Download - 4.Negotiable Instrument Act

8/2/2019 4.Negotiable Instrument Act

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NEGOTIABLE INSTRUMENT

ACT


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Negotiable Instrument

General Definition: Documents commonly used in monetary dealings

and commercial transactions.

A special kind of contract Indian act: Negotiable instrument act, 1881

Definition by act: A bill of exchange, promissory note or cheque

either to order or bearer.

Negotiable- transferable by delivery

Instrument- written document by which a

right is created in favor of some one


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Negotiable Instrument- Evolution

City A City B

Trader X Trader Y

X sells goods to Y

for 1000 Rs. At a

common place

Chance of theft and

discomfort of takingmoney

Trader X

Trader Z

Trader Y

X sells goods to Y

and Z buys goods

from Y for 1000 Rs.

At a common place

Negotiable instrument


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Properties

Freely transferable

Payable to bearer

Payable to order Property

Defects in title

Payment


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Presumptions

Consideration

Is presumed

Instrument drawn or transferred withoutconsideration (e.g.)

Consideration that fails in part (e.g.)

Date Time of acceptance

Order of endorsement

Holder in due course


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Kinds of Negotiable Instrument

Instruments payable to order or payable tobearer Payable to order:

when expressed to be so payable or payable to aparticular person

Prohibiting transfer

Payable to order of a specified person

Payable to him/ his order at his option Payable to bearer

When expressed to be so payable or on which theonly or last indorsement is in blank

It is transferable by mere delivery


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Inland and foreign instruments A promissory note, bill of exchange or cheque

which is

Both drawn or made in India and payable in India,or

Drawn upon any person resident in India

An instrument, which is not inland instrument

is deemed to be a foreign instrument. Example:

A bill drawn in Delhi on a merchant in Kolkata andpayable at Mumbai or London- Inland Bill

A bill drawn in Delhi on a merchant in New Yorkand payable at London is a foreign bill


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Time and Demand Instrument: Time Instrument:

A bill or note which payable a) after a certain

period or b) on a specified day or c) after sight ord) on the happening of an event which is certain tohappen.

Demand Instrument: The following instruments are payable to demand: A cheque is always payable on demand

A bill or note is payable on demand when-

No time for its payment is specified or

It is expressed to be payable on demand, at sightor on resentment.


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Documentary bill and clean bill:

Documentary bill is one to which documents oftiltle to the goods and other documents such as

invoice etc are annexed, such documents aredelivered to the buyer only on acceptance onpayment.

When no such documents are attached, it isclean bill.

Trade and accommodation bill:

A bill drawn accepted, drawn or indorsed for

consideration is called a genuine trade bill


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Incomplete Instrument:

An instrument which is incomplete in somerespect

Example:

A draws a bill payable to.or order. Any holder in

due course may fill in his name as payee in the blankand recover the money.

Ambiguous Instrument:

When an instrument owing to its faulty draftingmay be treated either as a promissory note or bill

of exchange.


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Hundis: A regional version of negotiable instrument in a

vernacular language. Can be a promissory note

or bill of exchange. Escrow:

Negotiable instrument delivered conditionally orfor a special purpose as a collateral security or

for safe custody and not for the purpose oftransferring.

The liability to pay on escrow does not arise untilthe purpose for which the instrument was

delivered is not satisfied.


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Promissory Notes

An instrument in writing containing an unconditional undertaking,signed by the maker, to pay a certain sum of money only to or to theorder of a certain person or to the bearer of the instrument.

Parties to a Promissory Note

Primarily two parties The Maker or Drawer - makes the note and promises to pay the

amount stated therein. The Payee - whom the amount is payable.

Other Parties involved may be The Endorser - The person who endorses the note in favour of

another person. The Endorsee - The person in whose favour the note is negotiated

by endorsement.


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Features of Promissory Note

Writing: in writing, duly signed by its maker and properlystamped

Undertaking to Pay: an undertaking or promise to pay. Mere

acknowledgement of indebtedness is not enough.

Unconditional promise to pay

Promise to pay money and money alone.

The parties to a promissory note, i.e. the maker and the payee

must be certain .

A promissory note may be payable on demand or after a

certain date.

Specific Sum: Sum to be paid must be certain and Specific


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Bill of Exchange

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.

Parties to a Bill of Exchange

The Drawer - The person who makes the order for making

payment.

The Drawee The person to whom the order to pay is made.

The Payee The person to whom the payment is to be made.


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Features of Bill of Exchange

Writing : in writing, duly signed by its drawer, accepted by its

drawee and properly stamped

3 parties to be there: Drawer, Drawee and Payee

It must contain an order to pay. Words like please pay Rs 5,000/-on demand and oblige are not used.

Order by the drawer to the drawee to pay

Unconditional: payable under all events and circumstances

Only money

The sum payable mentioned must be certain or capable of being

made certain.

Certain parties (Drawer, Drawee and Payee) to a bill.


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Promissory Note Bill of Exchange

2 Parties-Maker andPayee

Unconditional

promise to pay No acceptance is

required

Note cannot be made

payable to the maker.

3 Parties-Drawer,Drawee and Payee Unconditional order

to pay

Payable by otherperson directed. SoAcceptance isnecessary

Drawer and the

payee may be oneand the same person


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Cheque

The Negotiable Instruments Act, 1881 defines acheque as a bill of exchange drawn on aspecified banker and not expressed to bepayable otherwise than on demand. Actually, a

cheque is an order by the account holder of thebank directing his banker to pay on demand, thespecified amount, to or to the order of the personnamed therein or to the bearer.

Most commonly used Negotiable Instrument

A cheque may be regarded as a bill of exchange;the only difference is that the bank is always thedrawee in case of a cheque


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Parties Involved

There are three parties involved in a bill of exchange.

They are as follows:

The Drawer The person who makes the order formaking payment.

The Drawee The person to whom the order topay is made. He is generally a debtor of the

drawer. Always Bank in case of Cheque The Payee The person to whom the payment is

to be made.


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Features Of Cheque

A cheque must be in writing and duly signed by the drawer.

It contains an unconditional order.

It is issued on a specified banker only.

The amount specified is always certain and must be clearlymentioned both in figures and words.

The payee is always certain.

It is always payable on demand.

The cheque must bear a date otherwise it is invalid and shall notbe honoured by the bank.


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Types of Cheque

Open cheque

Crossed cheque

Bearer cheque Order cheque

Ante dated cheque

Stale cheque Mutilated cheque

Post dated cheque


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Types of Cheque

Open cheque: A cheque is called Open when it is possible toget cash over the counter at the bank. The holder of an opencheque can do the following:-

Receive its payment over the counter at the bank.

Deposit the cheque in his own account. Pass it to someone else by signing on the back of a cheque.

Crossed cheque: Since open cheque is subject to risk of theft,

it is dangerous to issue such cheques. This risk can beavoided by issuing other types of cheque called Crossedcheque. The payment of such cheque is not made over thecounter at the bank. It is only credited to the bank account ofthe payee. A cheque can be crossed by drawing two

transverse parallel lines across the cheque, with or without thewriting Account payee or Not Negotiable.


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Types Of Cheque

Bearer cheque:

A cheque which is payable to any person who presents itfor payment at the bank counter is called Bearer

cheque. A bearer cheque can be transferred by mere

delivery and requires no endorsement.

Order cheque:

An order cheque is one which is payable to a particularperson. In such a cheque the word bearer may be cutout or cancelled and the word order may be written. The

payee can transfer an order cheque to someone else bysigning his or her name on the back of it.


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Other Types of Cheques Ante-dated cheques: Cheque in which the drawer mentions the date

earlier to the date of presenting if for payment. For example, acheque issued on 20th May 2003 may bear a date 5th May 2003.

Stale Cheque:

A cheque which is issued today must be presented before at bank

for payment within a stipulated period. After expiry of that period,no payment will be made and it is then called stale cheque. Find

out from your nearest bank about the validity period of a cheque.

Mutilated Cheque:

In case a cheque is torn into two or more pieces and presentedfor payment, such a cheque is called a mutilated cheque. Thebank will not make payment against such a cheque withoutgetting confirmation of the drawer. But if a cheque is torn at thecorners and no material fact is erased or cancelled, the bank may

make payment against such a cheque.


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Other Types of Cheques

Post-dated Cheque: Cheque, on which drawer mentions a date, that is

subsequent to the date on which it is presented, iscalled post-dated cheque. For example, if a cheque

presented on 8th May 2003 bears a date of 25th May2003, it is a post-dated cheque. The bank will makepayment only on or after 25th May 2003


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Differences between a Cheque and a Bill ofexchange

Cheque Bill of Exchange

1. It is drawn only on a banker. 1. It can be drawn on anybody

including a banker.

2. The amount is always

payable on demand.

2. The amount is payable on

demand or after a specified

period.

3. It can be crossed to end its

negotiability.

3. It cannot be crossed.

4. Acceptance is not required. 4. Acceptance is a must.


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Crossed Cheque

A crossed cheque is one on which twoparallel transverse lines with or without the word &co. not negotiableetc. are drawn. A crossedcheque is not payable across the counter of the

bank. It must be collected through a bank. It is paidinto the bank account of a person and cannot beencashed at the counter of the bank. By crossingcheques safety is ensured and the person to whompayment is eventually made can be traced becausesuch a cheque is always paid into a bank account. Acrossed cheque provides protection not only to theholder of the cheque but also to the receiving andcollecting bankers.


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Kinds of Crossing

General Crossing Special Crossing

Restrictive Crossing

Non negotiable Crossing


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Definition of General Crossing

Sec 123 of the Negotiable Instruments Act1881 defines general crossing as follows:

Where a cheque bears across its face, anaddition of the words; and company or anyabbreviation thereof. Between two paralleltransverse lines or of two parallel transverse

lines simply, either with or without the wordsnot negotiable, that addition shall bedeemed to be a crossing, and the chequeshall be deemed to be crossed generally.


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Significance of General Crossing

The effect of general crossing is that it gives adirection to the paying banker.

The direction is that the paying banker shouldnot pay the cheque at the counter.

If a crossed cheque is paid at the counter incontravention of the crossing:a. He has no right to debit his customers account,

since , it will constitute a breach of his customersmandate,

b. He will be liable to the drawer for any loss, whichhe may suffer,

c. He will be liable to the true owner of the chequewho may be the third party.

The main intention of crossing a cheque is toive rotection to it.


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Special Crossing

Sec 124 of the Negotiable Instruments Act of1881 defines

where a cheque bears across its face, anaddition of the name of a banker, with orwithout the words Not Negotiable, thataddition shall be deemed a crossing, and thecheque shall be deemed to be crossed

specially, and to be crossed to that banker


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Essentials of Special Crossing

Two parallel transverse lines are not at allessential for a special crossing.

The name of a banker must be necessarilyspecified across the face of the cheque. Thename of the banker itself constitutes specialcrossing.

It must appear on the left hand side,preferably on the corner.

The two parallel transverse lines and thewords not negotiable be adedd to a specialcrossing.


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Significance of Special Crossing

It is a direction to the paying banker. A special crossing gives more protection the

cheque than a general crossing.


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Restrictive Crossing

It constitute a direction to the collectingbanker to collect the cheque and credit theproceeds to the account of the payee only.Such a crossing is known asRESTRICTIVE CROSSING. The collectingbank has to credit the account of the payeein whose favour the cheque is drawn.


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Non Negotiable Crossing

It makes the cheque non transferable butthe effect of such a crossing is that whenthe holder to a cheque transfers it to anyother person the transferee does not get abetter title than the transferor had eventhough the transferee is a bonafide personwho takes the instrument for a validconsideration and before the maturity of

the instrument.


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Dishonour Of Cheques

Dishonour of cheque for insuffiency offunds in the account(Sec.138 the Negotiable Instruments

Act,1881)

The Provisions of Section 138 of the actwould

be attracted when:a)Insufficiency of fundsb)Issue of Cheque for reasons other

than discharge of a debt or liability


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When Dishonour OF Cheque Is AnOffence?

Existence of a live account Presentation of the cheque within 6 months

or within the period of its validity.

Return of the cheque unpaid for reason ofinsufficiency of funds

Issue of the notice of dishonour demanding

payment within 30 days of receipt ofinformation as to dishonour the cheque Failure of the drawer to make the payment

within 15 days of the receipt of notice


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Time Line During Dishonour OfCheque

CONDITION TIME DURATION

Presentation of Cheque to banks for encashment 6 Months from the date mentioned on the

cheque(includes post dated cheques)

Number of times a cheque can be presented for

encashment in a bank(in case of dishonour)

a)Any number of times till NO legal notice of

dishonour and demand of cheque amount is madeb)Once a Legal notice about dishonour of cheque and

demand of cheque amount is made,the cheque

cannot be presented again

Issuance of Legal notice for dishonour of cheque and

demand

30 days from date of intimation of dishonour of

cheque by bank to customer

Payment of Dishonoured cheque amount by Drawer 15 days from date of receipt of legal notice of demand

Filing criminal complaint before court After 15 days but within 45 days from date of receipt

of legal notice of demand by drawer if no payment of

cheque amount is made


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Some Commonly faced Issues

When a cheque is dishonoured,what is the legal action thatcan be taken? Ans: Firstly a statuatory notice is liable to be given to the

other party. Then one can file a suit for recovery of chequeamount along with cost and interest under order XXXVII of

code of civil procedure 1908.A criminal complaint can also befiled u/s 138 of NIA act.

I have been given blank cheques by a partnership firm,sincethey owe me some money .Now the partnership firm has

been closed Can I deposit the cheques now and raise a claimon them? Ans: Yes,you can fill the cheques and present for

encashment.The partnership firm and partners are liableeven after the firm is dissolved.First a notice must be given

within 15 days of dishonouring and still if no payment is madea complaint must be made within 30 days thereafter.


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Contd

When drawer of a dishonoured cheque is a company orfirm or group:Ans: Every Director,secretary,manager,partner etc shallbe deemed to guilty and punished unless the personproves that offence was committed without his

knowledge or he had excercised due diligence to preventcommission of such offence

A large number of cases fail in court because of defectsand mistakes in legal notice

Mode of making demand for payment is by giving noticein writing to drawer of cheque which can be of any form Stopping payment of post dated cheques issued by a

person to discharge is debt or liability would amount topenal offence


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Penalty

The drawer may be punished with imprisonment for aterm which may extend to two years ,or

Fine which may extend to twice the amount of thecheque,or

With Both

However a Magistrate can award any sum as

compensation to alleviate the grievance of complainantusing section 357(3) of the code


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Where can the complaint be filed?

Where the Cheque was drawn

Where the Cheque was presented forencashment

Where the Cheque was returned unpaid by thedrawee bank

Where notice in writing was given to drawer ofCheque demanding payment

Where drawer of Cheque failed to makepayment within 15 days of receipt of notice


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Discharge of an Instrument

By Payment [Section 82 (a)] By Release [Section 82(b)] By Cancellation [Section 82(c)]

By default of holder: Allowing drawee more than 48 hours [Section83] Delay in cheque presentment & drawer

damage [Section 84] Parties not consenting to qualified/limitedacceptance [Section 86] Delay in presentment of payment

Failure to give notice of dishonor


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By material alteration [Section 87-89] There are both permissible alterations andimpermissible alterations. Alterations that make instruments void:

Date of the instrument Amount on the instrument Time or place of the paymentAddition of place of payment without acceptorsassent


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When cheque is an electronic image [Section 89(2) & (3)]By holder destroying indorsers remedy [Sector40] Draft indorsed by payee [Section (85A)] Discharge of drawee of a cheque [Section 85] By operation of law

By an order of insolvency When debt merged into judgment debt By remedy becoming time barred


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