Kothari Shiv, Ahmedabad

Introduction Negotiable Instrument Characteristics Presumptions Kinds

Promissory Notes Bills of Exchange Cheques

Holder Negotiation Endorsement Presentment Noting Protest Dishonour of Negotiable Instruments

For a commercial transactions, it is always not possible for a businessman to carry huge cash. Businessman, therefore adopt a new method of exchanging documents as Bills of Exchange, Cheques etc, in place of money. These documents, which are used as a substitution for money are known as negotiable instruments. It came into force on 08-031882. it extends to whole of India.

The word negotiable means transferable by delivery and instrument means a written document by which a right is created in favor of some person or persons. The term negotiable instrument literally means a written document which creates a right in favor of somebody and is freely transferable. According to act a negotiable instrument means a :
  

A promissory Note, Bill of exchange, Cheques payable either to order or to bearer.

Judge will defines a negotiable instrument as : One, the property in which is acquired by anyone who takes it bonafide for value not withstanding any defect of title in the person from whom he took it.

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

In writing, Signed by the maker, Promise or order to pay, Promise/order should be unconditional, Payment in terms of money, Payable at certain time, Free transferability or easy negotiability Title of holder is free from all defects

 Of

consideration As to Date As to time of Acceptance As to time of Endorsements As to stamps As to holder in due course(holder of NI is holder in due course As to time of transfer As to Proof

Bearer Instruments- payable to bearer Order Instruments- expressed to be payable to order Inland Instruments- drawn and made in India upon any person resident in India, even though payable in a foreign country Foreign Instruments- Not an Inland Instrument, must be drawn outside India and made payable outside or inside India Demand Instruments- Time for payment is specified in PN and BOE/ payable at sight Ambiguous Instruments- which can be treated as PN or BOE by the holder

Inchoate or incomplete instruments- when the person signs and delivers a instruments which is wholly blank or incomplete and gives the authority to make it complete to the holder Accommodation Bills- A bill drawn , accepted or endorsed without consideration
Party lending his name to oblige to the other party is Accommodating or accommodation party The party so obliged is called the party accommodated

Trade Bills- When a bill is drawn, accepted or endorsed for consideration it is called a genuine trade bill Escrow- When the NI is delivered conditionally or for special purpose as a collateral security or for safe coustody only and not for transferring the absolutely.

Negotiable instrument are of two kinds: Negotiable by statute:

Promissory Notes Bill of Exchange Cheques

Negotiable by custom or usage:

Hundis Treasury bills Draft Share warrants Bearer warrants Bearer debentures Bank Notes Exchequer Bills Share Certificates

According to the act a promissory note is  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 the bearer of the instrument.  Bank notes and currency motes are not treated as promissory notes.  The words or to the bearer of the instrument are inoperative in view of the provisions of RBI which prohibits the issue of PN payable to bearer by anybody other than RBI and the Central Govt of India.

1) 2) 3) 4) 5) 6) 7) 8) 9)

It must be in writing. It must contain a promise or undertaking to pay. The promise to pay is unconditional. It must be signed by the maker. The maker must be a certain person. The payee must be certain. The amount payable must be legal. Proper stamping must be there. Other formalities like number, date, consideration, place etc. are generally found in the promissory notes but they are not essential in law.

Rs. 5000/-

Pune November 30,2011

Three moths after the date, I promise to pay Mr. X of Mumbai or order a sum of Rupees Fifty Thousand for value received. To Mr. Address.. Stamp Ahmedabad Signature of Mr Y

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 to Bill of Exchange: i. Drawer: The person who draws bills of exchange. ii. Drawee: The person on whom BOE is drawn also called acceptor. iii. Payee:The person named in the instrument to whom or to whose order the money is directed.

September 4, 2011 Rs 10,000/- only Three months after the date pay to Alok Singh (Payee) or order the sum of rupees Ten Thousand for value received.

To Alok Singh R-2/55, Raj Nagar, Meerut

Accepted s/d Alok Singh (Drawee/Acceptor Drawee/Acceptor

Arun Kumar (Drawer)

In a PN there are only two partiesmaker and the payee It contains an unconditional promise by the maker to the payee No acceptance is necessary The liability of the maker or drawer is primary and absolute The maker stands in immediate relationship with the payee No notice of dishonor need to be given.

In a BOE, there are three partiesdrawer, the drawee and the payee It contains an unconditional order to the drawee or his agent to pay according to the drawers directions. A bill has to be accepted if it is a bill payable after sight The liability of the drawer secondary i.e. when there is non payment by the drawee. Notice of dishonor to be given by the holder to the drawer The maker and the drawee do not stand in immediate relationship.

According to the Act A cheque is a BOE drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. Explanation:  a cheque in electronic form means a cheque which contains the exact mirror of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature.  a truncated cheque means a cheque which is truncated during the course of a clearing circle

 A cheque is a negotiable instrument. It is a bill of exchange. It is always drawn on a specified banker. It is always payable on demand. A cheque can be bearer, order or crossed A cheque requires no acceptance in the ordinary

course of business as it is intended for immediate payment. In case of a cheque, a drawee is always a specified bank, a drawer is a person who draws a cheque and who has an account in the bank ad payee is a person to whom the amount of cheque is made payable.

A cross cheque is payable only through a collecting banker and not directly at the counter of the bank. A cheque is said to be crossed when two parallel transverse lines, with or without any words, are drawn on the left hand top corner of the cheque. Bouncing of Cheque A drawer of a bounce cheque shall be deemed to have committed an offence. For this offence , the punishment provided in the Act imprisonment up to 2 years or with a fine which may extend to twice the amount of the cheque or with both provided the following condition are fulfilled: Cheque have been dishonored due to insufficiency of funds.

a. b. c.

d. e.

The cheque must be presented within its validity. The cheque was issued for the discharge of legally enforceable debt or other liability. The payee is to give notice demanding payment within 30 days from the drawer on receipt of information of bouncing of cheque from the bank. The drawer is liable only if he fails to make payment within 15 days of such notice period. A written complaint to a metropolitan Magistrate or a Judicial Magistrate of the first class is made within 1 month .

In a BOE, there are three parties- drawer, the drawee and the payee It contains an unconditional order to the drawee or his agent to pay according to the drawers directions. A bill has to be accepted if it is a bill payable after sight The liability of the drawer secondary i.e. when there is non payment by the drawee. Notice of dishonor to be given by the holder to the drawer The maker and the drawee do not stand in immediate relationship.

A cheque does not require acceptance and it is intended for immediate payment No days of grace The drawee banker is always a

Delay in presenting does not discharge the drawer from his liability It may be crossed

The holder of a negotiable instrument means any person entitled to the possession of the instrument in his own name and to receive or recover the amount due there on from the parties thereto. Holder in due course: Section 9 A person is called a holder in due course if he satisfies the following conditions:
1. 2. 3. 4.

He must be a holder. He must be the possessor of the instrument. He must have obtained the instrument in good faith. He must receive the instrument complete and regular on the face of it means complete name.

 According

to section 8 of the Act holder of a negotiable instrument means any person

Who is entitled in his own name to the possession of the negotiable instrument and who has also the right to receive or recover the amount due thereon from the parties thereto.

A principal whose name appears on an instrument as the holder though it executed in the name of his agent for him Where a negotiable instrument is a bearer one, any person who is in the possession of such instrument is the holder. Where a negotiable instrument is in the name of a partner of a firm, it naturally becomes a holder as it is not a separate entity from the partner. The endorsee of a cheque is called a holder. If a holder of a negotiable instrument is dead, the heirs of the deceased holder between the holders. A principal on whose behalf a pronote is endorsed in blank and is delivered to his agent, he is a holder of the instrument though his name does not appear on the instrument though is name does not appear on the instrument

A thief or a finder of an instrument is not a holder though he is in possession of an instrument. The word entitled used in the definition of a holder shows that the title of the person who claims to be the holder must be acquired in a lawful manner. A person obtaining the instrument under forgery is not a holder. When the endorsement of a bill is for collection only the endorsee cannot be a holder

Holder in due course means any person who for the consideration becomes the possessor of PN, BOE or a cheque if payable to bearer, or the payee or endorsee thereof, if payable to order, before the amount mentioned in it becomes payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title (section 9). Essentials He must be a holder He must be a holder of valuable consideration

He must become a holder of the negotiable instrument before the date of maturity He must become a holder of the negotiable instrument in good faith:

The HDC should have acquired the instrument any time before the amount became payable. If a person takes the instrument after the day the amount becomes payable, such a person cannot take the place of HDC, and the rights acquired by him are only co-extensive with that of his immediate transferor. The HDC should have acquired the title without notice of the defect in the title

The presumption is that the HDC obtains title to the instrument free from equity. If the instrument is stamped but otherwise inchoate, the person who has signed and delivers is prevented from asserting against the HDC as the stamp in itself is sufficient to cover the amount, though the instrument was incomplete Until the instrument is duly satisfied, every prior party to a NI is liable thereon to a holder in due course.

Cont.

If the bill or note is negotiated to a HDC , then the negotiating parties cannot avoid liability if there was a condition or special purpose attached to it. Once the NI passes through the hands of the HDC, the NI get cleansed of all its defects, provided the holder is not a party to the fraud No defence can be set up against the holder in due course The validity of the instrument as originally made or drawn cannot be denied by the maker/ drawer/ acceptor for honor The endorser cannot deny the signature or capacity to the contract of any prior party to the instrument

Liability of the drawer- the drawer is liable to compensate in case of dishonor by the drawee or acceptor, provided due notice has been given to or received by the drawer. The liability of the drawer in case of bill is secondary in nature. It is the acceptor who is primarily liable to make the payment. By drawing a bill, the drawer undertakes that on presentment of the same to the acceptor, it will be accepted and duly honored and If it is dishonored by the acceptor or not accepted, the drawer will compensate to the holder or the indorser, provided due notice is given to him. The drawer can also limit his or her liability by using the sans recourse endorsement If the holder fails to give notice , then the drawer is not liable and beyond this he is discharged from his/her liability. This is not only with reference to the bill but also upon the original debt.

Cheques to be presented during the usual banking hours. If there is sufficient fund in the customers fund and still the bank does not honor the cheque , it has to fulfill the monetary loss of the customer and also the injury to reputation of the customer. This remedy against the bank is available only to the drawer of the cheque and not the holder of the cheque.

If bank honors a cheque which is forged, the bank cannot get the statutory protection, even if the sign could not be distinguished. The Act provides protection to the drawee bank paying a cheque that carries a forged indorsement. This section applies if the bank pays a cheque that carries a forged indorsement and it is payable to order and it purports to be indorsed by or on behalf of the payee. If the bank on which is drawn , makes the payment in due course, then the bank is discharged from its liability even if the signature of the payee might be forged.

Both the maker and the acceptor are liable to make the payment. The liability of the maker in case of note and acceptor in case the bill is absolute, Unconditional and primary. The liability exists only when he signs and delivers the note But to make the acceptor liable only signature is not enough, it has to be accepted i.e. notice of acceptance should be given and the bill has to be delivered. As the acceptor is not the originator of the bill as in case of the note, the acceptor can have an option to give a qualified acceptance.

Every indorser after dishonor is liable as upon an instrument payable on demand to every subsequent holder. The indorser is in a position of a new drawer and the liability of the indorser is conditional. By endorsing the bill the endorser undertakes that the instrument will be accepted and paid as per the tenor of presentment. If it is dishonored, he will compensate the holder or subsequent indorsers who is compelled to pay for it subject to due notice of dishonor. The indorsers liability as per this provision (sec 35) will not commence until the indorsed instrument is delivered to the transferee. The indorser has to make good the loss but he can make qualified indorsement by using sans recourse indorsement

Every prior party to the indorsement will be liable to the subsequent party until the instrument is duly discharged or satisfied. If the indorser knows that bill was forged, he cannot later deny the liability by pleading forgery as a reason. The indorser cannot challenge the holders title. He will be liable twice. One to the holder and the other to the true owner of the instrument. Acceptor of the bill drawn in fictitious name and payable to the drawers order is not, by reason that such name is fictious, relieved from liability to any holder in due course.

According to the Act: When PN, BOE or Cheque is transferred to any person, so as to constitute that person the holder of the instrument. Thus the essence of the negotiation is that it must be made with the intention of transferring a title of the instrument to the transferee. Modes of Negotiation Negotiation by delivery The negotiable Instrument is transferred by delivery, actual or constructive Negotiation by endorsement and delivery The negotiable Instrument payable to order is negotiable by the holder by endorsement and delivery thereof. Essentials of Negotiation There must be transfer of a negotiable instrument to another person. As a result of such transfer, the transferee must become the holder of the instrument.

Literal meaning of the term endorsement is writing on an instrument.

Endorser - The person who signs on the back or on the face of the instrument or on the slip is an endorser. Endorsee - The person to whom the instrument is endorsed is called the endorsee. General or blank endorsement - Endorser signs his name either on the back or face of the instrument. Full or special endorsement - It specifies the name of the person to whom or to whose order the payment must be made. Partial endorsement Endorsement is made for remaining balance of payment. Conditional endorsement The liability of the endorser is limited or negative.

Types of Endorsement

Presentment means placing negitiable instrument before a drawee for acceptance. Provisions Relating to Presentment:

When presentment is necessary: Where bill is payable after sight, Where a bill expressly stipulates that it shall be presented for acceptance. By Whom: Presentment for acceptance must be made by the person entitled to demand acceptance. To Whom: Presentment must be made to the Drawee of a bill of exchange. Hours and Day for Presentment: Presentment for acceptance must be made during business hours on a business day. Time for Presentment: The bill must be presented for acceptance within a specified time.

Place of presentment: The bill must be presented at a specified place. Drawee time for deliberation Section 63 The holder must, if so required by the drawee of a BOE presented to him allow the Drawee 48 hrs. to consider whether he will accept it When presentment is excused: if the drawee cannot found even after a reasonable search. if the drawee is a fictitious person. If the drawee is incompetent person. Effect of Non Presentment: Where the presentment is essential and not made, all parties liable on the instrument are discharged from the liability on the instrument to the person making such default. Mode of service of presentment:

Noting is a mode of authenticating the fact that a bill or note has been dishonored. Who does Noting:

Noting is done by a person officially designated for this purpose and such person is known as Notary Public. Noting public is appointed by the Central or State govt. The profession of the Notaries is regulated by the Notaries Act 1952.

Procedure and Content of Noting: A dishonored bill is handed over a notary public who presents it again for acceptance and if the drawee or acceptor refuses to accept or pay the bill the notary public records:

The date of dishonor. The Fact of dishonor. The reason Notary charges.

 Protest

is a formal certificate issued by the Notary Public about the dishonor of a bill. Contents of Protest: Sec 100

The instrument shall have everything is in written. The name of person for whom the instrument has been protested. A statement whether accepted or not. The time place of dishonor. The subscription of the Notary Public. The manner of acceptance.

 Negotiable instruments, Promissory notes

and Cheques may be dishonored by non payment Bills of exchange may be dishonored by non payment or by non-acceptance as they require acceptance from drawees.

Discharge of parties a) By cancellation b) Release c) Payment d) If the holder gives more time to the drawee than 48 hours e) by default in presenting the cheque within a reasonable time f) Dissenting parties discharged by qualified or limited acceptance g) Material alteration etc