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Negotiable instruments


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Negotiable instruments

  1. 1. Negotiable Instruments Act The Negotiable Instruments Act, 1881 VARIOUS TYPES OF NEGOTIABLE INSTRUMENTS Promissory note Bill of exchange Cheque Besides, certain other instruments such as documents of title to goods, govt. promissory notes, hundies etc. have acquired the character of negotiability and these are known as quasi- negotiable instruments. NEGOTIABLE INSTRUMENTS By virtue of Sec. 13(a) a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or bearer, whether the words order or bearer appear on the instrument or not. Any other instruments if satisfies the conditions of transferability by delivery or endorsement and is capable of being sued upon by the person holding it in his own name, may also be included as negotiable instrument. The definition simply mentions the names of Negotiable Instruments and does not explain their nature in the act. 1 Dr Subhash Gupta
  2. 2. Requirements of Negotiable Instruments An NI must be in writing, signed by the maker or the drawer, must be an unconditional promise or order to pay, must call for payment in money only which should be a certain sum of money payable at a certain time and the drawee must be named or described. Presumptions as to Negotiable Instruments Section 118 provides certain presumptions as to Negotiable Instruments until the contrary is proved: : NI was made, drawn, accepted, endorsed and negotiated or transferred for consideration. : It bears the date on which it was made or drawn : It was accepted within a reasonable time after its date and before maturity. : Every transfer of Negotiable Instruments was made before maturity. : Endorsements appearing on NI were made in the order in which they appear thereon. : It was duly stamped and stamp duly cancelled, when the NI stands lost : Holder is holder in due course. Promissory note (Sec 4) is an instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to or to the order of a certain person. Matters of form like no., place, date etc are usually found given in notes but they are not essential in law. Parties to a promissory note are a maker, payee, holder, endorser and endorsee. 2 Dr Subhash Gupta
  3. 3. Bill of Exchange (Sec5) 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. Where a bill is lost, the drawer is under obligation (Sec 45A) to issue a duplicate bill. Parties to a BOE are drawer, drawee, acceptor, payee, holder, endorser, endorsee, drawee in case of need an acceptor for honour. Cheque (Sec 6) is a bill of exchange drawn on a specified bank and not expressed to be payable otherwise than on demand. Parties to a cheque are drawer, drawee, payee, holder, endorser and endorsee. HOLDER The definition given in section 8 implies that: -holder must be entitled to the possession of the NI in his own name. Mere legal right to possess is enough and actual possession is not essential. -holder must be entitled to receive or recover the amount of NI from the parties to the same. Hence he should be bearer or payee or endorsee. -A person who was entitled to receive payment of an instrument and the instrument has been lost; he will continue 3 Dr Subhash Gupta
  4. 4. to be treated as holder. Person who finds the instrument lying somewhere will not become its holder by mere possession. A holder has following legal rights: -he can obtain a duplicate of the lost instrument. -he can cross the cheque if not already crossed, convert a general crossing to a special crossing and endorse and can negotiate, if the negotiation is not restricted. -he can sue or be sued in his own name in relation to the instrument. HOLDER IN DUE COURSE The definition implies the fulfillment of the following conditions: -person who claims to be holder in due course must have the negotiable instruments in his possession. He must be payee or endorsee and a bearer. -he must obtain possession of it for real, valuable and lawful consideration (and not as a gift) before its maturity, as after maturity of a bill, subsequent holders cannot be the holders in due course, even though they acquire in good faith and for due consideration. -he must obtain it in good faith without any sufficient reason to believe that any defect existed in the title of the person from whom he obtained it. The holders in due course have following legal rights: -if any inchoate/incomplete instrument has been handed over for a sum greater than what it was intended by maker, the maker cannot challenge the right of holder in due course to recover the amount mentioned (Sec 20). 4 Dr Subhash Gupta
  5. 5. -If a bill is drawn payable to the drawer’s order in a fictitious name, the acceptor is not relieved from liability to any holder in due course, provided endorsement and the drawer’s signatures are in the same handwriting (Sec42) -A person, liable on an NI, cannot be relieved from his liability towards the holder in due course on the ground that the bill was lost or obtained by fraud or for unlawful consideration (Sec 58). -Every prior party to an NI is liable thereon to a holder in due course until the instrument is duly satisfied (Sec 36). Distinction between holder and holder in due course: -Holder in due course obtains the instrument for lawful consideration while the condition of consideration does not apply to holder. -A person must acquire the possession of NI before maturity to become a holder in due course while the holder may obtain the possession, after maturity even. -NI must have been acquired in good faith and title of a person from whom it is acquired, to be a holder in due course. On the other hand this qualification is not needed to be a holder. NEGOTIATION AND ENDORSEMENTS Negotiation Negotiation is the transferring of any instrument from one person to another in such a manner as to convey title and to constitute the transferee the holder thereof. The negotiation is different from transfer by assignment as in negotiation mere delivery of a bearer instrument is enough while assignment 5 Dr Subhash Gupta
  6. 6. requires a written document to be signed by a transferor. Notice of assignment is also needed in assignment and the transferee takes the title with all the defects. In Negotiable Instruments consideration is presumed unless otherwise proved. U/s 46 delivery is very important in Negotiable Instruments which may be actual or constructive or it may be conditional for a specific purpose. Negotiation by endorsement and delivery would be required in case of Negotiable Instruments payable to other than the bearer. The endorsements may be blank or general, special or full, restrictive, partial and conditional or qualified. In a blank endorsement, the endorser merely writes his name without mentioning any thing. If the endorser signs his name and adds a direction to pay the amount to or to the order of a specified person, it would be a special or full endorsement. When the endorser restricts further negotiation, say, pay to B only, it would be known as restrictive endorsement. When endorsement purports to transfer a part of the amount payable in the instrument, it would be known as a partial endorsement, which does not operate as a negotiation of the instrument. Effect of endorsement is that an unconditional endorsement of an NI followed by its unconditional delivery transfers to the 6 Dr Subhash Gupta
  7. 7. endorsee the property therein, vesting in him the title to the instrument. The endorsee acquires a right to negotiate the instrument to any one he likes and sue all parties whose names appear or on it. Negotiation of Negotiable Instruments obtained through unlawful means or consideration cannot be affected unless such possessor or endorser or some person through whom he claims, was a holder thereof in due course (Sec 58). Types of endorsements Blank endorsements If the endorser signs his name only without adding any words of directions, the endorsement is said to be blank (Sec 16(1). Endorsement in full Restricted endorsement Partial endorsement Conditional endorsement Liability of endorser By endorsing an instrument, the endorser impliedly promises that (a) on due presentment, the instrument will be accepted and paid, in case of dishonour of bill, (b)he will compensate the holder, provided the notice of dishonour is given (c) he will not deny to a holder in due course, the genuineness or 7 Dr Subhash Gupta
  8. 8. regularity of a drawer’s signature and endorsement and (d) he will not deny the validly of endorsement and his title to the instrument to any subsequent endorsee. Regularity of endorsements To consider an endorsement as regular and valid, the following conditions should be fulfilled: -payee or endorsee of a bill himself or his duly authorised agent must sign the endorsement. -If a cheque is payable to two persons, both of them must endorse in their own hand writing. -endorser should not sign in capital letter, otherwise, it will be treated as irregular. -spelling of the name of the endorsee must be the same as appearing in the instrument. If his name is wrongly spelt, he must sign in the manner shown on the instrument and again with correct spelling. -initials of the name of payee or holder should not be changed in the endorsement. All pre-fixes and suffixes should be dropped while endorsing an instrument. CROSSING Who can cross ? As per Sec 125, a drawer at the time of issue, a holder (general to special or not negotiable crossing) and a banker who 8 Dr Subhash Gupta
  9. 9. receives the cheque for collection (special crossing), can cross the instruments. Types of crossing General crossing Special crossing Account payee crossing Cancellation of crossing Form of cheques Validity of cheques and Stale cheques : Payment in due course As per Sec 10, a payment would be considered in due course if: : Payment is in accordance with the apparent tenor of the instrument. : Payment must be made in good faith and without negligence and under circumstances which do not afford a reasonable ground for believing that the person to whom it is made is not entitled to receive the amount, : Payment must be made to the person in possession of the instrument : Payment must be made under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount mentioned therein : Payment must be made in money only. 9 Dr Subhash Gupta
  10. 10. Material alteration relates to: : Date : Sum payable : Time of payment : Place of payment : Rate of interest : Addition of new party : Tearing material part of the NI : Date of endorsement. BILLS OF EXCHANGE The bills are of following kinds: -inland bills and foreign bills -time bills and demand bills -trade bill and accommodation bills -clean bills and documentary bills. Dishonour of a bill A bill of exchange is said to be dishonoured either by non- acceptance, when drawee default in acceptance or by non- payment when the acceptor/drawee make default in payment also, where the drawee is incompetent to contract or acceptance is qualified, the bill is said to be dishonoured (Section 91 & 92). When a bill is dishonoured, the holder thereof must give notice that the instrument has been so dishonoured to all other parties or some of several parties whom the holder seeks to make jointly liable thereon. It is not necessary to give notice to 10 Dr Subhash Gupta
  11. 11. the mater of the dishonoured promissory note, or the drawee or acceptor of the dishonoured bill of exchange or cheque (Section 93). No notice of dishonour of a bill is necessary (Section 98): -when it is dispensed with by the party entitled thereto. -in order to charge the drawer when he has countermanded payment. -when the party charged could not suffer damage for want of notice. -when the party entitled to notice cannot after due search be found or the party bound to give notice is, for any other reason, unable without any fault of his own to give it. -to charge the drawers when the acceptor is also a drawer. -when the party entitled to notice knowing the facts, promises unconditionally to pay the amount due on the instrument. On dishonour, the holder may cause such dishonour 11 Dr Subhash Gupta