NEGOTIABLE INSTRUMENTS VIS-À-VIS CHEQUE Samir K Mahajan

Meaning: Negotiable Instruments Negotiable instruments are documents meant for making payments, which can be transferred from one person to another many times before final payments.  they take the form of written order or unconditional promise to pay a fixed sum of money on demand or at a certain time  they (i.e. their Ownership) can be transferred from one person to another before the final payment is made.  Once the instrument is transferred, the holder obtains full legal title to the instrument.  Negotiable instruments are integral part of business mechanism. Samir K Mahajan

Most Important Negotiable Instruments  PROMISSORY NOTE  BILL OF EXCHANGE  CHEQUE Other such instruments which posses features of negotiability  Hundis (a popular indigenous bill prevalent in India)  Treasury bills  Drafts  Certificates of deposits etc Samir K Mahajan

PARTIES TO A PROMISSORY NOTE: TWO PARTIES INVOLVED Maker or Drawer – the person who makes the note and promises to pay the amount stated therein. He is the debtor. Payee – the person to whom the amount is payable. He is the creditor. In course of transfer of a promissory note by payee and others, the parties involved may be  Endorser/ transferor – the person who endorses the note in favour of another person  Endorsee/ transferee – the person in whose favour the note is negotiated by endorsement Samir K Mahajan PROMISSORY NOTE A promissory note 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 a certain person or to the order of a certain person or to the bearer of the instrument’. The amount may be payable on demand or after expiry of certain period of time.

Rs. 10,000/- New Delhi September 25, 2013 On demand, I promise to pay Ramesh, s/o Ram Lal of Meerut or order a sum of Rs 10,000/- (Rupees Ten Thousand only) for value received. To, Ramesh Sd/ Sanjeev Address…….. Stamp Specimen of Promissory Note: Payable On Demand Rs. 10,000/- New Delhi September 25, 2013 Three months after date, I promise to pay Ramesh, s/o Ram Lal of Meerut or order a sum of Rs 10,000/- (Rupees Ten Thousand only) with interest at the rate of twelve percent per annum until payment, for value received. To, Ramesh Sd/ Sanjeev Address…….. Stamp Specimen of Promissory Note: Payable after date with interest Samir K Mahajan

BILL OF EXCHANGE 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 the person or to the order of a certain person, or to the bearer of the instrument’. The amount may be payable on demand or after expiry of certain period of time. PARTIES TO A BILL OF EXCHANGE: THREE PARTIES INVOLVED Drawer of the bill – The person who makes the order for making payment. He is the creditor. Drawee/Acceptor/payer of the bill – The person to whom the order to pay is made. He is generally a debtor. The drawee must accept the bill issued by drawer. The Payee of the bill – The person to whom the payment is to be made. The “drawer” can also draw a bill in his own name thereby he himself becomes the “payee”. In course of transfer of a bill of exchange by payee and others, the parties involved may be  Endorser/ transferer – the person who endorses the note in favour of another person  Endorsee/ transferee – the person in whose favour the note is negotiated by endorsement Samir K Mahajan

Rs.10,000/- New Delhi September 25, 2013 Five months after date, pay Tarun or to his order the sum of Rupees Ten Thousand only for value received. To, Sanjoy Accepted Sd/ Rajeeb Address…….. Sanjoy Stamp SPECIMEN OF A BILL OF EXCHANGE : PAYABLE AFTER DATE - TIME BILL SPECIMEN OF A BILL OF EXCHANGE : Payable on Demand –Demand Bill Rs.10,000/- New Delhi September 25, 2013 For this bill of exchange, pay to us or order of ourselves, the sum of Rupees Ten Thousand only for value received. To, Sanjoy Accepted Sd/ Rajeeb Address…….. Sanjoy Stamp Samir K Mahajan

CHEQUES A cheque is a document wherein an account holder of a bank orders the bank to pay a specified amount to a specified person named therein or to the order of the specified person or to the bearer. A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. In India, a customer with a saving bank account or current account in a bank can issue a cheque in his own name or in favour of others. Samir K Mahajan PARTIES TO CHEQUE  Drawer: the person (or persons) who draws/ signs the cheque  Drawee : the bank on whom a cheque is drawn  Payee: the beneficiary named on the cheque/ person in whose favour a cheque is drawn the “payee” of a cheque can be the “drawer” himself the “payee” of a cheque can be the “drawee” too In course of transfer of a cheque by payee and others, the parties involved may be – Endorser/transferor – the person who endorses the cheque in favour of another person. Endorsee/transferee – the person in whose favour the cheque is negotiated by endorsement

DATING OF CHEQUE A Cheque not dated at all is valid. Any holder of the cheque including the banker may insert a date. However bankers generally return a undated cheque. Cheque may be ante-dated or post-dated or a date on a public holiday, and thus are not invalid for those reasons. A cheque has a life of three months from the date of the cheque. Cheque may be : o Ante-dated Cheque o Post-dated Cheque. Samir K Mahajan

ANTE-DATED CHEQUE : Ante-Dated Cheque bears a date earlier than the date of issue. e.g A cheque issued (by drawer) on 30 September 2013 may bear a date 30 August Such a cheque is valid up to three months from the date of the cheque. A cheque presented for payment after three months from the date of the cheque is stale cheque. A stale cheque is not honored by the bank. POST DATED CHEQUE : Post Dated Cheque are written by the drawer for payment in a future date. cannot be honored earlier than the date on the cheque. For example, if a cheque presented/issued on 30 September 2013 bears a date of 30 October 2014, it is a post-dated cheque. The bank will make payment only on or after 30 October Samir K Mahajan DATING OF CHEQUE contd.

CHEQUES 1) OPEN CHEQUE BEARER CHEQUE ORDER CHEQUE 2)CROSSED CHEQUE TYPES OF CHEQUE Samir K Mahajan

Open cheque/ Uncrossed cheque The payment of "Open Cheque" or an "Uncrossed Cheque” can be obtained at the counter of the bank. The holder of an open cheque can do the following:  Cash the cheque over the counter at the bank  Deposits the cheque in his own account  Passes /transfers/endorses it to someone else by signing on the back of a cheque  An open cheque may be a bearer cheque or an order cheque or a cheque with specific name Samir K Mahajan

BEARER CHEQUE A bearer cheque (when not crossed) is made payable to the bearer i.e. the person who presents it to the drawee bank ( at the counter) for encashment. The words ‘or bearer’ mean that (when not crossed) the bank on which the cheque is drawn has authority to pay it to any person in possession of it, even if that person found it or stole it, unless the bank has reason to suspect that the cheque might have fallen into the wrong hands. appears as 'Pay Mr X or bearer'. bearer cheque can be altered to order cheque by deleting and inserting ‘or order” on it can be transferred by mere delivery; they need no endorsement. Samir K Mahajan such cheque are risky; this is because if such cheques are lost/theft, the finder of the cheque can collect payment from the bank

ORDER CHEQUE If a cheque is an ‘order’ cheque then (when not crossed) the drawee bank should pay it: o to the named payee; or o to any person to whom the named payee has ordered it to be paid, by endorsing the cheque normally appear as 'Pay Mr. X or order' if word "bearer" appears on face of a cheque, it is deleted, and in its place the word "or order" is written. The payee can transfer/ endorse an order cheque to someone else by signing his or her name on the back of it. The bank then has to pay to the person to whom it is endorsed /transferred). The bank must take care to ascertain that the person demanding payment is the right person Samir K Mahajan

CROSSED CHEQUE When cheque is crossed, the drawer is telling the bank not to pay it at the counter but to credit it at payees’ account with the bank. The crossing of a cheque is intended o To ensure that the cheque is not encashed by a wrong person, by concealing his identity, o to ensure that its payment is made to the right payee. A cheque whether in bearer or order form when crossed must be collected by the bank (e.g. Credited into a customer’s account ). ‘Crossed cheque’ avoids the danger of theft/loss as in case of open cheque. Samir K Mahajan

Types of crossing. General Crossing Special Crossing CROSSING OF CHEQUE Objectives of crossing:  It prevents the payment of the cheque to a wrongful holder.  It ensures safe payment.  It facilitates in tracing the recipient of the payment.  Further it is a guard against any cheating or theft. Samir K Mahajan

GENERAL CROSSING The drawing up of two simple parallel lines on the face of the cheque at the top left hand corner with or without the words such as: & Co., Not negotiable, or Account Payee only is known as general crossing. The effect of general crossing is that the crossed cheque cannot be paid at the counter of the bank. Its payment can only be deposited into the payee’s account only. Samir K Mahajan

SPECIAL CROSSING When a banker’s name is written in between the two parallel lines, the cheque is said to be specially crossed. In fact, drawing of two transverse and parallel lines is not necessary in case of a special crossing. When a cheque has been specially crossed, the drawee/paying banker will make the payment only to that banker in whose favour/name it has been crossed. The payment of such cheque is not made unless the bank named in crossing is presenting the cheque. Samir K Mahajan

WHO CAN CROSS A CHEQUE? a)A cheque may be crossed generally or specially by the drawer. b) Holder may also cross it. c) Holder may turn a general crossing into special crossing. d) A banker may cross an uncrossed cheque & it may cross it especially to itself or to another banker for purpose of collection through it. Samir K Mahajan

OPENING OF CROSSING/CANCELLATION OF CROSSING If the crossing on a cheque is cancelled, it is called opening of the crossing. The cheque thereafter becomes an open cheque.  Only the drawer of the cheque is entitled to open the crossing of the cheque by writing the words ‘Pay Cash’ and canceling the crossing along with his full signature.  The paying banker must be very careful in ascertaining the validity or genuineness of the drawer’s signature opening the crossing.  If drawer’s signature (already on the cheque) is forged by the holder in order to open the crossing and the payment is obtained at the counter, the banker will remain liable to the true owner of the cheque. Samir K Mahajan

ENDORSEMENT Endorsement means transfer of any document or negotiable instrument (e.g. Cheque) to another person by signing on its back or face or on a slip of paper attached to it. A negotiable instruments in bearer form need not be endorsed (mere delivery will do). A negotiable instrument payable otherwise than to a bearer can be negotiated only by endorsement and delivery. A person who signs the cheque and transfers the instrument is an endorser/transferor and in whose favour it is transferred is endorsee/transferee. Samir K Mahajan

Significance of Endorsement When a cheque is endorsed and delivered, the endorsee or transferee gets a valid tittle to it. The endorsee acquires a right to negotiate the instrument to anyone he / she like, provide his endorser did not restricts further endorsement. By making an endorsement the endorser promises that in case of dishonor, he / she provides a guarantee to compensate the holder. Thus if the cheque is dishonoured, the holder can sue any or all of the previous parties, and recover the amount of the cheque from any or all the previous parties. When, however, a cheque is endorsed back to the earlier endorser, the intermediate parties are not liable to him. This is technically known as negotiation back. For instance, ‘A’ endorses a cheque to ‘B’, ‘B’ to ‘C’, ‘C’ to ‘D’, ‘D’ to ‘E’ and ‘E’ back to ‘A’. The cheque thus is endorsed back to ‘A’ and ‘A’ is now the holder of the cheque. If the cheque is dishonoured, ‘A’ can sue ‘E’, ‘D’, ‘C’, or ‘B’. However, ‘A’ himself is liable to ‘E’, ‘D’, ‘C’, or ‘B’ as the original endorser. Hence if ‘A’ is allowed to sue ‘E’, ‘D’, ‘C’, or ‘B’ ; they,in turn, can sue ‘A’. Hence, ‘A’ is not allowed to sue intermediate parties. ‘A’ can further negotiate the cheque if he cancels endorsement for the intermediate parties i.e. ‘E’, ‘D’, ‘C’, or ‘B’. This is technically known as ‘taking up a bill’. Samir K Mahajan

 Crossed cheque with two parallel line is no more a bearer cheque, and thus the holder get the payment only in his or her account only and not across the counter. But such crossed cheque allows the payee to make further endorsements.  “Account Payee” cheque can not be endorsed further. Only payee of the cheque is entitled to get credit of the amount, i.e., the amount will be credited to his account only.  A cheque with pay A or B only with further words “Not Transferable” restricts the transferability to any other person and is only payable to the person or payee noted therein.  For a cheque crossed as “NOT NEGOTIABLE”, it does not mean that the cheque cannot be transferred further. It still can be endorsed but the transferee will not get the better title than the transferor. Thus, the cheque remains transferable but its important quality i.e. negotiable is withdrawn. CAN A CROSSED CHEQUE BE ENDORSED? Samir K Mahajan

SIGNIFICANCE OF “NOT NEGOTIABLE” CROSSING : Example Example 1: ‘A’ writes cheque to B. B as the payee has a right to the funds from A's cheque. B can sue A if the cheque is dishonored. Example 2: B endorses the same cheque to C. If the cheque is dishonored by A, C can sue either A or B as he has also accepted the cheque in good faith and gave value. Example3: C loses the cheque and it is found by D. D forges C's endorsement and endorses it over to E. (the cheque has now become defective). E receives it in good faith and for value without any knowledge of D’s defective/ illegal title. E does not acquire a better title to the cheque than D (because D had none).

SIGNIFICANCE OF “NOT NEGOTIABLE” CROSSING : Example (Contd.) If the cheque is dishonored, E can sue D but has no recourse to sue A, B or C as it is marked "not negotiable". Without the words "not negotiable“, E could have sued A, B, or D as prior endorsers. (C can't be sued as his endorsement was forged). Further, If E had passed it on to F, F could sue D and E but not A, B or C. Or in case of dispute, E/F who ever last transferee will have to return the cheque or pay equivalent in money to A, the true owner of the cheque. E cannot also pass a good title to anyone else, say to F.

ESSENTIALS OF A VALID ENDORSEMENT An endorsement in order to operate as mode of negotiation must comply with the following conditions:  Endorsement must be made by the maker or holder of the instrument such as cheque. A stranger cannot endorse it.  Endorsement must be on the instrument and be signed by the endorser. The endorsement may be on the back or the face of the instrument and if no space is left on the instrument, it may be made on a separate paper attached to it. It is not necessary to write the full name, initial may be sufficient. Thumb- impression should be attested.  Endorsement must be on the entire bill. Partial endorsement does not result in negotiation of the instrument. Samir K Mahajan

essentials of a valid endorsement contd.  Endorsement must be completed by delivery of the instrument. The delivery must be made by the endorser himself or by somebody on his behalf with the intention of passing property therein. If a person endorses an instrument to another and keeps the same with him rather than delivering the same, and if it is found after his death and then delivered to the endorsee, the latter gets no right on the instrument.  If delivery is conditional, endorsement is not complete until the condition is fulfilled. Samir K Mahajan

for details, follow Negotiable Instruments ACT, 1881.