CHAPTER 4 NEGOTIABLE INSTRUMENTS Section13 of Indian Negotiable Instruments Act, 1881 defines a negotiable instrument as a promissory note, bill

l of exchange or cheque payable either to order or to the bearer. In other words, it is a document which is transferable by mere delivery, and which entitles the bonafide holder for value to the sum of money specified in the instrument. Features: 1. free transferability: the ownership of the property in a negotiable instrument is freely transeferable either by delivery or by endorsement 2. negotiability : the bonafide transferee of a negotiable instrument is not affected by defect in the title of the transferor or any other previous holders 3. Right of action in his own name: the holder in due course of the instrument is entitled to sue the transferor in his own name. 4. Presumptions: Every negotiable instrument must be drawn,accepted,endorsed,negotiated for consideration It should bear the date of drawing It should be accepted within reasonable time It must be transferred before maturity date Endorsement must be made in order Types of negotiable instruments: 1. Bills of Exchange: Section5 of Indian Negotiable Instruments act 1881 defines a bill of exchange as an instrument in writing, containing an unconditional order,signed by the maker, directing certain person to pay on demand or at fixed or determinable future time,a certain sum of money only,to or to the order of certain person,or to the bearer of instrument. Specimen Mangalore: 04-03-2014 Stamp Rs.2000/Three months after date, pay Mr.XYZ or the order the sum of rupees two thousand only for value received. To, Mr.ABC Bondel Mangalore-07 Mr.MNO. Parties: 1. Drawer: the person who draws or makes the bill of exchange 2. Drawee: the person on whom the bill of exchange is drawn 3. Acceptor: the drawee who accepts or gives a notice of acceptance to the holder 4. Payee: the person named in the bill to whom amount of the bill is to be paid 5. Holder: the person who is entitled to the possession of the bill and to receive the amount from the parties liable thereto 6. Endorser: the holder who endorses the bill to another party 7. Endorsee: the person to whom the bill is endorsed 8. Drawee in case of need: the person whose name is written on instrument as an alternative drawee, to whom bill can be presented for acceptance. 9. Acceptor for honour: the person who accept the bill with the consent of the holder, when the bill is protested for non-acceptance 10. Payer for honour: the party who makes payment on behalf of the party liable on the bill in order to save his honour.

Kinds: A. On the basis of time of payment 1. Demand bill (sight bill): it is a bill of exchange drawn and payable on demand, at sight or on presentation and in which time for payment is not mentioned. 2. Time bill: it is a B/E which is drawn and made payable so many days or months after date or after sight B. On the basis of person to whom payment is to be made: 1. Bearer bill: it is a bill of exchange payable to certain person or to the bearer. It is time bill 2. Order bill: it is a bill of exchange payable certain person or to the order. It may be demand or time bill C. On the basis of place of payment 1. Inland bill: it is bill of exchange drawn in India and made payable in india or drawn on resident of india, made payable outside India. 2. Foreign bill: it is bill of exchange Drawn outside India and made payable outside India Drawn in India on person residing outside India and made payable outside India Drawn outside India and made payable in India. D. On the basis of documents attached to the bills. 1. Documentary bill: it is bill of exchange accompanied by documents of title of the goods Documents against acceptance(D/A): title documents of the goods given immediately after acceptance Documents against Payment (D/P): title documents of the goods given only after payment is made. 2. Clean bill: it is not accompanied by any documents. E. On the basis of consideration or value 1. Trade bill: a B/E drawn and accepted for valuable consideration(goods) which is passed from drawer to acceptor already.(it is drawn for credit purchases) 2. Accommodation bill: A B/E drawn for helping the drawer and acceptor financially.

Promissory note: Section 4 of Indian Negotiable Instruments act 1881 defines a promissory note as an instrument in writing(not being a bank note or 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 instrument Specimen Mangalore: 04-03-2014 On demand (or three months after date), I promise to pay Mr.XYZ or the order the sum of rupees two thousand only with the interest at 8% per annum for value received. Rs.2000/stamp Mr.MNO.

Cheque: Section 5 of Indian Negotiable Instruments act 1881 defines a cheque as a bill of exchange drawn on specified banker and not expressed to be payable otherwise than on demand. Essentials: 1. 2. 3. 4. 5. 6. 7. It must be in writing It must contain an order to pay The order must be unconditional It must be drawn on specified banker It must drawn only by the customer of the bank The order must be for payment of money only It must be signed by the drawer

Crossing of cheques: It means drawing across the face of the cheque two parallel transverse lines with or without the words not negotiable or account payee between the lines. Types: 1. General crossing: Section 123 of Indian Negotiable Instruments act 1881, defines a general crossing as where a cheque bears across its face an addition of the words and company or abbreviation thereof between two parallel transverse lines, or two parallel transverse lines simply, deemed a crossing and the cheque shall be deemed to be crossed generally.

2. Special crossing: Section 124 of Indian Negotiable Instruments act 1881, defines a special crossing as where a cheque bears across its face an addition of the name of the banker with or without the words not negotiable, that addition shall be deemed a crossing and cheque shall be deemed to be crossed specially and to be crossed to that banker. In other words it generally crossed cheque where name of the collecting banker is written on the face of the cheque.

3. Not negotiable crossing In this type not negotiable word it used in general crossing or special crossing of cheque. It loses its special feature of negotiability. It cannot be transferred to other person. 4. Account payee crossing In this type account payee only word is included in crossing of cheque. In this case, the banker does not collect the cheque for a person other than payee. It does not lose its negotiability as per the court decision on various related issues. But in actual practice it loses it transferability. 5. Double crossing A cheque may have two or double crossing. When the banker to whom cheque is crossed does not have any branch at place of paying banker, then another banker may act as agent for purpose of collection. In such case second special crossing is made to specify the banker who act as the agent of first banker fro collection of cheque. Endorsements: Section 15 of Indian Negotiable Instruments act 1881 defines an endorsement as when the maker or holder of negotiable instrument signs the same otherwise than as such maker, for the purpose of negotiation, on the back side or face thereof or on slip of papera annexed thereto, or signs for the same

purpose a stamped paper intended to be completed as a negotisble instrument, he is said to endorse the same, and is called the endorser. Who can endorse? 1. Payee of instrument 2. Drawer of bill of exchange 3. Maker of promissory note 4. Holder of negotiable instrument 5. Endorsee of instrument 6. All other joint payees, drawers, makers or endorsees of instrument Effects: 1. 2. 3. 4. 5. The endorser transfer his right, property, interest in instrument to endorsee He certifies the genuineness of instrument He guarantees to endorsee that he had good title to the instrument It conveys endorsee further negotiation He certifies that all the prior endorsements are genuine

Kinds: 1. Blank endorsement: it is an endorsement in which the endorser merely signs his name on the back of the instrument without mentioning the name of the person to whom the instrument is endorsed. It is a bearer instrument and it can be negotiated further.

(Sd) Mr.XYZ 2. Full Endorsement: it is an endorsement in which the endorser writes not only his name but also the name of the person to whom the instrument is endorsed on the back side of the instrument. pay Mr.ABC or order (Sd) Mr.XYZ 3. Restrictive endorsement: it is an endorsement in which the endorser restricts the further negotiation of he instrument by expressing the words or constitutes the endorsee just an agent to endorse the instrument or to receive its content for the endorser or some other specified person. pay Mr.ABC only (Sd.)Mr. XYZ pay Mr.ABC for my use (Sd.)Mr. XYZ pay Mr.ABC on account of Mr.MNO (Sd.)Mr. XYZ 4. Sans Recourse endorsement: In this type of endorsement the endorser frees himself from a liabilityin case of dishonor of instrument, by writing the words sans recourse or without recourse to me after writing name of endorsee. Pay Mr.ABC or order, sans recourse (Sd.)Mr. XYZ 5. Conditional endorsement: it is an endorsement in whoosh the endorser makes his liability on the instrument or the endorsee to receive the payment of the instrument depends upon happening of specified event. Pay Mr.ABC or order, on the arrival of matsyagandha express at mangalore railway station by 4-03-2014 (Sd.)Mr. XYZ 6. Facultative endorsement: here the endorser waives or surrenders his right to receive the notice of dishonor by writing the name of endorsee Pay Mr.ABC or order, Notice of Dishonour waived (Sd.)Mr. XYZ

7. Sans frais endorsement: it is an endorsement in which, by writing the words Sans frais the endorser makes it clear that no one should incur any expense on his account in respect of negotiable instrument. Pay Mr.ABC or order, sans frais

(Sd.)Mr. XYZ DIFFERENCES A. Bill of exchange and promissory note: Bill of exchange It is an unconditional order to pay money It include three parties. Drawer, drawee and payee It is drawn by creditor It requires acceptance The liability of the maker is secondary It is mainly used for financing trade Promissory note 1. It is a promise to pay money 2. It includes two parties. Maker and payee 3. 4. 5. 6. it is made by debtor it does not require any acceptance the liability of the maker is primary it is used for raising loans

1. 2. 3. 4. 5. 6.

B. Cheque and bill of exchange Cheque 1. It has to be drawn in printed form 2 It does not require acceptance 3. It is always payable on demand 4. It is not drawn in sets 5. If dishonoured, it is not noted or protested 6. It can be made payable to bearer 7. It is used as means of payment 8. The drawer of cheque can stop payment 9. It is not entitled to any period of grace 10. Drawer is not discharged from liability C. Cheque and promissory note Cheque It is unconditional order to pay money It is drawn by creditor 3 parties- drawer, drawee and payee Always payable on demand It can be made payable to bearer It can be made payable to maker It is required to be paid by drawee It is means of payment It does not require stamp duty in India It is not entitled to grace period Promissory note It is unconditional promise to pay money Drawn by debtor 2 parties maker and payee Payable either on demand or after fixed period It can be made payable only to order It cannot be made payable to maker It is required to paid by maker It is a means of borrowing It requires stamp duty It is entitled 3 days grace period Bill of exchange 1. It may or may not be drawn in printed form 2. It requires acceptance 3. It is payable on demand or after fixed period 4. Foreign bill of exchange drawn in 2 or 3 sets 5. If dishonoured it can be protested 6. It cannot be made payable to bearer 7. It is used for financing trade 8. The drawer cannot stop payment 9. It is entitled to 3 days of grace 10. Drawer is discharged from liability

1. 2 3. 4. 5. 6. 7. 8. 9. 10.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

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