Negotiable instruments


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Features of a Negotiable Instrument
Elements of Negotiability
Presumptions as to negotiable instruments
Promissory Note
Bill of Exchange
Holder and Holder in due course
Negotiation, Indorsement and Assignment
Dishonour of negotiable instrument
Liability of Banker

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Negotiable instruments

  1. 1. Dr. Tabrez Ahmad 1
  2. 2. Dr. Tabrez Ahmad 2
  3. 3. Agenda Features of a Negotiable Instrument Elements of Negotiability Presumptions as to negotiable instruments Promissory Note Bill of Exchange Cheque Holder and Holder in due course Negotiation, Indorsement and Assignment Dishonour of negotiable instrument Liability of Banker Dr. Tabrez Ahmad 3
  4. 4. Features of a NegotiableInstrument It is a written document by which certain rights are created and/or transferred to a certain person. It must be signed by the maker or the drawer as the case may be. There must exist the unconditional order or promise to pay. There must be a time mentioned for such payment. In particular cases, the drawee’s name should be specifically mentioned. It must be capable of being paid either by bearer or by order. Dr. Tabrez Ahmad 4
  5. 5. Elements of Negotiability Section 13 defines a negotiable instrument. The definition does not bar the inclusion of other documents which have the element of negotiability. Freely transferable Holder’s title is free from defects Can be transferred infinitum Dr. Tabrez Ahmad 5
  6. 6. Negotiable Instruments According to Section 13(a) of the Act, “Negotiableinstrument means a promissorynote, bill of exchange or chequepayable either to order or tobearer, whether the word “order”or “ bearer” appear on theinstrument or not.” Thus, the term, negotiableinstrument means a writtendocument which creates a right infavour of some person and whichis freely transferable. Althoughthe Act mentions only these threeinstruments (such as apromissory note, a bill ofexchange and cheque).
  7. 7. CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT1. Transferability:It is easily transferable from person to person by mere deliveryor by endorsement and delivery. But all the transferableinstruments are not negotiable instruments, but allnegotiable instrument are transferable.2. TitleThe transferee of a negotiable instrument is known as ‘holderin due course.’ A bona fide transferee for value is not affectedby any defect of title on the part of the transferor or of any ofthe previous holders of the instrument.3. Rights:The transferee of the negotiable instrument can sue in hisown name, in case of dishonour. A negotiable instrument canbe transferred any number of times till it is at maturity. Theholder of the instrument need not give notice of transfer tothe party liable on the instrument to pay.
  8. 8. 4. Presumptions Certain presumptions apply to all negotiableinstruments e.g., a presumption that consideration hasbeen paid under it. It is not necessary to write in apromissory note the words ‘for value received’ or similarexpressions because the payment of consideration ispresumed. The words are usually included to createadditional evidence of consideration.5. Prompt paymentA negotiable instrument enables the holder to expectprompt payment because a dishonour means the ruin ofthe credit of all persons who are parties to theinstrument.
  9. 9. Presumptions as to negotiableinstruments As to consideration As regards time As regards acceptance As regards transfer As regards endorsements As regards dishonour of negotiable instruments As regards capacity of the parties Dr. Tabrez Ahmad 10
  10. 10. PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTSections 118 and 119 of the Negotiable Instrument Actlay down certain presumptions which the courtpresumes in regard to negotiable instruments.1. Consideration2. Date3. Time of acceptance4. Time of transfer5. Order of endorsement6. Stamp7. Holder in due course8. Proof of protest
  11. 11. 1. ConsiderationIt shall be presumed that every negotiable instrument was madedrawn, accepted or endorsed for consideration. It is presumed that,consideration is present in every negotiable instrument until thecontrary is presumed. The presumption of consideration, howevermay be rebutted by proof that the instrument had been obtainedfrom, its lawful owner by means of fraud or undue influence.2. Date:Where a negotiable instrument is dated, the presumption is that it hasbeen made or drawn on such date, unless the contrary is proved.3. Time of acceptance Unless the contrary is proved, every accepted bill of exchange ispresumed to have been accepted within a reasonable time after itsissue and before its maturity. This presumption only applies when theacceptance is not dated; if the acceptance bears a date, it will primafacie be taken as evidence of the date on which it was made.4. Time of transferUnless the contrary is presumed it shall be presumed that everytransfer of a negotiable instrument was made before its maturity.
  12. 12. 5. Order of endorsement Until the contrary is proved it shall be presumed that theendorsements appearing upon a negotiable instrument were made inthe order in which they appear thereon. 6. Stamp Unless the contrary is proved, it shall be presumed that a lostpromissory note, bill of exchange or cheque was duly stamped. 7. Holder in due course Until the contrary is proved, it shall be presumed that the holder of anegotiable instrument is the holder in due course. Every holder of anegotiable instrument is presumed to have paid consideration for itand to have taken it in good faith. But if the instrument was obtainedfrom its lawful owner by means of an offence or fraud, the holder has toprove that he is a holder in due course.8. Proof of protest Section 119 lays down that in a suit upon an instrument which hasbeen dishonoured, the court shall on proof of the protest, presume thefact of dishonour, unless and until such fact is disproved.
  13. 13. TYPES OF NEGOTIABLEINSTRUMENTSSection 13 of the Negotiable Negotiable instrumentsInstruments Act states that a recognized by usage ornegotiable instrument is a custom are:promissory note, bill of (i) Hundisexchange or a cheque (ii) Share warrantspayable either to order or to (iii) Dividend warrantsbearer. Negotiable (iv) Bankers draftinstruments recognized by (v) Circular notesstatute are: (vi) Bearer debentures(i) Promissory notes (vii)Debentures of Bombay Port Trust(ii) Bills of exchange (viii)Railway receipts(iii) Cheques (ix) Delivery orders.
  14. 14. Promissory notesSection 4 of the Act defines, “A promissory note isan instrument in writing (note being a bank-noteor a currency note) containing an unconditionalundertaking, signed by the maker, to pay a certainsum of money to or to the order of a certain person,or to the bearer of the instruments.”
  15. 15. Essential Elements1. It must be in writingA mere verbal promise to pay is not a promissory note. The method ofwriting (either in ink or pencil or printing, etc.) is unimportant, but itmust be in any form that cannot be altered easily.2. It must certainly an express promise or clear understanding topayThere must be an express undertaking to pay. A mere acknowledgmentis not enough.3. Promise to pay must be unconditionalA conditional undertaking destroys the negotiable character of anotherwise negotiable instrument. Therefore, the promise to pay mustnot depend upon the happening of some outside contingency or event.It must be payable absolutely.4 It should be signed by the maker The person who promise to pay must sign the instrument even thoughit might have been written by the promisor himself.5. The maker must be certain The note self must show clearly who is the person agreeing toundertake the liability to pay the amount.
  16. 16. 6. The payee must be certain The instrument must point out with certainty the person to whom thepromise has been made.7. The promise should be to pay money and money only: Money meanslegal tender money and not old and rare coins. A promise to deliver paddyeither in the alternative or in addition to money does not constitute apromissory note.8. The amount should be certain:One of the important characteristics of a promissory note is certainty—notonly regarding the person to whom or by whom payment is to be made butalso regarding the amount.(a) there is a promise to pay amount with interest at a specified rate.(b) the amount is to be paid at an indicated rate of exchange.(c) the amount is payable by installments with a condition that the wholebalance shall fall due for payment on a default being committed in thepayment of anyone installment.9. Other formalitiesThe other formalities regarding number, place, date consideration etc. thoughusually found given in the promissory notes but are not essential in law. Thedate of instrument is not material unless the amount is made payable at acertain time after date. Even in such a case, omission of date does notinvalidate the instrument and the date of execution can be independentlyascertained and proved.
  17. 17. Bill of exchange Section 5 of the Act defines, “A bill of exchange is aninstrument in writing containing an unconditional order,signed by the maker, directing a certain person to pay acertain sum of money only to, or to the order of a certainperson or to the bearer of the instrument”. A bill of exchange, therefore, is a writtenacknowledgement of the debt, written by the creditor andaccepted by the debtor. There are usually three parties to abill of exchange drawer, acceptor or drawee and payee.Drawer himself may be the payee.
  18. 18. Mechanics of Bills Financing Sale of goods (1) Seller / Buyer / Drawer Drawing of bill & Acceptance Drawee (2) Banker
  19. 19. Essential conditions of a bill of exchange1. It must be in writing.2. It must be signed by the drawer.3. The drawer, drawee and payee must be certain.4. The sum payable must also be certain.5. It should be properly stamped.6. It must contain an express order to pay money and money alone.
  20. 20. Distinction Between Bill of Exchange and Promissory Note1. Number of parties:In a promissory note there are only two parties – the maker(debtor) and the payee (creditor). In a bill of exchange, thereare three parties; drawer, drawee and payee; although any twoout of the three may be filled by one and the same person,2. Payment to the makerA promissory note cannot be made payable the maker himself,while in a bill of exchange to the drawer and payee or draweeand payee may be same person.3. Unconditional promise A promissory note contains an unconditional promise by themaker to pay to the payee or his order, whereas in a bill ofexchange, there is an unconditional order to the drawee to payaccording to the direction of the drawer.
  21. 21. 4. Primary or absolute liability The liability of the maker of a promissory note is primaryand absolute, but the liability of the drawer of a bill ofexchange is secondary and conditional.5. Relation The maker of the promissory note stands in immediaterelation with the payee, while the maker or drawer of anaccepted bill stands in immediate relations with theacceptor and not the payee.6. Protest for dishonour:Foreign bill of exchange must be protested fordishonour when such protest is required to be made bythe law of the country where they are drawn, but nosuch protest is needed in the case of a promissory note.
  22. 22. Cheques Section 6 of the Act defines “A cheque is a bill ofexchange drawn on a specified banker, and not expressed tobe payable otherwise than on demand”. A cheque is bill of exchange with two morequalifications, namely, (i) it is always drawn on a specified banker, and (ii) it is always payable on demand. Consequently, all cheque are bill of exchange, but allbills are not cheque. A cheque must satisfy all therequirements of a bill of exchange; that is, it must besigned by the drawer, and must contain an unconditionalorder on a specified banker to pay a certain sum of moneyto or to the order of a certain person or to the bearer of thecheque. It does not require acceptance.
  23. 23. Cheque A cheque is an order by the customer of the bank directing his bank to pay on demand the specified amount to a certain person or to the order of a certain person named therein. It includes an electronic cheque and the electronic image of a truncated cheque. The drawer of the cheque must date it before it leaves his hands. A cheque may be ante-dated or post-dated.All cheques are bills of exchange but all bills of exchange are not cheques. Dr. Tabrez Ahmad 24
  24. 24. Distinction Between Bills ofExchange and Cheque1. A bill of exchange is usually drawn on some person or firm, while a cheque is always drawn on a bank.2. It is essential that a bill of exchange must be accepted before its payment can be claimed A cheque does not require any such acceptance.3. A cheque can only be drawn payable on demand, a bill may be also drawn payable on demand, or on the expiry of a certain period after date or sight.4. A grace of three days is allowed in the case of time bills while no grace is given in the case of a cheque.
  25. 25. 5. Notice of dishonour of a bill is necessary, but no such notice is necessary in the case of cheque.6. A cheque may be crossed, but not needed in the case of bill.7. A bill of exchange must be properly stamped, while a cheque does not require any stamp.8. A cheque drawn to bearer payable on demand shall be valid but a bill payable on demand can never be drawn to bearer. 9. Unlike cheques, the payment of a bill cannot be countermanded by the drawer.
  26. 26. Hundis A “Hundi” is a negotiable instrument written inan oriental language. The term hundi includes allindigenous negotiable instrument whether they be inthe form of notes or bills. The word ‘hundi’ is said to be derived from theSanskrit word ‘hundi’, which means “to collect”. Theyare quite popular among the Indian merchants fromvery old days. They are used to finance trade andcommerce and provide a facile and sound medium ofcurrency and credit.
  27. 27. PARTIES TO NEGOTIABLE INSTRUMENTSParties to Bill of Exchange1. DrawerThe maker of a bill of exchange is called the ‘drawer’.2. DraweeThe person directed to pay the money by the drawer iscalled the ‘drawee’,3. AcceptorAfter a drawee of a bill has signed his assent upon the bill,or if there are more parts than one, upon one of such paresand delivered the same, or given notice of such signing tothe holder or to some person on his behalf, he is called the‘ acceptor’.
  28. 28. 4. Payee The person named in the instrument, to whom or to whoseorder the money is directed to be paid by the instrument iscalled the ‘payee’. He is the real beneficiary under theinstrument. Where he signs his name and makes the instrumentpayable to some other person, that other person does notbecome the payee.5. Indorser When the holder transfers or indorses the instrument toanyone else, the holder becomes the ‘indorser’.6. Indorsee:The person to whom the bill is indorsed is called an ‘indorsee’.7. Holder A person who is legally entitled to the possession of thenegotiable instrument in his own name and to receive theamount thereof, is called a ‘holder’. He is either the originalpayee, or the indorsee. In case the bill is payable to the bearer,the person in possession of the negotiable instrument is calledthe ‘holder’.
  29. 29. 8. Notice of dishonourWhen a bill is dishonoured, due notice ofdishonour is to be given by the holder to thedrawer and the intermediate indorsers, butno such notice need be given in the case of anote.
  30. 30. Parties to a Promissory Note1. Maker. He is the person who promises to pay the amount stated in the note. He is the debtor.2. Payee. He is the person to whom the amount is payable i.e. the creditor.3. Holder. He is the payee or the person to whom the note might have been indorsed.4. The indorser and indorsee (the same as in the case of a bill).
  31. 31. Parties to a Cheque1. Drawer. He is the person who draws the cheque, i.e., the depositor of money in the bank.2. Drawee. It is the drawer’s banker on whom the cheque has been drawn.3. Payee. He is the person who is entitled to receive the payment of the cheque.4. The holder, indorser and indorsee (the same as in the case of a bill or note).
  32. 32. Promissory Note A promissory note is a negotiable instrument made in writing, making an unconditional undertaking to pay a certain sum of money to a certain person or to the order of a certain person or to the bearer of the instrument and signed by the maker. It cannot be drawn payable to the maker himself. It must be payable either on demand or after a definite period of time. It must contain a promise to pay money only. Dr. Tabrez Ahmad 33
  33. 33. Bill of Exchange It is an instrument in writing containing an unconditional order by the maker, directing a certain person to pay a certain sum of money to the bearer of the instrument or to the order of a certain person and it must be signed by the maker. The same person can be the drawer and the payee at the same time.NEITHER THE PROMISSORY NOTE NOR THE BILL OF EXCHANGE ARE REQUIRED TO BE ATTESTED OR REGISTERED. Dr. Tabrez Ahmad 34
  34. 34. Points of Distinction between Promissory Note and Billof Exchange Number of Parties Nature of the instrument Nature of presentment Liability of the maker or the drawer Immediate relation Dr. Tabrez Ahmad 35
  35. 35. Kinds of Bill of Exchange Inland bill  a bill of exchange drawn and payable, actually or on its face, in the s ame jurisdiction, as in the same country or state. Foreign bill  a bill of exchange drawn on a payer in one country by a maker in ano ther. Bills in sets  Three copies of a bill of exchange, sent separately by an exporter to an importer in case one gets lost. The importer only needs to accept one copy Drawee in case of need  "Drawee in case of need ": When the bill or in any endorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need such person is called a "drawee in case of need". Dr. Tabrez Ahmad 36
  36. 36.  Trade and accommodation bill Time bill Demand bill Clean and documentary bill Dr. Tabrez Ahmad 37
  37. 37. Inland and Foreign BillsInland bill: A bill is, named as an inland bill if:(a) it is drawn in India on a person residing in India, whether payable in or outside India, or(b) it is drawn in India on a person residing outside India but payable in India.
  38. 38. The following are the Inland bills(i) A bill is drawn by a merchant in Delhi on a merchant inMadras. It is payable in Bombay. The bill is an inland bill.(ii) A bill is drawn by a Delhi merchant on a person inLondon, but is made payable in India. This is an inland bill.(iii) A bill is drawn by a merchant in Delhi on a merchant inMadras. It is accepted for payment in Japan. The bill is aninland bill.Foreign Bill: A bill which is not an inland bill is a foreign bill.The following are the foreign bills:1. A bill drawn outside India and made payable in India.2. A bill drawn outside India on any person residing outsideIndia.3. A bill drawn in India on a person residing outside India andmade payable outside India.4. A bill drawn outside India on a person residing in India.5. A bill drawn outside India and made payable outside India.
  39. 39. Time and Demand BillTime bill: A bill payableafter a fixed time istermed as a time bill. Inother words, bill payable“after date” is a time bill.Demand bill: A billpayable at sight or ondemand is termed as ademand bill.
  40. 40. Trade and Accommodation BillTrade bill: A bill drawn andaccepted for a genuine tradetransaction is termed as a“trade bill”.Accommodation bill: Abill drawn and accepted notfor a genuine tradetransaction but only toprovide financial help tosome party is termed as an“accommodation bill”.
  41. 41. Example: A, is need of money for three months. He induceshis friend B to accept a bill of exchange drawn on him forRs. 1,000 for three months. The bill is drawn andaccepted. The bill is an “accommodation bill”. A may getthe bill discounted from his bankers immediately, payinga small sum as discount. Thus, he can use the funds forthree months and then just before maturity he may remitthe money to B, who will meet the bill on maturity. In the above example A is the “accommodatedparty” while B is the “accommodating party”. It is to be noted that an recommendation bill maybe for accommodation of both the drawer arid acceptor.In such a case, they share the proceeds of the discountedbill.
  42. 42. Acceptance of Bill of Exchange The bill of exchange has to be accepted by the drawee. Presentment of the bill for acceptance must be made before the drawee or his agent. The bill must be presented for acceptance before its maturity. The acceptance must be in writing and signed by the drawee or his agent. It must be delivered to the holder / payee. An acceptance of a bill of exchange may be general or qualified. It is not necessary that all bills of exchange have to be first presented for acceptance and then presented for payment. Dr. Tabrez Ahmad 43
  43. 43. Holder and Holder in due course Holder is a person who is entitled in his own name to the possession of the negotiable instrument and to recover the amount thereon. Holder in due course is a person who came into possession of the instrument on payment of consideration and without knowledge of the fact that the erstwhile owner had a defective title. The holder in due course has a better title than the holder. Dr. Tabrez Ahmad 44
  44. 44. Privileges of a holder in due course He can sue every prior party to the negotiable instrument if the instrument is not duly satisfied. When the holder endorses such instrument further, the new owner has a good title unless he is party to fraud. The burden of proving his title does not lie upon the holder in due course. Dr. Tabrez Ahmad 45
  45. 45. Negotiation, Indorsement and Assignment The transfer of a negotiable instrument by one party to another so as to make the transferee the holder thereof, is called negotiation. Both negotiation and assignment involve the transfer of right to receive the payment of a debt, but while in negotiation the transferee gets a good title, in assignment, the assignee has only those rights which the assignor possessed. Indorsement is the mode of negotiating a negotiable instrument which is payable otherwise than to bearer. Dr. Tabrez Ahmad 46
  46. 46. How is indorsement done? The maker or holder signs either on the back or the face of the instrument for the purpose of negotiation. Endorsement can also be done on a slip of paper annexed to the negotiable instrument. Dr. Tabrez Ahmad 47
  47. 47. Kinds of endorsements Indorsement in blank Indorsement in full Restrictive indorsement Conditional indorsement Indorsement sans recourse Facultative indorsement Partial indorsement Dr. Tabrez Ahmad 48
  48. 48. Indorsement sans recourse A clause inserted into an agreement which indicates that the endorser does not wish to incur liability if the document of title is not honored. It is essentially saying that the other party is entering into agreement at his or her own risk. For example, if Party A (the "endorser") signs a bill of exchange containing a sans recourse endorsement with Party B (the "endorsee") over a financial instrument, Party B signs into an agreement with Party C over the same instrument, and the instrument is dishonored, the Party B cannot seek payment from Party A. A sans recourse endorsement is often made by those in a representative capacity rather than those acting as principal. Also called without recourse or at the endorsees own risk Dr. Tabrez Ahmad 49
  49. 49. Maturity of a negotiable instrument The date on which the payment on the instrument falls due. If it is dishonoured on such date, a suit can be filed. Presentment for payment must be made within banking hours and at banker’s premises. Dr. Tabrez Ahmad 50
  50. 50. Dishonour of negotiable instrument Can be dishonored in 2 ways –1. by non-acceptance2. by non-payment Notice of dishonor is mandatory Noting of dishonor is also necessary Protest is mandatory for foreign bills. Dr. Tabrez Ahmad 51
  51. 51. Crossing of Cheques It is a direction given by the customer to the banker that payment should not be made across the counter. Crossing is effected by drawing two parallel transverse lines with or without particular abbreviations. A cheque that is not crossed is called an open cheque. It serves as a measure of safety against theft or loss of cheques in transit. Dr. Tabrez Ahmad 52
  52. 52. Types of Crossing GENERAL  SPECIAL1. Addition of two 1. Drawing of two parallel transverse parallel lines is not lines. always necessary.2. Between the lines, the 2. Addition of the words “Not specific name of negotiable”, “A/c banker on the face of Payee”, “& Co.”, “and cheque Co.”, may or may not be written. Dr. Tabrez Ahmad 53
  53. 53. Who can cross a cheque? Both the drawer and the holder can cross a cheque. General crossing can be converted into special crossing but special crossing cannot be converted into general crossing. A cheque crossed in favour of a particular banker can not again be crossed in favour of a another banker. Dr. Tabrez Ahmad 54
  54. 54. Liability of banker Liability of the banker differs based on the nature of the job performed by the banker. The paying banker shall honour only those cheques that are presented against the accounts maintained at the specific branch within reasonable time within banking hours. It is the duty of the paying banker to examine the contents of the cheque before honouring it. The liability of the collecting banker is to act in good faith and without negligence and collect the amount from the paying banker and credit the same to the payee’s account. Dr. Tabrez Ahmad 55
  55. 55. Drawer’s liability for dishonour of cheque in case of insufficiency of funds The drawer may be punished with imprisonment up to 2 years or with fine up to twice the amount dishonoured or both. Such punishment is given only:-a) when the cheque is dishonoured for insufficiency of funds;b) the payment was to enforce a legally enforceable debt;c) the cheque is presented to the drawee within six months of the date on which is drawn or within the period of validity, whichever is earlier;d) notice of dishonour is made known to the drawer in writing within 30 days of receipt of information of dishonour by the payee;e) The drawer does not make payment within 15 days of receipt of such notice. (contd.) Dr. Tabrez Ahmad 56
  56. 56. Drawer’s liability for dishonour of cheque in case of insufficiency of funds (contd.) It is the Court of Judicial Magistrate of First Class and Metropolitan Magistrate or any Court superior to it that can try such case. Even companies and every officer of such company who is associated with the dishonour remains liable but a director nominated by the Government does not stand liable. Such trials should be disposed within 6 months from date of filing. Onus lies upon the accused to prove that the cheque is not dishonoured. Such offence is a compoundable offence. Dr. Tabrez Ahmad 57
  57. 57. Dr. Tabrez Ahmad 58
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  59. 59. Dr. Tabrez Ahmad 60