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The Negotiable Instruments Act 1881

Presented By: Aditya Mahesh(08) Agam Agarwal(10) Ashish Mittal(37) Harshal Pahadia(60) Himanshu Aggarwal(63) Jatin Goyal(64)

Background
Goods are bought and sold for cash as well as on credit. All these transactions require flow of cash either immediately or after a certain time. It is quite inconvenient as well as risky for either party to make and receive payments in cash. Therefore, it is a common practice for businessmen to make use of certain documents as means of making payment. To regulate and to ensure the standardization of practice , Negotiable Instrument act ,1881 , was introduced. The Negotiable Instrument Act ,1881, (as defined in the Entry 46 of List 1 )is an act to define and amend the law relating to Promissory Notes , Bills of Exchange and Cheques.

Basic Conditions Of A Negotiable Instruments

Signed in writing. Payable to bearer or order. On demand or after certain days. Unconditional orders. Sum payable must be certain. Drawee and payee must be certain.

Types of Negotiable Instruments

Promissory Notes. Bill of Exchange. Cheques.

Promissory Note

A promissory note is an instrument in writing (not being a part of a bank note or a currency note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money to, or to the order of a certain person or to the bearer of the instrument

Essentials of Promissory Note

Writing : A promissory note must be in writing. Writing includes print and typewriting Promise to pay: It must contain an Undertaking or promise to pay. Thus a mere acknowledgement of debt is not sufficient. Notice that the use of the word promise is not essential to constitute an instrument as a promissory note . Promise should be to pay money only and that should be certain Signed by the maker : The promissory note must be signed by the maker otherwise it has no effect. Parties :There are 2 parties involved ie maker and the payee It must be duly stamped under the Indian Stamp Act: It means that the stamps of the requisite amount must have been affixed on the instrument .(Stamp Duty Rate is based on the duration and the amount)

Identification Of Promissory Note

(a) "I promise to pay B or order Rs. 500." (b) " I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on demand, for value received." (c) Mr. B, I owe you Rs. 1,000." (d) I promise to pay B Rs. 500 and all other sums which shall be due to him." (e) I promise to pay B Rs. 500, first deducting there out any money which he may owe me." (f) " I promise to pay B Rs. 500 seven days after my marriage with C." (g) " I promise to pay B Rs. 500 on D's death, provided D leaves me enough to pay that sum." (h) " I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next."

Example

Suppose you take a loan of Rupees Five Thousand from your friend A. You can make a document stating that you will pay the money to A or the bearer on demand. Or you can mention in the document that you would like to pay the amount after three months. This document, once signed by you, duly stamped and handed over to A, becomes a negotiable instrument. Now A can personally present it before you for payment or give this document to some other person to collect money on his behalf. He can endorse it in somebody elses name who in turn can endorse it further till the final payment is made by you to whosoever presents it before you. This type of a document is called a Promissory Note.

Bill of Exchange

A bill of exchange is defined 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

Bill of Exchange

Rs. 10,000/-

New Delhi May 2,2001

Five months after date pay Aditya or (to his) order the sum of Rupees Ten Thousand only for value received. To Jatin Address Accepted Jatin Stamp S/d Agam

Characteristic of Bills of Exchange

It must be in writing. It must contain an order to pay and not any request. The order must be unconditional. There must be 3 parties ie : drawer, drawee, and payee. The parties must be certain. It must be signed by the drawer. The drawer can also draw a bill in his own name thereby he himself becomes the payee. Here the words in the bill would be Pay to us or order. In a bill where a time period is mentioned, just like the above specimen, is called a Time Bill. But a bill may be made payable on demand also. This is called a Demand Bill.

+ Promissory Notes Vs Bills of Exchange

Promissory Notes

Bills of Exchange

It contains an unconditional promise. There are 2 parties the maker & the payee. It is made by the debtor. Acceptance is not required. The liability of the maker/drawer is primary & absolute.

It contains an unconditional order. There are 3 parties the drawer, the drawee & the payee. It is made by the creditor. Acceptance by the drawee is a must. The liability of the maker/drawer is secondary & conditional upon non-payment by the drawee.

Cheque

A cheque is defined as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand Thus a cheque is a bill of exchange with 2 added features: It must be drawn on a specified banker & It is always payable on demand and not otherwise

Types of Cheque:

Open Cheque Bearer Cheque Crossed Cheque Order Cheque

Crossing of the Cheque

Crossing of a cheque is a unique feature associated with a cheque affecting to a certain extent the obligation of the paying Banker and also its negotiable Character. Crossing of a Cheque is a direction to a particular Bank by the Drawer that Payment should not be made across the Counter. The payment on the crossed Cheque can be collected only through a Bank.

Who can cross a Cheque

1. The drawer of a Cheque 2. Holder of the Cheque 3.The Bank in whose favour the cheque has been crossed specially

Various kinds of Crossing

1.

General Crossing:- which bears across its face the words & co. or the words not negotiable. For general crossing two transverse lines on the face of cheque are essential. There are two sloping parallel lines, marked across its face The cheque bears an short form "& Co. "between the two parallel lines The cheque bears the words "A/c. Payee" between the two parallel lines. The cheque bears the words "Not Negotiable" between the two parallel lines.

Specimen of General Crossing

Various kinds of Crossing

2. Special or Restrictive Crossing :- When a particular bank's name is written in between the two parallel lines the cheque is said to be specially crossed. Where a cheque bears across its face an addition the name of banker either with or without the words not negotiable. It contains:

The name of the banker across the face of cheque. With the words not negotiable

In addition to the word bank, the words "A/c. Payee Only", "Not Negotiable" may also be written. The payment of such cheque is not made unless the bank named in crossing is presenting the cheque. The effect of special crossing is that the bank makes payment only to the banker whose name is written in the crossing. Specially crossed cheques are more safe than a generally crossed cheques.

+ Specimen of Special or Restrictive

Crossing

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A Crossed Cheque is Safer Than A Bearer Cheque

When a cheque is crossed, the holder thereof cannot encash it at the counter of the bank. Encashment at the counter of the bank is possible only in the case of an open cheque, i.e. a bearer cheque or an uncrossed cheque. The holder of a crossed cheque has to present the same to his bank for collecting its amount from the drawee bank. When the amount of the cheque is collected, the account of the holder is credited. Thus, it is possible to trace the party receiving the amount of the cheque. This is not so in the case of a bearer cheque because a bearer cheque can be encashed by anybody who presents it at the counter of the bank. Crossing, therefore, gives protection against payment of a cheque to wrong parties.

Distinction
Cheque

Bill of exchange

It must be drawn only on Bank

It can be drawn on any person including a Bank The amount may be payable on demand or after a specified time A usance ( time) bill is entitled to 3 days of grace. Crossing of Bill of Exchange is not possible

The amount is always payable on demand

The Cheque is not entitled to days of grace

Cheque can be crossed

Dishonour of the Cheque on the grounds of Insufficiency of Funds :

Specific provisions are made to discourage bouncing of cheque. Section 138 to 142 of the Negotiable Instruments Act provide for Criminal Penalties in event of Dishonour of Cheques for Insufficiency of Funds. The drawer under Section 138 may be punished with imprisonment upto 2 years or with a fine twice the amount of the Cheque or with Both. Still liable to make payment despite punishment.

Penalty for Dishonour of Cheque

Notice to drawer within 30 days from receiving information from bank. Drawer should make payment within 15 days of receipt of notice. If not paid then payee should lodge complain to metropolitan magistrate or judicial magistrate of first class. Notice can be sent by speed post or courier. Both civil and criminal cases permissible.

Return of Cheque should be for insufficiency of fund

o o o

Remark should be Insufficiency of fund. Exceed arrangement. Refer to drawer. Not in case of : Signature does not tally.

Offences By Company/Firm/Body Corporate

Every person/entity who are :

in charge or responsible Offence committed with the consent present at the time of offence

Are guilty. Not liable if proved that offence committed without his knowledge. Employee of government liable. who are nominee director are also not

Presumption in favour of holder

Court will presume dishonor of cheque once it receives banks slip from the complainant. Then burden shifts to drawer of cheque to prove that the cheque was not dishonoured. Court will take into consideration only the banks remark.

Notice to Drawer

Within 30 days. Cheque can be presented multiple times before issue of the legal notice.

+ IT ACT

Information technology is one of the important law relating to Indian cyber laws. It had passed in Indian parliament in 2000. This act is helpful to promote business with the help of internet. It also set of rules and regulations which apply on any electronic business transaction.

Main Objectives and Scope

1. It is objective of I.T. Act 2000 to give legal recognition to any transaction which is done by electronic way or use of internet. 2. To give legal recognition to digital signature for accepting any agreement via computer. 3. To provide facility of filling document online relating to school admission or registration in employment exchange. 4. According to I.T. Act 2000, any company can store their data in electronic storage. 5. To stop computer crime and protect privacy of internet users. 6. To give legal recognition for keeping books of accounts by bankers and other companies in electronic form. 7. To make more power to IPO, RBI and Indian Evidence act for restricting electronic crime.

E-Cheque

After amendments to THE NEGOTIABLE INSTRUMENTS ACT, 1881. [17th December, 2002.] Cheque" - A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. E-cheques are a mode of electronic payment. E-cheques work the same way as paper cheques and are a legally binding promise to pay and cryptographic signatures are substituted for handwritten signatures.

E-Cheque

Advantages and Disadvantages

It would be impossible for an e-cheque to bounce. Bank can do paperless , efficient transactions.

Merchant does not accept E-Cheque. The problem could be when someone have more than one signer and endorser.

Cheque Truncation System Concept

Cheque truncation is the conversion of physical into substitute electronic form for transmission. It eliminates cumbersome physical movement of cheque and saves time and processing cost.

CTS - Process

+ How to identify a CTS '2010' compliant

cheque ?

Benefits of the CTS

Shorter clearing cycle Physical movement of the cheque is stopped. Multiple clearing locations. Reduce the scope for perpetuation of frauds inherent in paper instruments. Reduction in operational risk and risks associated with paper clearing. Improve operational efficiency.

+ Adoption Challenges

Major IT and operational investment for banks. Replacement of Old cheque books. Creating awareness- public and officials. Hardwired behavior.

+ Non negotiable instruments

There are some instruments which Although they are transferable by delivery and endorsements, yet they are not able to give better title to the bonafide transferee for value than what the transferor has. Therefore these are not negotiable instrument Money order Postal orders Deposit reciepts Share certificates Bill of lading Dock warrant

Distinction btw transferable & negotiable

The distinction between transferable and negotiable documents is that a document is transferable when it can be transferred by one person to another, passing to the transferee the rights of the original holder but no more, while a negotiable document can give to the transferee rights that are better or greater than the right of the transferor, provided that consideration is given for the transfer. Therefore, only negotiable documents are an exception to the rule that nobody can transfer to another person more rights than he has (nemo plus iuris ad alium transferre potest quam ipse habet ).

MADAN GUPTA VS VIDEOCON

The place of drawing the cheque The place of presentation to the bank The place of returning of cheque unpaid by the drawee bank The place from where the notice is served in writing to the drawer demanding payment The place where drawer had to make payment within 15 days of notice being served

HEMANT CHEMICALS VS RIVERSIDE INDUSTRIES

"If due to stopping of payment a cheque is dishonored, that case is also covered under Section 138 of the Negotiable Instruments Act, if other requirements of that Section are complied with. This is settled position of law,"

ICICI BANK VS DECCAN CHRONICLES

ICICI Bank had advanced a loan of Rs. 511 cr. to Deccan Chronicle Holdings Ltd. Deccan Chronicles issued a cheque of Rs. 350 Cr on November 06, 2012 in favour of ICICI bank to be drawn on Canara Bank and paid the rest of the amount. Cheque was returned by Canara Bank with remarks INSUFFICIENT FUNDS ICICI has filed a petition under Section 138 Negotiable Instruments act in the local court. Court has issued summons to Deccan Chronicles to appear and explain the cheque dishonour.

Kingfisher Airlines Vs. Others

Hyderabad Court issued NBWs against Vijay Mallya and three executives. Kingfisher Airlines Vs. GMR-HIAL Kingfisher Airlines issued cheque of Rs. 10.50 Cr. which bounced when presented to the bank. In July 2012, the Chhatrapati Shivaji International Airport (CSIA), which is operated by Hyderabad-based GVK Group, filed a case against KFA after a cheque issued by the airline for Rs 5 crore bounced. Indira Gandhi International Airport has filed cases against KFA after cheques worth Rs. 45 Crores were dishonoured.

+ CHEQUE BOUNCE OFFENCE LIKELY TO GO

Government may soon bring an amendment in the Negotiable Instruments(NI) Act that will restrict banks from dragging a person to court for an offence like cheque bounce. Changes in the NI Act will make it compulsory for the disputing parties to resolve the matter through alternate Dispute Resolution Mechanism. As per IMG recommendation, the use of alternate dispute resolution mechanism on the lines of Section 89 of the Code of Civil Procedure, through arbitration; conciliation; judicial settlement including settlement through Lok Adalat of mediation may be made compulsory in cheque bounce cases by making suitable amendments in the negotiable instruments act.

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