Negotiable instruments act - Unitedworld School of Business


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Negotiable instruments act - Unitedworld School of Business

  1. 1. INTRODUCTION „Instrument „ means any written document bywhich a right is created in favour of someperson. “negotiable” – means whereby rights in aninstrument can be transferred by one personto another
  2. 2. CONTD- Thus, a negotiable instrument is a documentby which rights vested in a person can betransferred to another person in accordancewith the provisions of the Negotiableinstruments Act 1881
  3. 3. NEGOTIABLE INSTRUMENTSORIGIN : In the year 1881.SCOPE : Applicable in entire India except theState of Jammu & Kashmir.Applicability: Deals with law relating to threespecific instruments, viz. Promissory note, Bill ofexchange and cheque.
  4. 4. MEANING There are certain documents which are freelyused in commercial transactions and monetarydealings. These documents, if they satisfycertain conditions are known as “NegotiableInstruments.” A Negotiable instrument is a method oftransferring a debt from one person to another.
  5. 5. S 13 A negotiable instrument means a promissorynote, a bill of exchange or a cheque payableeither to order or to the bearer, whether thewords „order‟ or ‟bearer‟ appear on theinstrument or not
  6. 6. Kinds of negotiable instrumentNegotiable instrument Negotiable instrumentBy STATUTE . By custom or usage1) Promissory note. 1) Bank draft.2) Bill of exchange. 2) Pay orders.3) Cheque. 3) Hundies.4) Delivery orderNot negotiable instruments: Share certificate, bill oflading, postal order
  7. 7. CHARACTERISTICS OF A NEGOTIABLEINSTRUMENT1) Freely transferable: The property in a negotiable, instrumentpasses from one person to another by a simple process, i.e., bymere delivery if it is payable to bearer, and by indorsement anddelivery if it is payable to order.2) Holder‟s title free from all defects: The holder in due course (onewho acquires the instrument in good faith and for consideration) getsit free from all defects.
  8. 8. CONTD -Example S sells certain goods to B. B givesa promissory note to S for the price. Herefuses to pay the promissory note,claiming that the goods are not accordingto order. If S sues B on the note , B‟sdefence is good. But if he negotiates thenote to H, a holder in due course, B‟sdefence will be of no avail.
  9. 9. CONTD -Recovery: He can sue upon the instrument in his ownname.The transferee of the instrument need not give noticeof transfer to the party liable to pay.A negotiable instrument can be transferred infinitum,ie, can be transferred any number of times tillmaturity.
  10. 10. PRE- SUMPTION OF NEGOTIABLE INSTRUMENTUntil the contrary is proved, the followingpresumptions shall be made. (sec 118 & 119).N.I was made, drawn, accepted, indorsed ortransferred for consideration. NI Bearing a date was made or drawn on thatparticular date only.B.O.E was accepted within a reasonable time afterits date & before its maturity.
  11. 11. CONTD -Transfer of a N.I were made in order in which theyappear.It is presumed that a lost negotiable instrument isduly stamped.Holder of a negotiable instrument is a holder in duecourse except the case where the instrument hasbeen obtained by fraud
  12. 12. PROMISSORY NOTESec.4“ A promissory note is an instrument in writingcontaining an unconditional undertaking signed bythe maker to pay a certain sum of money only to orto the order of a certain person or to the bearer ofthe instrument”..
  13. 13. PARTIESMAKER : The person who makes the promissory noteand promises to pay is called the Maker.PAYEE : The person to whom the payment is to bemade is called the Payee.HOLDER: The holder is either the payee or someoneto whom he may have indorsed (transfer) the note isknown as Holder.ENDORSER: The person who indorses the note toanother is called the Endorser .ENDORSEE: The person to whose favour the note isendorsed is called the Endorsee
  14. 14. ESSENTIALS OF THE PROMISSORY NOTES1. It must be in writing .2. It must contain a promise or undertaking to pay a definitesum of money.3. The promise to pay must be unconditional.4. It must be signed by the maker.5. The payee must be identified & must be certain.6. The sum payable must be certain.7. The amount payable must be in legal tender in money ofIndia.8. Other formalities – like date, place ,& stamp must bementioned.
  15. 15. EXAMPLEa) I promise to pay Ram or order Rs.2000{PN}b) I acknowledge myself to be indebted to Shiva inRs.5000 to be paid on demand, for valuereceived.{pn}c) I am liable to Arnold Rs.3000 {Not PN}d) I have taken Rs.10000 from John to whom I amaccountable for the same with interest. {Not PN}b) I promise to pay Rs.10000 to George seven daysafter his marriage with Julie. {Not PN}
  16. 16. FORMAT OF PROMISSORY NOTERs. 1,000 Delhi, February10,2009Three months after date I promise to pay Shyam ororder the sum of one thousand rupees, for value received.To,Shyam222, Ashok ViharDelhi-110052StampSd/-Ram
  17. 17. BILL OF EXCHANGESec.5 :“A bill of exchange is an instrument in writing containing anUnconditional order signed by the maker directing a certainperson to pay a certain sum of money only to or to the order of acertain person or to the bearer of the instrument.”
  18. 18. PARTIESDRAWER: The person who makes the bill of exchange is calleddrawer.DRAWEE: The person who is directed to pay is called drawee.PAYEE: The person to whom the payment is to be made is calledpayee.ACCEPTOR: When the drawee accepts the bill is called acceptor.
  19. 19. FORMAT OF BILL OF EXCHANGERs. 500 Greater Noida,21 Feb.2009Three months after the date pay to Ram or order the sum of Five Hundredrupees , for value received.To,Shyam235,Subhash margdelhi-110006.In case of need with AcceptedCanara Bank, Delhi Shyam Sd/-StampKrishna
  20. 20. ESSENTIALS FEATURES OF BILL OF EXCHANGE:I1. It must be in writing.2. It must contain an order to pay a definite sum of money.3. The order to pay must be unconditional.4. It must be signed by the drawer (who draw money).5. The drawer, the drawee &the payee must be identified &must be certain.6. The sum payable must be certain.7. The bill must contain an order to pay the money in legaltender in India.8. It must contain the formalities like date, place & stampetc.
  21. 21. CHEQUESec.6 :“ A cheque is a bill of exchange drawn on a specifiedbanker & not expense to be payable on a specifiedbanker & not expense to be payable otherwise than ondemand & it includes the electronic image of atruncated cheque & a cheque in the electronic form.
  22. 22. FORMAT OF CHEQUENo.……..Date………..2010Pay…………………………………………………………or bearerthe sum of Rs…………………………………Rs…………………A/c No LF No Sd/-PUNJAB NATIONAL BANKSubzi Mandi,Delhi -110007“5777100” 111013035”
  23. 23. PARTIESDRAWER: The person who makes a cheque is called Drawer.DRAWEE: The person who is directed to pay is called Drawee.PAYEE: The person to whom the payment is to be made.
  24. 24. ESSENTIAL FEATURES OF CHEQUE:1. It is always drawn by a bank & not by any other institutions.2. It always payable on demand.3. A cheque can be bearer, order or crossed.4. The drawee, that is, the banker named must honour the cheque bymaking payment to the payee when the cheque is presented forpayment to the banker at his office during the usual office hours,provided the cheque is properly and validly drawn and the drawerhas sufficient funds to his credit.5. The signature on the cheque must tally with the specimensignature of the concerned drawer.6. A cheque must be dated.
  25. 25. CROSSING OF CHEQUES CHEQUE CROSSED GENERALLY - Where a cheque bears acrossits face an addition of the words “and company” or any abbreviationthereof, between two parallel transverse lines, or of two paralleltransverse lines simply, either with or without the words “notnegotiable”, that addition shall be deemed a crossing, and thecheque shall be deemed to be crossed generally. [section 123] CHEQUE CROSSED SPECIALLY - Where a cheque bears acrossits face an addition of the name of a banker,either with or without thewords “not negotiable”, that addition shall be deemed a crossing, andthe cheque shall be deemed to be crossed specially, and to becrossed to that banker. [section 124].
  26. 26. CONTD - PAYMENT OF CHEQUE CROSSED GENERALLY OR SPECIALLY -Where a cheque is crossed generally, the banker on whom it is drawnshall not pay it otherwise than to a banker. Where a cheque is crossedspecially, the banker on whom it is drawn shall not pay it otherwisethan to the banker to whom it is crossed, or his agent for collection.[section 126]. CHEQUE BEARING “NOT NEGOTIABLE” - A person taking a chequecrossed generally or specially, bearing in either case the words “notnegotiable”, shall not have, and shall not be capable of giving, a bettertitle to the cheque than the person from whom he took it had. [section130]. Thus, mere writing words „Not negotiable‟ does not mean that thecheque is not transferable. It is still transferable, but the transfereecannot get title better than what transferor had.
  27. 27. HOLDERSec.8The Holder of a Promissory note, B.O.E or CHEQUEmeans any person entitled in his own name to thepossession thereof, and to receive or recover theamount due thereon from the parties thereto. Wherethe note, bill or cheque is lost or destroyed, its holder isthe person so entitled at the time of such loss ordestruction.
  28. 28. HOLDER1) The person must be entitled to receive payment or receive theamount by filling a suit in his own name against other parties tonegotiate the instrument giving a valid discharge.2) In case instrument is lost from the person who was entitled toreceive the payment, the subsequent finder does not becomeit‟s owner. Only the person who was entitled to receive thepayment initially is the real owner.3) The person must have a legal right to possess the instrumentin his own name.
  29. 29. HOLDER IN DUE COURSESec.9Any person who for consideration becomes the possessor of thepromissory note, B.O.E or Cheque before the amount mentionedin it becomes payable & without having sufficient cause tobelieve that any defect existed in the title of the person fromwhom he derives his title.
  30. 30. WHEN DOES A PERSON BECOMES A HOLDERIN DUE COURSEBefore the amount mentioned in the instrument becomes payable.1) Without having sufficient cause to believe that any defectexists in the title of the person from whom, he derives his title2) He becomes a possessor of a promissory note, b.o.e or cheque.3) If it is payable to the bearer.4) Consideration has passed from him.Illustration:- A is a payee for a valuable consideration of a billpayable to order. He gets this instrument from B withoutknowledge of any defect in B‟s title & its maturity.In this e g. A is a holder in due course.
  31. 31. CONTD -A holder of a negotiable instrument will not be a holder in duecourse if:-a) he has obtained the instrument by gift or by illegal method.b) he has obtained the instrument after its maturity.
  32. 32. PRIVILEGES OF HOLDER IN DUE COURSE1)Inchoate stamped instrument: A person, who hassigned & delivered to another a stamped but otherwiseinchoate instrument , is precluded from asserting, asagainst a holder in due course, that the instrument hasnot been filled in accordance with the authority given byhim, the stamp being sufficient to cover theamount(sec.20).2) Liability of prior parties: Every prior party to anegotiable instrument is liable thereon to a holder indue course until the instrument is duly satisfied(sec.36).
  33. 33. CONTD -3) Fictitious payee: Where a bill is drawn payable to thedrawer‟s order in fictitious name & is indorsed in the samehand as the drawer‟s signature, the acceptor is not relievedfrom liability to any other holder in due course, on the pleathat the drawer is fictitious(sec.42).4) Conditional delivery: If a bill or not is negotiated to aholder in due course, the other parties to the instrumentcannot avoid liability on the ground that the delivery of theinstrument was conditional or for a special purpose only.
  34. 34. CONTD -5) Instrument cleansed of all defects: Once a negotiable instrumentpasses through the hands of a holder in due course, it getscleansed of its defects provided the holder was himself not a partyto the fraud or illegality which affected the instrument in somestage of its journey. Thus any defect in the title of the transferorwill not affect the rights of the holder in due course even if he hadknowledge of the prior defect provided he himself is not a party tothe fraud.Example: A, by fraud, induces B to make a promissory note in hisfavour. He indorses the note to C, who take it as a holder in duecourse. C subsequently indorses the note to A, for value. A cannotsue B on the note as he himself is a party to the fraud .
  35. 35. DIFFERENCE BETWEEN HOLDER AND HOLDER INDUE COURSE A holder can obtain aninstrument withoutconsideration If an instrument isinchoate, a holder of suchinstrument cannot getgood title in the instrument A holder need not botherabout the defect, if any inthe title of the instrument Obtains an instrument withconsideration and for value. Holder in due courseacquires a good title even ifthe instrument is inchoate. Holder in due course whoacquires an instrumentknowingly the defect of thetitle.
  36. 36. NEGOTIATIONMethod of transferAn instrument is said to be negotiatedwhen a promissory note,BOE,cheque istransferred to any person so as toconstitute that person the holder of theinstrumentTransfer with an intention to transfer thetitle of the instrument. Negotiation by delivery Negotiation by endorsement and delivery
  37. 37. CONTD- Meaning of endorsement – An endorsementmeans signing the negotiable instrument onthe back of ,or face thereof or, or on a slip ofpaper annexed thereto
  38. 38. PRESENTMENTPresentment for Acceptance (requiredonly in case of BOE)Presentment for paymentPresentment made to the drawee.Must be made before the date of maturity
  39. 39. DISHONOUR (S 92) A negotiable instrument is said to bedishonoured by non-payment when themaker, acceptor or drawee, as the casemaybe makes default in payment upon beingduly required to pay the same. Dishonour by non payment Dishonour by non acceptance
  40. 40. BOUNCING OF CHEQUES (S 138- S142) A cheque is said to be bounced or dishonored by non-payment when the drawer of the cheque makes defaultin the payment upon being duly required by the same. If a cheque is dishonoured even when presented beforeexpiry of 6 months, the payee or holder in due courseis required to give notice to drawer of cheque within 30days from receiving information from bank.. The drawer should make payment within 15 days ofreceipt of notice. If he does not pay within 15 days, the payee has tolodge a complaint with Metropolitan Magistrate orJudicial Magistrate of First Class, against drawer withinone month from the last day on which drawer shouldhave paid the amount.
  41. 41. CONTD - The penalty can be upto two years imprisonment or fineupto twice the amount of cheque or both. The offencecan be tried summarily. Notice can be sent to drawer byspeed post or courier. Offence is compoundable. It must be noted that even if penalty is imposed ondrawer, he is still liable to make payment of the chequewhich was dishonoured. Thus, the fine/imprisonment isin addition to his liability to make payment of the cheque.
  42. 42. NOTINGWhen a cheque is dishonoured generallythe bank who refuses payment returnsback the cheque gives reasons in writingfor the dishonour of the cheque.NotingThe holder cause such dishonour to be notedby a notary public upon the instrument or upona paper attached thereto or partly upon eachNoting consists in recording the fact ofdishonour by notary public
  43. 43. PROTESTProtest is a formal certificate issued by thenotary public certifying the dishonour ofthe bill or note.It has to be done within a reasonableperiod of time.
  44. 44. DISCHARGE FROM LIABILITYBy paymentBy cancellationBy releaseBy non-presentment for acceptance of abill of exchangeBy material alteration
  45. 45. BANKER AND CUSTOMER No statutory definition of banker NI Act defines a banker as any person actingas a banker Customer – A person becomes a customer ofa bank when the latter agrees to open anaccount with the former. Thus, a customer isa person who has some sort of account withthe banker. The duration of relationship isimmaterial.
  46. 46. OBLIGATIONS OF A BANKER To honour cheques. To keep a proper record of the transactions. To abide by the instructions given by thecustomer To not disclose the state of his customer‟saccount or affairs To claim interest on money lent
  47. 47. PROTECTION GRANTED TO BANKER Protection of paying banker – where a cheque payable to order purports to beindorsed by or on behalf of the payee, thedrawee is discharged by payment in due course. Where a cheque is originally expressed to bepayable to a bearer, the drawee is discharged bypayment in due course to the bearer thereof
  48. 48. CONTD- Protection of collecting banker – A bankerwho has in good faith received payment for acustomer‟s crossed cheque ,does not incurliability , later if it is found that the title isdefective