Business and Environment laws

• Unit-2 Negotiable Instrument Act 1881

MBA Sem:3 (finance group)
Prepared by:
1. Niyati Trivedi
2. Utsav Trivedi
3. Pooja Nathani
Guided by: Dr. Ami pandya
Submitted to: Department of Business
Administration, M.K. Bhavnagar university
The Negotiable Instruments Act,
1881
 Introduction
• The law relating to negotiable instruments is
contained in the Negotiable Instruments Act,
1881 which applies and extends to the whole of
India.

• Negotiable Instruments Act, "A negotiable

instrument means a promissory note, bill of
exchange or cheque payable either to order or to
bearer.it is also described that Local extent,
Saving of usage relating to hundis.
 DEFINATIONS
• The word negotiable means ‘transferable by
delivery,’ and the word instrument means ‘a written
document by which a right is created in favour of
some person.’
• Thus, the term “negotiable instrument” literally
means ‘a written document which creates a right in
favour of somebody and is freely transferable by
delivery.’
 Characteristics of Negotiable
Instruments
• Transferability or easy negotiability
The property in these instruments passes by either
endorsement and delivery or by delivery merely and no
further evidence of transfer is needed.

• 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.
• Transferee can sue in his own name without
giving notice to the debtor
A bill, note or a cheque represents a debt, i.e., an
“actionable claim” and implies the right of the creditor
to recover something from hid debtor
 The creditor can either recover this amount himself or
can transfer his right to another person.
• Presumptions:
 For consideration
As to date
As to time of acceptance
As to transfer
As to stamps
As to dishonour
PROMISSORY NOTE
 DEFINITION
• A Promissory note is an instrumennt in writing an
uncounditional undertaking signed by the maaker to
pay acertain some of money only to, or to the order
of a certain person, or to the bearer of the instrument.
•Promissory notes may also be referred to as an IOU, a
loan agreement, or just a note. It's a legal lending
document that says the borrower promises to repay to
the lender a certain amount of money in a certain
time frame. This kind of document is legally
enforceable and creates a legal obligation to repay the
loan.
 What Should Be Included?
• The names and addresses of the lender and
borrower
• The amount of money being borrowed and
what, if any, collateral is being used
• How often payments will be made in and in
what amount
• Signatures of both parties, in order for the
note to be enforceable.
 Parties to a promissory notes
• MAKER : The person who makes the promissory note and promises to
pay is called the Maker.
• PAYEE: The person to whom the payment is to be made is called the
Payee.
• HOLDER: The holder is either the payee or someone to whom he may
have indorsed (transfer) the note is known as Holder.
• ENDORSER: The person who indorses the note to another is called the
Endorser .
• ENDORSEE: The person to whose favor the note is endorsed is called
the Endorsee
 Essentials of Promissory notes
• It must be in writing.
• Contains a promise to pay.
• Signed by the Maker.
• definite and Unconditional Promise.
• The maker must be a certain person
• Payee must be Certain.
• Sum Payable must be Certain.
• Payable on Demand or After a Definite Period of
Time.
BILL OF EXCHANGE
 Definition
• A ‘bill of exchange’ is defined by section 5 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”.
 Parties To A
Bill Of Exchange
• Drawer:- Drawer is the maker of the bill of
exchange.

• Drawee:- Drawee is the person upon whom

the bill of exchange is drawn.

• Payee:- payee is the person to whom the

payment is to be made.
• Example:-
Amit sold goods worth Rs.10,000 to
Rohit and drew a bill of exchange upon him
for the same amount payable after three
months.
 Specimen Of A Bill of Exchange
Amit Gujarat
Rs.10,000 April 01.2018
Three months after date pay to me or my order, the sum of Rupees Ten
Thousand only, for value received.

Stamp

Accepted
(signed) (Signed)
Rohit Amit
1/04/2018 196-B,Navrang pura
73-B-Palanpur Ahmedabad
Gujarat To
Rohit
73-B-Palanpur
Gujarat
 Essentials Of Bill Of Exchange
• In writing
• It is an order
• Unconditional
• Signature
• Three parties
• Fixed sum
• Payable in money
• Parties must be certain
• Stamped
• Place and date
• Dishonour of Bill:- When the drawee is not
able to make payment on the date of maturity
of a bill, a bill is said to be dishonoured. When
the bill is dishonourd, a notice is given to all
parties that are involved.
 Cheque
Section 6 of the Act defines:-
“A cheque is a bill of exchange drawn on a
specified banker, and not expressed to be
payable otherwise than on demand”.
 Essentials of cheque
• Written
• Signature by the drawer
• Unconditional order
• Drawn on a bank
• Payable only in money
• Payable on demand
• May be electronic form
• Three parties
 Parties to cheque
• Drawer: The person who draws the cheque.

• Drawee: The drawee is the drawer’s banker on

whom the cheque has been drawn.

• Payee: The person who is entitle to receive

payment of a cheque.
 Types of Cheque
1. Bearer cheque
2. Order Cheque
3. Crossed Cheque
 Bearer Cheque
• The phrase “or Bearer” written after the name of
the payee.
• It is payable on demand to bearer or presenter.
• It doesn’t require endorsement.
• If bearer cheque is lost, the finder can cash it and
bank has no responsibility for it, unless the bank
is notified in time to stop the payment.
• It is not a safe method of payment.
Specimen of Bearer Cheque
 Order cheque
• Word “order” is written against the name of
the payee.
• The payment of such cheque is made only to
the person named there in the cheque on the
production of a valid identification.
• No other person get the payment of an order
cheque.
• Payment through order cheque is safer way,
because receiver will have to prove his
identity before receiving money.
 Order cheque
• In case of any problem, Bank will be held
responsible.
• Order cheque can be transferred to another
person by act of endorsement.
Specimen of order cheque
 Crossed cheque
• The cheques issued can be crossed or uncrossed.
• The uncrossed cheques can be encashed from
Bank’s counter, by the bearer of instrument
(bearer cheque).
• To avoid frauds or risk due to loss of cheque, it is
always advised to cross the cheque.
• When a cheque is crossed, the bearer can’t
encash it on bank’s counter, it can only be
encashed by depositing the cheque in bank and
transferring the amount in the holder’s bank a/c.
Specimen of crossed cheque
 Types of crossing cheque
• General crossing (& co. , & company)
• Special crossing (Dena bank, Dena bank not
negotiable)
• Restrictive crossing ( A/C payee, A/C payee not
negotiable)
• Not negotiable crossing (not be transferred to
another person)
 Dishonor of cheque (sec. 138 to 142)
• Suppose akash has drawn (the drawer) a cheque
of ICICI bank to make payment to rahul(the
payee).
mr. Akash(drawer) Cheque mr.rahul
ICICI bank-drawee (Payee/holder)
• if the drawee (ICICI Bank) refuses to make
payment(clear the cheque) to mr.rahul, is called
as Dishonor of cheque.
• The cheque has been presented to the bank
within a period of six months from the date on
which it is drawn or within the period of its
validity, whichever is earlier.
 Conditions of dishonor of cheque
• Insufficient funds in account of drawer
• If the account is closed either by the account
holder or by bank.
• Stop payment instruction given by the drawer to
his bank which is called as “counter mended
payment”.
• Signature not matching or incorrect date on
cheque
• Dishonor of cheque means breach of contract
treated as criminal offence .
• The payee (holder) now can take legal action
against the defaulter party(drawer)
• The holder thro’ the notice can give a time period
(15 days) to (drawer) make the due payment.
• If drawer make part payment, still it will be a
dishonor of cheque.
• If after 15 days, the drawer doesn’t make
payment to payee then the payee can file case
against the drawer in the court within one month
of time after the 15 days grace period over by
producing;
1. The bank’s statement along with reason of
dishonor of cheque and...
2. The copy of notice given to the drawer thro’
the lawyer of payee
Penalty: up to 2 years imprisonment and double
amount of dishonor.
 Case study
• Case
• By means of fall preference A has obtain from B a
cheque crossed “not negotiable” he took that
cheque to a bank (other than drawee bank)
which paid it. B sues the bank for conversion.
• Has A committed any offence or irregularity.
Under the negotiable instrument act.
• Is B entitled to get any relief?
• How will you decide the case
• Answer :
• The given case is under the chapter of negotiable
instrument which means promissory notes, bills of
exchange or cheque payable either to order or to
bearer.
• In this set case because of fall preference A obtain a
cheque from B a crossed cheque saying not negotiable.
He took the cheque to bank (collecting banker) which
paid it. Here the not negotiable word came on crossing
because of this crossing the cheque becomes made
available to pay to bearer that is to anyone who holds
it therefore here A did a lawful negotiation as he got a
cheque and went to the collecting banker who collects
the cross checks on behalf of their customer, Because
of not negotiable tittle bank paying in good faith and
without negligence to their regular customer to ensure
the interest of customers.
• Judgement:
• Here the cheque is crossed with the the label
“not negotiable” which means the transferee
cannot get a better title than that of transferor. It
also means that it can be paid only to a certain
person. A negotiable cheque is one which is
made payable to bearer that is to anyone who
“holds it. Here because of fall preference A has
obtain a cheque because of that “not negotiable”
cross cheque gives authority to receive the
payment of check therefore A followed the rules
and regulations covered under negotiable
instrument hence A the did not committed any
offence or irregularity under the Negotiation
instrument.
• Here because of fall preference A obtain a
cheque from B with the cross cheque “not
negotiable” because of this crossing the
cheque becomes made available to pay to
bearer that is to anyone who holds it. Hence
here B will not get any relif as the transaction
is lawful under the negotiable instrument act,
1881.
Thank You