal meaning of the term endorsement is writing on an instrument.”

Endorser - The person who signs on the back or on the face of the instrument or on the slip is an endorser.

Endorsee - The person to whom the instrument is endorsed is called the endorsee.

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Types of Endorsement

• General or blank endorsement - Endorser signs his name either on the back or face of the instrument.

• Full or special endorsement - It specifies the name of the person to whom or to whose order the payment must be made.

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Continued…

• Partial endorsement – Endorsement is made for remaining balance of payment.

• Conditional endorsement – The liability of the endorser is limited or negative.

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Dishonour of negotiable instrument

• Negotiable instruments, Promissory notes and Cheques may be dishonored by non payment

• Bills of exchange may be dishonored by non payment or by non-acceptance as they require acceptance from drawees.

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THANK YOU !!!

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HOLDER AND HOLDER IN DUE COURSE

Holder :- According to section 8 of the Act holder of a negotiable instrument means any person (a) who is entitled in his own name to the possession of the negotiable instrument and (b) who has also the right to receive or recover the amount due thereon from the parties thereto.

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Eligibility to be Holder

Possession of instrument:-

The person must be a de jure (original/real)holder. He must be entitled to possess the instrument in his own name. his possession must be under some legal and valid title. A thief or any person who finds the instrument or an endorsee under a forged endorsement though in possession of the negotiable instrument, is not a holder in the absence of a legal title to it. Even an agent holding a negotiable instrument for his principal is also not a holder though he has a right to receive the payment.

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Entitled to receive the amount:-

The person must be entitled to receive the amount of the instrument and give a valid discharge to the buyer. A person may be the bearer of an instrument or payee or endorses of an instrument but he may not be called a holder of instrument if he is prohibited by law from receiving the amount due on the instrument.

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The holders of the negotiable instruments: Eligibility

a. A principal whose name appears on an instrument as the holder though it executed in the name of his agent for him

b. Where a negotiable instrument is a bearer one, any person who is in the possession of such instrument is the holder.

c. Where a negotiable instrument is in the name of a partner of a firm, it naturally becomes a holder as it is not a separate entity from the partner.

d. The endorsee of a cheque is called a holder.

e. If a holder of a negotiable instrument is dead, the heirs of the deceased holder between the holders.

f. A principal on whose behalf a pronote is endorsed in blank and is delivered to his agent, he is a holder of the instrument though his name does not appear on the instrument though is name does not appear on the instrument

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No eligibility of Holders:

i.               I)    A thief or a finder of an instrument is not a holder though he is in possession of an instrument.

ii.              II)    The word ‘entitled’ used in the definition of a holder shows that the title of the person who claims to be the holder must be acquired in a lawful manner. A person obtaining the instrument under forgery is not a holder.

i III) When the endorsement of a bill is ‘for collection only’ the endorsee cannot be a holder

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Holder in due Course

Holder in due course’ means any person who for the consideration becomes the possessor of a promissory note, a bill of exchange or a cheque if payable to bearer, or the payee or endorsee thereof, if payable to order, before the amount mentioned in it becomes payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title (section 9) .

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a      He must be a holder:

A holder to be a holder in due course must be entitled to the possession of the instrument in his name under a legal title and he must also be entitled to recover the amount of the instrument from the parties liable thereto.

He must be a holder for valuable consideration

To be a holder in due course, a person must be a holder for valuable consideration and the consideration must not be illegal or void. However, consideration may be past, present adequate or inadequate.

A donee acquiring title to the instrument by way of a gift is not a holder in due course because there is no consideration to the contract and therefore he cannot maintain any suit against the donor in the court of law. The house hired for illegal purposes and money due on a promissory note, deposited for the security cannot be recovered by a suit.

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He must become a holder of the negotiable instrument before the date of maturity.

If the negotiable instrument is taken after it becomes due, the person taking it gets the rights of his immediate transferor against the other parties and therefore, a person who takes a negotiable instrument on the day on which it becomes payable cannot claim rights of a holder in due course.

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He must become a holder of the negotiable instrument in good faith:

Here the term ‘good faith’ implies that he should not accept the instrument after knowing about the defect or defects in the title to the instrument. A thing is done in good faith when it is done honestly. It is the duty of a person [who takes a negotiable instrument] to examine its contents thoroughly. If the negotiable instrument contains any material alteration or if it is incomplete, he will not become a holder in due course. Thus, he must become a holder and must take the negotiable instrument complete and regular on its face.

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Distinction between holder and holder in due course

Holder is different from a holder in due course. A holder in due course enjoys certain rights and privileges.

   1. A holder can obtain an instrument without consideration while a person cannot be a holder in due course unless he obtains an instrument with consideration and for value.

     2. If an instrument is inchoate, a holder of such instrument cannot get good title in the instrument. While holder in due course acquires a good title even if the instrument is inchoate.

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3. A holder of an instrument may acquire the instrument if it becomes payable. But the person is not treated as a holder in due course if he acquires an instrument when it becomes payable.

4. A holder need not bother about the defect, if any, in the title. But no holder is considered a holder in due course who acquires an instrument knowingly the defect of the title.

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NEGOTIATION AND TYPES OF ENDORSEMENT

One of the important characteristics of a negotiable instrument is its free transferability from one to another person. Such transfer can take place either by negotiating the instrument or by assigning the same. According to section 14 of the act, “When a promissory note, a bill of exchange or a cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.”

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Procedure of transfer or modes of negotiation:

A negotiable instrument can be transferred to another person in the following two ways:

a. Negotiation by delivery; and

b. Negotiation by endorsement and delivery

Instruments payable to bearer can be transferred by mere delivery, while instruments payable to the order are transferred by endorsement and delivery:

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Thus delivery of a negotiable instrument is a voluntary transfer of possession of the negotiable instrument. When an instrument is negotiated by delivery it is not necessary for a transferor to put his or her signature on the instrument and therefore, there is no privacy of any contract between the transferor and any subsequent transferee.

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Negotiation by endorsement and delivery:

Subject to the provision of section 58 [which is stated earlier] a promissory note, cheque or a bill of exchange payable to order is negotiable by the holder by endorsement and delivery thereof [section 48]

Thus the delivery is the common element between the two modes of negotiation i.e. negotiation by mere delivery and negotiation by endorsement and delivery.

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Types of Endorsement

The literal meaning of the term endorsement is writing on an instrument. But In the negotiable instrument or on a slip of paper attached thereto which is done for the purpose of negotiation [section 15]. The person who signs on the back or on the face of the instrument or on the slip attached thereto is called the endorser and the person to whom the instrument is endorsed is called the endorsee. An endorsement can be made by the holder of an instrument or by the maker who signs it otherwise than a maker. A payee or an endorsee may also endorse the instrument if they are holders of the instrument

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Endorsement may be of various types which are as follows:.     

1.General or blank endorsement    

2. Full or special endorsement

     3. Partial endorsement.

4. Conditional endorsement

5. Restrictive endorsement

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1. General or blank endorsement

When a endorser signs his name either on the back or face of the instrument, the endorsement is said to be blank or general [section 16(1)]. In a blank endorsement, endorsee is not specified and therefore the instrument becomes payable to bearer even though it was made originally payable to order {section 54]

2, Full or special endorsement:

when an endorser signs the instrument and adds a direction to pay the amount mentioned therein to or to the order of a specified person, the endorsement is said to be in full [section 16 (1)].

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a)      3.Partial endorsement:

According to section 56 of the Act, “No writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to transfer only a part of the amount appearing to be due on the instrument; but where such amount has been partly paid, a note to that effect may be endorsed on the instrument, which may then be negotiable for the balance

a)     4. Restrictive endorsement :

Restrictive endorsement restricts the further negotiability of the negotiable instrument. Such endorsement entitles the holder of the instrument to receive the amount on the instrument for a specific purpose. The endorsement is restrictive when it contains express words to that effect.

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Conditional Endorsement:-

In the conditional endorsement, the liability of the endorser is limted or negative. A conditional endorsement is different from a restrictive endorsement. A conditional endorsement limits or negatives the liability of the endorser while a restrictive endorsement places certain restriction on the negotiability of the instrument.

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DISHONOUR OF NEGOTIABLE INSTRUMENT

Promissory notes, cheques and bills of exchange are covered by this Act. Of these negotiable instruments, promissory notes and cheques may be dishonoured by non payment only while bills of exchange may be dishonoured by non payment or by non-acceptance as they require acceptance from drawees. Section 93 of the Act states that when a promissory note or a bill of exchange or cheque is dishonoured by non-acceptance or non-payment the holder thereof, or some party thereto who remains liable thereon, must give notice that the instrument has been so honored to all other parties whom the holder seeks to make severally liable thereon, and to some one of several parties whom he seeks to make jointly liable thereon

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Dishonour by Non-acceptance:

As mentioned earlier that a bill of exchange is dishonoured by non-acceptance. It stands dishonoured by non-acceptance in the following cases.

a). when there are several drawees who are not partners and if all of them refuse to accept.

b). If the drawee refuses to accept the bill within forty eight hours from the time of its presentment even though the bill is duly presented for his acceptance.

c) where the drawee is not competent to enter into contract.

d) When the presentment of a bill of exchange for acceptance is excused and it remains unaccepted.

e) where the drawee of the bill of exchange gives a qualified acceptance.

f) Where the drawee is a fictitious person and even after a reasonable search, he could not be found.

It should be noted that where a drawee in case of need is named in a bill of exchange or even in any other instrument, the bill is not considered to be dishonoured unless it has been dishonoured by such drawee [section 115].

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Dishonour by non-payment:

A negotiable instrument i.e. a bill, a cheque or a promissory note is said to be. Dishonoured by non-payment when the maker of the promissory note, acceptor of the bill of exchange or drawee of the cheque makes default in payment upon being duly required to pay the same. [section 2]. A bill or a promissory note is also said to be dishonoured by non-payment when presentment for the payment is excused expressly by the maker of the note or the acceptor of the bill and the note or bill remains unpaid or at after maturity [section 76]

If the bill is dishonoured either by non-acceptance or non-payment, the drawer and all endorsers of the bill are held liable to the holder provided that a notice of such dishonour is given by the holder. If the bill is dishonoured by non-payment, the drawee is held liable.

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NOTING AND PROTEST

Noting:

As mentioned above, when a negotiable instrument within the meaning of this Act is dishonoured, the holder of the instrument, after giving notice of the same, can sue any or all the prior parties liable thereon. But before he does so, he can get the fact of the dishonour of the instrument authenticated by noting by a notary public. Noting is the authentic and official proof of presentment and dishonour of the instrument.

Noting means nothing but the recording of the fact of dishonor of the instrument by a notary public within a reasonable time after dishonour. Of course, nothing is not compulsory neither it affects the rights of the holder thereon,

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Noting contains the following particulars.

a)      The fact and the date of dishonour of the instrument

b)      The reason or reasons if any, assigned for such dishonour.

c)      The rotary charges incurred.

d)      If the instrument has not been expressly dishonoured, the reason as to why the holder wants to treat the same as dishonoured.

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Protest:

According to section 100 of this Act, when a promissory note or a bill of exchange has been dishonoured b non-acceptance or non-payment, the holder may, within a reasonable time, cause such dishonour to be noted and certified by a notary public. Such certificate is called a protest.

Thus protest is a formal certificate of dishonour of an instrument issued by the notary public. Of Course, it is issued to the holder of the instrument on his demand only.

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Contents of protest:

1.Either the instrument itself, or a literal transcript of the instrument and of every thing written or printed thereupon;

2.The name of the person for whom and against whom the instrument has been protested;

3. A statement that payment or acceptance, or better security, as the case may be, has been demanded of such person by the notary public; the terms of his answer. If any, or a statement that he gave no answer, or that he could not be found;

4. When the note or bill has been dishonoured, the place and time of dishonour, and when better security has been refused, the place and time of refusal;

5. The subscription of the notary public making the protest;

1. 6 . In the event of an acceptance for honour or of a payment for honour, the name of the person by whom, of the person for whom, and the manner in which, such acceptance or payment was offered and effected.

2.  7. The signature of the notary public.

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