Common Characteristics of Negotiable Instruments,

1. 2.

Act Apply: Negotiable instruments act 1881.

A negotiable instrument means a promissory note, Bill of Exchange or cheque payable either to order or bearer, Sec (13)(1). 3 Essential features of Negotiable instrument: (a) Transferability: Ownership of the property in the instrument. if payable to bearer then by delivery only and if payable to then order then endorsement and delivery) (b) Title: Confers absolute and good title on the transferee: Holder in Due Course, Who take it in good faith, for value and without notice of the fact that the transferor had defective title thereto. (c) Negotiability differs from transferability: Transferor cannot transfer title better than what he himself possesses. (d) Money: Its for consideration in value for Money only. (e) Its presumed there is a consideration is for value received. & Every Holder is presumed to be Holder in due Course.
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Types and exceptions

(a) (i) (ii)

1.

2.

Types of Negotiable Instruments: Negotiable instruments by statute: Cheque, bill of exchange and promissory notes Negotiable instrument by custom or usage: Government promissory notes, shah jog hundis, delivery orders and railway receipts. Exceptions: If a cheque is payable to a specified persons only and not to his order or the bearer, it cannot be transferred to any other person and hence it loses its negotiability. If a cheque is crossed not negotiable it can be transferred but without conferring on the transferee absolute and good title in all cases.
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Promissory note(Pro Note) Sec.4

Rs. 5000 New Delhi 7thJanuary,08 Three months after the date I promise to pay X the sum of Rupees five thousand, for value received.

To X Rajkot Stamp Sd. Y

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promissory note is drawn and signed by the debtor who promises to pay the creditor a certain sum of money.
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Bill of Exchange:N I act Sec.5

Rs.10000 Ahmedabad 16thAug.2010 Three months after date pay to X or order the sum of ten thousand rupees, for valued received. To Z Accepted Stamp Z Sd Y
y Section 5, A bill of exchange is 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 order of a certain person or to the bearer of the instrument. y 1. An order from the creditor to the debtor y 2. maker is called drawer and who has been directed to pay is called drawee and who is entitled to receive money is called payee. y 3. Drawer can be the payee
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CHEQUE: NI Act Sec 6

A Date:...
Pay..orBearer

Rupee.
Rs...

cheque is a bill of exchange which is always drawn on a specified banker and payable on demand .

Axis bank
Vastrapur Ahmedabad Signature Eg.D/W or Share R/O or I Tax R/O are cheques but Bank Draft is BOE.

478162

110013005

10
5

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Difference of P N & B O E.
y DP Note: (i) In writing, y (ii) Signed by the maker y B O E: (1) In writing, y (ii) Signed by the maker y y y y y

(Debtor) (iii)Unconditional undertaking to pay y (iv) A certain sumof money y (v) Pay to or to the order of certain person or to the berear of P Note. (vi)Demand Pro Note /Usance P N, y (vii) Needs to be stamped which is uniform in India. y (viii) May be drawn on any form.
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(Creditor), (iii)Containing unconditional order, (iv) A certain sum of money only, (v) Pay to the order of certain person or to the bearer of B E., (vi) Payable on sight / or Usance Bill, (vii) No Stamp duty if payable up to 90 days period,
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y (viii)May be drawn in any form.

MICR Cheque or Draft

1.

MICR ( Magnetic Ink Character Recognition) for his speedy processing. Special quality paper and printing instruments specifications. Code line at the bottom containing information printed in magnetic ink. The code line contains the following information: First six numbers indicate the cheque number. Next three numbers indicate city code

2. 3.

4. (i) (ii)

(iii) Next three numbers indicate bank code (iv) Next three numbers indicate branch code (v)

After some space there is a number for transaction code ( SB or CA) presented by atul parikh

Obligations of a banker
y 1. Obligation to honour the cheques: Section 31 of

the negotiable instruments Act, 1881 lays down that: y The Drawee of a cheque having sufficient funds of the drawer in his hands, properly applicable to the payment of such cheque, must pay the cheque when duly required to do so and in default of such payment must compensate the drawer for any loss or damage caused by such default

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Conditions for honoring cheques There must be sufficient funds of the drawer in the hands of the drawee: Equal or more than the amount of cheque presented. (a) Cheque sent for collection by the customer has been realised. (b) Credit balances in other accounts at other branches. (c) Immediate credit of cheques of Rs. 15000 as instructed by RBI if there is no adverse experience.
1.
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Funds applicable to the payment of the cheque

y 1.Several bank accounts in his various capacities. 2. Funds are earmarked for some specific purposes. y 3. Has debit balance in his current account y 4. Cannot draw a cheques on the basis of his fixed deposit with the banker as the latter is deposited under a separate agreement for a specific period. y 5. if bank has sanctioned a overdraft to the customer and without informing him withdraw the limit. y Duly required to Pay :Cheque must be presented before the banker at the proper time. Not stale ( six month) or post dated.
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Garnishee order
1.

The obligation of a banker to honour his customers cheques is extinguished on receipt of an order of the court, known as the ganishee order, issued under Order 21, Rule 46 of the code of civil Procedure, 1906. If a debtor fails to pay the debt owed by him to his creditor, the latter may apply to the court for the issue of a Garnishee Order on the banker of his debtor. Such order attaches the debts not secured by a negotiable instrument, by prohibiting the creditor from recovering the debt and debtor from making payment thereof. The account of the customer with the banker, thus, becomes suspended and the banker is under an obligation to make any payment thereof.
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2.

Garnishee order
y 1. The creditor at whose request the order is issued is called judgment creditor, the debtor whose money is frozen is called judgment debtor and banker who is the debtor of the judgment debtor is called garnishee. y 2.First court directs the banker to stop payment out of the account of the judgments debtor. Such order is called order nisi. Explanation from the bank why funds cannot be used for creditor. Bank should inform the customer y 3. After explanation, court issue final order which is called order absolute whereby the entire balance or a specified amount is attached and handed over to the judgment creditor.
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Special points
1. 2. 3. 4. 5.

6. 7.

Amount attached by the order: entire or specified plus cost of legal proceedings. Order of the court restrains the banker from paying the debts or accruing due: if the account is overdrawn banker has no money to the customer and order becomes ineffective. Bank has right to set off any debt which is real and not contingent. Two accounts in the same name can be combined. Only limited to the balance in the account. Cheque sent for collections or sales proceeds from the securities are not applicable. It is not applicable to the amount deposited later on. Not applicable for the payment made before the order. Not applicable to money held abroad by the judgment debtor and securities held in the safe custody of the banker.
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Not applicable to
y 1. Joint accounts if other account holder is not

liable y 2.partnership accounts: partners accounts can be attached. y 3. Trust account: trustee account cannot be attached.

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Attachment order issued by income tax authorities

y 1. Section 226(3) of the Indian Income tax Act, 1961 authorizes the ITO to require by notice in writing any person from whom money is due or may become due to the assesses or any person who holds or may subsequently hold money for or account of assesses, to pay ITO an amount equal to the amount of the arrears of tax or whole amount. y 2. If it is joint account then prorata amount will be attached until contrary in proved. y 3. After making payment as required under this section, the banker shall be fully discharged from his liability to the assesses to the extent of the amount so paid. But if he fails to make payment, he shall be deemed to be assesses in default. presented by atul parikh 15

Liability of the banker in case of wrongful dishonour of cheque

y 1. Section 31 of NI act: the bank is liable to compesate the drawer for any loss or damage caused by default on his part in dishonouring the cheques without sufficient reason. y 2. Causes of wrongful dishonour: Mistake or negligence on the part of the banker or any of its employees. y Liability includes; y (i) The monetary loss suffered by the customer. y (ii) The loss of credit or reputation in the market.( in case of traders and businessman. Amount of chques: small the cheque larger the liability o f the bank. Liability towards the drawee and not the third party.
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Post dated and stale cheque

Post dated cheques: Bear a date later than that on which the holder presents it at the bank. Bank should not honor for following reasons:
1. 2. 3.

Customer may stop the payment before due date. Paid the cheque and hold it untill it matures, the customer may become insolvent, insane or die. Not statutory protection to the bank as payment is due course. Example: Cheque of Rs. 1000 of dated 31jan,2008 paid and later on the customer issued a cheque of Rs. 500 dated 18th Jan,2008 but due to insufficient balance, it is returned. Bank will be liable for dishonoring the cheque. Process of encashing post dated chques or discounted post dated cheques is a fraud or indirect lending which is not permissible. Stale cheque: Outstanding for more than six month ( in case of dividend warrants it is 3 months). Can be honoured after getting confirmation by the drawer ( change of date or revalidation)
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