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DEFINITION:
Section 13 of the Negotiable Instrument Act, 1881, defines a
negotiable instrument as: “A negotiable instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer.” [Sec. 13(1)].
DEFINITION:
Section 4 defines a promissory notes as under: “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 to the bearer of the instrument.”
• ILLUSTRATIONS:
• This are the promissory notes:
“I acknowledge receipt of Rs. 1,000 for value received.”
“I promise to pay B Rs. 1,000 on demand.”
“I promise to pay B or order Rs. 1,000 on demand.”
“I acknowledge myself to be indebted to B in Rs. 1,000 to paid on
demand, for value received.”
“Received from X Rs. 1,000, which I promise to pay on demand with
interest”.
This are not the promissory notes:
“I acknowledge receipt of Rs. 1,000.”
“I owe you Rs. 1,000.”
“Mr. Prakash Rs. 1,000.”
A document which is a receipt for money paid by cheque and which
incidentally contains a promise to repay the amount is not a promissory note, as
there is no intention of creating a negotiable instrument at all.
Unconditional:
The undertaking to pay must be definite and unconditional. If the
promise is uncertain or conditional, the negotiable instrument is not valid. Hence,
promissory notes, payable on the death of a person or persons, or at a particular
place, or after a specified time, are valid notes, under Section 5 (2). At a particular
place or at a specified time. A promise given for an executed consideration. Any
promise to pay an instrument on lapse of certain period, after a specified event
which is certain to happen.
• Valid Conditional Promissory Notes:
“I promise to pay B Rs. 1000, three days after the death of X.
“I promise to pay B Rs. 1000 at Mumbai.”
“I promise to pay B Rs. 1000 on 31st December 1977.”
4. The promissory note must be signed by the maker,
otherwise, it is incomplete and of no effect with free consent:
Person must sign the instrument with the physically and
mentally act with an intention to sign without the signature the instrument is not
valid person must sign with a free consent.
5. Both the drawer and the payee must be indicated or
designated with certainty on the face of the promissory note:
Where two or more persons sign the promissory note, their
liabilities will be joint and several.
Two distinct persons should fill in the role of a maker and
payee. A note cannot be made payable to the maker himself. However, if the maker
endorses the note, it is then valid. A note may be made payable to two or more
persons jointly. Payee must be a certain person. If he is capable of being ascertained
where he is misnamed or wrongly described, he will be a certain person.
For example:
A promissory note payable to “my only niece living in England” is a
valid promissory note.
Specific Sum:
The sum payable must be certain and must not be capable of
contingent subtractions or additions.
Illustrations:
I promise to pay A Rs. 1000 and all other sums due to him.
I promise to pay A Rs. 2000 together with the fine according to the rule.
The sum payable under a promissory note is certain in the following cases:
When it is payable with interest. However, if the rate of interest is not mentioned in
the instrument, it is not a promissory note.
When it is payable by installments, with a provision that on default of payment of an
installment, the balance unpaid shall become due (Sec. 5).
Thus, the act does require that the amount should be stated in both words
and figures form.
7. Promise to pay must be money only:
A promissory note should contains only payment of
money rather than any thing else or other than the money.
Illustrations:
“I promise to pay B Rs. 100 in cash and Rs. 199 worth of cosmetics.”
“I promise to pay B Rs. 299 and to deliver him my black horse.”
“I promise to pay B Rs. 999 in Government Bonds.”
“These above are all invalid promissory notes.”
8. Stamping:
As in every instrument which is legal, there are certain formalities
which are compulsory should be included and such formalities are date, place,
consideration, etc should be mentioned in the instrument. Without all this
formalities, the instrument is said to be invalid.
Types of Promissory Notes:
There are four kinds of promissory notes, and they are
1. Promissory notes payable on demand;
2. Promissory notes payable after date;
3. Joint promissory notes; and
4. Joint and several promissory notes.
Mumbai,
Rs. 5,000/- 1st June, 1999
Stamp
Sd/- XYZ
To
Prakash,
Empty Stomach,
Mumbai 400 052.
Mumbai,
Rs. 5,000/- 1st June, 1999
Sd/-
To
Srichand Rohra,
Jai Palace,
Mumbai 400 052.
Sta
3. Joint Promissory Notes:
When a promissory note is made by two or more
persons jointly, it is known as a joint promissory note. In such a case, the liability of
XY
the makers (Promisers) is joint and collective towards the payee, i.e., in case of a
default, the payee can take legal action one or all of them. If he elects to take action
against one of the promisers, it is deemed to be action against all of them. He
cannot, in that case, take action against the remaining promisers. The payee has only
one right of action.
Joint promissory notes may be payable on demand or
after date. Following is a specimen of a joint promissory note:
Specimen of a Joint Promissory Note
Mumbai,
Rs. 5,000/- 1st June, 1999
Sd/-
1. Signature:
Address:
Signature:
Address:
Stamp
Mumbai,
Rs. 5,000/- 1st June, 1999
1. Signature………… Mumbai,
Rs. 5,000/- Address………….. 1st June, 1999
2. Signature…………
Address…………..
We jointly promise to pay on demand to the Bank of India, or order, the
3. Signature…………
sum of Rs. 5,000/- (Rupees five thousand) only for value received with interest at
Address…………..
10 per cent per annum.
Sd/-
1. Signature:
2.
Address:
Signature:
Address:
BILLS OF EXCHANGE:
DEFINITION:
“Section 5 defines a bill of exchange as 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.”
Drawer:
The drawer is a person, who makes the bill of exchange, or who gives
the order to the drawee to pay a certain sum of money to the payee.
Drawee:
The drawee is a person, who is directed by the drawer to pay the
money to the payee.
Payee:
According to the section 7 of the Act defines ‘Payees’ as the person
named in the instrument, to whom or to whose order the money is, by the
instrument directed to be paid.
All these parties must be named or otherwise indicated with
reasonable certainty. Sometimes the drawer and the payee are the same persons, as
for example, where a bill is drawn “pay to me or my order.” But the drawer and the
drawee cannot be the same, because there cannot be an order to oneself.
Drawee and Acceptor:
The drawer or the payee, who is in possession of the bill, is
called the holder. The holder must be present the bill to the drawee for his
acceptance. When the drawee accepts the bill, he becomes the acceptor. Which
means one person can plays the two roles at a time of drawee and acceptor.
Order to Pay:
The bill of exchange must contain an order by the drawer to
drawee to pay certain sum of money under any circumstances. The order must be
imperative; it should not be in a request form.
An Unconditional Order to Pay:
The bill of exchange must contain an order for promise to pay
certain amount it should be unconditional. If there is conditional order which is
invalid means their should not be like that if this event is happen then only I will
pay to you, it is invalid. Conditional bill should not be their because it is invalid.
6. Signed by Drawer:
The bill of exchange must be signed by the drawer.
Payee must be certain:
It must be payable to a definite person or his order. The payee
must be certain. Bill may be made payable to two or more payees jointly or in the
alternative.
Stamping:
Bill of exchange is chargeable with stamp duty.
Types of Bills of Exchange:
There are five types of bills of exchange namely, (1) bill
of exchange payable on demand. (2) bill of exchange payable after date, (3) inland
bill of exchange, (4) foreign bill of exchange, and (5) accommodation bill of
exchange.
1. A Bill of Exchange Payable on Demand:
When a bill is made payable on demand, or at sight, or
on presentment, it is known as a bill of exchange payable on demand.
Following is a specimen of a bill of exchange payable on demand:
Mumbai,
Rs. 20,000/- 20th August, 1999
Stamp
thousand only for value received.
To
Prof. P.P. Prakash,
25, Raja Mahan, Accepted
Mumbai 400 001. Sd/-
R S T 21-8-1999
Three months after pay M.N. Patel, 12 V.P. Road, Surat, or order, the sum
Stamp
of rupees ten thousand only for value received.
Sd/-
A.G. Joshi,
245, Mahatma Gandhi Road,
Mumbai 400 001.
To
M.N.Patel
15, Netaji Subhash Lane, Accepted
Surat. Sd/-
B.K. Shah 10-6-1999
In the above bill, A.G. Joshi is the drawer; B.K. Shah is the drawee
who has accepted the bill; therefore acceptor; and M.N. Patel is the payee. The bill is
made payable after date.
Essentials\Characteristics of a Cheque:
Instrument in Writing:
A cheque must be writing. It can be written in ink, ball
point pen, typed or even printed. The ink used for writing the cheque should not be
easily erasable. Any overwriting or alteration will make the cheque dishonor. Oral
orders are not considered as cheques.
Unconditional Order:
In cheque there must be an order by a depositor
(drawer) on its bank (drawee) for paying money to the holder (payees) and order
should be unconditional. A cheque containing conditional order is dishonoured by
the bank.
Payable on Demand:
A cheque when presented for payment must be paid on
demand. If cheque is made payable after the expiry of certain period of time then it
will not be require.
Certain Sum of Money:
Cheque must be for money only and it must be written
in words and figures. If the amount in words and figured will differ from each other
or if there will be insufficient balance in the account then the cheque will be
dishonoured.
Types of Cheques:
There are two types of cheques:
2) Crossed Cheques:
Crossing of cheques is of different types: