Law Of Negotiable Instruments 301e54

Negotiable Instruments Act,1881

Law of Negotiable Instruments In business dealings, all the transactions do not take place in of money. Due to many reasons, business men adopted a new method of exchanging documents ( such as bills of exchange, cheques, DD etc. ) Documents used as substitute for money are called negotiable instruments (NI).

The law relating to Negotiable Instruments is contained in the NI acts of 1881.It extends to the whole of India

Definition of a negotiable instrument The word negotiable means “transferable by delivery”

Instrument means “ a written document in which a right is created in favour of some person. “a written document transferrable by delivery” Written promise or order to pay money which may be transferred from one hand to another as a substitute for

money.

It is a piece of paper which entitles a person to a sum of money mentioned in it, and which is freely transferable from person to person. It is transferred by: Mere delivery or Endorsement and delivery section 13 of NI Act: “ A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer”

(a) Payable to order: A bill , note or cheque is payable to order which is expressed to be payable to a particular person or his order. E.g: Pay A, Pay A or order - It should not contain any words prohibiting transfer E.g: Pay to A only (b) Payable to bearer: Payable to any person whosoever bears it

Note: NI should be freely transferable A person to whom the NI is transferred becomes entitled to get the money mentioned in it, notwithstanding the defective title in the person who transferred it. But, he should get instrument in good faith and for consideration

Essential characteristics of negotiable instrument 1.Easily Negotiability 2.Transferee can sue in his own name without giving notice to the debtor. 3.Better title to a bonafide transferee for value

4.Presumptions

7

Presumptions of negotiable instruments 1.That every negotiable instrument was drawn, accepted and endorsed, made or transferred for consideration 2. That the date it bears is the date on which it was made. 3.That it was accepted with in a reasonable time after being made and before maturity. 4.That every transaction was made before maturity. 5.That the endorsements were made in the same order in which they appear. 6.That the lost instrument was duly signed and stamped.

Reserve Bank of India- Provisions 1.No person in India other than RBI or central Government can

make or issue a promissory note payable to bearer . 2. No person in India other than RBI or central Government can draw or accept a bill of exchange payable to bearer on demand 3.A cheque payable to bearer on demand can be drawn on a person’s with a banker.

The effects of provision 1. A promissory note cannot be originally made payable to bearer, no matter whether it is payable on demand or after a certain time. It must be made payable to the order initially. 2. A Bill of exchange may be originally made payable to bearer 3. A cheque drawn on a bank can be originally made payable to the bearer on demand.

Promissory note(PN) Definition: “ 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”.

- The person who makes promise to pay is called the maker - The person to whom payment is to be made is called the payee(creditor).

Negotiable instrument in writing containing an unconditional promise by one person to pay a certain sum of money to a specified person. Specimen: Bangalore Feb 24, 2012 Three months after date, I promise to pay Mr. Ramesh the sum of Rs.1000/=( Rs. One thousand only) for value received.

Signature (Mr. Girish)

Essentials 1.

It must be in writing

2.

It must contain an express promise to pay

3.

The promise to pay must be unconditional

4.

It must be signed by the maker

5.

The maker must be a certain person

6.

The payee must be certain

7.

The sum payable must be certain

8.

The amount payable must be in legal tender money of India

9.

Other formalities

Bills of Exchange(BOE) According to the Act “ 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.”

Parties: - Drawer- person who makes the bill - Drawee-person who is directed to pay - Payee- the person to whom the payment is to be made.

Specimen: Bangalore Feb 24, 2012 Three months after date pay to Mr. Suresh or order the sum of Rs. 1000/= ( Rs. One thousand ), for value received. To Mr. Gowrish

Signature (Mr.Ramesh)

Essentials 1. 2. 3. 4. 5. 6. 7. 8.

It must be in writing It must contain express order to pay The order to pay must be unconditional It must be signed by the drawer The drawer, drawee and payee must be certain The sum payable must be certain It must contain an order to pay money only Other formalities

Special benefits of BOE 1.A BOE is a double secured instrument

2.In case of immediate need of money, a bill can be discounted with a bank by the payee 3.Two separate trade debts can be discharged by a BOE

Cheque A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. It is NI, in writing which contains an unconditional order directing a specified banker to pay a certain sum of money to the bearer of the instrument or to a specified person .

Essentials: 1. It must have all the essentials of B/E 2. It must be drawn on a specified banker 3. It must be payable on demand 4.A cheque may be written on a paper or it may be in the electronic form.

Bank draft Is an order issued by one bank on another bank or on its own

branch instructing the latter to pay a specified sum of money to a specified person or his order.

Difference btw cheque & BOE 1.A cheque is always drawn on the banker, while a bill may be

drawn on any person , including a banker 2.A cheque can only be drawn payable on demand, bill can be drawn payable on demand or after the expiry of a certain period after sight 3.A cheque payable to bearer on demand is valid, bill payable to

bearer on demand is void

4.A cheque does not require any acceptance by the drawee before payment can be demanded. Bill requires acceptance

5.A cheque does not require any stamp , BOE must be properly stamped 6. Three days of grace allowed for bill, not for cheque 7.Unlike cheques, a bill cannot be crossed.

Crossing of a cheque: • A crossed check is payable only through a collecting banker and not directly at the counter of the bank. Types of crossing: • 1.General-where the cheque bears a cross on its face, two

transverse parallel lines with or without words like “not negotiable”, and company etc. • 2.Special-where cheque bears across its face an addition of the name of banker, either with or without words, “not negotiable” etc.

Non negotiable crossing (sec. 130): • The effect of the words “not negotiable” on a crossed cheque is

that the title of the transferee of such a cheque cannot be better than that of its transferor

Bouncing of the cheque: • A drawer of the bounced cheque shall be deemed to have committed an offence. • The court have held the following amounting to dishonor for insufficient funds: Stop payment instruction to the payee bank. Request Payee to not to present the cheque till further intimation. The cheque received from the payee bank with the remarks closed. Cheque should be presented within validity. The cheque was issued for the discharge of legally enforceable debt

Conti… The payee is to give notice regarding payment within 30

days. The drawer is liable only if he fails to pay within the 15 days of such notice period.

The written complaint to the judicial magistrate of first class is made within one month of cause of action arised.

Parties to a NI 1. Parties to PN a. Maker b. Payee c. Holder d. Endorser e. Endorsee 2. Parties to B/E a. Drawer : The maker of a bill of exchange or cheque b. Drawee : The person thereby directed to pay

c. Payee The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the "payee". d. Holder e. Indorser f. Indorsee 3.Parties to a cheque Drawer Drawee

Negotiation of NI Transfer of a NI is known as negotiation.

Negotiation: When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute the person the

holder thereof, the instrument is said to be negotiated

Modes of negotiation We know that NIs are of two types: namely (a) bearer instruments (b) order instruments. Accordingly, two modes of negotiation 1. 2.

Negotiation by delivery Negotiation by endorsement and delivery

1.Negotiation by delivery: NI payable to bearer can be transferred by mere delivery but  It must actually be delivered and  The delivery must be voluntary Illustration (a) A, the holder of a negotiable instrument payable to bearer, delivers it to B's agent to keep for B. The instrument has been negotiated.

2.Negotiation by endors0ement and delivery : If NI is payable to a particular person or his order Two formalities required: 1. The holder must endorse the NI i.e. he must sign his name on the instrument 2. The duly signed instrument must be delivered to the transferee ( endorsee)

Kinds of delivery 1. Actual delivery : Instrument changes hands physically 2. Constructive delivery: Instrument is delivered to an agent, clerk or servant of the transferee who holds it on behalf of T. 3. Conditional delivery : Delivery which is effective on the fulfillment of certain condition or delivery for a special purpose

Presentment of NI The money due on the instrument can be received only after presenting NI to the parties liable for payment It is a process of presenting or placing the instrument before the maker, acceptor or drawee

Presentment of a NI is required for any one of the following purposes: 1. Presentment for acceptance 2. Presentment for sight 3. Presentment for payment

 Presentment for acceptance is required in case of BoE only  Presentment for sight only in case of PN  But, presentment for payment is necessary in all kinds of NI

1.Presentment of a BoE for acceptance - Required in case of bills of exchange only.

- If the bill is not presented for acceptance, no party is liable to the holder. Acceptance of a bill: The indication by the drawee of his assent to the drawer that he will pay the amount a BoE on due date. Acceptance must be in writing – oral acceptance is not a valid acceptance

The liability of the drawee arises only when the BoE has been validly accepted by him.

Essentials of a valid acceptance: 1.

The acceptance must appear on the BoE itself.

2.

The acceptance must be in writing.

3.

The acceptance must be signed by the drawee or his duly authorized agent.

4.

The acceptance must be completed either by delivering the accepted BoE to the holder or by giving notice of acceptance to the holder

Though, in certain cases, it is optional to present the BoE, it is also desirable 1.

In order to obtain additional security

2.

In order to have an immediate right of recourse against the drawer and other parties if the bill is dishonored by non-acceptance

Following types of bill of exchange need not be presented for acceptance 1.

BoE payable on demand

2.

BoE payable on fixed date

3.

BoE payable on fixed number of days after date

Need to be presented 1.

BOE payable at a given time after acceptance or after sight

2.

BOE having express term

that it shall be presented for

acceptance before it is presented for payment

3.

BOE payable at a place other than the place of residence or business of the drawee

Acceptance: When the drawee of the bill signifies his assent in writing to the drawers order in the bill, by g across the face of the bill with or without the word accepted and delivers back the bill to the holder or gives notice 0f acceptance to the holder, the bill

is said to be accepted.

1.

Kinds of acceptance

General acceptance- without any condition or qualification.

2. Qualified or Conditional acceptance : Instances of conditional acceptance a. Acceptance on the happening of an event b. Acceptance of partial amount c. Acceptance for payment at a specified place d. Acceptance for payment at a different time e. Acceptance by some of the drawees only f. Acceptance for payment in installments

Rules regarding the presentment of a BoE for acceptance: 1.

Persons who should present the bill for acceptance : any person who is entitled to demand the acceptance – Holder or his duly authorized agent

2.

Persons to whom the bill should be presented for acceptance : person who can accept the same i.e.



The drawee of a BoE or his duly authorized agent



The t drawees of a BoE



The legal representatives



The official receiver or assignee



The drawee in case of need



The acceptor for honor

3. Time for presentment for acceptance : stated as under a)

Where the time for presentment is specified

b)

Where the time for presentment is not specified

4. Place for presentment for acceptance

a)

Where the place for presentment is specified

b)

Where the place for presentment is not specified

Cases in which presentment for acceptance is excused The holder becomes entitled to recover the amount only when

the bill is duly presented for acceptance and the same is dishonored due to non-acceptance Sometimes excused, and treat the bill as dishonored : cases a)

When, after reasonable search, the drawee cannot be found

b)

When the drawee is a fictitious person or incapable of

contracting c)

When although the presentment is irregular, but acceptance has been refused on some other ground

Drawees time for deliberation • The holder can allow drawee 48 hours ( exclusive of public

holidays) to consider whether he will accept the bill. • The drawee can take time before taking the liability. • If the drawee does not return the accepted bill within 48hours the holder should treat the bill as dishonoured.

2.Presentment for sight: - Is necessary only for a PN , which is made payable at a certain period after sight , so that the maturity of the note may be ascertained. 3.Presentment of NI for payment : After a NI is made ( completed by acceptance or sight, where required) the next stage is that it must be presented for payment to the parties who are primarily liable. Thus, PN, BoE, and cheque must be presented for payment to the maker, acceptor or drawee respectively

Rules regarding the presentment of NI for payment 1.

Persons who should present an instrument for payment : person who can give valid discharge to the debtor

2.

Persons to whom the instrument should be presented for payment

3.

Time for presentment for payment :

a)

Where an instrument is payable after a fixed period of time – note the delay even of a brief period discharges all parties other than maker or acceptor of instrument

b)

Where an instrument is payable on demand : reasonable time – otherwise discharge from liability

c) Where a PN is payable by installments : presented for payment on the third day after the date fixed for payment of each installment – if not paid can be treated as dishonored 4. Place of presentment for payment Effect of non-presentment of NI for payment Then, except party who is primarily liable, all are discharged

Cases in which presentment of NI for payment is unnecessary 1.When presentment is intentionally prevented.

2.Place of business closed 3.Payer absents from place of payment 4.When the payer cannot be found 5.Waiver of presentment 6.Where drawer could not suffer damage.

Dishonour of NI NI may be dishonored in either of the following ways: 1.Due to non-acceptance 2.Due to non-payment 1.Dishonor of NI due to non-acceptance : In the following cases a. Where drawee or one of the several drawees makes default in acceptance upon being duly required to accept the bill. b. Where the presentment for acceptance is excused and the bill is not accepted. c. Where the drawee is incompetent to contract d. Where the drawee makes qualified acceptance e. Drawee cannot be found even after reasonable search.

Dishonor of NI due to non-payment •

PN,BoE,Cheque is said to be dishonoured by nonpayment.

- Notice of dishonor A notice must be given by the holder to all such parties to whom he wants to make liable on the instrument i.e. from whom he wants to recover the amount. -Persons by whom the notice of dishonor should be given: By holder or some other party who is liable on the instrument - party receiving the notice should also give the notice to the previous parties – if in the hands of agent NI is dishonored

- Persons to whom the notice of dishonor should be given : - Exception in the case of cheque – holder cannot make banker liable - To agent , legal representatives – If death information is not known and notice is given. Notice of dishonor is not necessary to the maker of PN and to the drawee or acceptor of BoE and cheque - Mode of giving notice of dishonor : oral or written - Time of giving notice of dishonor

Effect of default in giving notice of dishonor All who are entitled to require notice are discharged from their liability Cases in which notice of dishonor is excused ( page no 384-385 M C Kuchhal) 1.Notice of dishonour waived off 2.Drawer of a cheque has countermanded payment 3.Where the drawer has closed his with the bank 4.Party entitled to notice cannot be found 5.When the drawer also happens to be the acceptor 6.Party promises to pay unconditionally without the notice, the full amount due on the instrument

Discharge of the instrument and the parties Party’s liability on the instrument coming to an end - However

Discharge in relation to NI has two meanings 1. Discharge of the NI 2. Discharge of one or more parties from their liability on the NI 1.Discharge of NI : - No person related with the instrument has any further claim - Happens when the party who is primarily liable, is discharged from his liability

Ways in which NI is discharged: 1.

By payment in due course

2.

By the primarily liable party becoming the holder of the instrument

3.

By renunciation of the rights by the holder

4.

By cancellation of the NI

5.

By discharge as a simple contract

2.Discharge of one or more parties from their liability on the NI   

Note: NI is said to be discharged only if all the parties to a NI are discharged Otherwise, it is only a discharge of some of the parties and NI continues to be negotiable Amount can be recovered from the undischarged parties

A party may be discharged in any one of the following ways 1. By cancellation of the name of a party 2.By release of a party 3.By payment 4.By allowing the drawee more than 48 hours to accept the BoE 5.By taking qualified acceptance 6.By not giving notice of dishonour 7.By non-presentment of a BoE for acceptance 8.By delay in presenting a cheque for payment 9.By material alteration 10.By negotiation back of bill.