Negotiable Instruments Act, 1881

Prof. Priti Rachayeeta

Negotiable Instruments Act, 1881

Negotiable

instrument means a document transferable from one person to another Sec.13(1). Negotiable instrument means a promissory note; bills of exchange or cheque payable either to the Order or to the Bearer

It is an instrument , property in which is acquired by any one who takes it bona-fide, and for value, not withstanding any defect of title in the person from whom he took it, from which it is followed that an instrument can not be negotiable unless it is such and in such a state that the true owner could transfer the contract or engagement contained therein by simple delivery of instrument

Conditions of Negotiability
The instrument should be freely transferable by simple delivery or endorsement & delivery by the custom of trade The person who takes it for value and in good faith is not affected by the defect in the title of the transferor Holder has the right to transfer Such a person can sue upon the instrument in his own name. Negotiability continues till the maturity

Effect of negotiability
to the general rule nemo dat quad non habet A bonafide transferee of negotiable instrument for consideration without notice of any defect of title, acquires the instrument free from any defect (better title than the transferor)
Exception

Characteristics of a Negotiable instrument

Holder of the instrument is presumed to be the owner of the property contained in it. They are freely transferable A holder in due course gets the instrument free from all defects of title of any previous holder The holder in due course is entitled to sue on the instrument in his own name Instrument is transferable till maturity and in case of cheques till it becomes stale ( at the expiry of 6 months)

Negotiation
Transfer of an instrument by one party to another so as to constitute the transferee a holder thereof A bearer instrument is transferable by mere delivery (sec. 14) An instrument payable to order can be transferred by endorsement and delivery Rights which the transferee of an instrument by negotiation acquires, are substantially superior to those of an assignee The transferee gets a better title irrespective of any defective title of the transferor

Assignment
When a person transfers his right to receive the payment of a debt- it is assignment of debt (deposit of LIC policy to a bank & transferring the right to receive the payment against the policy to settle the loan account The transferee gets only those rights, which the assignor possesses; Here the assignee do not get a better title than the transferor

Crossing of Cheques
It is a direction to the paying banker that payment should not be made across the counter It can be general crossing or special crossing Special crossing signifies specification of name of the banker on the face of the cheque The object of this is to direct the drawee banker to pay the cheque only if it is presented through the particular bank mentioned therein.

Not negotiable Crossing / Account Payee Crossing

The

holder of a Not negotiable crossed cheque shall not be capable of having a better title than the transferor It gets deprived of its special feature of negotiability The title of the holder is always subject to the title of the transferor A/c payee crossing signifies that proceeds of the cheque must be credited to the payees A/c, none else.

Promissory Notes & Bills of Exchange

A

promissory note is an instrument in writing 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. E.g. I promise to pay B or order Rs. 500.

Essentials of a Promissory Note

It

must be in writing. It must contain an undertaking or promise to pay. Promise to pay must not be conditional It must be signed by the maker The instrument must point out with certainty the maker and the payee of the promissory note.

 The

sum payable must be certain or capable of being made certain. E.g. specified ROI or market ROI. Must contain a Promise to pay money only May be payable in installments Must be duly stamped under the Indian Stamp Act.

Parties to a Pro Note

The

maker-the person who makes the note promising to pay the amount The payee-the person to whom the amount of the note is payable The holder-is either the original payee or any other person in whose favor the note has been endorsed

 The

Endorser- the person who endorses the note in favor of another person The Endorsee- the person in whose favor the note is negotiated by indorsement

Bill of Exchange
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

Features of a BOE
It

must be in writing It must contain an order to pay and not a promise or request The order must be unconditional There must be three parties, drawer, drawee and payee. The parties must be certain.

 It

must be signed by the drawer. The sum payable must be certain The order must be to pay money Must be duly stamped

Cheques
A

cheque is the usual method of withdrawing money from a current account with a banker. A cheque, is an order by the customer of the Bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer.

Requisites of a cheque
Written

instrument Unconditional order On a specified banker only A certain sum of money Payee to be certain Payable on demand Amount of the cheque Dating of cheques

Acceptance of Bills
An

acceptance to be valid must be: In writing Signed by the drawee or his agent On the bill of exchange and Completed by delivery to the holder or by notice of acceptance to him or some person on his behalf.

Parties to a BOE
The

drawer-the person to whom the amount of bill is payable The drawee-the person on whom the bill is drawn. Thus, the drawee is responsible for acceptance and payment of the bill. The payee-the person to whom amount of the bill is payable. It may be the drawer himself or any other person

 The

holder- is the original payee but where the bill has been endorsed, the endorsee. Incase of a bearer bill, the bearer or possessor is the holder. The endorser-is the person who endorses a bill. The endorsee-is the person to whom the bill is negotiated by endorsement.

Holder in due course(sec.9)

A

person who for consideration obtains possession of a negotiable instrument if payable to a bearer or The payee or endorsee thereof, if payable to order before its maturity and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title

Holder in due courseconditions

He

must be the holder of the instrument He must have obtained it for value or for consideration He must have obtained it before maturity Instrument should be complete & regular on the face of it

 Holder

should take the instrument in good faith He serves as a channel to protect all subsequent holders Once an instrument passes thru a holder in due course, it is purged of all defects

Payment in due course

Any

person liable to make payment under a negotiable instrument, must make the payment of the amount due there under in due course in order to obtain a valid discharge against the holder Payment in due course means a payment in accordance with the apparent tenor of the instrument, in good faith and without negligence to any person in possession thereof.

Payment in due course

It

is in accordance with the apparent tenor of the instrument, I.e., according to what appears on the face of the instrument to be the intention of the parties It is made in good faith & without negligence, & under circumstances which do not afford a ground for believing that the person to whom it is made is not entitled to receive the

Payment in due course

It

is made to the person in possession of the instrument who is entitled as the holder to receive payment Payment is made under circumstances which do not afford a reasonable ground believing that he is not entitled to receive payment of the amount mentioned in the instrument & payment is made in money only

Banker
The

person who does banking business I.e., accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawals by cheque, draft or otherwise.

Obligations & rights of a Banker

Obligation to honor cheques of the customers Obligations to collect cheques and drafts on behalf of the customer To keep proper records of transactions with the customer Obligations to comply with the express standing instructions of the customer Obligation not to disclose the state of customers account to any one else To give reasonable notice to the customer if the banker wishes to close the account

Right of lien over any goods and securities bailed to him for a general balance of account Right of set-off or right of appropriation Right to claim incidental charges and interest as per rules and regulations of the bank, as communicated to the customer at the time of opening the account

Liability of a banker
By opening a current account of a customer, the banker becomes liable to his debtor to the extent of the amount so received in the said account and undertakes to honor the cheques drawn by the customer so long as he holds sufficient funds to the customers credit. If a banker without justifications, fails to honor his customers cheques, he is liable to compensate the drawer for any loss or damage suffered by him.

 Payee

or holder of the cheques has no cause of action against the banker as the obligation to honor the cheques is only towards the drawer. Banker must maintain proper and accurate accounts of credits and debits. He must honour cheques presented in due course

When banker must refuse payment

When a customer countermands payment When the banker receives notice of customers death When customer has been adjudged as insolvent When banker receives notice of customers insanity When an order of the court prohibits payment When the customer has given notice of assignment of credit balance of his account When the holders title is defective & banker comes to know of it When customer has given notice to close his a/c

When banker may refuse payment

When the cheque is postdated When the banker has not sufficient funds of the drawer with him and there is no communication between the bank and the customer to honour the cheque When the cheque is of doubtful legality When the cheque is not duly presented I.e., after banking hours When the cheque on the face of it is irregular, ambiguous or otherwise materially altered When the cheque is presented at a branch, where the customer has no account

 When

the cheque has been allowed to become stale When some person have joint account and the cheque is not signed jointly by all or by the survivors of them

Protection to the paying banker(sec. 10, 85,128)

Where a cheque payable to the order, purports to be endorsed by or on behalf of the payee, the banker is discharged by payment in due course Bank can debit the customers account even though the endorsement turns out to have been forged or agent of the payee without authority endorses it on his behalf This protection is given since the banker cannot be expected to know the signatures of all persons in the world. He is only bound to know the signatures of his own customers

In case of bearer cheques the rule is that once a bearer cheque, always a bearer cheque A cheque originally drawn by the drawer himself as payable to bearer the banker may ignore all subsequent endorsements on it. He is discharged by payment in due course.

Collecting Banker
Who collects proceeds of a cheque for a customer A cheque bearing general crossing shall not be paid any one other than a banker A cheque which is specially crossed shall not be paid to a person other than the banker to whom it is crossed Thus a paying banker must pay a generally crossed cheque only to a banker i.e., it should be collected by another banker

While collecting cheques for a customer, it is possible that the banker collects for a customer, proceeds of a cheque to which the customer had no title as such. In this case the the true owner may sue the collecting banker for conversion On the other hand it can not be expected of a banker to know or to ensure that all the signatures appearing in endorsements on the reverse of the cheque are genuine. Thus the banker is expected to be conversant only with the signature of his customer

A customer to whom a cheque is endorsed, would request his banker to collect the cheque In the event the endorsers signature being proved to be forged at a later date, the banker who collected the proceeds should not be held liable for the simple reason that he has merely collected the proceeds of a cheque. Ref. Sec 131

Sec. 131
A

Banker, who has in good faith and without negligence received payment for a customer, of a cheque, generally or specially crossed to himself, shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason of only having received such payment

Requisites of claiming protection u/s.131

The collecting banker should have acted in good faith, without negligence. An act done in good faith means done honestly (want of proper care & attention) Failure to verify regularity of endorsements, collecting a cheque payable to the account of the company to the credit of the Director are examples of negligence Banker should have collected a crossed cheque Proceeds should have been collected for a customer who has an account with it.

That the collecting banker has acted only as an agent of the customer However if the banker becomes holder for value, protection available u/s.131 shall be forfeited, e.g., if the banker allows the customer to draw the amount before it is collected or cheque has been accepted in specific reduction of the overdraft But mere crediting the amount to the customers account before collection of the cheque is not holder for value.

Liability of parties
Sec.

30 to 32 & sec 35 to 42 Liability of the drawer- sec. 30

The drawer of a bill or cheque is bound in case of dishonor by the drawee or acceptor thereof, to compensate the holder, provided due notice of dishonor has been given.

 The

nature of drawers liability is that by drawing a bill, he undertakes that

On due presentation, it shall be accepted and paid according to its tenor & In case of dishonor he will compensate the holder, provided notice os dishonor has been duly given