Negotiable Instruments Act 1881 Negotiable Instruments Act Negotiable Instruments Act 1881

Negotiable instruments ORIGIN : In the year 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. The Act does not apply to Indian Paper Currency Act, Negotiable Instruments Act 1881

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.” 3Negotiable Instruments Act 1881

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. 4Negotiable Instruments Act 1881

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. 5Negotiable Instruments Act 1881

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. 6Negotiable Instruments Act 1881

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. 7Negotiable Instruments Act 1881

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 8Negotiable Instruments Act 1881

Kinds of 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 9Negotiable Instruments Act 1881

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”.. 10Negotiable Instruments Act 1881

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 11Negotiable Instruments Act 1881

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. 12Negotiable Instruments Act 1881

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 Stamp Sd/-Ram 13Negotiable Instruments Act 1881

Bill 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.” 14Negotiable Instruments Act 1881

Parties 15Negotiable Instruments Act 1881

Essentials Features Of Bill Of Exchange: It must be in writing.It must contain an order to pay a definite sum of money.The order to pay must be unconditional.It must be signed by the drawer (who draw money).The drawer, the drawee &the payee must be identified & must be certain.The sum payable must be certain.The bill must contain an order to pay the money in legal tender in India.It must contain the formalities like date, place & stamp etc. 16Negotiable Instruments Act 1881

FORMAT 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 In case of need with Accepted Canara Bank, Delhi Shyam Sd/- Stamp Krishna 17Negotiable Instruments Act 1881

Bill of exchangePromissory 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 18Negotiable Instruments Act 1881

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. 19Negotiable Instruments Act 1881

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. 20Negotiable Instruments Act 1881

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. 21Negotiable Instruments Act 1881

FORMAT OF CHEQUE NO…….. Date……… PUNJAB NATIONAL BANK Subzi Mandi,Delhi Pay…………………………………………………………or bearer the sum of Rs………………………………… Rs………………… A/c No Sd/- 22Negotiable Instruments Act 1881

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]. 23Negotiable Instruments Act 1881

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. 24Negotiable Instruments Act 1881

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. 25Negotiable Instruments Act 1881

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. 26Negotiable Instruments Act 1881

HOLDER IN DUE COURSE Sec.9 Any 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. 27Negotiable Instruments Act 1881

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. 28Negotiable Instruments Act 1881

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. 29Negotiable Instruments Act 1881

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). 30Negotiable Instruments Act 1881

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. 31Negotiable Instruments Act 1881

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. 32Negotiable Instruments Act 1881

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. 33Negotiable Instruments Act 1881

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 34Negotiable Instruments Act 1881

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. 35Negotiable Instruments Act 1881

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. 36Negotiable Instruments Act 1881

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. 37Negotiable Instruments Act 1881

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 38Negotiable Instruments Act 1881

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. 39Negotiable Instruments Act 1881

Discharge from liability By payment By cancellation By release By non-presentment for acceptance of a bill of exchange By material alteration 40Negotiable Instruments Act 1881

Presumptions as to negotiable instruments 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; 41Negotiable Instruments Act 1881

Contd (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 42Negotiable Instruments Act 1881

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] 43Negotiable Instruments Act 1881

Assignment An 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 Negotiable Instruments Act 1881

Endorsement The 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. 45Negotiable Instruments Act 1881