The negotiable-instruments-act-1881


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The negotiable-instruments-act-1881

  1. 1. The NegotiableInstruments Act, 1881. By : Dr. Vilas Kulkarni.Godwill Management Company. 1
  2. 2. Introduction• The law relating to negotiable instruments is contained in the Negotiable Instruments Act. 1881 which applies and extends to the whole of India. 2
  3. 3. Definitions The word negotiable’ means “transferable by delivery” and instrument means “a written document by which a right is created in favor of some person or persons. Thus, the term negotiable instrument literally means a written document which creates a right in favor of somebody and is freely transferable. 3
  4. 4. Continued…• A negotiable instrument is a piece of paper which entitles a person to a certain sum of money and which is transferable from one to another person by a delivery or by endorsement and delivery. Eg - Promissory note, Cheque and a Bill of exchange, documents such as Railway or ST Receipts; Dividend, warrants; Railway Bonds payable etc. 4
  5. 5. Characteristics of negotiableInstruments• Free transferability or easy negotiability Negotiable instrument is freely transferable.• Title of holder is free from all defects A person who takes negotiable instrument bona-fide and for value gets the instrument free from all defects in the title. The holder in due course is not affected by defective title of the transferor or of any other party. 5
  6. 6. Presumptions:• Of consideration : that every negotiable instrument, was made or drawn for consideration.• As to date : that every negotiable instrument bearing a date was made or drawn on such date. 6
  7. 7. Continued…• As to time of acceptance : that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity.• As to time of endorsements : that the endorsements appearing upto negotiable instrument were made in the order in which they appear thereupon. 7
  8. 8. Continued…• As to stamps : that a last promissory-note, bill of exchange or cheque was duly stamped.• As to a holder in due course : that every holder of a negotiable instrument is holder in due course.• As to time of transfer : that every transfer of a negotiable instrument was made before its maturity. 8
  9. 9. Types of Negotiable Instruments Negotiable instruments are of two types which areas follows:• Negotiable Instruments recognized by status: e.g. Bills of exchange, cheque and promissory notes.• Negotiable instruments recognized by usage or customs of trade: e.g. Bank notes, exchequer bills, share warrants, bearer debentures, dividend warrants, share certificate. 9
  10. 10. 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.Eg - Mr. X purchases goods from Mr. Y for Rs. 1000/- Mr. Y buys goods from Mr. S for Rs. 1000/- Then Mr. Y may order Mr. X to pay Rs. 1000/- Mr. S which will be nothing but a bill of exchange. 10
  11. 11. 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 only to or to the order of a certain person or the bearer of the instrument. 11
  12. 12. Specimen of a promissory noteRs. 5000/- Pune November 25, 2008 Three moths after the date, I promise to pay Mr. X ofMumbai or order a sum of Rupees Fifty Thousand forvalue received.ToMr.Address………..…………… StampMumbai Signature of Mr Y 12
  13. 13. Essential characteristics of aPromissory Note• Promissory note is a negotiable instrument• It must be in writing• It is a promise to pay money only.• It must be definite. The promise to pay must be definite.• It must be unconditional. Undertaking to pay must be unconditional.• It must be signed by the maker. 13
  14. 14. Continued…• Maker of the promissory note must be a certain person and the payee must also be certain.• Amount of the promissory note must be certain.• Other formalities like number, date, consideration, place etc. are generally found in the promissory notes but they are not essential in law.• Promissory note must be properly stamped according to the provisions of the Indian Stamp 14 Act, 1899.
  15. 15. Cheque “A cheque is a bill of exchange drawn on a specified banker and expressed to be payable otherwise than on demand.” The maker of a bill of exchange or Cheque is called the “Drawer"; the person thereby directed to pay is called the "Drawee". 15
  16. 16. Essential characteristics of aCheque• A cheque is a negotiable instrument.• It is a bill of exchange.• It is always drawn on a specified banker.• It is always payable on demand.• A cheque can be bearer, order or crossed 16
  17. 17. Continued…• A cheque requires no acceptance in the ordinary course of business as it is intended for immediate payment.• In case of a cheque, a drawee is always a specified bank, a drawer is a person who draws a cheque and who has an account in the bank ad payee is a person to whom the amount of cheque is made payable. 17
  18. 18. Negotiation“It is a process of transferring the ownership, right, title, interest of a person in a negotiable instrument to another person so as to give a good title to the transferee and make a transferee a holder of such instrument.” 18
  19. 19. Continued…Negotiation does not mean a simple transfer.Simple transfer may not necessarily involve thetransfer of property in the negotiable instrumentbut negotiation implies the transfer of propertyor ownership.Eg -X hands over a cheque to Mr. Y here Mr. Xhas negotiates the instrument.But if he hands over a cheque to Mr. Y askinghim to keep the same in his safe, the cheque isnot negotiated to Mr. Y, Mr. Y does not becomeits holder but only a bailee. 19
  20. 20. Essentials of negotiation• There must be transfer of a negotiable instrument to another person.• As a result of such transfer, the transferee must become the holder of the instrument. 20
  21. 21. Modes of negotiation:• Negotiation by delivery – The negotiable Instrument is transferred by delivery, actual or constructive.” It is physical act of delivering the instrument or handing over the delivery, actual possession of the instrument is not passed.• Negotiation by endorsement and delivery – The negotiable Instrument payable to order is negotiable by the holder by endorsement and delivery thereof. 21
  22. 22. Endorsement“Literal meaning of the term endorsement is writing on an instrument.”Endorser - The person who signs on the back or on the face of the instrument or on the slip is an endorser.Endorsee - The person to whom the instrument is endorsed is called the endorsee. 22
  23. 23. Types of Endorsement• General or blank endorsement - Endorser signs his name either on the back or face of the instrument.• Full or special endorsement - It specifies the name of the person to whom or to whose order the payment must be made. 23
  24. 24. Continued…• Partial endorsement – Endorsement is made for remaining balance of payment.• Conditional endorsement – The liability of the endorser is limited or negative. 24
  25. 25. Dishonour of negotiable instrument• Negotiable instruments, Promissory notes and Cheques may be dishonored by non payment• Bills of exchange may be dishonored by non payment or by non-acceptance as they require acceptance from drawees. 25
  26. 26. THANK YOU !!! 26
  27. 27. `HOLDER AND HOLDER IN DUE COURSEHolder :- According to section 8 of the Actholder of a negotiable instrument means anyperson (a) who is entitled in his own name to thepossession of the negotiable instrument and (b)who has also the right to receive or recover theamount due thereon from the parties thereto. 27
  28. 28. Eligibility to be Holder Possession of instrument:-The person must be a de jure (original/real)holder. Hemust be entitled to possess the instrument in his ownname. his possession must be under some legal and validtitle. A thief or any person who finds the instrument or anendorsee under a forged endorsement though inpossession of the negotiable instrument, is not a holder inthe absence of a legal title to it. Even an agent holding anegotiable instrument for his principal is also not aholder though he has a right to receive the payment. 28
  29. 29. Entitled to receive the amount:- The person must be entitled to receive theamount of the instrument and give a validdischarge to the buyer. A person may be thebearer of an instrument or payee or endorses of aninstrument but he may not be called a holder ofinstrument if he is prohibited by law fromreceiving the amount due on the instrument. 29
  30. 30. 30
  31. 31. The holders of the negotiable instruments: Eligibilityb. A principal whose name appears on an instrument as the holder though it executed in the name of his agent for himc. Where a negotiable instrument is a bearer one, any person who is in the possession of such instrument is the holder.d. Where a negotiable instrument is in the name of a partner of a firm, it naturally becomes a holder as it is not a separate entity from the partner.e. The endorsee of a cheque is called a holder.f. If a holder of a negotiable instrument is dead, the heirs of the deceased holder between the holders.g. A principal on whose behalf a pronote is endorsed in blank and is delivered to his agent, he is a holder of the instrument though his name does not appear on the instrument though is name does not appear on the instrument 31
  32. 32. No eligibility of Holders:i. I) A thief or a finder of an instrument is not aholder though he is in possession of an instrument.ii. II) The word ‘entitled’ used in the definitionof a holder shows that the title of the person who claimsto be the holder must be acquired in a lawful manner. Aperson obtaining the instrument under forgery is not aholder.i III) When the endorsement of a bill is ‘forcollection only’ the endorsee cannot be a holder 32
  33. 33. Holder in due CourseHolder in due course’ means any person whofor the consideration becomes the possessor of apromissory note, a bill of exchange or a chequeif payable to bearer, or the payee or endorseethereof, if payable to order, before the amountmentioned in it becomes payable and withouthaving sufficient cause to believe that anydefect existed in the title of the person fromwhom he derived his title (section 9) . 33
  34. 34. a He must be a holder:A holder to be a holder in due course must be entitled to thepossession of the instrument in his name under a legal title and hemust also be entitled to recover the amount of the instrument from theparties liable thereto. He must be a holder for valuable consideration To be a holder in due course, a person must be a holder forvaluable consideration and the consideration must not be illegal orvoid. However, consideration may be past, present adequate orinadequate. A donee acquiring title to the instrument by way of a gift is nota holder in due course because there is no consideration to the contractand therefore he cannot maintain any suit against the donor in thecourt of law. The house hired for illegal purposes and money due on apromissory note, deposited for the security cannot be recovered by a 34suit.
  35. 35. He must become a holder of the negotiableinstrument before the date of maturity. If the negotiable instrument is taken after itbecomes due, the person taking it gets the rights ofhis immediate transferor against the other partiesand therefore, a person who takes a negotiableinstrument on the day on which it becomespayable cannot claim rights of a holder in duecourse. 35
  36. 36. He must become a holder of the negotiableinstrument in good faith:Here the term ‘good faith’ implies that he should notaccept the instrument after knowing about the defect ordefects in the title to the instrument. A thing is done ingood faith when it is done honestly. It is the duty of aperson [who takes a negotiable instrument] to examineits contents thoroughly. If the negotiable instrumentcontains any material alteration or if it is incomplete, hewill not become a holder in due course. Thus, he mustbecome a holder and must take the negotiableinstrument complete and regular on its face. 36
  37. 37. Distinction between holder and holder in due courseHolder is different from a holder in due course. A holderin due course enjoys certain rights and privileges. 1. A holder can obtain an instrument withoutconsideration while a person cannot be a holder in duecourse unless he obtains an instrument with considerationand for value. 2. If an instrument is inchoate, a holder of suchinstrument cannot get good title in the instrument. Whileholder in due course acquires a good title even if theinstrument is inchoate. 37
  38. 38. 3. A holder of an instrument may acquire theinstrument if it becomes payable. But the person is nottreated as a holder in due course if he acquires aninstrument when it becomes payable. 4. A holder need not bother about the defect, if any, inthe title. But no holder is considered a holder in duecourse who acquires an instrument knowingly the defectof the title. 38
  39. 39. NEGOTIATION AND TYPES OFENDORSEMENTOne of the important characteristics of anegotiable instrument is its free transferabilityfrom one to another person. Such transfer cantake place either by negotiating the instrumentor by assigning the same. According to section14 of the act, “When a promissory note, a bill ofexchange or a cheque is transferred to anyperson, so as to constitute that person the holderthereof, the instrument is said to be negotiated.” 39
  40. 40. Procedure of transfer or modes of negotiation:A negotiable instrument can be transferred to another person in the following two ways:c. Negotiation by delivery; andd. Negotiation by endorsement and delivery Instruments payable to bearer can be transferred by mere delivery, while instruments payable to the order are transferred by endorsement and delivery: 40
  41. 41. Thus delivery of a negotiable instrument is avoluntary transfer of possession of thenegotiable instrument. When an instrument isnegotiated by delivery it is not necessary fora transferor to put his or her signature on theinstrument and therefore, there is no privacyof any contract between the transferor andany subsequent transferee. 41
  42. 42. Negotiation by endorsement and delivery:Subject to the provision of section 58 [which is statedearlier] a promissory note, cheque or a bill of exchangepayable to order is negotiable by the holder byendorsement and delivery thereof [section 48] Thus the delivery is the common element between thetwo modes of negotiation i.e. negotiation by meredelivery and negotiation by endorsement and delivery. 42
  43. 43. Types of EndorsementThe literal meaning of the term endorsement is writing onan instrument. But In the negotiable instrument or on aslip of paper attached thereto which is done for thepurpose of negotiation [section 15]. The person who signson the back or on the face of the instrument or on the slipattached thereto is called the endorser and the person towhom the instrument is endorsed is called the endorsee.An endorsement can be made by the holder of aninstrument or by the maker who signs it otherwise than amaker. A payee or an endorsee may also endorse theinstrument if they are holders of the instrument 43
  44. 44. Endorsement may be of various types which are afollows:. 1.General or blank endorsement 2. Full or special endorsement 3. Partial endorsement. 4. Conditional endorsement 5. Restrictive endorsement 44
  45. 45. • General or blank endorsementWhen a endorser signs his name either on the back or face of the instrument, the endorsement is said to be blank or general [section 16(1)]. In a blank endorsement, endorsee is not specified and therefore the instrument becomes payable to bearer even though it was made originally payable to order {section 54]2, Full or special endorsement:when an endorser signs the instrument and adds a direction to pay the amount mentioned therein to or to the order of a specified person, the endorsement is said to be in full [section 16 (1)]. 45
  46. 46. a) 3.Partial endorsement:According to section 56 of the Act, “No writing on a negotiableinstrument is valid for the purpose of negotiation if such writingpurports to transfer only a part of the amount appearing to be dueon the instrument; but where such amount has been partly paid, anote to that effect may be endorsed on the instrument, which maythen be negotiable for the balancea) 4. Restrictive endorsement :Restrictive endorsement restricts the further negotiability of thenegotiable instrument. Such endorsement entitles the holder of theinstrument to receive the amount on the instrument for a specificpurpose. The endorsement is restrictive when it contains expresswords to that effect. 46
  47. 47. Conditional Endorsement:-In the conditional endorsement, the liability of theendorser is limted or negative. A conditionalendorsement is different from a restrictiveendorsement. A conditional endorsement limits ornegatives the liability of the endorser while arestrictive endorsement places certain restrictionon the negotiability of the instrument. 47
  48. 48. DISHONOUR OF NEGOTIABLE INSTRUMENTPromissory notes, cheques and bills of exchange arecovered by this Act. Of these negotiable instruments,promissory notes and cheques may be dishonoured bynon payment only while bills of exchange may bedishonoured by non payment or by non-acceptance asthey require acceptance from drawees. Section 93 of theAct states that when a promissory note or a bill ofexchange or cheque is dishonoured by non-acceptance ornon-payment the holder thereof, or some party theretowho remains liable thereon, must give notice that theinstrument has been so honored to all other parties whomthe holder seeks to make severally liable thereon, and tosome one of several parties whom he seeks to makejointly liable thereon 48
  49. 49. Dishonour by Non-acceptance:As mentioned earlier that a bill of exchange is dishonoured by non-acceptance. It standsdishonoured by non-acceptance in the following cases.a). when there are several drawees who are not partners and if all of them refuse toaccept.b). If the drawee refuses to accept the bill within forty eight hours from the time of itspresentment even though the bill is duly presented for his acceptance.c) where the drawee is not competent to enter into contract.d) When the presentment of a bill of exchange for acceptance is excused and it remainsunaccepted.e) where the drawee of the bill of exchange gives a qualified acceptance.f) Where the drawee is a fictitious person and even after a reasonable search, he couldnot be found.It should be noted that where a drawee in case of need is named in a bill of exchange oreven in any other instrument, the bill is not considered to be dishonoured unless it hasbeen dishonoured by such drawee [section 115]. 49
  50. 50. Dishonour by non-payment:A negotiable instrument i.e. a bill, a cheque or a promissory note issaid to be. Dishonoured by non-payment when the maker of thepromissory note, acceptor of the bill of exchange or drawee of thecheque makes default in payment upon being duly required to paythe same. [section 2]. A bill or a promissory note is also said to bedishonoured by non-payment when presentment for the payment isexcused expressly by the maker of the note or the acceptor of the billand the note or bill remains unpaid or at after maturity [section 76] If the bill is dishonoured either by non-acceptance or non-payment,the drawer and all endorsers of the bill are held liable to the holderprovided that a notice of such dishonour is given by the holder. If thebill is dishonoured by non-payment, the drawee is held liable. 50
  51. 51. NOTING AND PROTEST Noting:As mentioned above, when a negotiable instrument within themeaning of this Act is dishonoured, the holder of the instrument,after giving notice of the same, can sue any or all the prior partiesliable thereon. But before he does so, he can get the fact of thedishonour of the instrument authenticated by noting by a notarypublic. Noting is the authentic and official proof of presentmentand dishonour of the instrument.Noting means nothing but the recording of the fact of dishonor ofthe instrument by a notary public within a reasonable time afterdishonour. Of course, nothing is not compulsory neither it affectsthe rights of the holder thereon, 51
  52. 52. Noting contains the following particulars.a) The fact and the date of dishonour of theinstrumentb) The reason or reasons if any, assigned for suchdishonour.c) The rotary charges incurred.d) If the instrument has not been expresslydishonoured, the reason as to why the holder wants totreat the same as dishonoured. 52
  53. 53. Protest:According to section 100 of this Act, when apromissory note or a bill of exchange has beendishonoured b non-acceptance or non-payment, theholder may, within a reasonable time, cause suchdishonour to be noted and certified by a notary public.Such certificate is called a protest. Thus protest is a formal certificate of dishonour of aninstrument issued by the notary public. Of Course, it isissued to the holder of the instrument on his demandonly. 53
  54. 54. Contents of protest:1.Either the instrument itself, or a literal transcript of the instrument and of everything written or printed thereupon;2.The name of the person for whom and against whom the instrument has beenprotested;3. A statement that payment or acceptance, or better security, as the case may be,has been demanded of such person by the notary public; the terms of his answer. Ifany, or a statement that he gave no answer, or that he could not be found;4. When the note or bill has been dishonoured, the place and time of dishonour, andwhen better security has been refused, the place and time of refusal;5. The subscription of the notary public making the protest;1. 6 . In the event of an acceptance for honour or of a payment for honour, the nameof the person by whom, of the person for whom, and the manner in which, suchacceptance or payment was offered and effected.2. 7. The signature of the notary public. 54
  55. 55. 55