Negotiable instrument Act 1881
Priya Abraham Faculty, Dept of Management Studies VCMCS
Introduction
Definition “Negotiable instrument” Negotiable means transferable Instrument means a written document A negotiable instrument is a document which entitles a person to a sum s um of money and which is transferable from one person to another by mere delivery or by indorsement and delivery. It is a method of transferring a debt from one person to another.
Characteristics
Freely transferable Title of holder free from all defects A person who is holding negotiated instrument he is free from a defect in the title of the transferor Ex: S sells certain goods to B. B gives a promissory note to S for the price. He refuses to pay the promissory note, claiming that the goods are not according to order. If S sues B on the note, B’s defence is good. But if he negotiates the note to H, a holder in due course, B’s defence will be of no avail. Recovery A holder of the negotiable instrument can sue for recovery of the amount. Presumptions Negotiable instrument is for consideration Dated Reasonable Time of acceptance Before the maturity it should transferred Stamp when there is a dishonour
Types of negotiable instrument
Negotiable by statue - Promissory note -Bill of exchange -Cheque
Negotiable by custom or usage -Share warrants -Dividend warrants -Share certificat c ertificates es
Promissory note
It is an instrument in writing containing an unconditional undertaking, signed by the maker,to pay a certain sum of money only to, or to order of, a certain person, or to the bearer of the instrument. The person who makes the promissory note and promises to pay is called maker The person to whom the payment is to be made is called the payee. Essential elements -Writing -Promise to pay -Definite and unconditional -Signed by the maker -Point out the Certain parties -Payment of certain sum of money -Promise to pay money only -Formalities like date, number, place, consideration everything should be there -it may be payable on demand or after a definite period of time
Bill of Exchange
It 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. The person who makes the bill is called drawer The person who is directed to pay is called drawee The person to whom the payment is made is called payee Essential element -Must be in writing -Must contain an order to pay -The order must be unconditional -It requires three persons involvement -The parties must be certain -Signed by the drawer -Sum payable must be certain -It should be an order to pay -All the formalities like date, time, place etc., should be there
Distinction between a Note and the Bill of exchange
Note – two parties involved
BOE-Three parties involves
Note-Unconditional promise to pay pay
Note-Maker is a debtor BOE-maker is a creditor
Note-Maker is the acceptor
Note-Liability of the maker is Primary Note-Liability secondary
Note-Requires no acceptance drawee
Note-Cannot drawn as payable to bearer BOE-Drawn as payable to the bearer
Note-Dishonor may not informed to all all
BOE-Unconditional order to
BOE-Maker is not a acceptor BOE-Liability of the drawee is
BOE-Requires acceptance of
the
BOE-Dishonour informed to
Cheque A cheque is a bill of exchange drawn upon a specified banker and payable on demand. It is the electronic form means it contains the exact mirror image of the proper cheque, and is generated, written and signed in a secure system s ystem ensuring the minimum safety standards with the use of digital signature and asymmetric crypto system
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Types -Open cheque A cheque which is payable in cash across the counter of a bank -Crossed cheque It is the one on which two parallel transverse lines with or without the words &Co are drawn.
Types of crossing
General crossing A cheque is said to crossed generally where it bears across its face an addition of the words “&Co”or any abbreviation between two parallel transverse lines either with or without the not negotiable.
Special crossing Where a cheque bears across its face an addition of the name of a banker,either with or without the words not negotiable the cheque is deemed to be crossed specially.
Restrictive crossing A cheque which additionally contains the words ‘A/C Payee’ in the general or special crossing cheque with or with out the words not negotiable
Distinction between BOE and cheque
BOE-Drawn on any person
Ch-drawn only on banker
BOE-Accepted by drawee
Ch-No acceptance require
BOE-Not crossed
Ch-Can be crossed
BOE-Require stamp
Ch-Not require stamp
BOE-Cannot be countermanded Ch-Can be countermanded
Classification of Negotiable instrument
Bearer and order instruments A negotiable instrument is payable to bearer A negotiable instrument is payable to order
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Inland and foreign instrument -Both made and payable in India -not an inland
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Instrument payable on demand -a cheque always payable on demand
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Time instrument -which is payable after a period
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Accommodation bill -a bill drawn,accepted or indorsed for consideration
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Fictitious bill -when the name of the drawer or the payee or both is fictitious in a bill, the bill is called a fictitious bill
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Escrow -when a negotiable instrument is delivered conditionally or for a special purpose
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Ambiguous instrument -faulty draft instrument
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Inchoate instrument -incomplete instrument
Bills in sets
A bill of exchange is sometimes drawn in parts, especially when it has to be sent from one country to another. This is known as drawing a bill ‘in a set’. Each bill must be numbered Entire bill is extinguished when the payment is made The drawer must signed in each part of the bill
Parties to a negotiable instrument Capacity of parties
Minor
Unsound mind person
Corporations-upto the limit of MOA
Agent
Joint family system
Partners
PARTIES
Parties to a BOE -Drawer,Drawee,Acceptor,Payee,Holder, Indorser,Indorsee,Drawee in case of need, Acceptor for honour
Parties to Promissory note -Maker,Payee,Holder,Indorser,Indorsee
Parties to a cheque -Maker,Drawee,Payee,Holder,Indorser, Indorsee
Maker-The person who makes a Promissory note is Maker-The maker. Drawer-The DrawerThe person who makes or draws a bill of exchange or cheque is drawer. Drawee-The DraweeThe person on whom the BOE or cheque is drawn and who is directed to pay is called the drawee. Acceptor-In AcceptorIn case of a BOE, the drawee becomes the acceptor. Payee-The PayeeThe person named in the Bill, note or cheque, to whom or to whose order the money is to be paid. Indorser-the Indorserthe person who indorses the bill, note or cheque to another is called the indorser. Indorsee-The IndorseeThe person to whom the bill, note or cheque is indorsed is called the indorsee. Drawee in case of need-when need- when in the bill or in any indorement thereon the name of any person is given in addition to the drawee to be referred to in case of need, such person is called a drawee in need. Acceptor for honour- It a bill is dishonoured by nonacceptance, the holder may nevertheless allow any other person to accept it for the honour of the drawer . The person so accepting the bill is acceptor for honour
Holder and holder in due course
Holder(sec.8) any person entitled in his own name to the possession thereof and receive the amount from the parties Holder in due course(sec.9) any person who fulfils the following conditions -he possess the instrument if payable to bearer, or payable to order -he hold that instrument before the maturity -he hold that instrument in good faith.
Privileges of a holder in due course
Inchoate(unclear) stamped instrument Inchoate(unclear) It is prohibited from claim as against holder in due course. Liability of prior parties Every prior party is liable in payment. Fictitious payee The acceptor of a bill cannot say as against the holder in due course, that the other parties to the bill were fictitious Conditional delivery If a bill or note negotiated to a holder in due course, the other parties to the instrument cannot avoid liability. Instrument free from all defects Estoppel against denying the original validity Estoppel against denying the capacity of payee to indorse
Liability of parties
Liability of drawer Liable in case of dishonour by the drawee Liability of drawee must pay the bill or cheque when required Liability of the maker and acceptor Liable to pay to the holder Liability of indorser Liable to all subsequent holders for dishonour before the maturity Liability of prior parties
Presentment of a negotiable instrument Presentment means showing the instrument to the drawee, acceptor or maker for acceptance. Three kinds of presentment -Presentment of BOE for acceptance -Presentment of Note for sight -Presentment of instrument for payment
Presentment for acceptance Essentials of a valid acceptance
It must be in written on the bill
It must be signed by the drawee personally or by an agent
The accepted bill must be deliver to the holder
Modes of acceptance
General acceptance accept the bill without any condition
Qualified acceptance Accept with some qualified conditions -Conditional, Partial, Place, Time, Accepted by some of the parties
Presentment for acceptance submitted to the drawee, drawee in case of need, duly authorised agents, legal representatives, official receiver It should be submitted before the date of maturity or with in the mention date It should be submitted in the specified place. Excuses -when the drawee cannot be found -where the drawee is dead or insolvent -when the drawee is a fictitious person -already the acceptance is refused Acceptor for honour(conditi honour(conditions) ons) -the bill must have been protested for f or nonacceptance -made with the consent of the holder -written in the bill -signed by the honour
Presentment for payment Rules
Hours-Business hours Presentment of instrument after date or sight-must be presented for payment at maturity Presentment of promissory note payable by installments-presented for payment on third day after the date fixed for payment of each installment Place of presentment-specified or at the drawee place Present of cheque- presented at the bank Presented the instrument payable on demand-with in the reasonable time Delay in presentment-accepted when the circumstances are beyond the control Presentment excused Liability of banker
Dishonor of Negotiable instrument
Bill may be dishonored by non-acceptance or by non-payment but a cheque and Note are dishonored by non-payment only Dishonour by non-acceptance(sec.91) BOE is dishonoured by non-acceptance in any of the following ways. -If the drawee does not accept the bill within 48hours from the time of presentment though it is presented p resented for the acceptance -when the presentment is excused and the bill is not accepted. -When the drawee incompetent to contract -When the drawee gives qualified acceptance -When the drawee is a fictitious person or he can not be found Dishonour by non-payment(sec.92) when the maker or the drawee makes default in payment
Notice of dishonour
When the negotiable instrument is dishonoured the holder must give a notice to all the prior parties whom he wants to make liable on the t he instrument Object of the notice inform the party about their liability which accrues as a result of dishonour. Notice by whom -Notice by holder or any prior party -chain method of giving notice -Notice by principal or agent Notice to whom -Notice to all parties whom the holder seeks to make liable -Notice to party or his agent or legal representative or assignee Form of notice -The notice may be in oral or in written -It must be given within a reasonable time at the place of business Exceptions for notice(sec.98) -When it is dispensed with by the party entitled thereto -When the drawer countermanded the payment -when the party could not suffer by dishonour -When the party can not be found -in case of promissory note -When the entitled to the notice know the fact
Duties of holder upon dishonour
Notice of dishonor Noting and protesting Noting means the recording of the fact of dishonor by a Notary public upon the instrument within a reasonable time after dishonor(sec.99) The certificate of noting is called protest(sec.100). It is a formal notarial certificate attesting the dishonor of instrument Suit for money Contents of Noting -The fact of dishonour -The date of dishonour -The reasons -The notary charges Contents of protest -The instrument -The name of the person against whom it is protested -The reasons of dishoour -The place and time of dishonour -The signature of the notary public
Rules as to compensation(sec.117) c ompensation(sec.117) The liable party should compensate all the charges like noting and protesting etc., -Compensation to holder of the instrument -Re-exchange in case foreign holder of instrument -Compensation to indorser(with 18%interest) -Re-draft Penalties for dishonored cheques by insufficiency of funds(sec.138) -imprisonment which may extend to 2 years or fine twice the amount or both
Discharge of 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. Modes of discharge
By payment in due course By party primarily liable becoming holder when the maker or the acceptor becomes the holder of the instrument. By express waiver By cancellation By discharge as a simple contract
Discharge of party or parties
By payment By cancellatio c ancellation n By release By allowing drawee more than 48 hours By non-presentment of cheque Cheque payable to order Draft drawn by one branch on another Parties not consenting discharged by qualified acceptance By operation of law By material alteration Discharged by the payment of altered instrument
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