Negotiable Instruments Act 1881 By Prof. K.S.N. SARMA Faculty Member ICFAI Law School ICFAI University HYDERABAD.

2 Meaning of the term ‘Negotiable Instrument’. Negotiable Instrument means: - A written document - which entitles - the bearer or - a person specified therein - to a certain sum of money - on a particular date. The Property in the Instrument is negotiable.

3 What is a Negotiable Instrument? One - the property in which is acquired by any one - who takes it bonafide and - for value – notwithstanding any defect of title in the person from whom he took it. - Wallace (J)

4 From this definition of Wallace, it follows: That an instrument cannot be negotiable unless - it is such and in such a state - that a true owner could transfer the contract or engagement contained therein - by simple delivery of the instrument.

5 POINT – 1. A negotiable instrument is - a chose-in-action - with the feature of negotiability attached to it. It is this feature of negotiability that distinguishes an ordinary chose-in-action from a negotiable instrument. An assignee or a transferee of a chose-in- action cannot claim higher or superior or better title or rights than his transferor -

6 Because – the rule relating to transfer of ownership in goods is nemo dat quod non habet – i.e. No one can convey a better title than what he has. Thus, if a person entitled to a chose-in- action has got a defective title on account of some vitiating element – coercion, fraud or undue influence – the assignee or transferee from him will get a title subject to those defects.

7 But, to this rule – A Negotiable Instrument is an exception. POINT – 1. In the hands of a bonafide holder, for value, a NI would - entitle him to claim all the rights appearing on the face of the instrument - without being affected in the least by the defective title of his transfer.

8 POINT – 2. In order to transfer ownership in a negotiable instrument - no formalities are necessary - mere delivery of the instrument is in itself constitutes a valid transfer. These two characteristics (Point1and Point 2) constitute negotiability and A chose-in-action having these two characteristics is - a negotiable instrument.

9 Negotiable Instruments - negotiable by statute [Sec-13] - negotiable by custom or usage [Sec-1] Section – 1: Nothing herein contained affects any local usage relating to any instrument in an oriental language.

10 The Transfer of Property Act also recognizes the negotiability of instruments by law or custom. - Nothing in the foregoing sections of this chapter applies to stocks, shares or debentures or to instruments which are for the time being by law or custom negotiable or to any mercantile document of title to goods. [Sec–137 of TP Act ]

11 In India A negotiable instrument means [Sec- 13] - a Promissory note [Sec – 4] - a Bill of exchange [Sec – 5] or - a Cheque [Sec – 6] It also means [Sec-1 of NI Act and Sec-137 of TP Act] - Banker’s draft or pay orders - Hundis - Delivery orders - Railway Receipts and - Goods Receipts and so on

12 RBI Act and Negotiable Instruments Act. Object of Section 31 of the RBI Act is to prevent private persons from infringing the monopoly of the Government in Note-issue in India. Section No person, other than the Reserve Bank or Central Government can draw, accept, make or issue any bill of exchange, hundi or promissory note ‘payable to bearer on demand’ 2. No person, other the RB or Central Govt. can make or issue any promissory note ‘Payable to the bearer of the instrument’.

13 Exceptions to the RBI restrictions: 1. A Bill or note on being indorsed in blank, can become payable to bearer on demand 2. A Cheque is also payable to bearer on demand.

14 1. It is a contract: usually to pay certain sum of money. 2. Written Document 3. Signed 4. Stamped, ad valorem, under the Stamp Act, 1963 [Exception: Cheque] Characteristics of Negotiable Instruments.

15 5. Negotiability: implies that the transferee gets a right - to possess the instrument - to recover the amount mentioned in it on due date - to sue upon it on his own name, in case of dishonour - to negotiate further, if need be. 6. Consideration : Presumed to have been passed, unless the contrary is proved. 7. Notice of negotiation to payer unnecessary 8. Better title to holder in due course

16 Promissory Note [Sec – 4] Is an instrument in writing (not being a bank-note or a currency-note) 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.

17 Illustrations A signs instruments in the following terms: a) I promise to pay B or order Rs b) I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on demand, for value received. c) Mr. B, IOU Rs. 1,000. d) I promise to pay B Rs. 500 and all other sums which shall be due to him.

18 e) I promise to pay B Rs. 500 – first deducting thereout any money which he may owe me. f) I promise to pay B Rs. 500 – seven days after my marriage with C. g) I promise to pay B Rs. 500 on D’s death, provided D leaves me enough to pay that sum. h) I promise to pay B Rs. 500 and to deliver to him my Bajaj Scoter on 1 st January next.

19 Main Features or characteristics of Promissory Note  Written Instrument  Express promise to pay  Unconditional undertaking  Payment of money only  Certain parties Note: Bank note or Currency note are not regarded as Promissory Notes. Why so? This is because – they are money by themselves

20 Bill of Exchange [Sec – 5] 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

21 Main Features or characteristics of Bill of Exchange  Instrument in writing  Contains an order to pay as opposed to request to pay  The order to pay is unconditional  The order is to a certain sum of money only and not delivery of goods. Note: GRs and RRs not Bills of Exchange because the order contained therein relates to delivery of goods.

22  There are 3 parties - - Drawer, the person making the bill - Drawee, the person ordered to pay - Payee, the person to whom money is payable.  Drawer must sign the bill and  Drawee must accept the bill

23 Specimen of a Bill of Exchange A from Hyderabad draws a Bill of Exchange on B at Chennai in favour of C. Rs: 1,25,000/= Hyderabad 15 th December, 2004 To B, at Chennai Three months after date pay to C or bearer/order the sum of rupees one lakh twentyfive thousand only for value received. Accepted Stamps affixed Sd. B Sd. A

24 Cheque [Sec – 6] Is a bill of exchange Drawn on a specified banker, and Payable on demand Note: Cheque has all the characteristics or features of a Bill of Exchange. In addition to it, the following two additional characteristics:  A cheque is drawn upon a Banker  It must be payable on demand.

25 Specimen of a Cheque SB:A/C No: …..… Code No: UB State Bank of India Local Head Office Branch, Bank Street, Kothi, Hyderabad. Pay to ……………………… or bearer/order Rupees………………………………………………………… Rs:…………… Cheque No: Signature of the Drawer Ledger Folio: …………….

26 Distinguish between Promissory Note Bill of Exchange 1. Parties to the Instrument Two parties - Maker - Payee Three parties - Drawer - Drawee - Payee 2. Content of Instrument Unconditional promise to pay Unconditional order to pay 3. Need of acceptance Not required – because Maker is the payer Before payment acceptance by the drawee is a must.

27 Distinguish between Promissory Note Bill of Exchange 4. LiabilityOf maker is primary Of drawer is secondary and conditional 5. Notice of dishonour No notice to be given to the maker because it is he who refused payment Notice is must be given to the drawer and prior endorsers whom he wants to hold liable to pay.

28 Distinguish between Promissory Note Bill of Exchange 6. Possibility of making it payable to maker. It cannot be made payable to maker In this case, drawer and payee can be the same person. 7. Protest.Not requiredIn case of dishonour of Foreign Bills of Exchange, protest is a must.* *If the law of the country in which they are drawn requires it.

29 Distinguish between Bill of ExchangeCheque 1. On whom drawn Drawn upon any person Drawn upon a banker only 2. AcceptanceAcceptance of the drawee before payment required Acceptance is not required, because it is payable on demand 3. Time of payment Can be payable on expiry of certain period after date or of demand Always payable on demand

30 Distinguish between Bill of ExchangeCheque 4. Grace periodA grace of 3 days for calculating the date of payment No such grace is allowed in case of cheque. 5. CrossingAn ordinary Bill of Exchange cannot be crossed It can be crossed. 6. Noting and Protesting for dishonour Essential Not required at all

31 Distinguish between Bill of ExchangeCheque 7. Right to countermand the payment. Drawer cannot countermand the payment. Drawer can countermand the payment. 8. Discharge from liability Drawer is discharged if the payee fails to present it for payment to the acceptor at the appointed time Drawer is discharged only if he suffers any damage by default of payee to present at appointed time, only to the extent of the damage

32 Distinguish between Bill of ExchangeCheque 9. Consequences for dishonour Civil suit for damages Dishonour of cheque for insufficiency of funds is a criminal offence.

33 When can a banker refuse to honour the cheque drawn upon it?

34