Contents

Meaning Features Significance Types Endorsement

Negotiable Instruments

Negotiable instrument:

Is a written document which creates a right in favour of some person and which is freely transferable

Law relating to negotiable instruments in India is contained in the Negotiable Instrument Act, 1881.

Definitions
According to Section 13 (1) of the Negotiable Instrument Act, A negotiable instrument means a Promissory note, Bills of Exchange or Cheque payable either to order or bearer.

Essential features of a Negotiable Instrument

Free transfer Transfer free from defects Right to sue

No notice to transfer
Presumptions as to negotiable instruments Credit of the party

Types of Negotiable Instruments

Negotiable Instruments by Statue
Negotiable instruments by Custom or Usage

Classification of Negotiable Instruments

(a) Bearer Vs. Order Instruments (b) Inland Vs. Foreign Instruments (c) Demand Vs. Future Time Instruments

(d) Clean Vs. Ambiguous Instruments (e) Complete Vs. Inchoate Instrument (f) Clean Vs. Documentary Instruments (g) Trade Vs. Accommodation Bill (h) Fictitious Vs. Escrow Bill

Parties to a Negotiable Instrument

1. Promissory Note: (a) Maker (b) Payee 2. Bills of Exchange: (a) Drawer (b) Drawee (c) Payee 3. Cheque: (a) Drawer (b) Drawee Bank (c) Payee

Promissory Note
Is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of certain person, or to the bearer of the instrument(Section 4)

Specimen of Promissory Note

A promissory note is drawn and signed by the debtor, who promises to pay the creditor a certain sum of money.
Rs. 2500/Place: New Delhi 110023 Date: 15 May,2009

On demand, I promise to pay Mr. Joseph or order the sum of Rupees two thousand five hundred only for value received.

To
Mr. Joseph (1) (2)

Witness

Stamp Signature

Bills of Exchange
According to Section 5, a bill of exchange is 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 order of , a certain person or to the bearer of the instrument.

Specimen of Bills of Exchange

Rs. 2500/Place: New Delhi Date: May 15, 2009

Three months after date, pay to Mr. X or order the sum of Rupees two thousand and five hundred only, for value received. To Mr. Senthil Babu, Accepted 65, Church Street, Senthil Babu Nazareth.
Stamp Signature

Cheque
Section 6 of the Negotiable Instrument Act defines a cheque as follows:A bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.

Distinguishing features of a cheque and B.O.E

Cheque Bill of Exchange

1. A cheque is always drawn on printed form.

2. The drawee (banker) need not accept a cheque 3. A cheque is always supposed to be drawn against the funds in the hands of the banker

1. A bill need not be drawn on a printed form.

2. Acceptance by the drawee is essential. 3. There is no such supposition

4. A cheque is an instrument for immediate payment.

5. The liability of the drawer continues for 6 months.

4. It is drawn for a specified period and so it is intended for circulation.

5. Unreasonable delay in the presentation will discharge the Bill

6. A cheque is free from stamp 6. A bill is subject to ad duty valorem duty.

M.I.C.R. Cheque/Drafts
RBI has introduced mechanized cheque processing system using MICR(Magnetic Ink Character Recognition) technology initially in the four metropolitan cities of Mumbai, Calcutta, Chennai and New Delhi.

Under this system cheques are processed at high speed on machines.

Banks issue cheques, drafts and other payment instruments in MICR format using the special quality paper and printing specifications.

M.I.C.R. Cheque/Drafts
On MICR instruments, there is code line at the bottom containing information printed in magnetic ink, which is required for mechanical processing.

The code line contains the following information:

(

i)First six numbers indicate the cheque number (ii) next three numbers indicate city code

iii) next three numbers indicate bank code (iv) next three numbers indicate branch code After some space there is a number for transaction code

M.I.C.R Cheque

Crossing of Cheque

Crossing of cheque means a direction to the drawee banker not to pay the money over the counter,.

If not crossed, cheques are called open cheques.

In case of fraud, if cheques are crossed, it will enable to ascertain, if such cheques are paid, to what use the money has been paid

 General Crossing, Section 123 - the cheque bears two parallel transverse lines across its face with/without the words & Co., Not Negotiable, etc. - the paying banker shall make payment only to a banker.

Special, Section 124 - the cheque bear the name of a specific bank in addition of two parallel transverse lines with/without the words Not Negotiable. - such cheque can be payable to the so specified banker only by the paying banker.

Restrictive Crossing
- the cheque bears across its face words Account Payee along with general/special crossing. Such crossing restricts further transferability of cheque as the paying banker will make payment to the said payee only.

Crossed Cheque

Stale Cheque

If a cheque is not presented for payment within a reasonable time it becomes stale or out-of-date cheque.

Reasonable time depends upon the arrangement between the various banks and the customers.

In India, this reasonable period is 6 months.

No payment is made on stale cheque without getting it confirmed by the drawer.

Mutilated Cheque
are those cheques which have been damaged or mutilated in course of circulation. The bankers do not honor such cheque, in general, for payment

 In India, the term negotiable instrument does not include LIC policy, Share Certificate, FDR etc and similar other documents. However, being analogous to notes and bills, the N.I. Act applies to them under certain cases: (a) Bank Draft : It is a bill of exchange (b) Certificate of Deposit : it is a promissory note (c) Commercial Paper : it is a promissory note (d) Treasury Bill : it is a promissory note (e) Share Warrants : it is a cheque (f) Dividend Warrants : it is a cheque

Promissory Note i) In writing ii) Signed by the maker iii) Containing an unconditional Undertaking to pay iv) A certain sum of money only

Bill of Exchange i) In writing ii) Signed by the maker iii) Containing an unconditional order iv) A certain sum of money only

Cheque i) In writing ii) Signed by the drawer iii) Containing an unconditional order iv) A certain sum of money only iv) Pay to or to the order of a certain person or to the bearer vi) Need not be stamped vii) Must be dated and presented for payment after date only. viii) May be drawn in prescribed Form

v) Pay to or to the order of a iv) Pay to or to the order of certain person or to the a certain person or to the bearer of the P.N. bearer of the B.E. vi) Needs to be stamped vi) Must be properly stamped

vii) RBI Act prohibits a P. vii) RBI Act prohibits a BE Note payable on demand to drawn payable on demand a bearer. to a bearer viii) May be drawn in any form viii) May be drawn in any form

Endorsement
Endorsement has been defined in Sec. 15 of the N.I. Act 1881 as follows:

Where the maker or the holder of a negotiable instrument signs the same, otherwise that as such maker, for the purpose of negotiation, on the back or face thereof, or on a slip of paper annexed thereto. He is said to endorse the same, and is called the endorser.

Endorsement
In practice, an endorsement must always be made on the back of the instrument. Allonge if the space available on the back has been completely covered, a piece of paper may safely be attached to the instrument and subsequent endorsements may be made on that paper. The paper so attached is known as Allonge.

Significance of Endorsements

An endorsement consists of two contracts, namely:

(i) contract of transfer of property in the instrument, and

(ii) contract of contingent assumption of liability on the part of endorser

Kinds of Endorsement
(a) Blank endorsement(General Endorsement): Acc. to Sec. 16(1) of the N.I. Act the endorser signs his name only, the endorsement is said to be Blank. Example: A cheque is payable to David or order. If it simply signed by David on the back, it constitute a blank endorsement.

Kinds of Endorsement
Special endorsement(Full endorsement): Section 16(1) of th N.I. Act lays down that if he(endorser) adds a direction to pay the amount mentioned to or to the order of a specified person, the endorsement is said to be in full and the person so specified is called the endorsee of the instrument. Example: A cheque is payable to David or order. He adds a direction to pay the amount to Mr. Stephen or order and puts his signature below.

Kinds of Endorsement
(c) Restrictive endorsement: A restrictive endorsement is one which, limits the further negotiation of an instrument. The endorsee in such cases cannot further endorse it. Generally, the word only, is added after the endorsees name. Example: A cheque is payable to David. He endorses it as follows: (i) Pay to Samuel only- David (ii) For deposit only- David (iii) Pay to the order of Samuel- David however Pay to Samuel does not amount to a restrictive endorsement.

Kinds of Endorsement
An endorsement may be restrictive for the purpose of constituting the endorsee as an agent for collection. Examples: (i) Pay to kumar for my use David (ii) Pay to Mauli on my account David (iii) Pay to Akshita for the account of Dhruv David

Kinds of Endorsement
(d) Conditional endorsement: this is not a common form of endorsement. It may take many forms. It may either limit the liability of the endorser or create some liability to the endorsee to receive the payment of the instrument. The endorsees right to receive money is subject to the fulfillment of a particular event. Example: A cheque payable to David is endorsed as follows: (i) Pay to Y, if he marries X within a month- David (ii) Pay to C, if he returns from abroad. - David

Kinds of Endorsement
(e) Partial endorsement: if only a part of the amount of the instrument is endorsed, it is a case of partial endorsement Law recognizes only an endorsement of the entire amount of the instrument. Hence partial endorsement is not valid. Example: A cheque for Rs. 500/- is endorsed by Sohail as follows: Pay to Kartik Rs. 100/- only- Sohail (invalid endorsement) Supposing the same cheque is endorsed as follows: Pay to Kartik Rs. 100/- only and pay to Chetan Rs. 400/only.(validity of this endorsement is doubtful. Even though the entire amount has been endorsed, the endorsement in their favour is partial and invalid.) But , where a bill of exchange has been paid in part, it may be endorsed for the balance

Regularity of Endorsement
i) Complimentary and Courtesy Title: An endorsement should be in the form of an ordinary signature of the payee or endorsee.
Complimentary prefixes and suffixes and other courtesy title should not form part of the endorsement.

If the courtesy title appearing in the endorsement is merely descriptive, then, it is accepted.
Example: A cheque payable to Dr. Shipra Sehgal may be endorsed as Shipra Sehgal, MD.

Regularity of Endorsement
Example: A cheque is payable to Mr. Iyyappan or order whereas, the correct spelling of the payees name is Ayyappan. Here, the proper endorsement would be Iyyappan. if the payee wants, he can add his correct spellings in brackets.

(ii) Correct and Incorrect Spelling: if the name of the payee or endorsee is spelt incorrectly on a cheque, then, the endorsement must correspond with that of the mis-spelt name.

Regularity of Endorsement
(iii)Endorsement by Women: in the case of a spinster, the correct endorsement consists of her first name and surname. In the case of a married woman, she should endorse it by her name plus the name of her husband. When a cheque is payable to a married woman, in her maiden name, then, the correct form of endorsement is her name followed by her husbands surname with the words nee (meaning formerly or born as) and her maiden name. Example: A cheque is payble to Miss Priyanka khurana. But now she is married to Mr. Raj Kapoor. Here, the correct form of endorsement is Priyanka Kapoor nee khurana.

Regularity of Endorsement
(iv) Endorsement by Illiterate Persons: Cheques payable to illiterate persons should be endorsed with their left hand thumb impression, which should be witnessed by an individual wellknown to both the parties. The witness should give his/her signature and the complete address. Example: a cheque is payable to Muni lal, an illiterate person. The proper endorsement is: thumb impression of Muni lal witnessed and atteste by J.K. Passi, Advocate 7, East Car Street, Madurai

Regularity of Endorsement
(v)Endorsement by the Deceased Persons: A cheque in the name of a deceased person must be endorsed by his legal representative. Example: A cheque is payable to Mr. Ramnath or order(now dead). It is endorsed as follows: Pay to Mr Gobinath or order Parker Ramnath Son of Late Ramnath

Rights of an Endorser, Section 117

An endorser having paid the amount due thereupon an instrument is entitled to 1. the amount so paid with an interest @18% p.a. from the date of payment till its realization, and 2. All expenses caused by the dishonor and payment.

Liability of an Endorser, Section 35

Every endorser is liable to every subsequent holder, in case, the instrument is dishonoured. Where there are two or more endorsements on an instrument, the liability of the endorser will be fixed in the order in which, their signatures appear on the instrument. The liability of the endorser continues even after death till the instrument is paid. The endorser is liable, only if he is served with a notice of dishonor.

Closing Quiz
Endorsement signifies that the __________ (a) endorser has got a good title, (b) endorsers signature is genuine, (c) previous endorsements are genuine (d) All of the above One of the following endorsements is not a valid one____________ (a) partial endorsement (b) restrictive endorsement (c) conditional endorsement (d) full endorsement A cheque which is not crossed is called__________________ TRUE/FALSE Endorsement is a must for a bearer cheque also. ____ A bearer cheque will always be treated as a bearer cheque. _____ Any holder can cross a cheque.___________ A general crossing cannot be converted into special crossing._________ Two parallel transverse lines are not essential for a special crossing.______