Assignment no.1 Business law(E) Submitted by: zarnain zara Submitted to: prof. S.Haq Date: 11.1.

2013 l1s10bbam2080

NEGOTIABLE INSTRUMENTS ACT

Definition of a Negotiable Instrument
Negotiable instrument is just and order or promise to pay an amount to any person. Simply it means "negotiable instrument" is a document transferable. It includes a promissory note, bill

of exchange or cheque payable either to order or to bearer. (A) Payable to order: means to payable to a particular person & does not contain words prohibiting transfer or indicating an intention that it will not be transferable. (B) Payable to bearer: means any promissory note/bill of exchange/cheque which is expressed to be payable or on which the only or last indorsement is an indorsement in blank.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT There are following characteristics of negotiable instrument, anybody who is dealing with
Negotiable Instruments needs to know of these special features in order to protect its rights. Characteristics are: 1. These instruments are easily transferable from person to person and the ownership of the property is passed on by o mere delivery in case of bearer instruments; o Endorsement and delivery in case of order instruments. 2. These instruments confer absolute and good title on the transferee, who takes it in good faith, for value and without notice of the fact that the transferor had defective title thereto. 3. Right of "holder in due course" to sue upon the instrument in his own name. This means, he
can recover the amount of the instrument from the party liable to pay thereon.

TYPES OF NEGOTIABLE INSTRUMENT There are many types of negotiable instruments: (i) (ii) (iii) Promissory notes Bills of exchange Cheques

i) Promissory Notes A "promissory note is an o instrument in writing o It contains an unconditional undertaking, o Signed by the maker to pay a certain sum of money to o only to the order of, a certain person, or only to bearer of the instrument. Parties to a Promissory Note: There are two parties in Promissory notes: (a) The maker: the person who makes or executes the note promising to pay the amount stated therein. (b) The payee: one to whom the note is payable. Example: For example: I promise to pay B or order 1000. I acknowledge myself to be indebted of RS 1000 to be paid on demand. Essentials of a Promissory Note: There are following essentials of promissory note: 1) must be in Writing : would include type writing, engraving ink. It can be on any material; paper, parchment, account book. 2) Promise to pay: a certain sum of money shall be paid. Mere acknowdgement of debt is not promise to pay. For example: (a) statement of balance khata (b) Distinction between a receipt with a promise to pay & promissory note. 3) Promise to pay must be unconditional: Example: Rs:2500 will be paid by me to K on the first day of this month on which it rains. Here payment made to be dependent on an event which may not happen at all within the expressed period. The document is not a promissory note. 4) Signature of the maker: The word signature has not been defined. It is sufficient if the name of the drawer is added to show authentication. However, if name added at the beginning is not meant as a signature then signatures, thumb impression, initials are required. Signature at a particular place is not necessary.
5) Who is the Maker: Person making the promissory note is maker & to whom the promise is being made is payee. An instrument in which maker or payee is not certain cannot be a promissory note. There can be two or more makers.

6) Sum to be paid must be certain: & incapable of being varied by indefinite additions. See Illustration: (d) & (e) Promise to pay interest only & not the principal amount. It is not a promissory note. The medium of payment must be money only.

Bill of exchange
Bills of exchange are financial documents that require the individual or business that is addressed in the document to pay a specified amount of money on a date that is cited within the text of the document.

There are three parties to a bill of exchange drawer, acceptor or drawee and payee. Drawer himself may be the payee. Parties to bills of exchange The following are parties to a bill of exchange: (a) The Drawer: the person who draws the bill. (b) The Drawee: the person on whom the bill is drawn (c) The payee: one to whom the sum stated in the bill is payable, either the draweror any other person may be the payee.

Essentials of a Bill of Exchange: 1) Is an instrument in writing 2) Containing an unconditional order 3) Signed by the maker(drawer) 4) Directing a certain person(drawee) to pay on demand or at a fixed or determinate future time a certain sum of money 5) Only to, to the order of, a certain person(payee) or to the bearer of the instrument. A certain sum of money: (i)Includes future interest payable at an indicated/current rate of exchange. (ii) Can be paid in installments (iii) May contain a provision that in case of default of one or more installments the whole of the sum will become due. :

Distinction between bill of exchange and Promissory Note

sets (Secs. 132 and 133): Promissory note: 1) There are two parties: Maker & payee 2) Liability of the maker is absolute. 3) Maker is liable as a principal debtor. 4) Cannot be made to the maker himself Bill of exchange: 1) There are three parties: drawer, drawee/acceptor, payee. 2) Liability of drawer is conditional. He act as a surety for drawee. 3) Drawer liable in first instance as a principal debtor. Once drawee accepts the bill the acceptor become principal debtor & drawer the surety. 4) One person can become drawer& payee OR both drawee & payee. Three parties must be mentioned with certainity.

Cheques
A cheque is a bill of exchange drawn on a specified banker, and not expressed to be payable otherwise than on demand. In simple words, a cheque is a bill of exchange drawn on a bank payable always on demand. Two differentiating features of cheque are (i) (ii) it is always drawn on a banker it is always payable on demand.

Parties to a cheque
The following are the parties to a cheque: (a) The drawer: The person who draws the cheque. (b) The drawee: The banker of the drawer on whom the cheque is drawn. (c), (d), (e) and (f) The payee, holder, endorser and endorsee: same as in the case of a bill.

Sample Cheque: ABC Bank Date_____________ Pay 'A;--------------------------------------------------------------------------------or the bearer sum of rupees---------------------------------------------------------------------------------only. A/c No---------LF-----No--------------------Rs-------/Sd/-

Distinction between Bills of Exchange and Cheque Cheque: 1) Drawn on specified banker 2) Payable immediately on demand 3) Does not require acceptance & intended for immediate payment 4) Drawer is not discharged 5) In case of dishonor notice is not required Bill of exchange: 1) May be drawn on anyone including a banker 2) Entitled two days grace period 3) Must be accepted by the acceptor before he is held liable. 4) Failure of presentment for payment discharges the drawer 5) must be mentioned with certainity.

Holder in Due Course: Means any person who for consideration becomes the possessor of a
promissory not, bill of exchange or cheque (a) (b) (c) (d) if payable to bear or payee or indorsee if payable to the order before it becomes overdue without notice that the title of the person from whom he drives his own title is defective.

Essential conditions to constitute a holder in due course A) He should be a holder: To be in physical possession of the instrument & entitle to sue in his own name on the instrument. B) He should be holder for consideration: It must be of some conceivable value to the promisee sufficient to support a single contract. It may be in the past/present/adequate or inadequate. It should not be forbidden by law or against public policy. C) Before the instrument becomes over due: A person in order to become a holder in due course must take the instrument before maturity. D) He should have become a holder without sufficient cause to believe that any defect existed in the title of the person from whom he has acquired the instrument: The holder in due course should exercise reasonable diligence to satisfy himself that there is no defect in the title. Examples of defect in title: (I) By fraud (II) By coercion (III) by fear (IV) by unlawful means (V) for illegal consideration. Defect in title Vs Want of title:

Privileges of a Holder in due course:

(I) (II) He is protected against all defects of title of persons from whom he receives the instrument. He can recover the amount of the instrument from all previous parties although no consideration was paid by some of the previous parties or a defect of title existed in the party from whom he has acquired the instrument. He acts as a channel to protect all the subsequent holders: once a negotiable instrument reaches the hands of a holder in due course it is purged of all defects. The defense on part of a person liable to pay that the instrument has been lost, or obtained my means of an offence, or fraud or illegal considerations cannot be set up against the holder in due course. (section: 58) An acceptor of a bill of exchange drawn on a ficticious name

(III) (IV)

(V)