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NEGOTIABLE INSTRUMENT

ACT, 1881
BY

PROF. ATUL H. SHUKLA

NEGOTIABLE
INSTRUMENTS
Negotiable
means
one
which can be negotiated. In
other words, anything which is
transferable from one person to
another for a consideration.
Instrument means a written
document by which a right is
created in favour of a person.
Negotiable Instruments Act,
1881 is the law governing all

NEGOTIABLE INSTRUMENTS
There is no specific definition under the act
but Sec. 13 says A negotiable instrument
means a promissory note (PN), bill of
exchange(BE) or cheque payable either to
order or to bearer.
Characteristics of a valid N. I.
1. Freely transferable : property or right in
the NI passes from one to another either on
delivery (payable to bearer) or endorsement
and delivery (payable on order).

NEGOTIABLE INSTRUMENTS
2. Title of the holder is free from all defects:
Any person receiving the NI for value and in bona
fide manner, is called holder in due course.
He gets the NI free of all defects in the title of NI.
He is not affected by defect of transferor or earlier
party.
3. Recovery: The holder in due course has right of
recovery and he can sue the party for payment.
4. Presumptions: Certain presumptions apply to
all NI (unless contrary) to make it a valid
instrument.

NEGOTIABLE INSTRUMENTS
GENERAL PRESUMPTIONS FOR VALID NI.
1.
2.
3.
4.
5.
6.
7.

Consideration
Date
Time of Acceptance
Time of Transfer
Time of Endorsement
Stamping
Holder is holder in due course.

NEGOTIABLE INSTRUMENTS
Presumptions can be challenged in a court.
The above presumptions can be
challenged by evidence only.
Person has to prove the allegations.
Presumptions will not apply in case of
any fraud, unlawful consideration or
other offence.
There can be more specified presumption
added in certain NI by the parties.

DIFFERENT TYPES OF NI
NI can be divided into 2 main categories:
1. Instruments negotiable by custom or
usage:
Government promissory notes, bankers draft,
hundis, railway receipts etc were considered NI
by customary practice.
2. Instruments negotiable by Statute ( Law) :
Section 13 defines only 3 kind of NI:
a. Promissory Notes
b. Bills of Exchange
c. Cheques

PROMISSORY NOTES
PN is defined u/s 4 as an instrument in
writing (not being a currency or bank note)
containing unconditional undertaking, signed
by the maker, to pay certain sum of money
only to, or order of a certain person or the
bearer of the instrument.
Maker (Payer): one who prepares and signs
the PN is called MAKER ( same as PAYER)
Payee: the person whom the payment is to
be made is called PAYEE.

ESSENTIAL ELEMENTS OF
PN
1. Must be in Writing: Can not be verbal.
2. Promise to Pay: It must contain an express
promise to pay ( a sum of money). Mere
acknowledgement of indebtedness or
implied undertaking is not a PN.
3. Must be definite and unconditional
Promise: if the promise to pay is uncertain,
ambiguous or conditional, it is not PN.
4. Signature: Must be signed by the Maker
of PN, otherwise it is incomplete and
defective.

ESSENTIAL ELEMENTS OF
PN
5. Certainty of the Parties: the PN
must be clear as to who is the Maker
and who is the Payee.
6. 7. Promise to pay only Money: The
promise to pay must be in legal
tender money of India.
7. Certainty of Money (Amount):
The PN must specify the exact sum
of money payable and should not
have some contingency capable of

ESSENTIAL ELEMENTS OF
PN
8. Stamping: PN must contain required
stamps under Indian Stamp Act, 1899.
9. It must be payable ON DEMAND or after
a definite period of TIME (ON DATE). Here
on demand means payable immediately.
10. PN CANNOT be payable on demand to
BEARER of PN: RBI Act, 1934 prohibits
issue of any PN payable on demand to
bearer of PN except by RBI itself of Central
Government.

BILLS OF EXCHANGE
Sec 5 defines Bill of Exchange (BE) is an
instrument in writing, with an unconditional
order signed by the maker directing certain
person to pay a certain sum of money, only to
(or order of) certain person or the bearer..
Normally there are 3 parties in BE.
1. Person making the order or the bill, DRAWER
2. Person directed to pay, DRAWEE. He is called
ACCEPTOR when he accept the BE.
3. Person to whom payment is to be made is
called PAYEE.

ESSENTIAL ELEMENTS OF BE
1. Instrument in writing and signed by
drawer
2. Unconditional Order to Pay
3. Essential to have 3 parties
4. All parties must be certain
5. Sum must be certain
6. Payment in Money only
7. Stamping is must.

DIFFERENCE BETWEEN PN &


BE
1. In BE there are 3 parties in PN only 2.
2. PN is promise to pay, BE is order to pay.
3. Maker of PN is debtor, obliged to pay. Maker
of BE is creditor, who orders some one else
(his debtor) to pay the third party (payee).
4. Liability , in PN it is primary and absolute, in
BE it is secondary and conditional.
5. No acceptance required in PN, in BE
acceptance by the drawee is must.

DIFFERENCE BETWEEN PN &


BE
There is direct relations between maker and
payee in PN; while in BE there is direct
relation between drawer and drawee
(acceptor).
A PN can not be payable to maker but in BE,
the drawer and payee can be same party.
PN can not be drawn payable to bearer but
in some circumstances, BE can be payable
to bearer. But both can not be payable to
bearer on demand.

CHEQUE
A CHEQUE (CH) is a BE drawn on a
specified banker in specified form
only.
2 features are must in CH.
a. Always on specified banker.
b. Always payable on demand.
All CH are BE but all BE are not CH.
WHY?

DIFFERENCES BETWEEN BE & CH


1. BE can be drawn on any person while CH
can be drawn only on a BANK.
2. BE must be accepted by the drawee but no
acceptance required in CH.
3. BE can be payable after a period (with 3
days of grace), CH is always payable on
demand.
4. A CH can be crossed but not a BE.
5. BE requires stamping while in CH, no
stamping is required.

CROSSING OF CHEQUES
A CH can be payable to the PAYEE without
acceptance by the BANK (Drawee).
The mode of payment depends on
whether CH is crossed or not and if
crossed; the manner of crossing.
There are mainly 3 types of crossing:
1. General
2. Special
3. Restrictive

CROSSING OF CHEQUES
General crossing is one where 2 parallel
transverse lines are drawn, with or without
words not negotiable.
When CH is crossed generally, the drawee
banker will pay only if presented by any banker.
Special crossing is one where name of a
specified bank ( called collecting banker) is
written with or without words not negotiable.
When it is crossed specifically, it will be payable
only thru banker whose name is mentioned on
it.

CROSSING OF CHEQUES
In restrictive crossing, words A/c Payee only
are written with or without name of the
collecting banker.
This is the most safe way of crossing for the
drawer of the CH because the drawee bank is
prima facie responsible if proceeds of the CH
is credited to any account other than payee.
As per section 126, A cheque can be crossed
by drawer or holder ( generally payee) or
banker has right to cross the CH.

CLASSIFICATION OF N.I.
There are many different varieties of
Negotiable Instruments.
1. Bearer and Order Instruments.
A NI is a bearer instrument if :
(a)It is expressly payable to bearer or
(b)If the last endorsement on the
document is endorsement in blank.
Any person who is in lawful possession
of the NI

CLASSIFICATION OF N.I.
Payable to bearer is known as holder in due course
and he can enforce the payment due on the N.I.
A BE or PN can not be made payable to bearer on
demand. The RBI Act , 1934 prohibits issue of PN
payable to bearer.
An ORDER instrument is one , which is not
BEARER. It should contain words like payable to
Mr. X or Order.
Both Bearer and Order Instruments are
Transferable by either delivery or delivery plus
endorsement.

CLASSIFICATION OF N.I.
Inland and Foreign Bills [Section 11
and 12]
Inland Bill:
It is drawn in India on a person
residing in India
and
payable in
India; or
Drawn on a resident of India &
payable in India is an Inland bill even
if drawn outside India.
Foreign Bill:
A bill drawn in India on a person
residing outside India and made

CLASSIFICATION OF N.I.
Time and Demand Bills:
Time Bill: A bill payable after lapse of time is termed
as a time bill. A bill payable after an date is also
time bill.
Demand Bill: A bill payable at sight or on demand is
termed as a demand bill.
Trade and Accommodation Bills:
Trade Bill: A bill drawn and accepted for a genuine
trade transaction is termed as trade bill.
Accommodation Bill: A bill drawn and accepted not
for a genuine trade transaction but only to provide
financial help to some party is termed as an
accommodation bill.

NEGOTIATION
According to section 14 of the Act, when a
promissory note, bill of exchange or cheque is
transferred to any person so as to constitute that person
the holder thereof, the instrument is said to be
negotiated. The main purpose and essence of
negotiation is to make the transferee of a promissory
note, a bill of exchange or a cheque the holder there of.
Negotiation thus requires two conditions to be fulfilled,
namely:
There must be a transfer of the instrument to another
person; and
The transfer must be made in such a manner as to
constitute the transferee the holder of the instrument.

MODES OF NEGOTIATION

Negotiation by delivery (Sec. 47):


Where a promissory note or a bill of exchange or a
cheque is payable to a bearer, it may be negotiated by
delivery thereof. Example: A the holder of a negotiable
instrument payable to bearer, delivers it to Bs agent to
keep it for B. The instrument has been negotiated.
Negotiation by endorsement and delivery (Sec.
48):
A promissory note, a cheque or a bill of exchange
payable to order can be negotiated only be
endorsement and delivery. Unless the holder signs his
endorsement on the instrument and delivers it, the
transferee does not become a holder. If there are more
payees than one, all must endorse it.

ENDORSEMENT
Something written, especially a comment with
signature, written on the back of a document
to make it payable in a manner specified, to
approve it, or to comment on it.
The word endorsement in its literal sense
means, writing on the back of an instrument.
But under the Negotiable Instruments Act it
means, the writing of ones name on the back
of the instrument or any paper attached to it
with the intention of transferring the rights
therein.

ENDORSEMENT
Thus, endorsement is signing a negotiable instrument
for the purpose of negotiation. The person who effects
an endorsement is called an endorser, and the
person to whom negotiable instrument is transferred
by endorsement is called the endorsee.
Who may Endorse / Negotiate [Sec. 51]:
Every maker, drawer, payee or endorsee, or all of
several joint makers, drawers, payees or endorsees of
a negotiable instrument may endorse and negotiate
the same if the negotiability of such instrument has
not been restricted or excluded.

ENDORSEMENT

Essentials of a Valid Endorsement:


It must be on the back or face of instrument or on
a slip of paper annexed thereto.
It must be signed by the endorser.
It must be completed by the delivery of the
instrument.
It must be made by the holder of the instrument.
Kinds of Endorsement:
Blank or General Endorsement
Full or Special Endorsement
Partial Endorsement
Restrictive Endorsement
Conditional Endorsement

PRESENTMENT OF A N.I.
Presentment under the act means physical
showing of the NI to the drawee, acceptor
or maker for either acceptance or payment.
Mainly 2 types of presentment are done:
1. Presentment of only BE for acceptance.
2. Presentment of PN,BE or CH for payment.
(in case of PN presentment for sight is
required before payment in some cases).
3. Presentment must be done in prescribed
manner, during business hours, on the
date and at the place mentioned in the
instrument.

DISCHARGE UNDER N.I.


ACT
Under N.I. Act, discharge has two context:
1. Discharge of the instrument.
2. Discharge of the party/parties from liability.

Discharge of an Instrument:
a. By payment in due course.
b. When party primarily liable for payment,
becomes holder of the N.I.
c. By express waiver.
d. By cancellation.

DISCHARGE OF PARTY
1. By payment.
2. By cancellation: when name of any
party
is
duly
cancelled
with
intention to discharge
3. By expressly releasing the party in
any method other than cancellation.
4. By non-presenting of cheque in
time.
5. By operation of law. e.g. merger,
insolvency, lapse of time etc.

DISHONOUR OF N.I.
What is dishonour in case of N.I. ?
Under N.I. Act, dishonour is the act on the part of
one or more party resulting in failure to fulfill the
commitment as required by the law. It must be
an explicit act on the part of defaulting party.
Dishonour of N.I. can be of 2 types:
1. Dishonour by non-acceptance (only in case of
Bills) of the N.I.
2. Dishonour by non-payment (in case of all 3
kinds of N.I.; PN, BE and CH)
There are more serious consequences in case of
dishonour by non-payment.

DISHONOUR BY NON-ACCEPTANCE
Dishonour by non-acceptance can be a
result of any of the following:
1. The drawee does not accept the bill
within 48 hours of presentment.
2. If there are more than 1 drawee and all of
them have not accepted the bill.
3. When drawee gives qualified acceptance.
4. When drawee is incompetent to contract.
5. When drawee is a fictitious person and
can not be traced after reasonable search.

DISHONOUR BY NONPAYMENT
Dishonour by non-payment is said to
have happened when maker of PN ,
acceptor of BE or drawee bank of CH
makes default in payment at the
time
when
the
instrument
is
presented for payment in due course.
For steps against dishonour to be
effective, the payment must be due
and the holder of the instrument
must be holder in due course.

NOTICE OF DISHONOUR
Notice of dishonour must be given to inform the
defaulting party about the liability arising as a
result of dishonour of the instrument.
Who can give notice?
1. Holder or any prior party.
2. Principal or agent or any authorised person.
. Notice to Whom?
1. All parties, whom the holder seek to make liable.
2. To the party or agent or legal rep. or assignee.
3. Not compulsory to give notice to maker of PN,
acceptor of BE or drawee of the cheque. They are
primarily liable for honouring the instrument.

REQUIREMENTS FOR COMPENSATION

Duties of the holder :


1. Notice of dishonour to all parties.
2. Noting & Protesting by a Notary Public.
3. Suit for recovery of money.
. Rules for Compensation:
1. Compensation to the holder for amount
and expenses.
2. Re-draft of the instrument.
3. Compensation to endorser for amount
paid and interest @ 18% p.a. on the
amount.

PENALTIES FOR DISHONOUR


OF CHEQUE FOR
INSUFFICIENCY OF FUNDS

New chapter XVII has been inserted in the act


comprising of Sec 138 to 142 (in 1988 &
2002).
Sec 138: In case of dishonour of a cheque
due to insufficiency of funds, the drawer of
the CH shall be punished with imprisonment
up to 2 years or with a fine which may extend
up to 2 times of the amount of CH or both.
Sec 139: it is assumed that holder of the CH
was in discharge of debt or liability.

Conditions for Action u/s 138.

1. The CH must be returned (dishonoured) by the


drawee bank due to insufficiency of funds in
the drawers account and no other reason.
2. The payment must be in discharge of legally
enforceable debt or liability.
3. The CH must be presented by payee within
period of validity, i.e. within 3 months of date.
4. Payee or holder must give notice demanding
payment from holder within 30 days of
receiving info from bank for dishonour.
5. The drawer is liable for action u/s 138 only if
he fails to make payment within 15 days of
such notice period.

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