INTRODUCTION

‘Instrument ‘ means any written document by which a right is created in favour of some person.

“negotiable” – means whereby rights in an instrument can be transferred by one person to another

CONTD-

Thus, a negotiable instrument is a document by which rights vested in a person can be transferred to another person in accordance with the provisions of the Negotiable instruments Act 1881

NEGOTIABLE INSTRUMENTS

ORIGIN : In the year 1881.SCOPE : Applicable in entire India except

the State of Jammu & Kashmir.Applicability: Deals with law relating to

three specific instruments, viz. Promissory note, Bill of exchange and cheque.

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.

S 13

A negotiable instrument means a promissory note, a bill of exchange or a cheque payable either to order or to the bearer, whether the words ‘order’ or ’bearer’ appear on the instrument or not

Kinds of negotiable instrument

Negotiable instrument Negotiable

instrumentBy STATUTE . By custom or usage 1) Promissory note. 1) Bank draft. 2) Bill of exchange. 2) Pay orders. 3) Cheque. 3) Hundies. 4) Delivery orderNot negotiable instruments: Share certificate,

bill of lading, postal order

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

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.

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.

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.

A negotiable instrument can be transferred infinitum, ie, can be transferred any number of times till maturity.

PRE- SUMPTION OF 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.

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

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”.

.

PARTIES

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 favour the note is endorsed is called the Endorsee

ESSENTIALS OF THE PROMISSORY NOTES

1. It must be in writing .2. It must contain a promise or undertaking to pay a

definite sum of money.3. The promise to pay must be unconditional.4. It must be signed by the maker. 5. The payee must be identified & must be certain.6. The sum payable must be certain.7. The amount payable must be in legal tender in

money of India.8. Other formalities – like date, place ,& stamp must

be mentioned.

EXAMPLE

a) I promise to pay Ram or order Rs.2000{PN}b) I acknowledge myself to be indebted to

Shiva in Rs.5000 to be paid on demand, for value received.{pn}

c) I am liable to Arnold Rs.3000 {Not PN}d) I have taken Rs.10000 from John to whom I

am accountable for the same with interest. {Not PN}

b) I promise to pay Rs.10000 to George seven days after his marriage with Julie. {Not PN}

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

BILL OF EXCHANGE

Sec.5 :“A bill of exchange is an instrument in writing containing anUnconditional order signed by the maker directing a certainperson 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

DRAWER: The person who makes the bill of exchange is called drawer.

DRAWEE: The person who is directed to pay is called drawee.

PAYEE: The person to whom the payment is to be made is called payee.

ACCEPTOR: When the drawee accepts the bill is called acceptor.

FORMAT OF BILL OF EXCHANGE

Rs. 500 Greater Noida,21 Feb.2009Three 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

ESSENTIALS FEATURES OF BILL OF EXCHANGE:

1. It must be in writing.2. It must contain an order to pay a definite sum

of money.3. The order to pay must be unconditional.4. It must be signed by the drawer (who draw

money).5. The drawer, the drawee &the payee must be

identified & must be certain.6. The sum payable must be certain.7. The bill must contain an order to pay the

money in legal tender in India.8. It must contain the formalities like date, place

& stamp etc.

CHEQUE

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.

FORMAT OF CHEQUE

No.…….. Date………..2010

Pay…………………………………………………………or

bearer the sum of Rs…………………………………

Rs………………… A/c No LF No Sd/- PUNJAB NATIONAL BANK Subzi Mandi,Delhi -110007 “5777100” 111013035”

PARTIES

DRAWER: The person who makes a cheque is called Drawer.

DRAWEE: The person who is directed to pay is called Drawee.

PAYEE: The person to whom the payment is to be made.

ESSENTIAL FEATURES OF CHEQUE:

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

2. It always payable on demand.3. A cheque can be bearer, order or crossed.4. The drawee, that is, the banker named must honour the

cheque by making payment to the payee when the cheque is presented for payment to the banker at his office during the usual office hours, provided the cheque is properly and validly drawn and the drawer has sufficient funds to his credit.

5. The signature on the cheque must tally with the specimen signature of the concerned drawer.

6. A cheque must be dated.

CROSSING OF CHEQUES

CHEQUE 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].

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.

HOLDER

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.

HOLDER

1) 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.

HOLDER IN DUE COURSE

Sec.9Any person who for consideration becomes the possessor

of the promissory note, B.O.E or Cheque before the amount mentioned 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.

WHEN DOES A PERSON BECOMES A HOLDER 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.

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.

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).

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.

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 .

DIFFERENCE BETWEEN HOLDER AND HOLDER IN DUE COURSE

A holder can obtain an instrument without consideration

If an instrument is inchoate, a holder of such instrument cannot get good title in the instrument

A holder need not bother about the defect, if any in the title of the instrument

Obtains an instrument with consideration and for value.

Holder in due course acquires a good title even if the instrument is inchoate.

Holder in due course who acquires an instrument knowingly the defect of the title.

NEGOTIATION

Method of transfer An 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.

Negotiation by delivery Negotiation by endorsement and delivery

CONTD-

Meaning of endorsement – An endorsement means signing the negotiable instrument on the back of ,or face thereof or, or on a slip of paper annexed thereto

PRESENTMENT

Presentment for Acceptance (required only in case of BOE)

Presentment for payment Presentment made to the drawee. Must be made before the date of

maturity

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. Dishonour by non payment Dishonour by non acceptance

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.

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.

NOTING

When 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

PROTEST

Protest 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.

DISCHARGE FROM LIABILITY

By payment By cancellation By release By non-presentment for acceptance

of a bill of exchange By material alteration

BANKER AND CUSTOMER

No statutory definition of banker NI Act defines a banker as any person

acting as a banker Customer – A person becomes a

customer of a bank when the latter agrees to open an account with the former. Thus, a customer is a person who has some sort of account with the banker. The duration of relationship is immaterial.

OBLIGATIONS OF A BANKER

To honour cheques. To keep a proper record of the

transactions. To abide by the instructions given by

the customer To not disclose the state of his

customer’s account or affairs To claim interest on money lent

PROTECTION GRANTED TO BANKER

Protection of paying banker – where a cheque payable to order purports

to be indorsed by or on behalf of the payee, the drawee is discharged by payment in due course.

Where a cheque is originally expressed to be payable to a bearer, the drawee is discharged by payment in due course to the bearer thereof

CONTD-

Protection of collecting banker – A banker who has in good faith received payment for a customer’s crossed cheque ,does not incur liability , later if it is found that the title is defective

CAMPUS OVERVIEW

907/A Uvarshad, GandhinagarHighway, Ahmedabad – 382422.

Ahmedabad Kolkata

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Mumbai

Goldline Business Centre Linkway Estate, Next to Chincholi Fire Brigade, Malad (West), Mumbai – 400 064.

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