NegotiableNegotiable Instruments Instruments Act 1881 Act 1881

1Negotiable Instruments Act 1881

Negotiable instruments

2Negotiable Instruments Act 1881

MEANING MEANING

There are certain documents which are freely used in commercial transactions and monetary dealings. These documents, if they satisfy certain conditions are known as “Negotiable Instruments.”

A Negotiable instrument is a method of transferring a debt from one person to another.

The word negotiable means “transferable from one

person to another in return for consideration ” and instrument means “a written document by which a right is created in favour of some person.”

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Characteristics Of a Negotiable Characteristics Of a Negotiable InstrumentInstrument

1) Freely transferable: The property in a negotiable, instrument passes from one person to another by a simple process, i.e., by mere delivery if it is payable to bearer, and by indorsement and delivery if it is payable to order.

2) Holder’s title free from all defects: The holder in due course (one who acquires the instrument in good faith and for consideration) gets it free from all defects.

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Contd -Contd -Example S sells certain goods to B.

B gives a promissory note to S for the price. He refuses to pay the promissory note, claiming that the goods are not according to order. If S sues B on the note , B’s defence is good. But if he negotiates the note to H, a holder in due course, B’s defence will be of no avail.

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Contd -Contd -Recovery: He can sue upon the instrument

in his own name.

The transferee of the instrument need not give notice of transfer to the party liable to pay.

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Pre- sumption as to Negotiable Instrument

Until the contrary is proved, the following presumptions shall be made. (sec 118 & 119).

N.I was made, drawn, accepted, indorsed or transferred for consideration.

NI Bearing a date was made or drawn on that particular date only.

B.O.E was accepted within a reasonable time after its date & before its maturity.

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Contd -Contd - Transfer of a N.I were made in order in which they

appear. It is presumed that a lost negotiable instrument is

duly stamped. Holder of a negotiable instrument is a holder in due

course except the case where the instrument has been obtained by fraud

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Kinds of negotiable instrument

Negotiable instrument Negotiable instrument

By STATUTE . By custom or usage

1) Promissory note. 1) Bank draft.

2) Bill of exchange. 2) Pay orders.

3) Cheque. 3) Hundies.

4) Delivery order

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Promissory Note Promissory Note

Sec.4 “ A 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”.

.

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PartiesParties

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Essentials Of The Promissory NotesEssentials Of The Promissory Notes

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FORMAT OF PROMISSORY NOTE

Rs. 1,000 Delhi,February10,2009

Three months after date I promise to pay Shyam or

order the sum of one thousand rupees, for value received.

To,

Shyam

222, Ashok Vihar

Delhi-110052

Stamp

Sd/-Ram

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Bill Of ExchangeBill Of Exchange

Sec.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 the order of a certain person or to the bearer of the instrument.”

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PartiesParties

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FORMAT OF BILL OF EXCHANGEFORMAT OF BILL OF EXCHANGE

Rs. 500 Greater Noida,21 Feb.2009

Three months after the date pay to Ram or order the sum of Five Hundred rupees , for value received.

To,

Shyam

235,Subhash marg

delhi-110006.

In case of need with Accepted

Canara Bank, Delhi Shyam Sd/-

Stamp

Krishna

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Bill of exchange Promissory Note

There are three parties – drawer, drawee and payee.

It contains an unconditional order given by a creditor to a debtor.

The liability of the drawer is secondary and conditional

It requires acceptance to become a valuable instrument

There are two parties –maker and payee

It contains an unconditional promise given by a debtor to a creditor

The liability of the maker is primary and absolute

The liability of the maker is primary and absolute

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CHEQUECHEQUE

Sec.6 :

“ A cheque is a bill of exchange drawn on a specified banker & not expense to be payable on a specified banker & not expense to be payable otherwise than on demand & it includes the electronic image Of a truncated cheque & a cheque in the electronic form.

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PartiesParties

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Essential Features Of Cheque:Essential Features Of Cheque:

1. It is always drawn by a bank & not by any other institutions.

2. It always payable on demand.

3. It does not require an acceptance.

4. It does not require a stamp.

5. It can be crossed.

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FORMAT OF CHEQUE

NO…….. Date………..2009

PUNJAB NATIONAL BANK

Subzi Mandi,Delhi -110007

Pay…………………………………………………………or bearer the sum of Rs…………………………………

Rs…………………

A/c No Sd/-

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Crossing of chequesCrossing of chequesCHEQUE CROSSED GENERALLY - Where a

cheque bears across its face an addition of the words “and company” or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words “not negotiable”, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally. [section 123]

CHEQUE CROSSED SPECIALLY - Where a cheque bears across its face an addition of the name of a banker,either with or without the words “not negotiable”, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker. [section 124].

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Contd -Contd - PAYMENT OF CHEQUE CROSSED GENERALLY OR

SPECIALLY - Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker.  Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent for collection. [section 126].

CHEQUE BEARING “NOT NEGOTIABLE” - A person taking a cheque crossed generally or specially, bearing in  either case the words “not negotiable”, shall not have, and shall not be capable of giving, a better title to the cheque than the person from whom he took it had. [section 130].

Thus, mere writing words ‘Not negotiable’ does not mean that the cheque is not transferable. It is still transferable, but the transferee cannot get title better than what transferor had.

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HOLDERHOLDER

Sec.8 The Holder of a Promissory note, B.O.E or

CHEQUE means any person entitled in his own name to the possession thereof, and to receive or recover the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.

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HolderHolder1) The person must be entitled to receive payment or

receive the amount by filling a suit in his own name against other parties to negotiate the instrument giving a valid discharge.

2) In case instrument is lost from the person who was entitled to receive the payment, the subsequent finder does not become it’s owner. Only the person who was entitled to receive the payment initially is the real owner.

3) The person must have a legal right to possess the instrument in his own name.

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HOLDER IN DUE COURSEHOLDER IN DUE COURSE

Sec.9Any person who for consideration becomes the

possessor of the promissory note, B.O.E or Cheque before the amount mention in it becomes payable & without having sufficient cause to believe that any defect existed in the title of the person from whom he derives his title.

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When does a person becomes a When does a person becomes a Holder in due courseHolder in due course

Before the amount mentioned in the instrument becomes payable.

1) Without having sufficient cause to believe that any defect exists in the title of the person from whom, he derives his title

2) He becomes a possessor of a promissory note, b.o.e or cheque .

3) If it is payable to the bearer.4) Consideration has passed from him.

Illustration:- A is a payee for a valuable consideration of a bill payable to order. He gets this instrument from B without knowledge of any defect in B’s title & its maturity.

In this e g. A is a holder in due course.

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Contd -Contd -A holder of a negotiable instrument will not be a

holder in due course if:-

a) he has obtained the instrument by gift or by illegal method.

b) he has obtained the instrument after its maturity.

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Privileges of Holder in due course

1)Inchoate stamped instrument: A person, who has signed & delivered to another a stamped but otherwise inchoate instrument , is precluded from asserting, as against a holder in due course, that the instrument has not been filled in accordance with the authority given by him, the stamp being sufficient to cover the amount(sec.20).

2) Liability of prior parties: Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied (sec.36).

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Contd -Contd -

3) Fictitious payee: Where a bill is drawn payable to the drawer’s order in fictitious name & is indorsed in the same hand as the drawer’s signature, the acceptor is not relieved from liability to any other holder in due course, on the plea that the drawer is fictitious(sec.42).

4) Conditional delivery: If a bill or not is negotiated to a holder in due course, the other parties to the instrument cannot avoid liability on the ground that the delivery of the instrument was conditional or for a special purpose only.

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Contd -Contd -

5) Instrument cleansed of all defects: Once a negotiable instrument passes through the hands of a holder in due course, it gets cleansed of its defects provided the holder was himself not a party to the fraud or illegality which affected the instrument in some stage of its journey. Thus any defect in the title of the transferor will not affect the rights of the holder in due course even if he had knowledge of the prior defect provided he himself is not a party to the fraud.

Example: A, by fraud, induces B to make a promissory note in his favour. He indorses the note to C, who take it as a holder in due course. C subsequently indorses the note to A, for value. A cannot sue B on the note as he himself is a party to the fraud .

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NegotiationNegotiationMethod of transferAn instrument is said to be negotiated

when a promissory note,BOE,cheque is transferred to any person so as to constitute that person the holder of the instrument

Transfer with an intention to transfer the title of the instrument.

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PresentmentPresentmentPresentment for Acceptance (required

only in case of BOE) Presentment for paymentPresentment made to the drawee.Must be made before the date of

maturity

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Dishonour (s 92)A negotiable instrument is said to be

dishonoured by non-payment when the maker, acceptor or drawee, as the case maybe makes default in payment upon being duly required to pay the same.

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Bouncing of cheques (s 138- s142)Bouncing of cheques (s 138- s142)

A cheque is said to be bounced or dishonored by non-payment when the drawer of the cheque makes default in the payment upon being duly required by the same.

If a cheque is dishonoured even when presented before expiry of 6 months, the payee or holder in due course is required to give notice to drawer of cheque within 30 days from receiving information from bank..

The drawer should make payment within 15 days of receipt of notice.

If he does not pay within 15 days, the payee has to lodge a complaint with Metropolitan Magistrate or Judicial Magistrate of First Class, against drawer within one month from the last day on which drawer should have paid the amount.

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Contd -Contd -The penalty can be upto two years imprisonment or

fine upto twice the amount of cheque or both.  The offence can be tried summarily. Notice can be sent to drawer by speed post or courier.  Offence is compoundable.

It must be noted that even if penalty is imposed on drawer, he is still liable to make payment of the cheque which was dishonoured. Thus, the fine/imprisonment is in addition to his liability to make payment of the cheque.

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NotingNotingWhen a cheque is dishonoured

generally the bank who refuses payment returns back the cheque gives reasons in writing for the dishonour of the cheque.

Noting◦The holder cause such dishonour to be noted

by a notary public upon the instrument or upon a paper attached thereto or partly upon each

◦Noting consists in recording the fact of dishonour by notary public

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ProtestProtestProtest is a formal certificate issued

by the notary public certifying the dishonour of the bill or note.

It has to be done within a reasonable period of time.

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Discharge from liabilityDischarge from liabilityBy paymentBy cancellationBy releaseBy non-presentment for acceptance of

a bill of exchangeBy material alteration

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Presumptions as to negotiable Presumptions as to negotiable instrumentsinstruments

Until the contrary is proved, the following presumptions shall be made :—

(a) of consideration - that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, negotiated or transferred, was accepted, negotiated or transferred for consideration;

(b) as to date - that every negotiable instrument bearing a date was drawn on such date;

(c) as to time of acceptance - that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity; 

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ContdContd(d) as to time of transfer - - that every

transfer of a negotiable instrument was made before its maturity;

(e) as to order of indorsements - that the indorsements appearing upon a negotiable instrument were made in the order in which they appear thereon;

(f) as to stamps - that a lost promissory note, bill of exchange or cheque was duly stamped

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Contd -Contd -(g) that holder is a holder in due course -

that the holder of a negotiable instrument is a holder in due course: provided  that, where the instrument has been obtained from its lawful owner, or from any person in lawful custody thereof, by means of an offence or fraud, or has been obtained from the maker or acceptor thereof by means of an offence or fraud, or for unlawful consideration, the burden of proving that the holder in due course lies upon him. [section 118]

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AssignmentAssignmentAn instrument is said to be assigned

when a negotiable instrument is transferred by means of a written and registered document under the provisions of the Transfer of Property Act 1882.

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EndorsementEndorsementThe process of transferring of an

instrument is called an endorsement.An endorsement means signing the

negotiable instrument on the back or face thereof or on slip of paper annexed therto by the holder of negotiable instrument for the purpose of negotiation.

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