Beruflich Dokumente
Kultur Dokumente
NEGOTIABLE
INSTRUMENT
S ACT 1881
Meaning of Negotiable
Instruments
o According to the Section 13 of the
Act, a negotiable instrument
means, a promissory note, bill of
exchange or cheque payable
either to order or bearer, whether
the words order or bearer
appear on the instrument or not
It
must be transferable by
delivery or by endorsement and
delivery.
The property in it must pass to a
bona fide transferee for value,
free from any defect in the title of
the transferor.
The holder must be able to sue
upon it in his own name
Free transferability
Holders title free from defects
Recovery
Presumptions of Sections 118 and 119
Date
Time of acceptance
Time of transfer
Order of endorsements
Stamp
Holder in due course
Consideration
Proof of protest
KINDS OF NEGOTIABLE
Negotiable
instruments by statute:
Promissory notes, Bills of exchange
and cheques.
Negotiable
instruments by usage:
Share warrants, Dock warrants, Bearer
bonds, Exchequer bills, Dividend
warrants, Circular notes, Bank
notes/drafts, Debentures, Government
Promissory notes, Railway receipts.
The
PROMISSORY NOTE
Section
4 defines a Promissory
note as an instrument in writing
(not being a bank note or a
currency note) containing an
unconditional undertaking, signed
by the maker, to pay a sum of
money only to, or the order of, a
certain person, or to the bearer of
the instrument.
CHARACTERISTICS OF A
PROMISSORY NOTE
Instrument in writing
Promise to pay
The promise to pay must be unconditional
Signed by the maker
Certainty of the parties
Certain sum of money
The promise must relate to the payment of money
only
Other formalities like stamp, date place,
consideration
It may be payable on demand or after a definite
period of time
It cannot be made payable to bearer on demand
Bombay
July 11, 2006
(Stamp)
Ram Gupta
BILL OF EXCHANGE
Section
5 defines a bill of
exchange as, an instrument in
writing containing an
unconditional order, signed by the
maker, directing a certain person
to pay a certain sum of money
only to, or to the order of a
certain person or to the bearer of
the instrument.
Drawer
Drawee
Drawee in - case - of need
Acceptor for honour
The payee
The holder
ESSENTIAL CHARACTERISTICS OF A
BILL OF EXCHANGE
It
must be in writing.
It must contain an order to pay.
The order must be unconditional.
The order must be to pay money only.
The sum payable must be certain.
It must be signed by the drawer, and
dated.
The drawer, drawee, and payee must
be certain.
It must be properly stamped.
Accepted
(Stamp)
Ram Gupta
Dr. S.P. Narang
3, Lodi Road
N. Delhi 110003
QUALIFIED ACCEPTANCE
If
DISTINCTION BETWEEN A
PROMISSORY NOTE AND A BILL OF
EXCHANGE
Sl. Basis
No of
.
differe
nce
1. Numbe
r of
parties
Promissory note
Bill of exchange
2.
It contains an
unconditional
promise by the
Parties
vs.
Order
3. Acceptanc
e
It does not
need any
acceptance
4. Nature of
liability
The liability of
the maker is
primary.
5. Need of
notice of
dishonour
In case of its
dishonour,
there is no
need to give
any notice of
It must be
accepted by the
drawee or his
authorized agent
before it is
presented for
payment.
The liability of the
drawer is
secondary and it
arises only when
the drawee does
not pay.
The notice of
dishonour must be
given by the
holder to the
drawer and the
7. Restrictio
ns
It cannot be
made payable to
bearer in view of
restriction of
Section 31 of RBI
Act 1934.
8. Protesting No protesting is
required in case
of its dishonour.
It can be made
payable to bearer
but not to
bearer on
demand.
Foreign bills must
be protested for
dishonour if such
protest is
required by the
law of the place
where they are
drawn. [Section
104]
The drawer of a
bill stands in
immediate
CHEQUE
Section
26 defines a cheque
as, a bill of exchange drawn
on a specified banker and not
expressed to be payable
otherwise than on demand
and it includes the electronic
image of a truncated cheque
and a cheque in the electric
form.
ESSENTIAL
CHARACTERISTICS OF A
CHEQUE
It
is always drawn on a
specific banker.
It is always payable on
demand.
Basis of
differen
ce
Drawee
2.
Accepta
nce
3.
Payable
to
bearer
on
demand
Cheque
Bill of Exchange
It can be drawn
only on a
banker.
It does not
require any
acceptance.
It can be made
payable to
bearer on
demand.
It can be drawn on
any person
including a banker.
It needs
acceptance from
the drawee.
It cannot be drawn
payable to bearer
on demand.
5.
It must be duly
presented to the
acceptor for
payment, else the
drawee will be
discharged from
liability.
6.
Crossing
It may be crossed.
There is no provision
of crossing.
7.
Stoppage
of
payment
8.
Noting
and
protesting
There is no need of
noting or protesting in
case of its dishonour.
It must be noted or
protested for
dishonour.
9.
Stamping
It needs stamping
except in certain
cases.
1
0.
Notice of
dishonour
No notice of dishonour
is required.
The holder is
required to give
notice to all the prior
Stale
TYPES OF CROSSING
General
Special
Restrictive
crossing
Liability
VARIOUS
KINDS OF
NEGOTIABLE
INSTRUMENT
S
Instrument
According to Explanation (ii) to Section
13(1), a negotiable instrument is payable
to bearer if
(i) It is expressed o be so payable, or
(ii) It is one on which the only or the last
endorsement is an endorsement in blank
Eg. The instruments made in the following
words are bearer instruments: (a) Pay to
X or bearer (b) Pay the bearer
Order
instrument
It is an instrument which is expressed
to be payable to order or to a
particular person and does not contain
words prohibiting its transfer or
indicating an intention that it shall not
be transferrable.
Eg. Pay X or order Rs. 5000; Three
months after date, pay X are
instances of order instruments. But
the instrument containing the words,
Pay X only, is not an order
instrument. Rather such an
(ii)
payable on demand:
A cheque is always payable on demand and it
cannot be expressed to be payable otherwise
than on demand [Section 6, and 19].
A promissory note and a bill is payable on
demand if:
(a) it is expressed to be payable on
demand, or at sight, or on presentment
[Section 21], or
(b) no time for its payment is specified
[Section 19].
Time
Inland
Foreign
New York
July 11, 2006
Documentary
Clean
Ambiguous
Inchoate
Fictitious
Escrow:
A negotiable instrument
delivered conditionally or for a special
purpose such as a collateral security or
for safe custody only, but not for the
purpose of negotiation is called an
escrow.
The
MATURITY OF NEGOTIABLE
INSTRUMENT
The maturity of a promissory not, or a
billl of exchange is the date on which it
falls due [Section 22].
Days of grace are not allowed in the
case of the following instruments:
(i) A cheque,
(ii) A bill or note payable at sight, or
on presentment, or on demand,
and
(iii) A bill or note in which no time is
mentioned.
The
CALCULATION OF DATE OF
MATURITY
If
Eg.
PARTIES TO
NEGOTIABLE
INSTRUMENT
S
The
Holder:
Holder
In
2.
3.
4.
5.
6.
7.
2.
Holder
A holder is
entitled in his
own name to the
possession of
the instrument
and to recover
the amount due
thereon from
the parties
liable thereon.
Considera It is not
Holder in Due
Course
A holder in due
course denotes a
holder who takes
the instrument in
good faith, for a
consideration
and before its
maturity.
He must have
3. Maturity
4. Title
He may acquire
a negotiable
instrument even
after its
maturity
The title cannot
be better than
that of the
transferor.
5. Possession It is not
necessary for a
holder.
6. Good faith
and
A holder may
have defect in
He must have
obtained it
before maturity.
7.
Right to
recover
A holder can
recover the
amount of the
instrument from
the maker and
the transferor
but not from all
the prior parties.
8.
Special
privileges
No special
privileges.
The holder in
due course
can recover
the amount
from any of
the prior
parties until
the
instrument is
duly
discharged.
The law has
conferred
special
privileges on
the holder in
due course.
CAPACITY OF PARTIES
According to Sec. 26, every person capable of
contracting, may bind himself and be bound by
making, drawing, accepting, accepting, endorsing,
delivering and negotiating a promissory note, bill
of exchange or a cheque.
The extent of liability of different parties:
1. Minor
2. Person of unsound mind
3. Joint Stock company
4. Agent
5. Partner
LIABILITY OF PARTIES
Liability of legal representative [Sec. 29]
2. Liability of drawer of a bill of exchange or of a
cheque [Sec. 30]
3. Liability of drawee of cheque [Sec. 31]
4. Liability of maker of note and acceptor of bill
[Sec. 30]
5. Liability of endorser [Sec. 35]
E.g. X is the holder of a bill which is payable to Y
or order . The bill contains three endorsements.
First endorsement: Y; Second endorsement: Z;
Third endorsement: M. X sues M and strikes off
the rest of the endorsements without Ms
consent. X cannot recover anything from M.
1.
NEGOTIATION
AND
ENDORSEME
NT
NEGOTIATION
Modes of Negotiation
1. Negotiation by delivery [Sec. 47]
E.g. A holds a cheque payable to bearer. He puts the
cheque into his desk drawer from where it is stolen
by B. There is no negotiation of the cheque from A
to B as it has not been voluntarily delivered to B.
2. Negotiation by endorsement and delivery
E.g. A draws a cheque for Rs. 1000 payable to B and
delivers it to him. B endorses it in favour of C and
then puts the cheque in his table drawer.
Thereafter B meets with an accident and dies. The
cheque is found lying in Bs drawer by C. In this
case there is no negotiation because endorsement
has not been completed by delivery.
EFFECT OF NEGOTIATION
A
ASSIGNMENT
It
DIFFERENCE BETWEEN
NEGOTIATION AND ASSIGNMENT
Sl. No.
Negotiation
Assignment
1.
Formalities
Negotiation can be
done:
(i) By delivery in
the case of a
bearer
instrument,
(ii)By endorsement
and delivery in
case of order
instruments
Consideration is
always presumed
in case of
It requires a
written document
signed by the
assignor.
2.
Considerati
on
The assignor
must establish
that he has
3.Notice
4.Title
5. Right to
sue
No notice of
transfer is
necessary.
Notice of
assignment must
be given to the
debtor by the
transferee.
The transferee of a The title of the
negotiable
assignee is
instrument, if he is subject to the
a holder in due
defects that may
course, takes the
exist in the title
instrument free
of the assignor.
from any defect
that may exist in
the title of the
transferor.
Transferee can sue An assignee
the third parties in cannot sue third
his own name.
parties in his
ENDORSEMENT
According
KINDS OF ENDORSEMENTS
1.
2.
Restrictive Endorsement
E.g. (i) Pay C only (ii) Pay X or order for the account
of Y.
3.
Partial Endorsement
E.g. X holds a bill for Rs. 1000. He endorses it as
Pay to B or order Rs. 500. This is a partial
endorsement and hence invalid.
4.
5.
(i)
(ii)
(iii)
(iv)
Conditional Endorsement
Sans recourse endorsement
Facultative endorsement
Sans frais endorsement
Contingent endorsement
(ii)
(iii)
PRESENTMEN
T OF
NEGOTIABLE
INSTRUMENT
S
Meaning
of Presentment
Presentment means showing an
instrument to the drawee, acceptor, or
maker for acceptance or payment.
Presentment is of three kinds,
(a) For acceptance, in case of a bill of
exchange,
(b) For sight in case of a promissory note,
and
(c) For payment in case of all the
negotiable instruments
ESSENTIALS OF VALID
ACCEPTANCE
(a)
(b)
(c)
(d)
(e)
PRESENTMENT TO WHOM
Presentment for acceptance maybe made to the
following:
(i) To the drawee or his duly authorized agent.
(ii) To all the drawees, except in the case os a
trading firm where one partner may accept for
the firm on behalf of all the partners.
(iii) To the legal representative, in case the drawee is
dead.
(iv) To the official assignee/receiver in case the
drawee has become insolvent.
(v) To a drawee in case of need.
(vi) To an acceptor for honour;
CIRCUMSTANCES WHEN
PRESENTMENT FOR ACCEPTANCE
IS EXCUSED
When
The
2.
3.
4.
2. PRESENTMENT OF PROMISSORY
NOTE FOR SIGHT
A
On
CIRCUMSTANCES WHEN
PRESENTMENT FOR PAYMENT IS
NOT NECESSARY
1.
2.
3.
4.
5.
6.
7.
8.
DISHONOUR
AND
DISCHARGE
OF A
NEGOTIABLE
INSTRUMENT
(a) non-acceptance
(b) non-payment
1. DISHONOUR BY NONACCEPTANCE
If the drawee refuses to accept it, or
does not accept it within 48 hours
from the time of presentment for
acceptance.
(ii) If presentment for acceptance is
excused and it has remained un
accepted.
(iii) If the drawee is incompetent to
contract.
(iv) If the drawee gives qualified
acceptance.
(i)
2. DISHONOUR BY NON-PAYMENT
When
When
NOTICE OF DISHONOUR
Section
93 makes it obligatory
for the holder of an
instrument to give a notice of
dishonour to every party
whom he wants to make
liable.
DISCHARGE OF A NEGOTIABLE
INSTRUMENT
The
METHODS OF DISCHARGE OF AN
INSTRUMENT
By payment in due course to the
person legally entitled to receive it at
or before maturity.
(ii) When the party primarily liable
becomes holder of the instrument in
his own right.
(iii) By express waiver
(iv) By cancellation of the instrument by
the holder.
(v) By discharge as a simple contract.
(i)
DISCHARGE OF A PARTY OR
PARTIES
By payment in due course.
(ii) By cancellation of the instrument.
(iii) Be release of a party to the instrument.
(iv) By allowing drawee more than 48 hours to
accept.
(v) By non-presentment of a cheque within a
reasonable time of its issue.
(vi) In case of a qualified acceptance, the parties
not consenting to it are discharged.
(vii) By operation of law.
(viii)By material alteration.
(i)
MATERIAL ALTERATION
It
Instances
of material alteration:
(a) Alteration in the date, time or place of
payment;
(b) Conversion of an order cheque into a
bearer cheque;
(c) Alteration in the sum payable.
(d) Opening a crossed cheque.
(e) Alteration in the rate of interest.
(f) The addition of names of new parties
as payees of the instrument.
BOUNCING
OF CHEQUES
2.
3.
4.
5.
6.
(iv)
(v)
PRESUMPTION IN FAVOUR OF
HOLDER [SEC. 139]
It
Defences
Death of Complainant:
The complaint under Section 138 does not abate
on the death of the complainant. His legal heirs
may pursue the case.
If the accused dies, the criminal complaint cannot
be continued against his legal heirs.
Offence