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LAW OF NEGOTIABLE

INSTRUMENTS ACT

The Negotiable Instruments Act 1881 in Sec. 13 means a


promissory note, bill of exchange or cheque payable
either to order or bearer.
More broadly Negotiable Instrument may be defined as
an instrument the property in which is acquired by
anyone who takes it bona fide, and for value,
notwithstanding any defect of title in the person from
whom he took it , from which it follows that an
instrument cannot be negotiated unless it is such and in
such a state that the true owner could transfer the
contract or engagement contained therein by simple
delivery of the instrument.
A negotiable instrument is, therefore, that which when
transferred by delivery or by endorsement and delivery
as the case may be , passes to the transferee a good
title in the transferor , provided he is bona fide
transferee of the value.

Salient Features of Negotiable Instrument


Following are the elements of the negotiable instruments:
1. Freely transferable : The property in a negotiable
instrument passes by mere delivery if the instrument is
payable to bearer and by endorsement if payable to order.
2. Defect free title to the transferee : transferee can enjoy title
to the instrument even if the title of transferor is defective.
3. Recovery : holder-in-due course is presumed to be the
owner of the property and is entitled for the same.
4. Ceiling on number of transfers: any number of times till its
maturity.
5. Payable to order: for instrument to be negotiated it should
be payable to order
6. Payable to bearer : paid to the holder of the instrument
7. Payment: may be made payable to two or more payee
jointly or it may be made payable in alternative to one or
two or several payee

Classification of Negotiable Instruments


1. Bearer Instrument negotiated by mere delivery.
The bearer may be required to acknowledge the
receipt of money by putting his signature on the
back. There are exceptions to the bearer
instruments e.g. bill of exchange, promissory
note cannot be made payable to bearer.
2. Order Instrument- an instrument can be
negotiated by endorsement and delivery.
3. Inland Instrument- an instrument which is drawn
in India and payable in India except promissory
note which can be made in India and paid in
foreign country.
4. Foreign Instrument- an instrument which is not
inland.

5. Time Instrument- which is payable at sometime in


future. A promissory note or Bill of Exchange shall
be time instrument if it is payable: -after a fixed
period,
-on a specified day
- on happening of an event
- after sight i.e. after showing to maker
6. Demand Instrument- payable on demand
7. Ambiguous Instrument- instrument which can be
treated as bill of exchange or as promissory note
depending on holders choice.
8. Inchoate Instrument- implies incomplete
instrument, an instrument duly signed and stamped
and left blank or incomplete in some respect is
called inchoate instrument

Kinds of Negotiable Instruments


Sec. 13 recognizes only three kinds of
instruments i.e. Promissory note, bills of
exchange, cheque, however the Act has
not excluded any other instrument if it
entitles a person a sum of money and is
transferable on delivery and the
transferee can acquire better title. Hence
following instruments are also
negotiable :
Share/ dividend warrants, bearer
debenture, Government bonds payable to
bearer, treasury bills, hundis, etc.

Promissory Notes
This is an instrument in writing containing an
unconditional undertaking signed by the maker to pay a
certain sum of money to, or to the order of, a certain
person or the bearer of the instrument. A promissory
note must possess following essentials:
1. Must be in writing
2. Must contain an express promise or clear undertaking
to pay
3. Must be unconditional
4. Must be signed
5. Must be made to certain person
6. The sum payable must be certain
7. Must be stamped as per the Indian Stamp Act.
8. Must contain number, place and date
9. The payment must be in currency of the country
A promissory note or Bank draft cannot be made

Bill of Exchange
This is an instrument in writing containing an unconditional,
signed by the maker, directing a certain person to pay a
certain money only to, or to the order of, a certain person or
to the bearer of the instrument.
Parties to Bills of Exchange:
Drawer person who signs the bill
Drawee person on whom the bill is drawn
Acceptor person accepting the bill i.e. drawee or person to
whom bill is endorsed
Payee person to whom money is payable
Holder person in possession of the bill after being drawn
i.e. original payee, endorsee and bearer in case of bearer
bill
Endorser either drawer or holder who endorses the bill by
signing on the back
Endorsee person in whose favour the bill is endorsed.

Distinction Between Promissory Note (PN) and Bill


of Exchange (BOE)
1. PN is two-party instrument-debtor and creditor,
in BOE there are three parties- drawer, drawee
and payee.
2. A PN cannot be made payable to the maker
himself, while in a BOE the drawer and payee
may be the same person.
3. PN contains unconditional promise by maker to
pay to the payee or his order, in BOE there is an
unconditional order to the drawee to pay
according to the direction of the drawer.
4. PN is presented without any prior acceptance of
the maker. A BOE payable after, sight must be,
accepted by the drawee or some one else on his
behalf before it can be presented for payment.

5.The liability of the maker of a pronote is primary and absolute, but


liability of the drawer of a bill is
secondary and conditional.
6.Foreign bills must be protested for
dishonor but no such process is
necessary in case of note.
7.When bill is dishonored due notice of
dishonor is to be given by the drawer
and the intermediate endorsees, but
no such notice need be given in case
of a note.

Forms of Bills of Exchange


The BOE can be classified as below:
Inland bill-drawn & payable in India & drawee must
be in India
Foreign bill- bills which are not inland bills
Trade bill bill is drawn, accepted & endorsed for
trade transaction e.g. sell of goods on credit.
Accommodation bill is drawn, accepted with
consideration
Documentary bill documents of title to the goods or
other documents such as invoice, bill of lading etc
are attached to BOE.
Clean bill no documents are attached normally for
inland trade.
Escrow an instrument is delivered conditionally or
for special purpose as a collateral security or for

Cheque
A cheque is bill of exchange drawn on a
specified banker, and not expressed to
be payable otherwise than on demand. A
cheque is a BOE with two additional
qualifications viz.,
1. It is always drawn on a banker
2. It is always payable on demand
Since cheque is bill of exchange it must
satisfy all the requirements of bills, it
does not however require acceptance

Distinction between Bill of Exchange & Cheque


1. BOE can be drawn on any one including banker,
cheque is always drawn on banker.
2. BOE can be payable on demand or on expiry of the
specified period after sight or date, cheque can be
payable only on demand.
3. BOE must be accepted before payment can be
demanded, a cheque does not require acceptance
and is intended for immediate payment.
4. A grace of three days is allowed in case on BOE,
while no grace is given in case of cheque.
5. The drawer of BOE is discharged, if it is not
presented for payment, but the drawer of cheque is
discharged only if he suffers any damage by delay
in presentation for payment.

6. Notice of dishonour of bill is


necessary, but not in the case of a
cheque.
7. The cheque being irrevocable
mandate, the authority may be
revoked by countermanding
payment , but this is not so in case of
bill.
8. The cheque may be crossed but not
bill.
9. The BOE needs to be adequately
stamped and stamping is not required

CROSSING OF CHEQUE
A crossing is a direction to paying
banker to pay the money generally to a
banker or to a particular banker not to
pay otherwise.
The object of the crossing is to secure
payment to the banker so that it could
be traced to the person receiving the
amount.
To restrain negotiability addition of
words Not Negotiable or Account
Payee only is necessary.

MODES OF CROSSING
There are two types of crossing
General where the cheque bears across its
face an addition of two parallel transverse
lines/or the addition of and Co between them.
Special where a cheque bears across its face
an addition of the name of a banker, either with
or without the words not negotiable that
addition constitutes special crossing.
Accounts Payee Crossing restricts negotiability
of a cheque. The proceeds of the cheque are to
be credited only to the account of the payee.

ENDORSEMENT
When the maker or holder of a negotiable instrument
signs the same for the purpose of negotiation on the
back or on the face thereof, he is said to endorse the
same and is called endorser and the person to whom
the instrument is endorsed is called endorsee.
CLASS OF ENDORSEMENT
1. Blank or General: where the endorser merely signs
on the back of the instrument and the instrument
so endorsed becomes payable to bearer, even
though originally it is payable to order.
But the holder of instrument endorsed in blank
may convert the endorsement in blank into
endorsement in full or special by writing above the
endorsers signature a direction to pay the
instrument to another person of his order.

2. Special or Full: If endorser signs and adds direction to


pay the amount mentioned in the instrument to, or to the
order of a specific person then it is specific endorsement.
3. Restrictive : which prohibits the further negotiation of the
instrument. Pay A only
4. Partial: is one which purports to transfer to the endorsee
an a part only of the amount payable on the instrument.
A partial endorsement does not operate as a
negotiable instrument.
5.Conditional or Qualified: this limits the ability of the
endorser by:
a. by making it clear that he does not incur the liability of
an endorser to the endorsee or subsequent holder and he
is liable if the instrument is dishonoured.
b. by making his liability depend upon the happening of a
specific event which may or may not happen, e.g. Pay A
or order on his marrying B only

HOLDER
Sec.8 of the Act states a person is a holder of
a negotiable instrument who is entitled in his
own name
(i) To the possession of the instrument and
(ii)To recover or receive its amount from the
parties thereto
Thus as per Indian Law it is not every person
in possession of the instrument is called the
holder. To be the holder the person must be
named in the instrument as a payee or the
endorsee or he must be the bearer thereof.
Thus if the person holds the instrument by
theft is not a holder.

HOLDER IN DUE COURSE


(i) A person who for consideration , obtains
possession of the negotiable instrument if
payee is bearer
(ii)The payee or endorsee thereof, if payable to
order, before its maturity and without having
sufficient cause to believe that any defect
existed in the title of the person from whom
he delivered his title.
A holder in due course can recover the amount
from all previous parties, although, no
consideration was paid by some if the previous
parties to the instrument or there was defect of
title in the party from whom he tool it.

NOTING
Where note or bill is dishonored the
holder is entitled after giving due
notice of dishonor to sue the drawer
and the endorser. This is a convenient
method of authenticating the fact of
dishonor .
The noting must be recorded by the
notory within a reasonable time after
the dishonor and must contain the
facts of the dishonor, date and reason
is any assigned for such deishonor.

Protesting
The protest is the formal notarial certificate
attesting the dishonor of the bill, and based upon
the noting which has been effected on the
dishonor of the bill.
Foreign bill must be protested for dishonor when
such protest is required by law of the place
where they are drawn, however foreign
promissory notes need not be protested.
The protest to be valid must contain on the
instrument itself or a lateral transcript thereof,
the names of the parties for and against whom
protest is made, the fact and reasons for
dishonor together with the place and time of
dishonor and signature of the public notary.

DISHONOUR OF CHEQUES AND REMIDIES


SECTION 138 NEGOTIABLE INSTRUMENTS ACT 1881
Section 138 Negotiable Instruments Act as it is at present after
coming into force of The Negotiable Instruments (Amendment
And Miscellaneous Provisions) Act, 2002:
138. Dishonour of cheque for insufficiency, etc., of funds in the
account:
Where any cheque drawn by a person on an account
maintained by him with a banker for payment of any amount
of money to another person from out of that account for the
discharge, in whole or in part, of any debt or other liability, is
returned by the bank unpaid, either because of the amount
of money standing to the credit of that account is insufficient
to honour the cheque or that it exceeds the amount
arranged to be paid from that account by an agreement
made with that bank, such person shall be deemed to have
committed an offence and shall, without prejudice. to any
other provision of this Act, be punished with imprisonment for
a term which may extend to two years, or with fine which
may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply


unless (a) the cheque has been, presented to the bank within a
period of six months from the date on which it is drawn or
within the period of its validity, whichever is earlier;
(b) the payee or the holder in due course. of the cheque as
the case may be, makes a demand for the payment of the
said amount of money by giving a notice, in writing, to
the drawer of the cheque, within thirty days of the receipt of
information by him from the bank regarding the return of the
cheque as unpaid; and
(c) the drawer of such cheque fails to make the payment of
the said amount of money to the payee or, as the case may
be, to the holder in due course of the cheque, within
fifteen days of the receipt of the said notice.
Explanation.-For the purposes of this section, debt or
other liability means a legally enforceable debt or other
liability.

INGREDIENTS OF OFFENCE UNDER SECTION 138


The cheque should have been issued for the
discharge , in whole or part, of any debt or other
liability
The cheque should have been presented within a
period of six months or within its validity period
whichever is earlier.
The payee or holder in due course should have
issued a notice in writing to the drawer within 30
days of the receipt of information by him from the
Bank regarding the return of the cheque as unpaid.
After receipt of the said notice from the holder in due
course, the drawer should have failed to pay the
cheque within 15 days of receipt of the said notice.

GROUNDS FOR DISHONOUR OF CHEQUE


Funds Insufficient :
Section 138 describes the above ground of insufficient funds in
the account of the drawer of the cheque in the following words:
The amount of money standing to the credit of the account of the
drawer on which the cheque is drawn is insufficient to honour the
cheque, or
The cheque amount exceeds the amount that can be paid by the
bank under an arrangement entered into between the bank and
the drawer of the cheque.
However, besides the above, the Courts have also accepted some
other heads which though expressly do not say insufficient funds
but are implied to mean the same and a cheque dishonoured on
any of these grounds can be used for the purpose of prosecution
under section 138 Negotiable Instruments Act. Some of theses
grounds are:
1. Account Closed: It is an offence under section 138 of the
Act Closure of account would be an eventuality after the entire
amount in the account is withdrawn It means that there was no
amount in the credit of that account on the relevant date when
the cheque was presented for honouring the same

2. Stop Payment instructions:


Once the cheque has been drawn and issued to the payee and the
payee has presented the cheque, stop payment instructions will
amount to dishonour of cheque.
3. Refer to drawer:
.. makes out a case under section 138 of the Negotiable
Instruments Act, 1881 which expression means that there were not
sufficient funds with the bank in the account of the respondent
4. Not a clearing member:
Cheque returned with endorsement not a clearing member. To
attract the provisions of section 138 NI Act, the cheque should be
presented with the bank on which it I drawn- If the cheque is not
presented to the bank on which it is drawn, then provisions of sec
138 would not be attracted. If bank on which the cheque is drawn is
not a clearing member of the Reserve Bank of India unpaid return
of the cheque would not attract section 138.
5. Effect of other endorsements:
It has been repeatedly held by courts that manifest dishonest
intention of the drawer resulting in dishonour of the cheque would
lead to prosecution under section 138 Negotiable Instruments Act
regardless of the actual ground of dishonour.

COMPLAINTS AGAINST A COMPANY:


Section 141 of Negotiable Instruments Act says:
141. Offences by companies:
(1) If the person committing an offence under section 138 is a company,
every person who, at the time the offence was committed, was in charge
of, and was responsible to, the company for the conduct of the business of
the company, as well as the company, shall be deemed to be guilty of the
offence and shall be liable to be proceeded against and punished
accordingly:
- Provided that nothing contained in this sub-section shall render any
person liable to punishment if he proves that the offence was committed
without his knowledge, or that he had exercised all due diligence to
prevent the commission of such offence.
- Provided further that where a person is nominated as a Director of a
company by virtue of his holding any office or employment in the Central
Government or State Government or a financial corporation owned or
controlled by the Central Government or the state Government, as the case
may be, he shall not be liable for prosecution under this Chapter.
(2) Notwithstanding anything contained in sub-section (1), where any
offence under this Act has been committed by a company and it is proved
that the offence has been committed with the consent or connivance of,
or is attributable to, any neglect on the part of, any director, manager,
secretary or other officer of the company, such director, manager, secretary
or other officer shall also be deemed to be guilty of that offence and shall be
liable to be proceeded against and punished accordingly,

Explanation-For the purposes of this section, (a)company means any body corporate and includes a firm or other
association of individuals; and
(b) director, in relation to a firm, means a partner in the firm.
The Honble Supreme Court has held that merely being a director of a company
is not sufficient to make a person liable under section 141 of the Act. A director in
a company cannot be deemed to be in charge of and responsible to the company
for the conduct of its business. The requirement of section 141 is that the person
sought to be made liable should be in charge of and responsible for the conduct
of the business of the company at the relevant time. This has to be averred as a
fact and there is no deemed liability of a director in such cases. AIR 2005 (SCW)
4740; AIR 2005 SC 3512, AIR 2007 SC 1682
Supreme Court has also held that for the directors of the company to be made
liable for an offence under sec 138, the complaint must contain specific
allegations against directors as to how directors are in charge and responsible for
conduct of business of company. Mere allegation in complaint that accused
persons are directors and responsible officers of the company is not sufficient.
AIR 2007 SC 1454
COMPLAINT AGAINST PARTNERS
Averment in a complaint that accused (partners) at relevant time were in charge
of and responsible to the partnership firm for conduct of its business are
necessary to initiate process against them for an offence under sec 138 NI Act. In
absence of requisite averments in complaint, the offence against accused /
partners could not be made out.

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