Negotiable Instrument Act, 1881

Topper’s Institute

Negotiable Instruments

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NEGOTIABLE INSTRUMENTS ACT:-

Meaning of Negotiable Instruments

Chapter 1

The word negotiable means transferable and the word instrument means a written document by which a right right is create created d in favour favour of some some person person.. Negotia Negotiable ble instru instrumen mentt means means a writt written en docume document nt transferable by delivery or endorsement and delivery. Section 13 "a negotiable instrument means a promissory note, bill of exchange or Cheque payable either to order or to bearer". Section 31 of Reserve Bank India Act

person in India India other other than than the RBI or the the C. Govt. Govt. can make or issue issue a the 1. No person of promissory note payable to bearer. 2. No person person in India India other other than than the RBI RBI or the the C. Govt. Govt. can draw draw or accept accept a bill of exchange payable to bearer on demand. 3. A Cheque Cheque payable payable to bearer on demand demand can be drawn drawn on a person's person's account account with a banker. The effect of the above provisions is that (i) (i) A prom promis isso sory ry note note canno cannott be orig origin inal ally ly made made paya payabl blee to beare bearer, r, no matter whether it is payable on demand or after a certain time. (ii) A bill of exchange exchange may be original originally ly made made payable payable to bearer bearer but but it must be payable otherwise than on demand. (iii) (iii) A Cheque drawn drawn on a bank bank can be origin originally ally made made payable payable to bearer bearer on demand and it shall be valid.

Char Charact acter erist istic icss of a negotiable instrument

Pres Presum umpt ptio ions ns as to Negotiable Instruments:

Easy Negotiability: These are transferable from one person to another without more formality. 2. Trans ransfer feree ee Can Can sue sue in his his own own name name witho without ut givin giving g notice notice to the the debtor : The creditor can ether recover this amount himself or can transfer his right to another person. 3. Be bonafid idee tran transf sfer eree ee of a Bette tterr title title to a transf transfer eree ee for value value:: A bonaf negot negotia iabl blee inst instru rume ment nt for for valu valuee (i.e (i.e.. hold holder er in due due cour course se)) gets gets the the instrument free from all defects. 1.

(i) (ii) (ii) (iii) (iii) (iv) (iv) (v) (v) (vi) (vii) (vii) (viii)

that that every negot negotiab iable le instru instrumen mentt was made, made, drawn, drawn, accepted accepted,, endorsed endorsed or transferred for consideration; that that every every negotiab negotiable le instru instrumen mentt bearing bearing a date was made made or drawn drawn on such date; that every every bill bill of exchange exchange was accepted accepted within within a reasonable reasonable time time after after its date and before its maturity . that that every every trans transfe ferr of a negot negotia iabl blee inst instru rume ment nt was was made made befor beforee its its maturity; that that the the endor endorse seme ment ntss appea appeari ring ng upon upon a nego negoti tiab able le inst instru rume ment nt were were made in the order in which they appear thereon; that a lost lost negotiab negotiable le instrume instrument nt was was duly duly stamped stamped that the holder holder of a negotia negotiable ble instrument instrument is is holder in due course; course; that the instrument was dishonored, in case a suit upon a dishonored



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instrument is filed with the court and the fact of protest is proved. Promissory note Section. 4, a promissory note is an instrument in writing (not being a bank note or a currency note) containing containing an unconditiona unconditionall undertaking signed by the make or to pay a certain certain Sum of money only to or to the order of a certain person or to the bearer of the instrument. Essentials of a Promissor y Note

(i) (i)

It must must be in writ writin ing g (ii) It must The under underta taki king ng to pay pay may may be must conta contain in prom promise ise to pay pay : The gathered either from express words or by necessary implication. A mere acknowledgement of indebtedness is not a promissory note although is its valid as an agreement and may be sued upon as such. (iii) The promise to pay must be unconditional : The promise to pay must not not depe depend nd upon upon the the happ happen enin ing g of some some unce uncert rtai ain n even eventt i.e. i.e.,, a cont contin inge genc ncy y of the the fulf fulfil illm lmen entt of cond condit itio ion. n. It must must be paya payabl blee absolutely. (iv) (iv) It mus mustt be signe signed d by the maker maker (v) The instr instrume ument nt itself itself must must indicate indicate with with certain certainty ty who is the person person or are the persons engaging himself or themselves to pay. (vi) The payee must be certain: Like the maker the payee of a promissory note must also be certain on the face of the instrument. (vii) The sum payable must be certain: But according to section 5, the sum does not become indefinite merely because: the amount is to be paid at an indicated rate of exchange or according to the course of exchange; The amount is payable by installments even with a provision that on default being made in payment of an installment the balance unpaid shall become due. The amount payable must be legal tender money of India: A document containing a promise to pay a certain amount of foreign money or to deliver a certain quality of goods is not a promissory note. (viii) Other formalities : Though is usual and proper to state in a not the place where is made and the date on which it is made but their omission will not render the instrument invalid. But a promissory not e must be properly stamped and stamp must also be duly cancelled.

BILL OF EXCHANGE

Section 5:- A bill of exchange is a instrument is 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 bearer of the instrument.


Essentials of Bills


(i) (ii)

(iii) (iv) (v) (vi) (vii) (viii)

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It must be in writing it must contain an order to pay . A mere request to pay will not amount to an order. but an order may be expressed in polite language The order to pay must be unconditional. It must be signed by the drawer The drawer draw and payee must be certain. The sum payable must be certain The bill must contain an order to pay money only. It must comply with the formalities as regards date, consideration & stamps etc.

Distinction between a Pro-note and a bill Number of parties: In a bill of exchange three are three parties the drawer the drawee and the payee, but in case of note only two parties. The maker of a note can not be payee but in bill any of the two parties can be same. Promise and order: In a promissory note there is a promise to the payment whereas in a bill of exchange there is a order of the payment. Acceptance: A promissory note requires no acceptance. The drawer of a bill is generally the creditor of the drawee and therefore it may be accepted by the drawee before it can be presented for payment Nature of liability: The liability of the maker of a is secondary and conditional. Makers position : The maker of a promissory note stands in immediate relation with the payee, while the maker or drawer of an accepted bill stands in immediate relation with the acceptor and not the payee ( Sec. 44). Payable to bearer: A promissory note cannot be issued payable to bearer while a bill of exchange can be so. drawn provided it is not drawn payable to bearer on demand; Notice of dishonor: In case of dishonor of a bill of exchange, notice of dishonor; must be given by the holder to all prior parties who are liable to pay (including the drawer and endorser), whereas in case of dishonor of a promissory note, no notice is necessary to the maker. Applicability of certain Provisions: The provisions relating to presentment for acceptance, acceptance, acceptance supra protest and drawing of bills in sets are applicable only to a bill of exchange, they are not applicable to a promissory note.

CHEQUE Section 6 A Cheque is a bill of exchange drawn on a specified banker and not exposed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form A cheque in the electronic form means “cheque which contains the exact mirror image of a proper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature and asymmetric crypto system. A truncated cheque means a chque 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 the further physical movement of the cheque in writing. Two distinctive features: it is always drawn on a bank, and (ii) it is always payable on demand. •

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Distinction between a Cheque and Bill of exchange:



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(i)

A Cheque is always drawn on a banker, while a bill may be drawn on any person including a banker. (ii) A Cheque can only be drawn payable on demand, whereas a bill may be drawn payable on demand or on the expiry of a certain period after date of sight. (iii) A Cheque drawn payable to bearer on demand is valid but a bill drawn payable to bearer on demand is absolutely void and illegal through a bill can be made payable to the bearer after a certain time. (iv) A Cheque does not require any acceptance. But a bill required acceptance by the drawee before the can be made liable upon it. (v) A Cheque does not require any stamp whereas a bill of exchange must be property stamped. (vi) Three days of grace are allowed while calculating the maturity date in the case of time bills (i.e. bills drawn payable after the expiry of a certain period). Since a Cheque is always payable on demand there is no any days of grace. (vii) Unlike cheque bill cannot be crossed, (viii) Unlike cheque the payment of a bill cannot be countermanded by the drawer. (ix) Unlike bills there is no system of noting or protest in the case of a Cheque. (x) The drawer of a bill is discharged from liability if it is not duly presented for payment but the drawer of a Cheque will not be discharged by delay of the holder in presenting it for payment unless through the delay the drawer has been injured by the failure of the bank.

Holder (See. 8). The holder of a negotiable instrument means any person entitled to the possession of the instrument in his own name and to receive the amount due thereon from the parties liable thereto.

Holder in Due Course(See. 9) The holder in due course means any person who for consideration became the possessor of a negotiable instrument if payable to bearer or the payee or endorsee if payable to order, before the amount mentioned in it became payable and without sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. Privileges of a Holder in due course

(i) (ii) (iii) (iv)

(v)

(vi) (vii)

(viii)

He gets a better title than that of the transferor. Privilege in case of inchoate stamped instruments holder in due course fill sufficient amount. All prior parties to a negotiable instrument continue to remain liable to a holder in due course both jointly and severally. Privilege in case of fictitious bills: the acceptor of such a bill is liable to a holder in due course provided the latter can show that the first endorsement on the bill and the signature of supposed drawer are in the same handwriting. Privilege when an instrument delivered conditionally is negotiated to a holder in due course, the parties liable on the instrument cannot escape liability. Estoppels against denying original validity of instrument. The plea of original invalidity of the instrument e.g., that no consideration actually passed between the maker and the payee of a promissory note; cannot be put forth against the holder in due course. No maker of a note and no acceptor of a bill payable to order shall in a suit thereon by a holder in due course, be permitted to deny the payee's



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capacity at the date of the note or the bill, to endorse the same. CHEQUE

Crossing of cheque Types of crossing (1) General or (2) Special.

General Crossing Sec- Where a cheque bears across its face an additions of the words, and company 123 or any abbreviation thereof, between two parallel transverse lines or of two parallel transverse lines simply either with or without the words not negotiable that additions shall be deemed a crossing and the cheque shall be deemed to be crossed generally.

Crossing Section. 124

Here a cheque bears across its face, an addition of the name of a bank, either with or without the words not negotiable the addition shall be deemed a crossing, and the cheque shall be deemed to be crossed to that banker.

Not Crossing

Negotiable

The effect of inclusion of such words will be not to render the cheque non transferable. But as per section 130, a person who takes such as cheque shall not have and shall not be capable of giving a better title to the cheque than that which the person from whom the took.

Account Crossing

Payee

An A/c payee crossing signifies that the drawer intends the payment to the credited only to the payee's account.

Special


Not


Negotiable A/c Payee Crossing

Opening of Crossing

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The instrument is rendered not negotiable plus A/c payee crossing directs the collecting banker to collect if for the payee only and warns that if the amount is collected for someone else, he may be held liable for damages. The drawer has the right to cancel the crossing by writing the words pay cash and putting the full signatures. BANKER AND CUSTOMER

There is no statutory definition of the term banker and customer. Banker: The business of a banker in ordinary course consists in receiving money from or n account of a • customer and repaying the same on demand. The Negotiable Instruments Act defines a banker as including any person acting as a banker. The • Banking Regulation Act, 1949 defines a banking company as a company which transacts the business of banking in India. The term banking has been defined as accepting for the purpose of lending or investment of • deposits of money from the public repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. Customer: A customer is a person who has some sort of account either deposit or current account with the • banker •

LEGAL RELATIONSHIP BETWEEN BANKER AND CUSTOMER

The relationship between a banker and his customers is essentially contractual and is that of debtor (the banker) and creditor (the customer). This relation ship is sometimes reversed. This happens when the banker lends money to the customer .The relationship also partakes many aspects of relationship of agent and principal. Special features of legal relationship: • Obligation to honour cheques. • Obligation to keep proper of transactions. • Obligation to abide by the express instructions of the customer. • Obligation not to disclose the state of his customer’s account or affairs. • Right of general lien. • Right to charge incidental charges and interest on money lent. • Right of appropriation. Protection of paying Banker

PROTECTION OF COLLECTING BANKER

The bankers are placed in privileged position as regards the payments of their customer cheques. Where a cheque payable to order purports to be endorsed by on or behalf • of the payee, the drawee is discharged by payment in due course. Where a cheque is originally expressed to be bearer thereof, • notwithstanding that any such endorsement purports to restrict or exclude further negotiation. •

The collecting banker may collect the proceeds of a cheque in the capacity of an agent of his customer, or a holder in due course. Collecting banker as an agent. The position of the collecting banker as an agent may be studied in •



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relation to crossed cheques and open cheques. Crossed cheques. A banker who has in good faith and without negligence • received payment for a customer of a cheque crossed generally or specially to himself does not in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment [Section 131] Open cheques Section 131 omits a reference to open or uncrossed • cheques. Presumably it does not afford protection to the collecting banker as regards collection of uncrossed cheques. Collecting banker as a holder in due course If a collecting banker acquires a cheques for value and in good faith, he • collects it for himself and has all the privileges of a holder in due course.



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PRACTICAL PROBLEM Are the following instruments promissory notes: “I promise to pay B Rs. 5,000 on the death of C provided he leaves me sufficient amount to pay the sum.” “I acknowledge myself to be indebted to B in Rs. 5,000 to be paid on demand to B on his attaining the age of majority. [Hint. (a) No. (b) No.] A bill is drawn payable at 50 Lucknow Road, Kanpur but does not contain the name of the drawee, B who resides at 50, Lucknow Road, Kanpur accepts the bill. Is it a valid bill? [Hint: Yes. When B accepts it he holds out by his acceptance that he is the person to whom the bill is directed [Section: 54 Gray v. Milner) A signs as maker a blank stamped paper and gives it to B, and authorises himto fill it as a note for Rs. 500to secure an advance which C is to make to B. B fraudulently fills it up as a note for Rs. 2,000, payable to C who has in good faith advanced Rs. 2,000. Can c recover Rs. 2,000? [Hint: Yes ] A sign as acceptor a bill bearing an 80 P, stamp with the amount left blank. The amount of Rs. 100 in the margin is fraudulently altered to Rs. 1,000 and the bill is in words, filled in for a thousand rupees. The bill gets into the hands of H, a holder in due course. Can he recover this amount? [Hint: Yes] D drew a bill on A in favour of P. The bill was payable on demand. When the payee sought to present the bill for acceptance or payment he discovered that no such person as A existed. (a) is this a valid bill ? (b) To whom should P go for the money? [Hint : (a) No, as the drawee is not certain (b) D]. W dismissed his servant R from service and for his wages gave him a draft in the following words: “Mr. N will much oblige Mr. W by paying to Mr. R or order, rupees two hundreds on his account. Signed by W. is this draft a bill of exchange ? [Hint :Yes, as the introduction of the words of gratitude does not destroy the order to pay] A Company issued a cheque on its bankers. A receipt was appended to the cheque and it ordered the banker to make the payment provided the receipt form at foot hero of is duly signed stamped and dated. Is the cheque valid ? [Hint : No, because its payment is made conditional upon signing of the receipt] A accepts a bill for the accommodation of B (the drawer). The bill is dishonoured by A on the due date and C, the holder of the bill, on that date collects the amount from B. Can B sue A for the recovery of the amount? Will it make any difference if the bill gets into the hands of a holder in due course and he files a suit against A for the recovery of the amount? [Hint : (a) No, B cannot sue A for the recovery of the amount on the bill. (b) The holder in due course can recover the amount from A] •

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Chapter 2


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Classification of Negotiable Instruments

Time and Demand Instruments:

An instrument payable after a fixed time or on specified date is termed as a time instrument An instrument payable after happening of a event which is certain to happening e.g. death though the time of its happening may be uncertain is also called a time instrument. A promissory note or bill of exchange is payable on demand when no time for payment is specified or when it is expressed to be payable on demand or at sight or presentation.

Bearer and instrument

Bearer instruments when it is expressed to be so payable or when the only or last endorsement is in blank order instrument when it is expressed to be payable to the order or when it is expressed to be payable to a particular person and does not contain the words prohibiting or restricting its transfer

order

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Ambiguous instrument (See. 17)

An instrument which in form is such that it is may either be treated as a bill or as promissory note, is an ambiguous instrument. in such a case the holder may either treat it as a bill or a promissory note but once he has made his choice the instrument shall henceforth be treated accordingly. (Sec. 17)

Inchoate Instruments: (Sec 20)

An incomplete or blank negotiable instrument properly stamped and signed is termed as inchoate instrument. Where one person signs and delivers to anther a properly stamped in accordance with law either wholly blank or having written thereon an incomplete negotiable instrument he there by gives prima facie authority to the holder to make or complete instrument for any amount specified there in and not exceeding the amount covered by the stamp. The person so signing shall be liable upon such instrument in the capacity in which he signed the same to any holder in due course for such amount.

Escrow:

When a negotiable instrument is endorsed and delivered conditionally or special purpose as collateral security it is called escrow. In this case, property in the instrument does not passes to the endorsee, and he is merly a bailee with limited title and power of negotiating it .however It does not affect the Rights of a holder m due course.

Lost Instruments:

When a bill or note is lost, the finder acquires no title to It as against the rightful owner. He is also not entitled to sue the acceptor or maker in order to enforce payment on it [Lowell v. Martin] • If the finder obtains payment, the person who pays it in due course may •



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be able to get a valid discharge for it. Bona fide transferee for value acquires a valid title to it and entitled both to retain the instrument as against the rightful owner and to compel payment from the parties liable thereon. If the finder forges the Endorsement of the loser and negotiates it to a bona fide transferee for value. The latter acquires no legal title to it. Stolen Instruments

Instruments obtained by Fraud

Instruments obtained for unlawful considerat ion Forged Instruments

Bills in Sets

A person who has obtained a negotiable instrument by theft cannot enforce payment. • If the thief negotiates the instrument to a purchaser for value who has notice of the theft, the transferee cannot acquire a better title. • If a person who has stolen a bill or note payable to bearer transfers it to a holder in due course, he confers a good title on him or any person deriving title from such holder. •

A person who obtains an instrument by fraud has no right to claim money thereupon, the consent of the party not being free. • The transferee if aware of the fraud shall not be entitled to claim any payment. • The defense of fraud cannot, in general, be set up against a holder in due course or a holder deriving a title from such holder. •

If the consideration for a negotiable instrument is unlawful, the instrument is void. • A holder in due course however obtains a good title to an instrument. •

As a general rule, a forged signature is worthless and confers no title. • The holder of a forged instrument cannot, enforce payment thereon, can he give a valid discharge therefor. • The true owner can compel the debtor to pay it again to him. a holder in due course cannot. claim payment on a forged • Even instrument • Person whose signature have been forged -may, be his conduct, be estopped from denying its genuineness to an Innocent holder. •

When a bill is drawn is sets known as the bill in sets, bills in sets are usually drawn when they are to be sent from one Country to another. The parts of a bill in set are sent by different mail routes in order to ensure the safe transmission of at least one part. Sections 132 and 133 provide the following rule for a bill in sets. Bills of exchange may be drawn in sets or parts. • Each part of a bill in set should be numbered and must contain a provision that is shall continue, payable only so long as the other parts remain unpaid. • The drawer must sign each part of the bill and should deliver all the parts. But only one part is required to be stamped and only one parts is to



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be accepted the drawee. • If payment is made on one of the parts of the bill, the whole bill is extinguished. • Where a person accepts or endorses different parts of the bill in favour of different persons, he and the subsequent endorsers of part are liable on such part as if it were a separate bill. When two or more parts of a set are negotiated to different holders in due course, then as between holders in due course in who first acquired the title to the other and money represented by the bill. Accommodation Bill

The drawer does not give any consideration to the drawee but instead it is drawn with an object of providing financial help to the drawer or to both the drawer and the drawee. • Thus the relationship between the drawer and the drawee is not that of creditor and a debtor. Actually it is a sort of mercantile credit where one person lends out his name on the bill so that the other person taking the bill can get the same discounted from the bank and get money for the same. •

The rule In regarding accommodatio n bill.

An accommodation bill creates no obligation of payment between the parties to the transaction. The accommodation party is liable on the bill to any • subsequent holder for value even if the holder knew at the time of taking the bill that it is an accommodation bill (Sec. 43). An accommodation bill can be negotiated after • maturity with all benefits of a holder in due course (Sec. 59). • Non Presentment of an accommodation bill to the acceptor for payment does not discharge drawer. when an accommodation bill is dishonored, failure to • give notice of dishonor does not discharge the liability of prior parties. •



Fictitious Bill

When in a bill of exchange the names the drawer or the payee or both are fictitious the bill is said to be a fictitious bill Such a bill is drawn in a fictitious name and is made payable to the • drawer's order and as such that a names of both the drawer and the payee are said to be of a fictitious person. However, such a bill if accepted in due course it can be a good bill provided he can show that the first endorsement on the bill and the signature of the supposed drawer (being the holder as well) are in the same handwriting and the acceptor is liable on the bill to him) Sec. 42. •

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Documentary Bill

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When documents relating to the goods represented by some documents e.g., bill of lading or railway receipt invoice, marine insurance policy etc., are attached to a bill, the bin is called a documentary bill. Such documents are delivered to the buyer only on acceptance or payment of the bill.

A promissory note or bill which is drawn or made in India and also Inland and Foreign made payable in India or, drawn in India upon. any person resident in India Instruments: (Sec. 11). although it may be made payable in a foreign county are deemed to be Inland instrument . All other bills are known as foreign bill.

Material alteration: Any change in an instrument (a) which causes it to speak a different language in effect from that which it original spoke, or if (b) which changes the legal identity or character of the instrument either in its terms or the relation of the parties to it, is a material alteration, ; Instances of material alteration are:

Example

(i) date; (ii) the time of payment; (iii) the place of payment; (iv) the sum payable; (v) the number of parties; (vi) the relationship between parties; (vii) legal character of the instrument; (viii) opening a crossed cheque; (ix) converting an order cheque into a bear cheque. Any material alteration of a negotiable instrument renders the same void

of (i) filing blanks of the instrument; (ii) conversion of blank endorsement into endorsement in full; Alteration Which are (iii) crossing of cheques; not (iv) altering a general crossing into a special ; (v) canceling the word bearer and making the cheque payable to order; and Material alteration made with the consent of the parties,

Effect of alteration [Sec. 87]

The effect of a material alteration of a negotiable instrument is only to discharge those who become parties thereto prior to the alteration. But if an alteration is made in order to carry out the common intention of the original parties, it does not render the instrument void. Any material alteration, if made



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by an endorsee, discharges his endorser from all liability to him in respect of the consideration thereof.

Maturity of Negotiable Instruments: Maturity means the date on which the payment of a instrument falls due. As instrument payable on demand or at sight becomes payable immediately on the date of its execution and there is no question of its maturity. Rules for calculating maturity: (Section 23 to 25)

1. Payable after a stated number of months, 3 days after the corresponding date of the month of payment 2. If the month has no corresponding date, on the last day of such month, 3. Payable after a certain number of days, exclude the day on which the instrument is drawn presented for acceptance or Sight or on which the event happens. 4. If the date on which a bill or note is mature is a public holiday the instrument shall be deemed to be due on the immediately preceding business day. 5. The expression public holiday includes Sunday and other day notified in the official Gazette to be public holiday under this act. 6. If it is a emergency holiday on subsequent date. If an instrument is payable by installment three days of grace are to allowed on each installment

Payment in Due Course (See. 10) The payment due under a negotiable instrument operate as a valid discharge of the instrument against, the holder.  The payment must be in accordance with the apparent tenor of the instrument  made in good faith and without negligence.  made to a person in possession of the instrument.  made in money only.


Payment of Interest


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When rate specified expressly on instrument: Calculated at thc Rate specified on the amount of the principal money due from the date of the instrument until realization or until such date in case of a suit to recover such amount as the court directs (Sec. 79). When no rate specified 18% p. a. When the party charged is the endorser of instrument dishonored by non payment, he is liable to pay 'interest only from the time that he receives notice of the dishonor HUNDI

Hundis are negotiable instruments written in Hindustani language. Sometimes they are in the form of promissory notes but more often they take the form of a bill of exchange. The provisions of the Negotiable Instruments Act apply to Hundi unless there is a local usage to the contrary. Type

Darshani Hundi. It is one payable at sight like a demand bill. Miadi or Muddati hundi : It is one payable after a specified period of time like a time bill. Shah jog hundi : This is a hundi made payable only to a Shah. A shah means a respectable person. Nam jog hundi: Where a hundi is made payable to or to the under of specified person is called a Nam jog hundi. Nishan –Jog- Hundi : A Nishan jog hundi is payable only to the persons who presents it The word Nishan -Jog is inserted-in the hundi. Jokhmi hundi :

The term jokhmi means against risk. A jokhmi hundi therefore is combination of bill of exchange and insurance policy. Dhani Jog Hundi:

'Dhani' means 'owner'. A dhani -jog hundi is payable to a dhani, owner.

Chapter 3

Negotiation of Negotiable Instruments

A negotiable instrument may be transferred by negotiation or assignment. Negotiation: (Sec. 14) According when a note or bill is transferred to any person so as to constitute that person the holder thereof the instrument is said to be negotiated. Every maker drawer payee or endorsee, and if there are several makers, drawers, payees or endorses, all of them jointly can negotiated an instrument provided the negotiability of such instrument has not been restricted by any express words used in the instrument. A negotiable instrument may be negotiated until payment or satisfaction thereof by the maker drawee or acceptor at or after maturity but not after such payment or satisfaction (Sec. 60).



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Distinction between negotiation and assignment Negotiation

Assignment

1. Consideration is presumed. 2. The title of the transferee (i.e., the bolder in due course) is better than that of the transferor. 3. Notice of transfer to the debtor by the transferee is not necessary .The acceptor of a bill and the maker of a note are liable on maturity to the holder in due course of the instrument. Instruments payable to bearer are negotiated by mere delivery and instruments payable to order are negotiated by endorsement and delivery. 1. Consideration must be proved. 2. The title of the assignee is subject to the title of the assignor 3. An assignment does not bind the debtor notice of the assignment has been given by assignee to the debtor, and the debtor has expressly or impliedly, assented to it. 4. An assignment can only be made in writ either on the instrument itself or in a separate document transferring to the assignee transferor's rights in the instrument.


Type

of neg otia tio n


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Negotiation by mere delivery: A negotiable instrument payable to bearer Negotiation by endorsement and delivery: Payable to order.

Endorsement [Sec. 15] When the maker or holder of a negotiable instrument signs the same otherwise than as such maker, for the purpose of negotiation on the back thereof or on a slip of paper annexed thereto, he is said to endorse the same and is called the endorser. The person to whom the instrument is endorsed is called the endorsee. Kind

of En dor se me nt

Blank or general Endorsement:

If the endorser sign his name only and does not specify the name of the Endorsee is said to be in blank. Endorsement in full or special Endorsement: If the endorser in addition to his signature also adds a direction to pay the amount to or to the order of a specified person the Endorsement is said to be in full. Endorsement in blank followed by an endorsement in full. If an instrument endorsed in blank followed (which becomes payable to bearer) is subsequently endorsed in full, it remains payable to bearer and negotiable by delivery as against all the parties prior to the endorser in full. Such endorser in full cannot be held liable on the instrument except by the endorsee in whose favour such endorsement in full is made or by any party who derives a title through such endorse in full [sec 55]. Partial Endorsement: A negotiable instrument cannot be endorsed for a part of the amount appearing to be due on the instrument. In other words a partial instrument which transfer the right to receive only a part payment of the amount due on the instrument is invalid. Restrictive Endorsement: An Endorsement which, by express words, prohibits the endorsee from further negotiating the instrument is called Restrictive Endorsement. Conditional Endorsement:

If the endorser of a negotiable instrument, by the express words in the Endorsement, makes his liability, dependent on the happening of a specified event, although such event may never happen, such Endorsement is called a Conditional Endorsement (Sec. 52) Sans recourse Endorsement When the endorser expressly excludes his own liability in the negotiable instrument to the endorsee or any subsequent holder in case of dishonor of the instrument .the Endorsement is known as " Sans recourse" Endorsement. Facultative Endorsement:

When the endorser expressly gives up some of his rights under the negotiable instrument, the endorsement is called a facultative endorsement.



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Negotiation Back During the course of negotiation if a negotiable instrument is reendorsed by the last endorsee to the, original holder or previous endorser, it is called a negotiation back.

Presentment & Dishonour

Chapter 4

Presentment means showing a negotiable instrument to the drawee, acceptor or maker for (1) acceptance or (2) sight (3) payment.

Presentment for acceptance It is only bills of exchange of certain type that need to be presented for acceptance. The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer that he will pay the bill at the appropriate time. The liability of the drawee does not arise until he has accepted the bill. A bill payable on demand or at sight, or on certain fixed date need not be presented for acceptance unless it is specifically agreed that such a bill is to be presented for acceptance. But presentment of acceptance is obligatory in case of a bill payable some period after sight or after presentment or when there is an express stipulation in the bill that it shall b e presented for acceptance

Modes of acceptance: An acceptance may be general or qualified. General acceptance:

When the drawee, while accepting the bill, does not attach any condition or qualification to it.

Qualified acceptance:

The acceptance is qualified when it is given subject to some condition or qualification. The holder may refuse to take the qualified acceptance, and treat the bill as dishonored by non-acceptance. But if he takes it he does so at his own risk and discharges all parties prior to himself unless he obtains their consent to such acceptance.

Presentment for acceptance to whom: Presentment for acceptance may be made (i) To the drawee or his duly authorised agent. (ii) To his legal representative if the drawee has died. (iii) To his assignee, if he drawee has been declared insolvent. (iv) To all the drawees, if there are several drawee unless they are partners or agents or one another. (v) To drawee in case of need.

Presentment for acceptance excused: Presentment for acceptance is excused where (i) the drawee is a fictitious or incompetent person, (ii) he cannot after reasonable search, be found (iii) he is dead or insolvent, (iv) although the presentment has been irregular, acceptance has been refused on some other ground.



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Acceptor for honour: Normally a stranger to all cannot accept it but he may with he consent of the holder accept the bill in place of the drawee for the honour of some party liable on the bill. Such an acceptor is known as acceptor for honour.

Presentment for sight A promissory note payable after sight must be presented to the maker for sight to determine its maturity, during business hours, and on a business day. If the maker cannot be found after a reasonable search, presentiment is excused the note may be treated as dishonored (see 62).

Presentment for Payment Promissory notes, bills of exchange and cheque must be presented for payment to the maker acceptor or drawee thereof respectively, by or on behalf of the holder. If default is made the parties other than the parties primarily liable are discharged of their liability (See 64). Presentment for payment must be made during the usual hours of business. It must be made (a) at the place of payment specified in the instrument: (b) if no place is specified, at the place of business or residence: (c) in any other case, wherever the party liable to pay can be found. Presentment for Presentment for payment must be made (a) to the drawee maker or acceptor, as the case may be or to their duly authorised agent; (b) where the payment to whom: drawee, maker or acceptor has died, to his representative; (c) where he been declared insolvent, to his assignee. Delay in presentment for payment is excused if it is caused by circumstances beyond the control of the holder.

Presentment for payment is not necessary:

(i) where it is intentionally prevented by the maker drawee or acceptor, or (ii) where the business of the maker, drawee or acceptor is closed or he cannot after due search be found or there is no person at the place of payment, or (iii) where there is a promise to pay notwithstanding non-presentment, or (iv) where presentment is expressly or impliedly waived, or (v) where the bill is dishonoured by non acceptance or (vi) where the drawee is a fictitious person, or (vii) where the presentment becomes impossible.

Payment for honour: Just as a bill may be accepted for the honour of a party to bill, it may also be paid for the honour of a party liable to pay the bill.



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Dishonour A bill may be dishonoured by non-payment or by non-acceptance. A promissory note and a cheque are dishonoured by non- payment. Dishonour by Nonaccepta nce. Set. 91

Dishonour by Nonpaymen t

When the drawee or one of several drawees (not being partners) makes default in acceptance. Where the presentment for acceptance is excused and the bill is not • accepted i.e. remains unaccepted. When the drawee is incompetent to contract. Where the drqwee makes the acceptance qualified. • If the drewee is a fictitious person or after reasonable search cannot be • found •

A promissory note, bill of exchange or cheque is said to be dishonored by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same Sec. 92). Also a promissory note or bill of exchange is dishonored by non-payment • when presentment of payment is excused expressly be the maker of the note or acceptor of the bill and the note or bill remains unpaid at or after maturity (Sec. 76) •

Effect Dishonor:

of

As soon as a negotiable instrument is dishonoured the holder becomes entitle to sue the parties liable to pay thereon. The drawer of cheque, maker of note acceptor and drawer of bill and all the endorsers are liable severally and jointly to a holder in due course.

Notice Dishonor:

of

Notice of dishonour must be given by the holder or any of the parties to the instrument who remains liable thereon (Sec. 93). Further any party receiving notice of dishonor must also transmit the same • within a reasonable time to all prior parties in order to render them liable to himself. He cannot sue any prior party to whom the he has not transmitted the • notice unless that party has received due notice from the holder or some other party to the instrument. • Notice of dishonor can also be given by the duly Authorised agent of the person.

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Notice to whom:

Notice of dishonor must be given to all parties (other than the maker of a note acceptor of a bill, or drawee of cheque) to whom the holder seeks to make liable or to their duly Authorised agents. Where there are two or more persons jointly liable as drawer or endorses, • notice to anyone of them is sufficient. In case of death of person, notice must be given to his legal representative, or where he has been declared an insolvent, it must be given to his official Assignee (Sec. 97). •

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What is reasonable time:

If the holder and the party to whom notice of dishonour is given carry on business or live in different places such notice shall be deemed to be given



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within a reasonable time if it is dispatched by the next post or on the day next after the day of dishonour. If the holder and the party to whom notice of dishonour is given carry on business or live in same places such notice shall be given so as to received on day of dishonour or day after dishonour. of is

Section. 98, When it is dispensed with by the party entitled to the notice. When the drawer of a cheque has countermanded payment no notice of dishonour is required to charge the drawer. When the party charged could not suffer damage for want of notice. When the party entitle to notice cannot after due search be found or the party bound to give notice is because of some justifiable reason (e.g, death accident or serious illness), unable to give it. When the drawer also happens to be acceptor. In the case of promissory note which is not negotiable. When the party entitled to notice promises to pay unconditionally the amount due on the instrument after dishonor and with fun knowledge of facts.

Consequences of not giving notice of dishonour.

Any party to a negotiable instrument (other than the maker of a note acceptor of a bill or drawee of cheque) to whom notice of dishonour is not sent by the holder is discharged from his obligation under the instrument and cannot be used by the holder unless the circumstances are such that no notice of dishonour is required to be sent.

When notice dishonour unnecessary:

Noting According to section 99, when a promissory note or a bill of exchange has been dishonored by nonacceptance or non-payment, the holder may cause such dishonour to be noted by a Notary upon the instrument or upon a paper attached thereto. Noting means recording the fact of Dishonour on the dishonored instrument or on paper attached thereto for the purpose. Noting must be made within a reasonable time after dishonour and must specify the date of dishonour the reason assigned for such dishonour and the notary's charges.

Protest : Protest is a formal certificate of dishonour issued by the notary public to the holder of the bin or note on his demand (noting is merely a record of dishonour on the instrument itself) Sec. 100. Protest for better security

When the acceptor of a bill of exchange become insolvent or his credit has been publicly impeached before the maturity of the bill the holder may within a reasonable time cause such facts to be recorded and certified as aforesaid such certificate is called a protest for better security . Noting and protest of inland bills or notes is not compulsory, but foreign bills must be protested for dishonour if so required by the law of the place where they are drawn (Sec. 104).

Discharge of an Instrument: A negotiable instrument is said to be discharged when it becomes completely useless, i.e., no action on that will lie and it cannot be negotiated further. When the party primarily liable on the instrument makes the p ayment in due course to the holder at or after maturity (Sec. 78).



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When a bin of exchange which has been negotiated is, at or after maturity, held by acceptor in his own right, the instrument in discharged (Sec. 90). When the party primarily liable becomes insolvent the instrument is discharged and the holder cannot make any other prior party liable thereon. When the holder cancels the instrument with an intention to release the party primarily liable thereon from the liability, the instrument is discharged and cases to be negotiable (Sec. 82.)

Discharge of One or More Parties A party is said to be discharged from his liability when his liability on the instrument comes to an end. When the holder of negotiable instrument deliberately cancels the name of any of the party by drawing a line throughout the name liable on the instrument with an intention to discharge him any party who have a right of action against the party whose name is so cancelled are discharged from liability.

By cancellation:

If the holder of a negotiable instrument releases any party to the instrument by any method other than cancellation of names (i.e., by a separate agreement of waiver release or remission), the party so released and all parties subsequent to him, who have a right or action against the party so released, are discharged from liability.

By release:

By payment:

When the party primarily liable on the instrument makes the payment in due course to, the holder at or after maturity all the parties to the instrument stain discharged, because the instrument as such is discharged by such payment.

By allowing drawee more than 48 hours to accept (Sec. 83):

If the holder of a bill or exchange, allows the drawee more than 48 hours exclusive of public holidays to consider whether he will accept the same all parties not consenting to such allowance are thereby discharged from liability to such holder

If the holder of a bill agrees to a qualified acceptance all prior parties By taking qualified whose consent is not obtained to such an acceptance are discharged from liability. acceptance (Sec. 86): Any party to a negotiable instrument (other than the party primari1y liable) By not giving notice of to whom notice of dishonours not sent by the holder is discharged form liability as dishonour: against the holder unless the circumstances are such that not notice of dishonour is required to be sent. When a bill of exchange is payable certain period after sight its holder By Non presentment of must present for acceptance to the drawee within a reasonable time after is its acceptance of bill: drawn. If the makes a default in making such presentment the drawer and all endorses who were liable towards such a holder are discharged from their liability (Sec. 61) towards him. By delay presenting cheque: (Section -84).

in

It is the duty of the holder of cheque to present its for payment with in reasonable time of its issue.


By negotiation back of a bill:


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When a bill of exchange comes back to the acceptor by process of negotiation and he becomes its holder, it is called as negotiation back.

Bouncing of cheque Section 138 to 142 of the Negotiable Instruments Act provide for criminal penalties in the event of dishonour of cheques for insufficiency of funds. The drawer, under Sec. 138, may be punished with imprisonment upto 2 years or with a fine up to twice the amount of the cheque or with both. However, in order to attract the aforesaid penalties, following conditions must be statisfied. 1. The cheque should have been dishonoured due to insufficiency of funds in the account maintained by him with a banker for payment of any amount of money to another person form out of that account. In case of stop-payment, it shall be deemed to have so dishonoured for insufficiency of funds unless stop-payment can be justified. 2. The payment for which the cheque was issued should have been in discharge of a legally enforceable debt or liability in whole or part o f it. 3. The cheque should have been presented within 6 months from the date on which it is drawn or within the period of validity, whichever is earlier. 4. The payee or the holder in due course of the cheque should have given notice demanding payment within 30 days. 5. The drawer is liable only if fails to make payment within 15 days of such notice. 6. The payee should have made complaint within 1 month of the cause of the action.



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Practical Problems •

a sells a radio to M, a minor, who pays for it by his cheque. A indorese the cheque to B, who takes it in good faith and for value. The cheque is dishonoured on presentation. Can B enforce payment of the cheque against A or M? [Hint: B can enforce payment of the cheque against A only [sec 26].

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A executed a promissory note in favour of B without B’s demanding payments, A paid the money due on the note to B but left the note in his hands. Subsequently b endorsed the note of C for consideration. C had knowledge of the payment made by A, C brings a suit against A and B for recovery of money on the note. Will he succeed against either or both? [Hint : C can enforce payment against either A or both [sec 9 and 58]

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A gives a blank acceptance to one Banerjee who fills it up as a bill payable to the drawer’s order and himself signs it as the drawer and the first endorser in a ficitious name Jogender Lall. Is A or Banarjee liable to the holder of the bill. [Hint : Both A and Banarjee are liable to the holder of the bill [sec 41 and 42]. Moreover the acceptance in the instant case is blank and as such the instrument becomes payable to bearer. The right of the holder of the bill therefore will not be affected even if there is an endorsement in the name of fictitious plerson]

-M draws a cheque In favour of N, a minor. N Endorses it In favour of P, who In turn Endorses it In favour of Q. The cheque is dishonored by the bank. Examine the rights of P and Q. [Hint: P has the right to recover payment of the cheque from M only. Q can hold both P and M liable for payment of the cheque (Sec. 26)]. A, on attaining the age of majority, executes a fresh promissory note In consideration of a promissory note executed by him during his minority. Can a suit be maintained on the fresh promissory note? Hint [ : No, as the fresh promissory note is void for want of consideration] •

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The director of a company borrowed Rs. 10,000 from A and executed a promissory note in favour of A. On the promissory note, there was no Indication if the money was borrowed for and on behalf of the company. The company used the money for its purposes. Can the company be held liable to repay the loan on the basis of the promissory note ? [Hint: No, the director is personally liable (Sec. 2)]. A bill of exchange purports to be drawn by A on B and is accepted by B. The bill is payable to C or order. C negotiates it to D who takes it as a holder In due course. In a suit by D on the bill, can B disclaim liability on the ground that A's signature is forged? [Hint: No. (Sec.120]. A signs his name on a blank but stamped instrument He gives the paper to B with authority to fill it up as a promissory note for Rs. 250 only. B fraudulently fills the paper for Rs. 1,000, the stamp put upon it being sufficient to cover the amount. He then hands it to H for Rs. 1,000 who Hint takes it without notice of fraud. Is A bound to pay Rs. 1,000 to H? [ : Yes]. B obtains A's acceptance to a bill by fraud. B endorses it to C who take B it as a holder In due course. C endorses the bill to D who knows of the fraud. Can D recover from A?


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[Hint: Yes, D can recover the amount form A as he derived his title from C who is a holder In due course. Moreover, D is not a party to the fraud. Once the title has been cleansed of the defect, notwithstanding notice of the fraud, D gets a good titleSec.53)]. A bill is addressed to Herbert Morris who is a partner in the firm of and Parker". Herbert Morris accepts the bill in the firm's name. Explain then he will be personally liable on the bill or not. [Hint: Herbert Moms is personally liable on the bill as acceptor].

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A Drew cheques in favour of B. A’s clerk forged B’s endorsement and negotiated the cheques to C who took them in good faith and for value. C received payment of the cheques. A claims to recover the amount from C, will he succeed? [Hint: A will succeed if the cheque was an order cheque, but fall if the cheque was payable to bearer.]

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A the holder of a bill transfer it to B as payable to him or is order for the express purpose that it shall be discounted. B endorses it to C who takes it bona fide and for value. Discuss the position of C as against A and B. [Hint: C can hold both A and B liable for payment of the bill (sec. 46)]

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A owes B Rs. 3,000. He makes a promissory note for the amount payable to B. A dies and the note is after ward found among his paper and delivered to B Can B recover upon bill? [Hint: B cannot sue up on the note (sec. 46)]

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A accepted a bill and gave it to B who put his name as a drawer for the purpose of discounting it and paying the proceeds to A. B having failed to discount returned the bill to A who , intending to cancel it tore it into two and threw it into the street . B picked it up pieces and pasted tem together and put the bill into circulation. Examine the liability of A on the bill. [Hint: A is not liable as he did not delivered the bill(sec.46)]

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A endorses and delivers a cheque to B who keeps it for an unreasonable length; of time and then endorse d and delivers it to C. C present the cheque for payment within reasonable time after its receipt by him and it is dishonored Can C enforce payment against B or A or both. [Hint: C can enforce payment against B only] A bill of exchange payable three month after the date is altered to be payable three months after sight by the holder, and then endorsed to X. The drawee refuses to make payment. Can X enforce its payment against the drawer? [Hint: No, as the bill has materially altered (sec:87)]

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A draws a cheque for Rs.10000 on Bank Yon 25th may 1993 he has sufficient fund to his credit on that date; Bank Y fails on 25th June a1993, before the cheque is presented Advice the holder of the cheque as to; his course of action; [Hint: A is discharged from liability to the holder to the extant of actual damage suffer through the delay In the presentment of the cheque (sec.84)]

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A customer f XYZ Bank drew an open cheque for Rs.100 payable to G. the was stolen. The thief forged the payees endorsement and presented the cheque for payment at the branch upon which it was drawn. The bank cashier paid the cheque without asking for proof his identity. To whom is the bank liable for the cashier action?



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[Hint: The bank is not liable to anyone and can debit the account of customer with the amount of cheque (sec 85(1)] •

A cheque drawn by A and payable to B passed by endorsement through the hand of several persons and was ultimately endorsed in favour of E. The cheque was dishonored on account of want of funds. Advise E. [Hint: E can hold all prior parties liabilities to him provided h e gives them a notice of dishonour]

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A cheque is drawn payable to “B or order. It is stolen and B’s endorsement is forged. The banker pays the cheque in due course. Is the banker discharged from liabilities? Would it make any different if the drawers signature is forged? [Hint: The banker is discharged from liability (sec 85)]

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Cheque payable to a company were endorsed by a director to himself in his capacity as director and paid into his personal account with bank for collection. The bank received the money and allowed him to withdraw. Is the bank liable to the company for conversion of its cheque ? [Hint: Yes, the bank is liable as it was guilty of negligible]

Negotiable Instrument Act, 1881

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