NEGOTIABLE INSTRUMENT ACT, 1881

Saturday, April 21, 2012

Negotiable: transferable from one person to another in return for consideration Instrument: written document by which a right is created in favor of some person Negotiable Instrument: a document which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or indorsement

Negotiable Instrument

The law relating to negotiable instruments is contained in the Negotiable Instrument Act,1881 which deals with promissory notes, bills of exchange and cheques .
Saturday, April 21, 2012

Definition
a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer - Sec 13 of Negotiable Instrument Act,1881

Saturday, April 21, 2012

Characteristics of Negotiable Instrument

1. Freely transferable: property in a negotiable instrument passes from one person to another by a delivery 2. Title of holder free from all defects: holder in due course (one who acquires the instrument in good faith and for consideration) gets it free from all defects

3. Recovery :sue instruments upon individual name

4. Presumptions : 1. Consideration 2. Date 3. Time of transfer 4. Holder presumed to be a holder in due course
Saturday, April 21, 2012

Types of Negotiable Instruments

Instrument Negotiable by Statute Promissory notes, Bills of Exchange, cheques Instrument Negotiable by custom, Usage Government promissory notes, bankers draft, pay orders, hundis, delivery orders, railway receipts for goods

Saturday, April 21, 2012

Promissory Note
Sec 4 is an instrument in writing containing an unconditional undertaking, signed by the

maker, to pay a certain sum of money only to, or to order of, a certain person, or to the bearer of the instrument
The person who makes the promissory note and promises to pay is Maker The person to whom the payment is to be made is

Payee
Saturday, April 21, 2012

Promissory Note
Promissory Note
In writing, signed, stamped
Unconditional promise to

pay Money only Certain party On demand or certain date Certain sum Parties Drawer, Payee

Eg
I Promise to pay B Rs.1 lakh I acknowledge myself to be indebted to B in Rs.50 crores to be paid on demand, for value received

Saturday, April 21, 2012

Requirement for a promissory note

1. Writing: verbal engagement, print or typewriting, in ink or pencil

2. Promise to pay: an express promise to pay

3. Definite and unconditional: if uncertain or conditional, the instrument is invalid
I promise to pay B a sum of Rs.5,000 when convenient - not a promissory note

4. Signed by the maker: signature writing of a

persons name in order to authenticate

Saturday, April 21, 2012

Requirement for a promissory note continues

5. Certain parties: should point out who the maker is and who the payee is. Pro note cannot be made payable to the maker himself 6. Certain sum of money: I promise to pay Saran Rs.6,000 and all the other sums due to him not a pro note
7. Promise to pay money only: I promise to pay Arjun Rs.10,200 and deliver 250 bags of wheat and 50 bags of rice- not a pro note
Saturday, April 21, 2012

10

Requirement for a promissory note continues

8. Bank Note or Currency Note is not a promissory

note as it is money itself 9. Date, Place, Consideration is essential 10. Payable on demand or after a definite period of time.

Saturday, April 21, 2012

11

Bill of Exchange
A bill of exchange is a written order by one party, the

drawer, addressed to another party, the drawee, to pay a specified amount of money to a named party, the payee, or to the bearer, at a fixed or determinable future time on demand.
An instrument in writing containing an unconditional order, signed by the drawer, 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 Sec 5
Saturday, April 21, 2012

12

Bill of Exchange
Bill of Exchange
Writing, signed, accepted, stamped Unconditional order to pay Money only Certain party Certain sum Parties Drawer, Drawee & Payee

3 parties to the Bill of Exchange

Drawer: the person who gives the order to pay

or who makes the bill Drawee: the person who is directed to pay o Acceptor: when the drawee accepts the bill he becomes acceptor Payee: the person to whom the payment is to be made. Holder: the drawer or the payee who is in possession of the bill is holder. The holder must present the bill to the drawee
Saturday, April 21, 2012

14

 Must be in writing Contain an order to pay

Essential elements or Requirements

3 months after January 21, 2008 pay to Kousik or order the sum of

5 hundred rupees, for value received

Unconditional order 3 parties are required- drawer, drawee, payee Parties must be certain Signed by the drawer Sum payable must be certain Contain an order to pay money Bill should be affixed with stamp, date, place, consideration

is not essential
Saturday, April 21, 2012

15

SPECIMEN OF BILL OF EXCHANGE

Rs. 10,000

New Delhi, March 15, 1997

Stamp Three months after date pay Gopal Chand or order the sum of ten thousand Rupees only,value received. To,

Shri N.N.Dutt Model Town, Amritsar.

R.S.Saxena

Saturday, April 21, 2012

16

Bill of Exchange Vs. Promissory Note

Promissory Note 2 parties- Maker, Payee Unconditional promise to pay Maker is the debtor and he himself undertakes to pay Maker of the note cannot undertake to pay conditionally Liability of the maker of a note is primary Note cannot be made to the maker himself No acceptance is required as the maker is liable to pay Bill of Exchange 3 parties- Drawer, Drawee, Payee Unconditional order to pay Drawer Is the creditor who directs the drawee (his debtor) to pay Acceptor may accept the bill conditionally because he is not the originator of the bill Liability of the drawer is secondary Drawer and the payee can be the same person Accepted by the drawee before it is presented for payment

Saturday, April 21, 2012

17

R.S.Saxena has ordered N.N.Dutt to pay Rs.10000 to Gopal Chand. Who is drawer, drawee, payee??
R.S.Saxena is the drawer,
N.N.Dutt is the drawee, Gopal Chand is the payee.

Saturday, April 21, 2012

18

Cheque
A cheque is a bill of exchange, drawn on a specified

banker and payable on demand. Sec 6 All cheques are Bills of Exchange, but all BOE are not cheques. All essential requirements of BOE should be there in a cheque. Must be signed by the drawer Unconditional order on specified banker to pay a certain sum of money to or to the order of a specified person or to the bearer of the cheque Does not require acceptance
Saturday, April 21, 2012

19

CHEQUES
CHEQUES

Writing, signed
Unconditional order Issued by specified

banker, certain payee On demand Certain amount Must bear a date

HUNDIS
HUNDIS
Drawn in any local language in accordance with the custom of the place

For transfer of money without its actual physical movement

Bill of Exchange V. Cheque

BOE Drawn on any person, including a banker
All Bills are not cheques Bill must be accepted by the drawee Bill not expressed to be payable on demand is entitles to 3 days grace Payable on demand or after the expiry of a certain period Bill cannot be crossed

Cheque Drawn only on specified Banker

All cheques are Bills Acceptance is not necessary No grace of period is available Cheque is payable on demand Can be Crossed

Requires stamp

No stamp is required

Saturday, April 21, 2012

22

Crossing of Cheque
Cheques
Open cheques

Crossed cheques

Saturday, April 21, 2012

23

Types of crossing

Types of crossing

Saturday, April 21, 2012

24

General crossing
General crossing: bears across its face an addition of the words and company, & Co with or

without the words Not Negotiable Specimens

1. 3. & Co 5. Not Negotiable & Co

2.

And Company

4.

Not Negotiable

6.

N/N & Co.

25

Saturday, April 21, 2012

Special crossing
Where a cheque bears across its face an addition of the name of a banker, either with or without the

words not negotiable, the cheque is deemed to be crossed specially Transverse lines ( ) are not necessary for special crossing Payment can be obtained only through the particular banker whose name appears across the face of the cheque or between the transverse lines, if any
Saturday, April 21, 2012

26

Specimen of a special crossing

1. Bank of India 2. ICICI Bank & Co. 3.

HDFC Bank Not negotiable

4. Centurian Bank for A/C of Payee

Saturday, April 21, 2012

27

Restrictive Crossing : created out of business usage

Adopted by commercial and banking usage A/C payee are added to the general or special crossing A/C Payee direction to the collecting banker that the amount collected on the cheques is to be

credited to the account of the payee A/C Payee cheques are not negotiable

Saturday, April 21, 2012

28

Who can cross a cheque???

Drawer Holder Banker (for collection )

Saturday, April 21, 2012

29

Holder
Any person entitled in his own name
To the possession.
To receive or recover the amount due from the parties. Where the instrument is lost or destroyed, its holder is the

person so entitled at the time of such loss or destruction

Saturday, April 21, 2012

30

Holder in due course

Any person can become the holder in due course if For consideration he became i. Possessor of the negotiable instrument if payable to bearer

Ii. Payee or indorsee if payable to order

He/she became the holder of the instrument before its

maturity. He became the holder of the instrument in good faith

Saturday, April 21, 2012

31

Holder of a negotiable instrument will not be a holder in due course if

Obtained instrument by gift or for an unlawful consideration or illegal agreement Obtained instrument after its maturity Not obtained instrument bonafide

Saturday, April 21, 2012

32

 Can fill in an inchoate stamped instrument for any

Privileges of a holder in due course

amount provided the stamp is sufficient to cover the amount Every prior party to a negotiable instrument is liable to holder in due course As the negotiable instrument passes in the hands of the holder in due course, its gets cleansed of all its defects. If a bill or note is negotiated to a holder in due course, the other parties to the bill cannot avoid liability

Saturday, April 21, 2012

33

Types of Negotiable instrument

Bearer and order instruments

Payable to bearer o When it is expressed to be payable to bearer o When the last endorsement on the instrument is

endorsement in blank Payable on ordero When expressed to be payable to a particular person and does not contain words prohibiting transfer

Saturday, April 21, 2012

34

 Inland and Foreign instruments: Inland Instruments: a Pro Note, BoE or cheque drawn or made in India and is payable in India or drawn upon any person in India is deemed to be Inland Instruments All instruments other than Inland Instruments are Foreign Instruments
Demand and Time Instruments

Saturday, April 21, 2012

35

 Inchoate Instruments: Instruments which are incomplete in some aspects Ambiguous Instruments: owing to its faulty drafting can be interpreted either as a promissory note or Bill of Exchange.

Saturday, April 21, 2012

36

Types of transfer
By negotiation:
When the instrument is transferred from one

party to another, so as to constitute the transferee, the instrument is said to be negotiated

By assignment:
When a person transfers right to receive the

payment of a debt The holder of an instrument transfers it to another so as to confer a right on the transferee to receive the payment of the instrument, transfer by assignment takes place
Saturday, April 21, 2012

37

Types of Negotiation
Negotiation by delivery:
An instrument payable to bearer

Negotiation by indorsement and delivery:

An instrument payable to order is

Saturday, April 21, 2012

38

Indorsement
Indorsement: writing on an instrument i.e writing the persons name on an instrument for the purpose of negotiation The person who indorses the instrument is indorser

The person to whom it is indorsed is indorsee

Saturday, April 21, 2012

39

Banking definition
According to Banking Regulation Act,1949,

Banking is defined as
accepting for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise

Saturday, April 21, 2012

40

Relationship of Banker and Customer

Contractual relationship Debtor ( banker ) and Creditor( customer) Can be reversed when banker lends money to

the customer

Saturday, April 21, 2012

41

Rights of paying banker

o To honour cheques o To keep proper record of transactions o To abide by the express instructions of the customers o Not to disclose the state of the customers affairs o o o o

or customers account Right of general lien Right to charge incidental charges and interest on money lent Right to set-off Right of appropriation
Saturday, April 21, 2012

42

When a cheque is dishonored?

When the banker does not have sufficient balance in the customers account when cheque is ambiguous when mutilated when altered materially When cheque is not duly presented when customers signature does not agree with his

specimen signatures When the cheque is postdated When the cheque has become stale
Saturday, April 21, 2012

43

Dishonouring of a cheque continues

When the cheque is presented at a branch other than the one where the customer has account When the account is in joint names of a persons, but all joint holders signatures are not present When customer becomes insolvent When customer countermands payment( giving stop payment order to banker) When the banker receives notice of the customers death When the banker suspects or has reason to believe that the title of the person presenting the cheque is defective

Saturday, April 21, 2012

44