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  2. 2. Importance Business transactions in the modern world have increased the scope and relevance of the law relating to negotiable instruments.  Credit is an essential element of modern business dealings. Usually credit is carried through written documents called credit instruments. The credit instruments are divided into two 1.Negotiable instruments 2. Non negotiable instruments .
  3. 3. Negotiable Means transferable from one person to another in return for consideration. Instrument means a written document by which a right is created in favour of some person. Negotiable Instrument literally means is a written document transferable by delivery
  4. 4. Negotiable instrument Act In India law relating to negotiable instruments is contained in negotiable instruments Act 1881.
  5. 5. Definition-Negotiable Instrument Sec 13 (1) of N I Act states that “A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer”.
  6. 6. Essential Features of a Negotiable Instrument: 1.Negotiability- it means transferability. It can be transferred without any formality. 2. Property- The possessor of negotiable instrument is presumed to be the owner of the property contained there in. 3. Equivalent to cash- Even though is a document it is as good as cash. 4.Recovery- The transferee of the negotiable instrument can sue in his own name, in case of dishonor for the recovery of the amount with out giving notice to the debtor.
  7. 7. 5. Contract- A negotiable instrument is a contract to pay money. 6. Prompt payment-A negotiable instrument enables the holder of the instrument to expect prompt payment. 7. A negotiable instrument can be transferred any number of times till it is at maturity and the holder of the instrument need not give any notice of transfer to the debtor
  8. 8. Types of negotiable instruments. A. Negotiable instruments recognized by statute. 1) Promissory notes 2) Bill of exchange 3) Cheque B. Negotiable instruments recognized by custom. 1. Money order 2. Fixed deposit receipts 3. Share certificates 4. Postal orders 5. National saving certificates
  9. 9. A. Promissory note Sec.4 “A promissory note is an instrument in writing 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 to the bearer of the instrument”.
  10. 10. Parties Two parties: The person who makes the promissory note and promises to pay is called the maker. The person to whom the payment is to be made is called the payee. Eg I promise to pay A or order Rs 500.
  11. 11. Specimen of a promissory note Rs 5000 Ernakulam Date On demand , I promise to pay Mr Rajesh or order , the sum of Rs 5000( Rupees Five Thousand only) with interest at 8% per annum for value received. To Rajesh (Address) Sd/- Stamp Babu
  12. 12. Essentials of a promissory note 1. Pro notes must be in writing 2.A Promise to pay must be express. 3Definite and unconditional 4. To be signed by the maker 5.Certainty in the case of parties. 6. Certainty in the case of sum of money 7. Promise to pay money only
  13. 13. 8. Formalities are not essential. Formalities like time ,place registration Number etc is not required. But it must be stamped as per stamp act. 9. It may be payable on demand or after a definite period of time - Where there is no time is mentioned the note is payable on demand.
  14. 14. B. Bill of Exchange Sec.5 “A bill of exchange is an instrument in writing containing the 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”.
  15. 15. Parties to a Bill of Exchange Three parties: 1.The maker of bill of exchange is called the drawer. 2.The person who is directed to pay is called the drawee. 3.The person who will receive the money is called the payee
  16. 16. Specimen of Bill of Exchange Rs 5000 Place. Date. On demand pay to Rajesh or order, the sum of Rs 5000/(Rupees Five thousand only) for value received. To Ajith ( Address) Sd- Stamp Babu
  17. 17. Here Babu is the drawer Ajith is the drawee (Acceptor) Rajesh is the payee
  18. 18. Essentials of Bill of Exchange. 1. The instrument must be in writing. 2.The instrument must contain an order to pay. 3. There must be three parties. 4. The instrument must be signed by the drawer. 5. The amount of money to be paid must be certain. 6. The payee must be certain. 7. It must comply with the formalities as regards date, stamp etc.
  19. 19. Difference between pronote and bill of exchange 1. 2. 3. 4. 5. 6. Two parties Unconditional promise to pay Maker of a note is the dr. & he himself undertakes to pay Liability of maker is primary. A pro-note cannot be made payable to the maker himself. A note requires no acceptance 1. 2. 3. 4. 5. 6. Three parties Unconditional order to pay The drawer of a bill is the creditor who directs the drawee (his dr.) to pay Liability of maker or drawer is secondary. Drawer and payee may be same. It must be accepted by drawee
  20. 20. C. Cheque A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. That is the drawer directs the bank to pay a certain sum to payee on his demand. (A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing the banker to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument)
  21. 21. Definition Sec.6 “ a bill of exchange drawn upon a specified banker and payable on demand” Rules 1. All cheques are bill of exchange but all bill of exchanges are not cheques. 2. Usually banks provide their customers with printed cheque forms which are filled up and signed by the drawer. 3. The signatures must tally with specimen signature of the drawer kept in the bank.
  22. 22. 4. A cheque must be dated. 5. A cheque becomes due for payment on the date specified in it. 6. A cheque drawn on a future date is valid but it is payable on and after the date specified. Such cheques are called post dated cheques.
  23. 23. Essentials of a Cheque 1. 2. 3. 4. 5. 6. 7. 8. It must be unconditional order It must be in writing It must be drawn on a specified banker it must be signed by the drawer The order must be for the payment of a certain sum of money only Drawer, drawee and payee must be certain The payee must be certain The amount must be payable on demand
  24. 24. Difference between bill of exchange and cheque Bill of Exchange 1. A bill of exchange may be drawn on any person 2. A bill must be accepted by the drawee before making payment upon it 3. A bill is entitled to 3 days of grace Cheque 1. But a cheque is always drawn on a bank 2. But a cheque does not require acceptance 3. A cheque is not entitled to any days of grace
  25. 25. 4. A bill may be payable on demand or after the expiry of a certain period 5. No need to crossed 6. A bill must be stamped 7. A payment of a bill cannot be countermanded 8.A bill may be noted or protested for dishonour 4. But a cheque is always payable on demand. 5. A cheque may be crossed 6. A cheque does not require any stamp 7. Payment may be countermanded by the drawer 8. Not required
  26. 26. Negotiation It is the transfer of an instrument from one person to another in such a manner so as to convey the title and constitute the transferee the holder therof. it may be; a. Negotiable by mere delivery Payable even to agent to keep it for payee b. Negotiable by endorsement and delivery Unless the holder signs his endorsement on the instrument , the transferee does not become a holder.
  27. 27. Endorsement The literal meaning of the word endorsement is writing on the back of an instrument. Under the NI Act, it means, writing of the name of the endorsee on the back of the instrument by the endorser under his signature with the object of transferring the rights therein. If an instrument is fully covered with endorsements and no space is left, further endorsement can be made on a slip of paper (called alonge) annexed thereto
  28. 28. Kind of Endorsement 1. Blank or general endorsement Just put the signature 0of endorser without mention the name of endorsee Eg: sd/D.Mohan 2. Special or full endorsement Including the name of endorsee Eg: Pay to Ghosh or order sd/D.Mohan
  29. 29. 3. Restrictive endorsement An endorsement, when it prohibits or restricts the further negotiation of the instrument. Eg: pay to Ghosh only sd/D.Mohan 4. Conditional or Qualified An endorsement is conditional or qualified if it limits or negates the liability of the endorser Eg: pay to ghosh on Signing a receipt Sd/D.mohan
  30. 30. 5. Partial endorsement When an endorser endorses only a part of the amount mentioned in the instrument. it is irregular
  31. 31. Type of cheques 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Open cheque Crossed cheque Ante dated cheque (before) Post dated cheque (after) Stale cheque (out dated) Mutilated cheque (Torn) Traveller’s cheque Marked cheque (drawee banker initials or write good/approved) Truncated cheque (later further physical movement of cheque in writing) Cheque in electronic form (digital signature)
  32. 32. Open cheque A cheque which can be presented by the payee for payment at the counter of the bank of which they are drawn, are called open cheques. These cheques may be made payable to the bearer or the payee. But there is certain risk to that type of cheques. If the cheque go to wrong hands he may encash it.
  33. 33. Crossed Cheque Crossing of cheque means putting two parallel lines across the face of the cheque with or with out the use of words like‘&Co,Not negotiable’ etc.  The payment of such cheque cannot be obtained at the counter of the bank.  Such cheques must be collected through a banker.
  34. 34. Types of crossing a cheque A) General crossing B) Special crossing C) Not Negotiable Crossing D) Restrictive crossing
  35. 35. 1. General crossing A cheque must contain two parallel transverse lines. When a cheque is crossed generally the paying banker shall not pay it other than to a banker, holder cannot get payment over the counter of bank
  36. 36. 2. Special crossing The cheque must contain the name of a banker. The cheque must be paid only to the banker to whom it is crossed. Here the payee can receive the amount only through the banker named on the cheque.
  37. 37. 3. Not negotiable crossing The cheque must contain the words ‘not negotiable’. The cheque must be crossed generally or specially. The effect of the words ‘not negotiable’ on a crossed cheque is that when such a cheque is endorsed, the endorsee cannot get a better title than that of the endorser.
  38. 38. 4.Restrictive Crossing or account payee crossing It has been adopted by commercial and banking usage. In this type , the words a/c payee are added to the general or specific crossing. It warns the collective banker that the proceeds are to be credited only to the account of the payee.
  39. 39. Bouncing or Dishonour of a Negotiable Instrument A negotiable instrument may be dishonored by non payment or non acceptance.  A cheque and promissory note may be dishonored by non payment and  a bill of exchange may be dishonored either by; 1.Non acceptance or by 2.Non payment.
  40. 40. 1. Dishonor by Non Acceptance A bill of exchange is said to be dishonored by any one of the following reasons; 1.If the drawee does not accept the bill within 48 hrs from the time of presentment 2. If there are several drawees and all of them do not accept 3. when the presentment of acceptance is excused, and the bill is not accepted . (Say some excuse for acceptance) 4. When drawee become insolvent or died 5. When the drawee gives a limited acceptance 6. When the drawee is incompetent to contract 7. When the drawee is a fictitious person
  41. 41. 2. Dishonour by Non-Payment A promissory note, bill of exchange, or cheque is said to be dishonoured by nonpayment if the maker fails to make payment on the date of maturity. A cheque is dishonored by non payment as soon as a banker refuses to pay.
  42. 42. Notice of dishonour When a negotiable instrument is dishonoured the holder must give notice of dishonour to all the prior parties Notice by whom? 1. Notice by holder or any other a party 2. Chain method of notice of dishonour 3. Notice by principal or agent Form of Notice 1. It may be oral or written 2. Clearly indicate the reason for dishonour 3. It must be given within in a reasonable time
  43. 43. Duties of Holder upon Dishonour 1. Notice of Dishonour 2. Noting and protesting 3. Suit for money (after noting and protesting)
  44. 44. Circumstances When a banker is bound to dishonour of a cheque 1. When the customer countermands payment 2. Garnishee order (issued by high court) 3. Death, Insolvency or insanity of the customer 4. Notice of assignment (letter to transfer) 5. Defective title of the party 6. Loss of cheque 7. Post dated or stale cheque
  45. 45. 8. When the cheque is irregular (may changed cheque book, any information missing) 9. Closing of account 10. On transfer of accounts 11. When a cheque is Mutilated (Torn) 12. When there is material alteration 13. When the amount in words and figures differs 14. If the cheque is undated 15.The cheque is not presented in banking hours
  46. 46. Noting  When a promissory note or bill of exchange is dishonored the holder has to note this fact by a notary public.  Cheques do not require noting and protesting. Noting is usually done by a notary public by making a note of the dishonor of the instrument on a paper attached to it. The notary public is an officer appointed by the govt. for the purpose of noting.
  47. 47. Noting must specify the following; 1.The fact of dishonour 2.The date of dishonour 3.The reason for dishonour 4.Notary charges 5.A reference to the notary’s registration 6. Notary’s initials
  48. 48. Protesting It is a formal certificate issued by the notary public confirming the dishonour of the negotiable instrument. It is based upon noting  The certificate can be produced before at the time of litigations (legal proceedigs). It is a conclusive proof of dishonour.
  49. 49. Contents of protest 1. 2. 3. 4. 5. The instrument or literal transcript of the instrument The name of the person for whom and against whom the instrument has been protested The fact of and reason for dishonour The place and time of dishonour The signature of the notary public
  50. 50. Discharge of a Negotiable Instrument An instrument is said to be discharged when all rights of action under it are completely extinguished and when it ceases to be negotiable. This would happen when the party who is ultimately liable on the instrument is discharged from liability. In such a case even in holder in due course does not acquire any right under the instrument
  51. 51. Modes of Discharge 1. By payment. 2. By Debtor as a holder 2.By express waiver- holder gives up his right. 3.By cancellation-holder may cancel the instrument. 4.By material alteration or lapse of time.
  52. 52. Discharge of a party or parties 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. By payment By cancellation By release (let loose) By allowing drawee more than 48 hours By delay in presentment of cheque Cheque payable to order (fraudlent payee) By operation of law By material alteration By taking limited acceptance By not giving notice of dishonour
  53. 53. Holder (Sec.8) The holder of a promissory note, bill or cheque means any person entitled in his own name (i) to the possession thereof, and (ii) to receive or recover the amount due thereon from the parties thereto.
  54. 54. Holder in due course (Sec.9) Holder in due course, a person must possess the following qualification; 1. He must be a holder 2. He must be holder for valuable consideration 3. He must have become the holder of the negotiable instrument before its maturity 4. He must take the negotiable instrument complete and regular on the face of it 5. He must have become holder in good faith
  55. 55. Privileges of a holder in due course 1. Presumptions 2. Privilege in case of inchoate (incomplete) 3. 4. 5. 6. stamped instruments Liability of prior parties (prior parties are liable) Fictitious drawer or drawee No effect of conditional delivery ( by any prior declare ) Instrument cleansed of all defects
  56. 56. 7. Estoppel against denying(by maker or drawer) original validity of instrument 8. Estoppel against denying(by maker or acceptor) capacity of payee to endorse 9. Estoppel against denying (by endorser) signature or capacity of prior party.