NEGOTIABLE INSTRUMENTS

Slide 1

NEGOTIABLE INSTRUMENTS ACT

Negotiable Instruments Act, 1881 by British India According the Negotiable Instruments Act means "A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.It extends to the whole of India

Slide 2

NEGOTIABLE INSTRUMENTS
What is negotiable?
Negotiable means transferable. The negotiation that goes on refers to the transfer of the instrument between two people, or from one bank to another, or even from one country to another.

What is an instrument?
In the broadest sense, almost any agreed-upon medium of exchange could be considered a negotiable instrument. In day-to-day banking, a negotiable instrument usually refers to checks, drafts, bills of exchange, and some types of promissory notes. Slide 3

FORMS OF NEGOTIABLE INSTRUMENTS

A negotiable instrument is a written order promising to pay a sum of money. It may be a bearer instrument, which is payable to the bearer, or it may be an instrument with highly specified terms.

Slide 4

Main Features of Negotiable Instruments

Freely Transferable: Either by delivery or by endorsement and delivery Holders title must be free from defects Holders acquires in due course a good title not withstanding and defect in previous holders title. The holder in due course acquires the instrument for value and without any notice as to the defect in the title of the transferor.
Slide 5

The holder in due course can sue in his own name. A negotiable instrument can be transferred infinitium ie can be transferred any number of times till its maturity

Slide 6

Presumptions
Consideration : Every negotiable instrument is deemed to have been drawn and accepted , endorsed, negotiated, or transferred for consideration Date : Every negotiable instrument must bear the date on which it is made or drawn Acceptance : Every Bill of exchange was accepted within a reasonable time after the date mentioned therein and before the date of its maturity Transfer : Every transfer should be made before the expiry
Slide 7

Every transfer is made before its maturity All the endorsements were made in the order in which they appear It is duly stamped The holder of the NI is holder in due course

Slide 8

Quasi NI
Bill of lading Railway receipts

Slide 9

Days of Grace
3 days of grace after the due date for Bill payable on specified date Bill payable after sight Bill payable after certain period of time No grace period for following NI 1) A cheque 2) A bill payable on demand 3) A bill on which time is not mentioned.
Slide 10

Negotiation
According to the Negotiable Instrument Act, there are two special methods of transfer. 1. By endorsement and delivery in case of order instrument. 2. By mere delivery in case of bearer Instrument.

Slide 11

Types of Endorsement
Endorsement may be either in blank or in full. It is in blank when the person making it signs his name only. It is in full when the person signing adds direction to pay the amount to the order or the specified person. Full endorsement is also called special endorsement.

Slide 12

Endorsement may be either absolute or restrictive or conditional. In the case of absolute endorsement there is no condition attached to it.

Slide 13

In the case of restrictive endorsement the following points are important: Such endorsement restricts or excludes the right of the endorsee to further negotiate the instrument. Such endorsement constitutes the endorsee merely an agent to endorse the instrument or to receive the content for the endorser for another specified person.
Slide 14

Rules of Endorsement
For the purpose of a valid endorsement the following rules are important: 1. There cannot be endorsement of part of the amount of bill. 2. Where however a part of the amount of the bill has been paid or received by the holder, endorsement can be made for the balance. An instrument originally payable to order if endorsed in blank becomes a bearer instrument
Slide 15

 A person receiving an instrument by theft or fraud can not negotiate it, because he is not a holder. A negotiable instrument can be negotiated until payment or satisfaction.

Slide 16

Lost Instrument
The finder of a lost instrument gets no title to it. The finder can not sue the acceptor or drawee. The true owner can recover the instrument from him. If the finder negotiate the instrument in the case of a bearer instrument or blank endorsement to a holder in due course, such a holder gets a title to it.
Slide 17

Where a bill of exchange has been lost before it is due, the person who was the holder may apply to the drawer to give him another duplicate bill of same tenor on proper indemnity. According to Sec. 4SA of the Netotiation Instrument Act, if the drawer does not give such a duplicate bill he may be compelled to do so.

Slide 18

Fraud
The person obtaining an instrument by fraud can not get a title to it. He cannot enforce payment from the parties who are liable on the instrument.

Slide 19

The holder in due course may however enforce payment. The parties liable on the bill get a good discharge by payment in due course thereof.

Slide 20

Forgery
The law on the subject Is governed by the following important principals; A forged signature of the drawer or 'acceptor is inoperative. Forgery is a nullity in law as such as a forged endorsement is not endorsement at all.

Slide 21

The instrument is regarded as incomplete and no title can be claimed to arise on such instrument. If the signature of the drawer or acceptor is forged, the holder of the instrument can not enforce payment and the person claiming the instrument can recover the amount paid from such person as payment under a mistake.
Slide 22

CHECKS
Most common form of negotiable instrument Preferred method of payment for many debts Offer convenience, safety, and a record of transactions

Slide 23

DRAFTS
A draft is a three-party instrument similar to a check. A draft is an order signed by one party (the drawer, or drafter) that is addressed to another party (the drawee) directing the drawee to pay to someone (the payee) the amount indicated on the draft. The payment may be at sight or at some defined time.

Slide 24

BILLS OF EXCHANGE
A bill of exchange is a negotiable and unconditional written order, such as a check, draft, or trade agreement, addressed by one party to another. The receiver of the bill must pay the specified sum or deliver specified goods on demand or at a specified time. Bills of exchange are a common form of internationally negotiable instruments.
Slide 25

PROMISSORY NOTES
A promissory note is a written promise to pay at a fixed or determinable future time a sum of money to a specified individual. These two-party instruments are legally binding documents with many specified terms that vary widely. Commercial paper, a short-term (270 days or fewer) note or daft issued by a corporation or government, is a common investment instrument.
Slide 26

Cheque
A cheque is a negotiable instrument governed by the provisions in the Negotiable Instrument Act. It is an unconditional order, drawn on a specified banker, signed by the drawer, directing the banker, to pay on demand, a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.

Slide 27

Essentials : 1. It is an instrument in writing; 2. It contains unconditional order; 3. It is drawn by the drawer; 4. It is drawn upon a specified banker; 5. To pay a certain sum of money; 6. Payable on demand; 7. Payable to a certain person or his order or to the bearer of the instrument. 8. A cheque should be properly dated 9. It is signed by the maker
10. There are three parties to a cheque, viz (a) Drawer (b) Drawee, and (c) Payee.
Slide 28

CROSSING OF CHEQUES Crossing first originated in England when cheques were sent from one bank to another. There was the possibility that a cheque might fall in the hands of wrong or unauthorised parties and thereby the original holder was likely to be put to a loss or inconvenience. To avoid this disadvantage, the bankers introduced this new system of crossing of cheques. Crossing automatically means that a cheque should be presented for payment through a bank.
Slide 29

Meaning of Crossing Crossing of cheques means drawing two parallel transverse lines on the left hand top corner of a cheque. Sometimes, it is also done in the centre of the cheque. The Negotiable Instruments Act 1881, recognises crossing of cheques. A crossing is a direction to the paying banker that the cheques should be paid only to a banker and if the banker is named in the crossing, only to that banker. This ensures the safety of payment by means of cheques. The holder of the cheque is not allowed to cash it across the counter.
Slide 30

Types of Crossing Cheques can be crossed in two ways (1) General Crossing (2) Special Crossing. 1.

Slide 31

General Crossing: Section 123 of the Negotiable Instruments Act 1881, defines a general crossing as follows: Where a cheque bears a cross its face an addition of the words & 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.
Slide 32

Special Crossing
Section 124 of the Negotiable Instruments Act 1881, defines a special crossing as follows: Where a cheque bears a cross 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.
Slide 33

Kinds of Endorsement Endorsement may be of any of the following kinds: 1. Blank endorsement, 2. Special endorsement, 3. Partial endorsement, 4. Restrictive endorsement, 5. Conditional endorsement.
Slide 34

Blank Endorsement: It is also called general endorsement. An endorsement is said to be blank if the endorser signs his name only on the face or back of the instrument. Endorsement in blank specifies no endorsee. A negotiable instrument even though payable to order becomes a bearer instrument if endorsed in blank.
Slide 35

Special Endorsement: It is also called full endorsement. In this type of endorsement, the name of the endorsee is specifically stated. If the endorser adds direction to pay the amount mentioned in the instrument to, or to the order of a specified person, the endorsement is said to be special. In other words, it specifies the person to whom or to whose order the cheque is to be payable. A blank endorsement can be easily converted into a special endorsement by any holder of negotiable instrument. Example: (a) Pay to x or order, (b) Pay to the order of x
Slide 36

 Partial Endorsement: If an instrument is endorsed for a part of its amount, such an endorsement is said to be partial. Similarly, if an instrument is endorsed to two or more endorsees separately and not jointly, the endorsement becomes partial. Such an endorsement does not operate as a negotiation of the instrument. No right of action arises under a partial endorsement. It is invalid. Example: The holder of a promissory for Rs. 1,000 writes on it pay B Rs. 500 and endorses the note. The endorsement is invalid for the purpose of negotiation.
Slide 37

Restrictive Endorsement: An endorsement is said to be restrictive when it prohibits or restricts the further negotiability of the instrument. It merely gives the holder of the instrument the right to receive the amount on the instrument for a specific purpose. It does not give power to him to transfer his rights in endorsement to any one else. Pay X only or pay X for my use are examples of restrictive types of endorsement.
Slide 38

 Conditional Endorsement: It is also called qualified endorsement. An endorsement where the endorser limits or negatives his liability by putting some condition in the instrument is called a conditional endorsement. If for instance, the endorser endorses an instrument with the words pay A or order on his marrying B, the endorsement becomes conditional. A conditional endorsement, unlike the restrictive endorsement, does not affect the negotiability of the instrument. It does not invalidate the instrument.
Slide 39

Collecting Banker
Banker who collects cheques and bills on behalf of the customers. Every crossed cheque is necessarily to be collected through any bank, which is known as collecting banker.

Slide 40

Collecting Banker as Holder for Value

A collecting banker is holder for value if he gives the value of the cheque in any form to its customer before collecting the proceeds of the cheque deposited by the latter. He does not remain an agent of the customer, but becomes the owner of the cheque in his own right since he has paid value for it, and has acquired the ownership right in good faith. In such a situation, the banker is called holder for value and he is also the holder in due course.
Slide 41

a banker becomes an holder for value in the following ways: (a) by lending on the strength of the cheque; (b) by paying the amount of the cheque or part of it in cash or in account before it is cleared; (c) by agreeing that the customer may draw before the cheque is cleared; (d) by accepting the cheque in avowed reduction of an existing overdraft; (e) by giving cash over the counter for the cheque at the time it is deposited in for collection.
Slide 42

In the above circumstances, the banker becomes the holder for value. Further, if he proves that he gave value for a cheque in good faith, he will be able to resist any claim by the true owner provided that (a) the cheque was not tainted with forgery, (b) he had no notice of any previous dishonour or of any defect in the title of his customer, (c) the cheque was not crossed not negotiable (d) the cheque was not overdue for the purpose of negotiation, and (c) the cheque was regular on the face of it in all respects.
Slide 43

Collecting Banker as an Agent of the Customer When a collecting banker acts as an agent of the customer, he credits the latters account with the amount of the cheque after the proceeds of the cheque are actually collected from the drawee banker. The customer can draw the amount after his account is credited with the proceeds.

Slide 44

 Like any other agent, the banker has to perform his duties diligently for the customer who has paid in his cheques. If he delays or does not exercise the normal skills expected, he will be liable to his customer. It has been held that the reasonable time would be presenting the cheque within one day after the receipt thereof where the cheque is drawn on a bank in the same place, or forwarding or presenting it on the day following the receipt thereof where the cheque is drawn on a bank in another place. After the expiry of reasonable time, the customer paying in the cheque for collection is entitled to presume that it has been collected and the proceeds thereof credited to his account.
Slide 45

Conversion
Conversion is a legal term signifying wrongful interference with another persons property inconsistent with anothers right of possession. The collecting banker while collecting the payment of a cheque to which his customer has defective title, deprives the true owner of the cheque to receive payment. So he incurs a liability to the true owner of the cheque.
Slide 46

The principle which is applied here is that a rightful owner of the cheque can recover the same from anyone who takes it without his authority and in whose hands it can be traced. But the banker has been granted statutory protection in certain circumstances

Slide 47

In the following cases, the banker is liable for conversion to the true owner of the instrument: (a) when he collects a cheque, a bill of exchange, or a promissory note bearing a forged endorsement or in respect of which the customer has no title at all; (b) when he borrows for his customer the proceeds of a cheque on which the customer has no title or only defective title; (c) when he takes as holder for value, a cheque marked not negotiable; and (d) when he delivers to the wrong person the goods entrusted with him for safe custody.
Slide 48

In the following cases, the banker is not liable for conversion to the true owner of a cheque: (a) where there is no forgery and the instrument comes into the hands of the holder in due course; and where there is forgery and the instrument is a cheque, payment whereon has been made in due course by the banker.
Slide 49

Statutory Protection to Collecting Banker

Section 131 of the Negotiable Instruments Act provides protection to a collecting banker who receives payment of a crossed cheque or draft on behalf of his customers. The protection provided by Section 131 is not absolute but qualified.

Slide 50

A collecting banker can claim protection against conversion if the following conditions are fulfilled. Good Faith and Without Negligence: The burden of proving that he collected in good faith and without negligence is on the banker What constitutes negligence depends upon facts of each case.

Slide 51

Following are a few examples which constitute negligence: (a) Failure to obtain reference for a new customer at the time of opening the account. Collection of cheques payable to trust accounts for crediting to personal accounts of a trustee. (c) Collecting for the private accounts of partners, cheques payable to the partnership firms. Omission to verify the correctness of endorsements on cheques payable to order. (e) Failure to pay attention to the crossing particularly the not negotiable crossing.
Slide 52

Collection for a Customer: Statutory protection is available to a collecting banker if he collects on behalf of his customer only. . Acts as an Agent Crossed Cheques: Statutory protection is available only in case of crossed cheques. It is not available in case uncrossed or open cheques because there is no need to collect them through a banker.
Slide 53

Duties and Responsibilities of a Collecting Banker 1. Due care and diligence in the collection of cheque. 2. Serving notice of dishonour. 3. Agent for collection. 4. Remittance of proceeds to the customer. 5. Collection of bill of exchange.
Slide 54

THE PAYING B ANKER

The banker is liable to pay the value of a cheque of a customer as per the contract, when the amount is due from him to the customer is called Paying Banker or Drawee Bank. The payment to be made by him has arisen due to the contractual obligation. He is also called drawee bank as the cheque is drawn on him.

Slide 55

Precautions for Payment of Cheques

Proper Form Open or Crossed Cheque: Madras Bank Ltd. Vs South India Match Factory Ltd., Place of Presentment of Cheque Date of the Cheque Mutilated Cheque: Words and Figures Alterations and Overwritings
Slide 56

 Proper Endorsements Sufficiency of Funds Verification of Drawers Signature

Slide 57

Statutory Protection
Protection in Case of Bearer Cheque: Section 85 (2) of the Negotiable Instruments Act, 1881 states, Whereas a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing thereon, notwithstanding that any such indorsement purports to restrict or exclude further negotiation.
Slide 58

Protection in Case of Order Cheque: If the endorsement is regular and payment is made in due course, the paying banker gets the protection under Section 85 (1) of the Negotiable Instruments Act, 1881 : Whereas a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course.
Slide 59

In case, payment is made to a wrong person whose signature is not according to specimen signature, the protection is given to a banker under Section 16 (2) of the Negotiable Instruments Act : It is not possible for a banker to know each of the endorsers and their signatures. For getting the protection, the banker should note the following: (a) Regular Endorsement: According to Section 85 (1) of the Act the endorsement should be regular. For example, if a cheque is payable to a right person and signature is bearing same name and the same spellings this is known as regular endorsement.
Slide 60

Payment in Due Course: According to Section 10 of the Act the cheque should be paid in due course. In case the payment is made on forged signature of the endorser and not that of the drawer, the banker gets statutory protection under Section 10 of the Act.

Slide 61

Dishonour of Cheques
When the Customer Countermands the Payment Notice of the Customers Death: remark Drawer Deceased Notice of Customers Insanity Notice of the Customers Insolvency Receipt of the Garnishee Order Notice of Assignment Trust Accounts
Slide 62

Suspicion about the Title over the Cheque Post-dated Cheques Insufficiency of Funds Presentation of Cheque Joint Accounts Material Alterations Stale Cheques . Drawers Signature
Slide 63

Difference between Words and Figures Irregular Endorsement Proper Form of the Cheque Drawn on Another Branch

Slide 64