Negotiable Instruments Act, 1881

Features of a Negotiable Instrument

It is a written document by which certain rights are created and/or transferred to a certain person. It must be signed by the maker or the drawer as the case may be. There must exist the unconditional order or promise to pay. There must be a time mentioned for such payment. In particular cases, the drawees name should be specifically mentioned. It must be capable of being paid either by bearer or by order.

Elements of Negotiability
Section 13 defines a negotiable instrument. The definition does not bar the inclusion of other documents which have the element of negotiability. Freely transferable Holders title is free from defects Can be transferred infinitum

Presumptions as to negotiable instruments

As to consideration As regards time As regards acceptance As regards transfer As regards endorsements As regards dishonour of negotiable instruments As regards capacity of the parties

Promissory Note
A promissory note is a negotiable instrument made in writing, making an unconditional undertaking to pay a certain sum of money to a certain person or to the order of a certain person or to the bearer of the instrument and signed by the maker. It cannot be drawn payable to the maker himself. It must be payable either on demand or after a definite period of time. It must contain a promise to pay money only.

Bill of Exchange

It is an instrument in writing containing an unconditional order by the maker, directing a certain person to pay a certain sum of money to the bearer of the instrument or to the order of a certain person and it must be signed by the maker. The same person can be the drawer and the payee at the same time.

NEITHER THE PROMISSORY NOTE NOR THE BILL OF EXCHANGE ARE REQUIRED TO BE ATTESTED OR REGISTERED.

Points of Distinction between Promissory Note and Bill of Exchange

Number of Parties Nature of the instrument Nature of presentment Liability of the maker or the drawer Immediate relation

Kinds of Bill of Exchange

Inland bill Foreign bill Bills in sets Drawee in case of need Trade and accommodation bill Time bill Demand bill Clean and documentary bill

Acceptance of Bill of Exchange

The bill of exchange has to be accepted by the drawee. Presentment of the bill for acceptance must be made before the drawee or his agent. The bill must be presented for acceptance before its maturity. The acceptance must be in writing and signed by the drawee or his agent. It must be delivered to the holder / payee. An acceptance of a bill of exchange may be general or qualified. It is not necessary that all bills of exchange have to be first presented for acceptance and then presented for payment.

Cheque
A cheque is an order by the customer of the bank directing his bank to pay on demand the specified amount to a certain person or to the order of a certain person named therein. It includes an electronic cheque and the electronic image of a truncated cheque. The drawer of the cheque must date it before it leaves his hands. A cheque may be ante-dated or post-dated.

All cheques are bills of exchange but all bills of exchange are not cheques.

Holder and Holder in due course

Holder is a person who is entitled in his own name to the possession of the negotiable instrument and to recover the amount thereon. Holder in due course is a person who came into possession of the instrument on payment of consideration and without knowledge of the fact that the erstwhile owner had a defective title. The holder in due course has a better title than the holder.

Privileges of a holder in due course

He can sue every prior party to the negotiable instrument if the instrument is not duly satisfied. When the holder endorses such instrument further, the new owner has a good title unless he is party to fraud. The burden of proving his title does not lie upon the holder in due course.

Negotiation, Indorsement and Assignment

The transfer of a negotiable instrument by one party to another so as to make the transferee the holder thereof, is called negotiation. Both negotiation and assignment involve the transfer of right to receive the payment of a debt, but while in negotiation the transferee gets a good title, in assignment, the assignee has only those rights which the assignor possessed. Indorsement is the mode of negotiating a negotiable instrument which is payable otherwise than to bearer.

How is indorsement done?

The maker or holder signs either on the back or the face of the instrument for the purpose of negotiation. Endorsement can also be done on a slip of paper annexed to the negotiable instrument (allonge).

Kinds of endorsements
Indorsement in blank Indorsement in full Restrictive indorsement Conditional indorsement Indorsement sans recourse Facultative indorsement Partial indorsement

Maturity of a negotiable instrument

The date on which the payment on the instrument falls due. If it is dishonoured on such date, a suit can be filed. Presentment for payment must be made within banking hours and at bankers premises.

Dishonour of negotiable instrument

1.
2.

Can be dishonored in 2 ways by non-acceptance by non-payment Notice of dishonor is mandatory Noting of dishonor is also necessary Protest is mandatory for foreign bills.

Crossing of Cheques
It is a direction given by the customer to the banker that payment should not be made across the counter. Crossing is effected by drawing two parallel transverse lines with or without particular abbreviations. A cheque that is not crossed is called an open cheque. It serves as a measure of safety against theft or loss of cheques in transit.

Types of Crossing
GENERAL 1. Addition of two parallel transverse lines. 2. Between the lines, the words Not negotiable, A/c Payee, & Co., and Co., may or may not be written.

SPECIAL 1. Drawing of two parallel lines is not always necessary. 2. Addition of the specific name of banker on the face of cheque

Who can cross a cheque?

Both the drawer and the holder can cross a cheque. General crossing can be converted into special crossing but special crossing cannot be converted into general crossing. A cheque crossed in favour of a particular banker can again cross it in favour of a another banker.

Liability of banker

Liability of the banker differs based on the nature of the job performed by the banker. The paying banker shall honour only those cheques that are presented against the accounts maintained at the specific branch within reasonable time within banking hours. It is the duty of the paying banker to examine the contents of the cheque before honouring it. The liability of the collecting banker is to act in good faith and without negligence and collect the amount from the paying banker and credit the same to the payees account.

Drawers liability for dishonour of cheque in case of insufficiency of funds

a) b) c)

d)

e)

The drawer may be punished with imprisonment up to 2 years or with fine up to twice the amount dishonoured or both. Such punishment is given only:when the cheque is dishonoured for insufficiency of funds; the payment was to enforce a legally enforceable debt; the cheque is presented to the drawee within six months of the date on which is drawn or within the period of validity, whichever is earlier; notice of dishonour is made known to the drawer in writing within 30 days of receipt of information of dishonour by the payee; The drawer does not make payment within 15 days of receipt of such notice. (contd.)

Drawers liability for dishonour of cheque in case of insufficiency of funds (contd.)

It is the Court of Judicial Magistrate of First Class and Metropolitan Magistrate or any Court superior to it that can try such case. Even companies and every officer of such company who is associated with the dishonour remains liable but a director nominated by the Government does not stand liable. Such trials should be disposed within 6 months from date of filing. Onus lies upon the accused to prove that the cheque is not dishonoured. Such offence is a compoundable offence.