NEGOTIABLE INSTRUMENTS ACT, 1881

Prof. K.M.Vishnu Nambudiri

M.COM.; LL.B.; PGDBM

NEGOTIABLE + INSTRUMENTS (section 13)

Negotiable means something legally transferable from one person to another for a consideration. Instrument means a written document by which some legal rights are created in favour of some person

CHARASTERICS OF NEGOTIABLE INSTRUMENTS

Though there is no clear definition for negotiable instruments in the Act, sec.13 says Negotiable instrument means a promissory note, bill of exchange or cheque, payable either to order or to bearer Freely transferable, by delivery (to bearer) or endorsement (to order)
Title of holder-in-due-course free from all defects. Recovery can be made in own name. It presupposes certain presumptions such as Consideration is paid, made on date of signature, it is accepted properly, transferred in time, endorsed properly, stamped properly, holder is in-due-course, protest is a proof of dishonour, etc.

PROMISORY NOTE (section 4)

Promissory note is an instrument in writing 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. Sec.4

Rs.1,00,000/-

Panvel, 1st August 2009

STAMP Three months hereafter, I promise to pay a sum of Rs.50,000/Rupees fifty thousands only to Shri Ramanlal Vadilal Shah or order, for value received. To Ramanlal Vadilal Shah, Prop: Ramanlal Sweets, Sector 29, Vashi, Navi Mumbai. Sd/Keshav Kanti Patel

ESSENTIALS OF A P/N
In Writing Undertaking/Promise to pay Definite and unconditional Signed by the maker Certainty of the maker and payee. Certainty of amount, money only. Formalities like number, date, place, consideration, Stamp etc. Never payable to bearer on demand.

BILL OF EXCHANGE (section 5)

A Bill of Exchange is an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person, to a pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument Sec.5 Three parties The drawer, drawee(acceptor), and the payee.

BILL OF EXCHANGE
Rs.1,00,000/Panvel, 1 August 2009
st

STAMP Three months hereafter, pay a sum of Rs.50,000/- (Rupees fifty thousands only) to, or to the order of Shri Bharat Sajjan Sheth, or to the bearer of the instrument , for value received.
To Ramanlal Vadilal Shah, Prop: Ramanlal Sweets, Sector 29, Vashi, Navi Mumbai. Sd/Keshav Kanti Patel Accepted Sd/Bharat Sajjan Sheth

ESSENTIALS OF BILL OF EXCHANGE

In Writing Order Definite and unconditional Signed by the maker Certainty of the maker, drawee and payee. Certainty of amount, money only. Formalities like number, date, place, consideration, Stamp etc. Payable to order or bearer on demand. Acceptance by drawee is compulsory

DISTINCTION BETWEEN BILLOF EXCHANGE AND PROMISORY NOTE

BILL OF EXCHANGE Three parties Orders to pay Drawer is both debtor to one and creditor to another. Acceptance compulsory Conditional Acceptance OK Liability of maker secondary Maker & payee can be same Can be payable to bearer PROMISORY NOTE Two parties Promise to pay Maker is debtor No acceptance is necessary No conditional making Liability of maker primary Maker cannot be payee Cannot be bearer instrument

MATURITY AND DAYS OF GRACE

A Promissory Note or Bill of Exchange can be made payable:
i) On demand; ii) On a specific date; iii) After a specified period months or days. (a) in case of months, calendar dates are counted (b) The drawing date to be excluded for counting (c) If the due date is a holiday, the next day is due.

If the instrument is not on demand three days of grace is granted.

CHEQUE (section 6)
A Cheque is a Bill of Exchange drawn upon a specified banker and payable on demand Sec.6 It is always drawn on (drawee is) a bank It is always payable on demand Separate acceptance is not necessary In the case of Draft, both the drawer and drawee are banks.

DISTINCTION BETWEEN BILLOF EXCHANGE AND CHEQUE

BILL OF EXCHANGE
Drawn on any body Acceptance compulsory Payable after a date or on demand. Days of grace available Delay in presentation may exonerate the drawer Cannot be crossed Cannot be countermanded Noted/protested in dishonour

CHEQUE
Drawn on bank only No Acceptance needed Payable on demand No days of grace available. Delay in presentation does not exonerate the drawer Cheque can be crossed can be countermanded (Stop payment) Noting /Protesting not necessary

CROSSING OF CHEQUE (section 123 to 131A)

General crossing Two parallel lines or with word & Co. etc. Special crossing Not negotiable Clearable through a the bank named. (Title of transferee not any better than transferor Restrictive crossing A/c payee only or A/c payee - Bank of India Bank of India A/c. Nambudiri

i) ii) iii)

DISHONOUR OF CHEQUE BY BANK (section 31 & section 138)

iv) v) vi)

When sufficient funds are not in credit. Where the fund is held in trust Where the cheque is ambiguous or doubtful legality. When the cheque is mutilated Where the cheque is irregular or materially altered When the cheque is not duly presented

DISHONOUR OF CHEQUE BY BANK..

vii) Drawers signature does not agree with specimen signature. viii) Where the cheque is post dated, prior to that date. ix) Stale cheques six months after the date. x) Presented in a wrong branch xi) In accounts of joint drawers, without signature of all prescribed xii) If the cheque amount exceeds the minimum balance or agreed set-off limits

COMPULSORY DISHONOUR BY BANK..

i) When the drawer becomes insolvent or adjudicated accordingly; ii) When drawer countermands payment; iii) After the bank received notice of death of drawer; iv) When the bank receives notice of drawers insanity; v) When a garnishee or attachment of account is served on the banker;

COMPULSORY DISHONOUR BY BANK..

vi) When notice of closure account is received; vii) When notice is received, being credit balance is assigned; viii)When the bank has reason to believe that the title of the presenter is defective; ix) When the loss of cheque is intimated to the bank. It is advisable to get the cheque countermanded.

PARTIES OF INSTRUMENTS
Drawer is the maker of instrument. Drawee is the person on whom it is drawn. In the case of B/E drawee is the acceptor. Payee is the person to whom amount is payable. Drawer can be payee. Endorser is the one who endorses Endorsee is the one to whom it is endorsed Drawee in case of need.

HOLDER-IN-DUE-COURSE (section 8 & section 9)

Holder of an instrument means a person legally entitled to possess and receive in his own name Holder-in-due-course is a holder having: a) he is named/possesses it for value received i.e. for good consideration. b) he is holder before maturity; c) became holder in good faith (i.e. Having no reasonable cause to doubt its title)

 All earlier parties are liable to him; He is protected even from an earlier defect of no-consideration Protected even from an earlier conditional delivery. Instruments are cleansed from all defects. Protected from an earlier obtainment by unlawful means or for unlawful consideration. Presumption is that every holder is holder-indue course, unless otherwise proved.

PRIVILEGES OF HOLDER-IN-DUE-COURSE

NEGOTIATION AND ASSIGNMENT

Negotiation is delivery or endorsement and delivery, for value received. If it is conditional or for specific purpose, the property in instrument would not pass, till the event. If the transfer is made with the sole intention of assigning the power of collection of payment to transferee, it is assignment, which is not recognised by Negotiable Instruments Act.

DISTINCTION - NEGOTIATION AND ASSIGNMENT

NEGOTIATION Consideration is presumed The title of transferee is better than transferee ASSIGNMENT Consideration must be proved Title of transferee depends on title of transferor.

Notice to debtor is not necessary

Instrument payable can be negotiated by mere delivery.

Until debtor gets notice, assignment has no value

The assignment notice has to be in writing

PRESENTMENT
Presentment for acceptance (B/E) Presentment for sight (P/N) Presentment for payment

PRESENTMENT FOR ACCEPTANCE

Acceptance must be written on the bill. It must be signed by drawee (personally or through authorized agent) The accepted bill must be delivered to holder.

PRESENTMENT FOR SIGHT

No acceptance needed for Promissory Note. If the P/N payable at a certain period after sight, it should be presented for sight.

PRESENTMENT FOR PAYMENT

The negotiable instrument should be presented (to the maker in case of P/N, to the acceptor for B/E, to the bank for cheque or draft) for payment, failing he is not liable for payment.
(Presentment will not be necessary, only if the payable at the place of maker and it is closed, or drawer/payee intentionally prevents presentment, if the concerned parties are not present at the specified time and place, acceptor exonerates or when presentment is waived.)

DISHONOUR NOTICE
If the drawee/acceptor fails to make payment on presentment, it is called dishonour. In case of dishonour, the payee should give notice to endorser/drawer(i.e. earlier party) written or not, but clear and unambiguous, within reasonable time (by the next day)and manner.

DISHONOUR NOTICE EXCUSED

Notice can be excused if (i) dispensed with by parties,
(ii)if it is countermanded by any, (to him) (iii)when no damage by dishonour, (iv)when the party to whom notice tobe given is not found, When the payee is acceptor of his bill(mutual) If P/N has become not negotiable In case of novation (replacement)

DISHONOUR OF CHEQUE
When a cheque is dishonoured for insufficiency of funds, the drawer is punishable with imprisonment up to two years or with a fine up to twice the amount of the cheque or both, if the following eight conditions are satisfied: i) Dishonoured for insufficiency of funds; ii) payment is for a legal liability; iii) payee is a holder-in-due-course;

DISHONOUR OF CHEQUE.
iv) presented within its validity of time; v) the payee should have given a notice demanding payment within 30 days of information of dishonour; vi) the drawer fails to pay within 15 days of such notice; vii) the payee should have made a complain within one month of cause of action.

DISHONOUR OF CHEQUE.
The holder of the cheque is presumed to be holder-in-due-course, unless otherwise proved. The drawer has no defense that he had no reason to believe that the funds are insufficient. In case of a company or firm or AOP, all the responsible persons are jointly and severally liable alongwith the company/firm/AOP unless otherwise proved.

DISCHARGE OF NEGOTIABLE INSTRUMENTS

i) ii) iii) iv) v) By payment in due course i.e. paid properly when presented by payee who is holder-in-due-course. By party primarily liable becoming holder drawer becomes the payee. When the holder renounces his rights absolutely and unconditionally in writing, after maturity. When it is cancelled by holder, by disfiguring or destroying the instrument. By novation, rescission, or by expiry of time.

DISCHARGE OF PARTIES
i) By Payment; ii) By Cancellation or Release (Holder
cancels/reseases the name of one party from instrument) ;

iii) If drawee is allowed more than 48 hours to accept; iv) Non-presentment of cheque; v) When cheque is paid in due course, when endorsed;

DISCHARGE OF PARTIES.
vi) Sans-recourse endorsements; vii) By operation of law : a) By order of insolvency b)By merger into judgment debt c)By lapse of time viii)By material alteration ix) By payment of altered instrument.

MATERIAL ALTERATION (sections 20, 49, 87, 89, 125)

Alters the character or identity of instrument; Changes the rights and liabilities of any of the parties; Alters the operation of the instrument.
Eg: the date, the sum payable, time of payment, place of payment, addition of place of payment, the rate of interest If the alteration is with consent of all concerned, then it is not rendered defective.