amity global business

1. Legal Aspects of Business
• Module III: Negotiable Instruments Act, 1881
Meaning of Negotiability and Negotiable
Instruments—Cheques, Bills of Exchange and
Promissory Note—Crossing of cheques—
Endorsement--Dishonour of Cheques.
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2. Negotiable Instruments Act 1881
Negotiable Instruments Act
Characteristics of a Negotiable Instruments: (meaning of negotiability)
 Free Transferability
 Holder is the owner
 Holder in due course (good faith for consideration and right of
recovery)
 Validity period—6 months –Stale and Post dated
 Presumptions as to NI: a) consideration; b) date; c) time of
acceptance and payment;- accepted before maturity and
transferred before maturity; d) instruments are endorsed in the
order in which they appear; e) holder is a holder in due course; f)
lost instruments, it is presumed that it was stamped; g) Proof of
protest is enough for proving dishonour. IN all these cases burden
of proof lies on the defendant and not on the plaintiff
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3. Kinds of Negotiable Instruments Act
Kinds of Negotiable Instruments
 Bearer Instruments
 Order Instruments
 Inland Instrument
 Foreign Instrument
 Demand Instrument
 Ambiguous instrument
 Inchoate or incomplete Instrument
 Escrow (conditionally as a security)
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4. Negotiable Instruments Act
Promissory Notes: Characteristics:
In writing;
Express promise (on demand or after a definite time but cannot be made
payable to bearer on demand.
Undertaking definite and unconditional
Signature;
Maker
Jointly or jointly and severally
Sum payable must be certain without any scope of contingent additions or
subtractions
Payment in money only and not in kind;
Payee should be specified
Bank note or currency note is not a promissory note.
Consideration, date and Place –formalities
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5. Negotiable Instruments Act
Bill of Exchange: Parties to a B/E & Characteristics:
 In writing
 Express Order (unconditional order)
 Signature of the drawer
 Drawer, drawee and Payee. The parties must be certain
 Acceptor, Acceptor for Honour
 Holder
 Indorser and Indorsee
 Jointly or jointly and severally
 Sum payable must be certain without any scope of contingent
additions or subtractions
 Payment in money and not in kind
 Payee should be specified
 Number, Consideration, date and Place --formalities
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6. Negotiable Instruments Act
Bill of Exchange: Parties to a B/E & Characteristics:
Accommodation Bill
• Where a bill of exchange is drawn to accommodate another
party without underlying commercial transaction of buying or
selling goods or services, such a bill of exchange is called
ACCOMMODATION BILL. Bankers will not extend credit on
accommodation bill.
• In other words, where a bill is drawn without any
consideration is called an accommodation bill.
DA Bill and DP Bills and Clean Bills
• Documents against Acceptance and Document against
Payment.
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7. Negotiable Instruments Act
CHEQUES-Parties to a cheque and characteristics
 Cheque is a bill of exchange drawn on a specified banker and payable on
demand and include the electronic image of a truncated cheque and a
cheque in the elctronic form
 In writing in the prescribed cheque book or electronic format.
 Express Order (unconditional order) by the customer to his banker to pay
the amount to the payee or the last payee in case of endorsement.
 Payment only on demand.
 Signature of the drawer
 Drawer, drawee and Payee. Drawee is always the bank branch.
 Holder
 Indorser and Indorsee
 Sum payable must be certain without any scope of contingent additions
or subtractions
 Payment in money and not in kind
 Payee should be specified
 Number, Consideration, date and Place --formalities
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8. Negotiable Instruments Act
Truncated Cheques:
Truncated cheque means a cheque which is truncated during the
course of a clearing cycle either by the clearing house or by the
bank whether paying or receiving payment, immediately on
generation of an electronic image for transmission, substituting
further physical movement of the cheque in writing.
Crossing of Cheques:
• Crossing of cheques is a direction to the banker to pay through an
operative account and not directly by cash. i.e, cheques will be
credited to an operative account –SB or CA or OD and the payee
has to draw from that account in any mode of payment.
• General Crossing and Special Crossing
• Not Negotiable crossing (title not better than that of the
transferor)
• Restrictive Crossing
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9. Negotiable Instruments Act
Legal Provisions
 Holder and Holder in Due Course
 Negotiation
 Indorsements. In full, in blank,
 Cheques—Electronic Cheques, Truncated Cheques
 Crossing of Cheques—General Crossing, Special crossing,
Restrictive Crossing, Not-Negotiable Crossing
 Protection to a paying Banker
 Payment in Due Course of open cheques and crossed cheques
 Payment of altered instruments
 Protection to a Collecting Banker
 Good faith and without negligence
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10. Negotiable Instruments Act
Legal Provisions (contd..)
• Escrow: Where a negotiable instrument is delivered
conditionally or for a special purpose as a collateral security
or for safe custody only, and not for the purpose of
transferring the absolute property in the instrument, it is
called an ESCROW.
• Inchoate Instruments (Filing up the blanks)
• Interest on bills and notes—due dates, holidays etc
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11. Endorsements
• Cheques and Bills of Exchange can be endorsed
• The correct term is INDORSEMENT which means writing a
person’s name OTHERWISE THAN AS MAKER.
• It must be on the face or back of a negotiable instrument or
on a piece of paper attached (called ALLONGE) for the
purpose of negotiation.
• The person so signing is known as INDORSER and the person
to whom it is negotiated is known as INDORSEE.
• The first indorsement can be made by the payee. The
subsequent indorsements can be made by the holder. The
first signature of the drawer is not indorsement because
INDORSEMENT means signing otherwise than as a MAKER.
The second and subsequent signature including of the maker
is known as INDORSEMENT.
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12. Endorsements
Essentials of a Valid Endorsement:
a) On the instrument itself or on an ALLONGE
b) Signed by the indorser for the purpose of negotiation. The
first signature of the maker and the last signature of the
payee is not indorsement
c) Indorsement is complete when the instrument is delivered.
d) INDORSEMENT IN BLANK ( Mere signature and delivery)
e) FULL INDORSEMENT OR SPECIAL ( indorsement with a
direction )
f) RESTRICTIVE INDORSEMENT (Restricts further negotiation)
g) PARTIAL INDORSEMENT ( a part of the amount– not
permitted as negotiation)
h) CONDITIONAL INDORSEMENT ( limits or negates the liability
of the indorser.
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13. Negotiable Instruments Act
Legal Provisions: Dishonour of Negotiable Instruments
 Liability of Drawer
 Liability of drawee bank (wrongful dishonour, forged signature)
 Liability of maker of note and acceptor of a bill
 Liability of indorser
 Dishonour of cheques-- a criminal office Sec 138 to 147
 Rethinking about criminal cases where cases are filed by the
creditors on dishnour of cheques which were obtained postdated
at the time of sanction of loans. Recovery of loans—customers
may become incapable of payment should not be tried under
criminal cases. Dishnour of cheques on payments other than loan
recovery should only be under the purview of criminal cases.
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