Negotiable Instrument

Sec.13. A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.

Negotiable Instrument - Definition

Sheldon : An instrument can only be said to be fully negotiable when the absolute ownership of the property represented by the instrument vests in the holder, so that (1) he is not prejudiced by any defect in his transferors title and (2) he can sue on the instrument in his own name.

Negotiable Instrument - Definition

Judge Willis: A negotiable instrument is one, the property in which is acquired by one who takes it bona fide and for value notwithstanding any defect in title of the person from whom he took it.

Negotiable Instrument - Definition

More comprehensive definition: A negotiable instrument is one which is, by a legally recognized custom of trade or by law, transferable by delivery or by endorsement and delivery in such circumstances that (a) the holder of it for the time being may sue on it in his own name and (b) the property in it passes, free from equities, to a bonafide transferee for value, notwithstanding any defect in the title of the transferor. (Thomas)

Specimen of a Promissory Note

Rs.10,000/Bangalore, 07-04-2005

Six months after date I promise to pay Sor order the sum of Rupees Ten Thousand only for value received. To S Nitte Institute of Technology Yelahanka.

Specimen of a Bill of Exchange

Rs.10,000/Bangalore 07-04-2005

Six months after date pay to X or order the sum of Rupees Ten Thousand Only for value received. To S Nitte Institute of Technology Yelahanka.

Specimen of a Cheque
07-04-2005 PAY s________________________________

____________________________________________OR BEARER RUPEES TEN THOUSAND ONLY----------------------------------------------Rs. 10,000/UTI BANK LTD. YELAHANKA ___________________
(Signature of the Account Holder)

Distinction between Cheque and Bill of Exchange

1. A cheque is always drawn on a banker. A Bill may be drawn on any person including a banker.

Distinction between Cheque and Bill of Exchange

2. A cheque can only be drawn payable on demand. A bill may be drawn payable on demand or on the expiry of a certain period after date or sight.

Distinction between Cheque and Bill of Exchange

3. A cheque drawn payable to bearer on demand is valid. A Bill drawn payable to bearer on demand is absolutely void and illegal.

Distinction between Cheque and Bill of Exchange

4. A cheque does not require any acceptance by the drawee before payment can be demande A Bill requires acceptance by the drawee before he can be made liable thereon.

Distinction between Cheque and Bill of Exchange

5. A cheque does not require any stamp. A Bill of Exchange must be properly stamped.

Distinction between Cheque and Bill of Exchange

6. A cheque is always payable on demand; there is no question of allowing any days of grace. Three days of grace are allowed while calculating the maturity date in the case of time bills.

Distinction between Cheque and Bill of Exchange

7. A cheque can be crossed A Bill of Exchange cannot be crossed.

Distinction between Cheque and Bill of Exchange

8. Payment of a cheque can be countermanded. Payment of a bill cannot be countermanded.

Distinction between Cheque and Bill of Exchange

9. There is no system of Noting or Protest in the case of a cheque. Bills require Noting and Protest in case of dishonour.

Distinction between Cheque and Bill of Exchange

10.A cheque can be presented for payment within 6 months from the date of drawal. The drawer of a bill is discharged from liability, if it is not duly presented for payment.

Holder in due course

A holder in due course is one who receives the instrument for value and without any notice as to the defect in title of the transferor.

The presumptions:
1. consideration. Every negotiable instrument is deemed to have been made, drawn, accepted, endorsed, negotiated or transferred for consideration.

The presumptions:
2. Date. Every negotiable instrument bears the date on which it is drawn.

The presumptions:
3.Acceptance. Every bill of exchange was accepted within a reasonable time after the date mentioned therein and before maturity date.

The presumptions:
4. Transfer Every transfer was made before maturity date.

The presumptions:
5.Order of endorsements: All endorsements were made in the same order as they appear thereon.

The presumptions:
6. Lost instruments: The lost instruments were duly stamped and the stamp was duly cancelled

The presumptions:
7. Holder-in-due-course. Holder of the instrument is a holder in due course.

The presumptions:
8. Dishonour. On proof of protest, the court shall presume the fact of dishonour, unless it is disproved.

Examples of Negotiable Instruments Negotiable Instruments : Bills of Exchange, Promissory Notes, Cheques, Govt. Promissory Notes, Treasury Bills, Dividend Warrants, Share Warrants, Bearer Debentures, Port Trust/Improvement Trust Debentures, Hundis, Railway Bonds payable to bearer, etc.

Non-negotiable instruments:
Money Orders, Postal Orders, Fixed Deposit Receipts, Share Certificates, Letters of Credit.

Quasi-Negotiable Instruments (Documents of Title)

Bills of Lading, Railway Receipts, Dock Warrants, Wharfinger Certificates. These are transferable by endorsement and delivery but the transferor cannot give the holder any better title than what he himself possesses. Provisions of Negotiable Instruments Act, do not apply to them.

PROMISSORY NOTE:
A 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 to, or to the order of, a certain person, or to the bearer of the instrument.

Essentials of a Promissory Note:

1. It must be in writing. 2. Must contain a promise or undertaking to pay. 3. The promise to pay must be unconditional 4. It must be signed by the maker. 5. The maker must be a certain person. 6. The payee must be certain. 7. The sum payable must be certain. 8. The amount must be in legal tender in India. 9. Other formalities such as place and date

BILL OF EXCHANGE:
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 the order of, a certain person or to the bearer of the instrument.

Essentials of a Bill of Exchange:

1. It must be in writing. 2. It must contain an order to pay. 3. Order to pay must be unconditional. 4. It must be signed by the drawer. 5. The drawer, drawee and payee must be certain because of the rule of law where liability lies, no ambiguity must lie. 6. The sum payable must be certain. 7. The bill must contain order to pay money only. 8. Must comply with the formalities as regards date, consideration, stamps, etc.

Distinction between a Pro-note and a Bill of Exchange:

1. Number of parties: Pro-Note, there are two parties the maker (debtor) and the payee (creditor). Bill of Exchange, there are three parties the drawer, drawee and the payee, although any two of these capacities may be filled by one and the same person.

 2. In Pro-note, the maker cannot be the payee. In Bill of Exchange, the drawer and Payee can be one person Pay to me or my order. 3. Promise and Order: Pro-note, promise to make payment. In Bill, an order to make payment. 4. Acceptance: Pro-note requires no acceptance. In Bill, It must be accepted by the drawee.

 5. Nature of liability : Pro-note liability is primary. B/E secondary and conditional. Only when the acceptor does not honour, the liability falls on the drawer. 6. Makers position : Pro-note contains an unconditioinal promise to pay. He stands in immediate relation to the payee and cannot make the pro-note conditional. B/E Acceptor may accept the bill conditionally (S.86) However drawer has to make an unconditional order to pay.

 7. Payable to bearer: A pro-note cannot be payable to bearer. B/E can be drawn to bearer provided it is not payable to bearer on demand. 8. Notice of dishonour: Pro-note No notice necessary. B/E Notice of dishonour must be given by holder to all prior parties liable to pay. 9. Certain provisions: Provisions relating to presentment for acceptance, acceptance, acceptance supra protest and drawing in sets, are applicable only to B/E. Not for Pro-Note.

CHEQUE:
A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.

 Cheque 1. A cheque is always drawn on a banker. 2. A cheque can only be drawn payable on demand. 3. A cheque drawn payable to bearer on demand is valid. 4. A cheque does not require any acceptance by the drawee before payment can be demanded. 5. A cheque does not require any stamp.

Bill Of Exchange 1. A Bill may be drawn on any person including a banker. 2. A bill may be drawn payable on demand or on the expiry of a certain period after date or sight. 3. A Bill drawn payable to bearer on demand is absolutely void and illegal. 4. A Bill requires acceptance by the drawee before he can be made liable thereon. 5. A Bill of Echange must be properly stamped.

 6. A cheque is always payable on demand; there is no question of allowing any days of grace. 7. A chque can be crossed. 8. Payment of a cheque can be countermanded. 9. There is no system of Noting or Protest in the case of a cheque. 10.A cheque can be presented for payment within 6 months from the date of drawal.

6. Three days of grace are allowed while calculating the maturity date in the case of time bills. 7. A Bill of Exchange cannot be crossed. 8. Payment of a bill cannot be countermanded. 9. Bills require Noting and Protest in case of dishonour. 10. The drawer of a bill is discharged from liability, if it is not duly presented for payment.

Bills in Sets. Accommodation Bills. Fictitious Bill V. Forged Bill. Documentary Bill. And Clean Bills. Bank Draft. Hundis. Inland and Foreign Instruments. Time and Demand Instruments. Ambiguous Instruments. Inchoate Instruments. Escrow

Calculation of Maturity Date

Maturity of B/E and Pro-note. three days after the date it is expressed to be payable.

Payment in due course

  
in accordance with the tenor, without negligence and in good faith, to the person in possession of the instrument, payment in money only.

HOLDER IN DUE COURSE:

Holder In due course means a person who for consideration became the possessor of a negotiable instrument if payable to bearer, or the payee or indorsee thereof if payable to order, before the amount mentioned in it became payable, and without sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

Privileges of a Holder in due course:

1. He gets a better title than the Transferor. 2. Privilege in case of Inchoate stamped instruments. 3. Liability of prior parties. 4. Privilege in case of fictitious bills. 5. Privilege when an instrument delivered conditionally is negotiated. 6. Estoppel against denying original validity of instrument. 7. Estoppel against denying capacity of the payee to indorse.

An acceptor for honour or Acceptance supra-protest:

Sec. 108 :When a bill of exchange has been noted or protested for nonacceptance or for better security, any person not being a party already liable thereon may with the consent of the holder, by writing on the bill, accept the same for the honour of any party thereto.

Negotiation and Assignment distinguished:

Negotiation 1. Negotiation requires mere delivery of a bearer instrument and indorsement and delivery of an order instrument. 2. No notice of transfer of debt need to be given in the case of negotiation. 3. If the transferee takes the instrument for value, and in good faith, as holder in due course, he takes it free of all defects in title. 4. Consideration is presumed in transfer by negotiation. Assignment 1. Assignment requires a written document signed by the transferor irrespective of whether the instrument is a bearer or an order one. 2. In assignment, notice of transfer of debt is required to be given. 3. The assignee takes the instrument subject to the defects in title of the assignor, even though against value and in good faith.. 4. Burden of proof of consideration lies upon the assignee.

INDORSEMENT:
When the maker or holder of a negotiable instrument signs the same otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as negotiable instrument, he is said to indorse the same, and is called the indorser.

Kinds of indorsement
1. Blank or general indorsement: If the indorser just signs his name only without specifying the name of the indorsee, the indorsement is said to be blank. The blank indorsement converts the order instrument into a bearer instrument.

Kinds of indorsement
2. Indorsement in full or special indorsement: If in addition to his signature, the indorser adds a direction to pay to, or to the order of a specified person, the endorsement is said to be in full. After such an indorsement, only the indorsee is entitled to receive the payment of the instrument or to further negotiate the instrument by his indorsement.

Kinds of indorsement
3. Partial indorsement: Partial indorsement which transfers the rights to receive only a part payment of the amount due on the instrument is invalid. An indorsement purporting to transfer the instrument to two or more indorsees separately and not jointly, is treated as partial indorsement and hence invalid. Where an instrument has been paid in part, a note to that effect may be indorsed on the instrument and it may then be negotiated for the balance.

Kinds of indorsement
4. Restrictive indorsement: An indorsement which, by express words, prohibits the indorsee from further negotiating the instrument or restricts the indorsee to deal with the instrument as directed by the indorser is called a restrictive indorsement. The indorsee under a restrictive indorsement gets all the rights of an indorser except the right of further negotiation.

Kinds of indorsement
5. Conditional indorsement: If the indorser, by express words in the indorsement, makes his liability, dependent on the happening of a specified event, although such event may never happen, such indorsement is called a conditional indorsement. Since law permits conditional indorsement, it does not in any way affect the negotiability of the instrument. The liability of the indorser, would arise only on the happening of the event specified, but the indorsee can sue the other prior parties, if instrument is not duly met on maturity, even if specified event did not happen.

Kinds of indorsement
6. Sans recourse indorsement: When the indorser expressly excludes his own liability on the negotiable instrument to the indorsee or any subsequent holder in case of dishonour of the instrument, the indorsement is known as sans recourse indorsement. Such indorsement is generally made by adding the words sans recourse, without recourse , without recourse to me, ..at his own risk etc.

Kinds of indorsement
7. Facultative indorsement: When the indorser expressly gives up some of his rights under the negotiable instrument, the indorsement is called a facultative indorsement. Notice of dishonour waived is a facultative indorsement. By this indorsement, the indorser remains liable to the indorsee for non-payment of the instrument, even though no notice of dishonour has been given to him.