A To Z in Banking - Negotiable Instruments Act 1881 With Amendments

2/28/13
A to Z in Banking - Negotiable Instruments Act 1881 with Amendments
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Negotiable Instrument as Defined under Section 13 of the Negotiable Instruments Act: A Negotiable Instrument means a Promissory Note, Bill of Exchange or Cheque payable either to order or bearer.
Que. Whether any other instrument which satisfies the essential features of the negotiability is treated as Negotiable Instrument? This section does not prohibit any other instrument which satisfies the essential features of the negotiability to be treated as Negotiable Instrument. In India Government Promissory Note, Shah Jog Hundies, delivery orders, dividend warrants etc are treated as Negotiable Instruments by usage and customs of trade.
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Que. What are the essential features of Negotiable Instruments? The essential features of Negotiable Instruments are: 1. Easily transferable from person to person 2. Negotiability -Confers absolute and good title on the transferee. 3. Holder in due course possesses the right to sue upon the instrument in his own name.
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Que. What is the impact of the instrument crossed as Not Negotiable? Exception to the negotiability is when the instrument is crossed Not Negotiable. In such a case the transferee of the instrument does not hold better title than the person from whom he derives the title.
Que. Define Promissory Note? According to section 4 of the NI Act: A promissory note is an instrument in writing, not being a bank or a currency note, containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to or to the order of, a certain person, or to the bearer of the instrument.
Que. Whether a Promissory Note can have the qualities of a currency Note? A promissory note cannot have the qualities of a currency note because like a currency note it cannot be issued as payable on demand and payable to the bearer. Section 31 of RBI Act prohibits any person other than RBI for issuing a promissory note payable to bearer on demand.
Que. Whether a currency notes possess the qualities of a negotiable instrument? The currency notes possess all the qualities of a negotiable instrument. In fact a currency note is a promissory note ( except in case of inconvertible currency) issued by the monetary authorities of a country payable to the bearer on demand.
Que. Define a Bill Of Exchange?
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According to section 5 of the NI Act: A Bill of Exchange 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 maker of a bill is called the drawer; person who is directed to pay is called the drawee. (Section 7). A bill of exchange requires in its inception three partiesthe drawer, the drawee, and the payee. The person who draws the bill is called the drawer. He gives the order to pay money to the third party. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to pay the bill. (Sec.62) The party in whose favor the bill is drawn or is payable is called the payee. The parties need not all be distinct persons. Thus, the drawer may draw on himself payable to his own order. (see Sec. 8) A bill of exchange may be endorsed by the payee in favour of a third party, who may in turn endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the amount of the bill against the drawee and all previous endorsers, regardless of any counterclaims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable.
Que. Define a Cheque? According to section 6 of NI Act: A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.
Que. What is meant by the term "Drawer", "drawee", Drawee in case of need, Acceptor, Acceptor for honour, Payee? The maker of a bill of exchange or cheque is called the "drawer"; the person thereby directed to pay is called the "drawee". "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". "Acceptor": After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the "acceptor". "Acceptor for honour" : When a bill of exchange has been noted or protested for non-acceptance or for better security and any person accepts it supra protest for honour of the drawer or of any one of the endorser, such person is called an "acceptor for honour". "Payee" : The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the "payee".
Que. What are the features of a cheque? A cheque possesses the following features: 1. Always drawn on a banker 2. Payable on Demand
Que. Define Holder of a NI. According to section 8 of the NI Act: The holder of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.
Que. What are the essential conditions to constitute a person the holder of an instrument? A person is called the holder of an instrument if the following conditions are satisfied: - He must be entitled to the possession of the instrument in his own name. - He must be entitled to receive or recover the amount in his own name. The instrument payable to the bearer is negotiated by mere delivery whereas an order instrument is negotiated by endorsement and delivery.
Que. Define a Holder In Due Course. According to section 9 of the NI Act: Holder in Due Course means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof, if payable to order, before the amount mentioned in
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it became payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.
Que. How a person become the Holder in due Course of an instrument? A person becomes holder in due course if the following conditions are satisfied: - The NI must be in the possession of the holder in due course. - The NI must be regular and complete in all respects. - The instrument must have been obtained for valuable consideration. - The instrument must be obtained before the amount mentioned therein becomes payable. - The holder in due course must obtain the instrument without having sufficient cause to believe that any defect existed in the title of the transferor.
Que. What do you mean by Payment In Due Course? According to section 10 of the NI Act: Payment in due course means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to pay to the person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.
Que. What are the essential features of a payment in due course? The essential features of a payment in due course are: 1. Payment must be made according to the apparent tenor of the instrument. 2. The payment should be made in good faith and without negligence. 3. The payment should be made to a person in possession thereof under circumstances, which do not arise suspicion about the title of the person to possess and to receive payment of the instrument. The payment of an order cheque must be made after proper introduction.
Que. What is an Inland Instrument? According to section 11 of the NI Act: An Inland instrument is A Negotiable Instrument drawn or made in India and made payable in or drawn upon any person resident in India shall be deemed to be an Inland Instrument.
Que. What is a Foreign Instrument? According to section 12 of the NI Act: Any such instrument not so drawn, made or made payable as an inland instrument as mentioned in section 11, shall be deemed to be a foreign instrument. So A Negotiable Instrument drawn or made outside India and made payable in or drawn upon any person resident outside India shall be deemed to be an Foreign Instrument.
Que. What is meant by Negotiation? According to section 14 of NI act: When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.
Que. How can an Instrument be Negotiated? An instrument may be negotiated by: (i) by delivery if payable to bearer and; (ii) by endorsement and delivery if payable to order. Que. What is meant by Endorsement? According to section 15 of NI Act: 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 or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to have endorsed the same and is called the endorser.
Que. What is an Endorsement In Blank and Full? According to section 16 of the NI Act: If the endorser signs his name only, the endorsement is said to be the endorsement
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in blank and if he adds a direction to pay the amount to the order of a specified person, the endorsement is said to be full.
Que. What is meant by an Ambiguous Instrument? According to section 17 of the NI Act: An Ambiguous Instrument may be construed either as a promissory note or a bill of exchange, the holder may, at his discretion, treat it as either and the instrument shall be treated accordingly.
Que. What is the provision for payment when the amount in words and figures differ? According to section 18 of the NI Act: If the amount in words and figures differs, the amount stated in words shall be the amount undertaken or ordered to be paid by the drawer.
Que. What is an Inchoate Instrument? According to section 20 of the NI Act, An inchoate instrument is one wherein a person only signs and allows the holder/s to fill in any amount covered by stamps affixed on its back.
Que. How a bearer cheque is Negotiated? According to section 47 of the NI Act: A cheque payable to the bearer is negotiable by mere delivery and requires no endorsement. It does not differentiate between a crossed and uncrossed cheque.
Que. What is the protection to the holder if the cheque is stolen? According to section 58 of the NI Act: If a cheque is stolen, the possessor cannot receive payment until he is holder in due course.
Que. When a chequed be presened for payment? According to section 65 of the NI Act: Presentment for payment must be made during the usual business hours and if a banker within the banking hours.
Que. If rate of interest is not mentioned in Bill of Exchange what rate is payable? According to section 80 of the NI Act: If in a bill of exchange, no rate of interest is specified, it is to be taken as 18%.
Que. What statutory protection is available to the paying banker? According to section 85 of the NI Act: In case of an open instrument, protection is available in sub-section (i) which states that: Where a cheque payable to order purports to be endorsed by or on behalf or the payee, the drawee is discharged by payment in due course. So, the first condition for protection is that endorsement must be regular and; the second condition is that the payment must be made in due course. Sub section 2 of section 85 provides: Where cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, not withstanding any endorsement whether in full or blank appearing thereon, and not withstanding that any such endorsement purports to restrict or exclude further negotiation. So a cheque which is once a bearer is always a bearer. The banker is not required to verify the regularity of the endorsement on the bearer instrument. He is discharged by making payment of an uncrossed bearer cheque to the bearer, in due course.
Que. What Protection is available to a Paying Banker in payment of Materially Altered Cheque? According to section 89 of the NI Act: Where a cheque is presented for payment which does not at the time of presentation appear to be crossed or to have had a crossing which has been obliterated, payment thereof by a banker liable to pay and paying the same according to the apparent tenor thereof at the time of payment and otherwise in due course, shall discharge such banker from all liability thereon and such payment
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shall not be questioned by reason of the cheque having been crossed. This section provides statutory protection to the paying banker provided the following conditions are fulfilled: (i) The cheque does not appear to be a crossed one at the time of presentation or the obliteration of the crossing is not apparent; and (ii) The payment is made according to apparent tenor of the cheque and in due course.
Que. What is meant by Noting And Protesting? According to section 99 of the NI Act: When a promissory note or bill of exchange has been dishonoured by nonacceptance or non-payment, the holder may cause such dishonour to be noted by a Notary Public upon the instrument or upon a paper attached thereto. According to section 100 of the NI Act: When a promissory note or a bill of exchange has been dishonoured, the holder may, within a reasonable time, cause such dishonour to be noted and certified by a Notary Public. Such certificate is called a protest.
Que. What is meant by Crossing Of Cheques? Section 123 to 131 of the NI Act contain provisions relating to crossing. Crossing on cheques is of two types: General Crossing and Special Crossing.
Que. What is meant by General Crossing? According to section 123 of NI Act: Where a cheque bears across its face an addition of the words and company or any abbreviation thereof, between two parallel transverse lines, or two parallel transverse lines simply, either with or without the words not negotiable, that addition shall be deemed a crossing, and the cheques shall be deemed to be crossed generally. Thus drawing of two parallel transverse lines on the face of the cheque constitutes general crossing. The lines must be (i) on the face of the cheque (ii) parallel to each other and (iii) in cross direction ( i.e. transverse). Inclusion of words and company is immaterial and of no special consequence.
Que. What is meant by Special Crossing? According to section 124 of NI Act: Where a cheque bears across its face an addition of the name of a banker, either with or without the words not negotiable, that addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially and to be crossed to that banker.
Que. Who can cross a cheque as per NI Act? According to section 125 of the NI Act: (i) The holder of a cheque may cross it generally, if it is uncrossed; or may cross it specially if it is crossed generally or may add the words not negotiable in case of both the types of crossing. (ii) The banker to whom the cheque is crossed specially may again cross it specially to another banker, his agent for collection. This is called double special crossing.
Que. What is the Liability of the Paying Banker on Crossed Cheques? According to section 126 of the NI Act: Where a cheque is crossed generally, the banker on whom it is drawn shall not pay otherwise than to a banker and where a cheque is crossed specially, the banker to whom it is drawn, shall not pay otherwise than to the banker to whom it is crossed or his agent for collection.
Que. What is the liability If the paying banker defaults in making payment of a crossed cheque as stated in section 126 of NI Act? If the paying banker defaults in making payment of a crossed cheque as stated in section 126, he shall bear the liability specified in section 129 of NI Act as follows: Any banker paying a cheque crossed generally, otherwise than to a banker, or a cheque crossed specially, otherwise than to the banker to whom the same is crossed, or his agent for collection being a banker, shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.
Que. What Protection is available to the collecting banker as per NI. According to section 131 of the NI Act:
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A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment.
Que. What are the conditions for the collecting banker to get protection under section 131 of the NI Act? The collecting banker is given statutory protection subject to fulfilment of following conditions: 1. The cheque must be a crossed cheque. 2. The payment must be received for a customer. 3. Payment must be received in good faith and without negligence.
Que. What are the provisions relating to dishonour of the cheque for insufficiency of funds in the account? According to section 138 of the NI Act: Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to one year, or with fine which may extend to the amount of the cheque, or with both.
Que. Under which circumstances provisions under section 138 will not apply? Provisions under section 138 will not apply unless: The cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier. The payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque, within 15 days of receipt of information by him from the bank regarding the return of the cheque as unpaid and The drawer of such cheque fails to make the payment of the said amount of money to the payee or as the case may be, to the holder in due course of the cheque, within 15 days of the receipt of the said notice.
Que. What are the provisions contained in section 139 of NI Act? Section 139 refers to the Presumption in favour of holder: It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to section 138 for the discharge, in whole or in part, of any debt or other liability.
Que. What are the provisions contained in section 140 of NI Act? Section 140 refers to the defences, which may not be allowed in any procecution under section 138. It shall not be a defence in prosecution of an offence under section 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section.
Que. What are the provisions contained in section 141 of NI Act? Section 141 refers to the Offences by Companies: (1) If the person committing an offence under section 138 is a company, very person, who at the time the offence was committed, was in charge of , and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offences. (2) Notwithstanding anything contained in sub-section (1), where any offence under this act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be proceeded against and punished accordingly.
Que. What are the provisions contained in section 142 of NI Act? Section 142 refers to the Cognizance of offences. Not withstanding anything
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contained in the Code of Criminal Procedure, 1973 No court shall take cognizance of any offence punishable under section 138 except upon a complaint, in writing, made by the payee or, as the case may be, the holder in due course of the cheque. such complaint is made within one month of the date on which the cause of action arises under clause (c) of the provisio to section 138. No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall try any offence punishable under section 138.
THE NEGOTIABLE INSTRUMENTS (AMENDMENT & MISC.PROV.) ACT 2002 INTRODUCTION OF TRUNCATED CHEQUE AND CHEQUE IN ELECTRONIC FORM The Act makes following amendments in the Negotiable Instrument Act 1881:
BOUNCING OF CHEQUE
Some of the implications of the amendment relating to bouncing of cheque are:
1. The maximum imprisonment has been extended to a term of 2 years. 2. Time for giving notice by the payee or the holder in due course of the
cheque to its drawer has been increased to 30 days (from existing 15days) from the receipt of information by him from the bank regarding the return of the cheque as unpaid (Section 138).
3. In case of offence by companies, the person who has been nominated by
virtue of his holding an office or employment in the Central Govt, State Govt or a Financial Corporation owned or controlled by Central or State Govt shall not be liable for prosecution. (Section 141)
4. Court has been given the power to condone the delay if the complainant
satisfies the Court that he had sufficient cause for not making a complaint within prescribed period. (Section 142)
5. The Court has been given power to try cases summarily, and in any such
summary Trial, Magistrate shall have the power to pass the sentence of imprisonment for a term not exceeding one year and fine not exceeding Rs 5000/-. It has also been provided that so far as practicable, the trial of the cases shall be continued from day to day until conclusion.(Section 143)
6. The services of summons can be made by speed post or by courier services
as are approved by Court of Session (Section 144)

7. Evidence of the complainant can be made on affidavit. (Section 145) 8. Bank's slip or memo bearing official mark denoting that cheque has been
dishonoured shall be prima-facie evidence for such dishonour (section 146). So, Bank's officials will not be disturbed for evidence, unless absolutely necessary.
9. The offences under this Act have been made compoundable (Section 147)
Section 6(Definition of 'Cheque') 'The electronic image of a truncated cheque' and 'a cheque in the electronic form' have been included in the definition of 'cheque'. What is e-cheque or cheque in electronic form? The electronic cheque is just what its name implies and is an electronic substitute for the paper cheque. Like paper cheques, e- cheques are legally binding promises to pay. They are having the same legal treatment as paper cheque, e- cheque uses digital signature that can be automatically verified. The digital signature gives a lot more authenticity and security than the normal hand-written signature. On the computer screen, the e-cheque looks just like the paper cheque and is filled out in the same way. It has details about the payee's name, drawers account information, amount, date, drawee bank etc The e- cheque is being developed by the Financial Services Technology Consortium (FSTC) of the USA. The FSTC consists of a group of banks, technology providers, universities and Government agencies and was formed in 1993 in the US to perform research and development for the benefit of financial services industry. The FSTC has developed and is pioneering the e-cheque project as a secure payment mechanism. In this system, the e-cheque can be transferred from the drawer to the payee to his bank and onwards using the internet and e-cheques totally eliminate physical movement of cheques. A truncated cheque is defined by the new Section 6(b) as "a cheque 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, substituting the further physical movement of the cheque in writing." Thus the characteristics of a 'truncated cheque' can be summed up as below:
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It is an electronic image of a paper cheque. Only the Bank's involved and the Clearing House can truncate a Cheque (i.e. create an electronic image of a cheque) .The drawer /holder of a cheque cannot truncate a cheque. The electronic image of the 'truncated cheque ' will substitute the physical cheque from the point and time of truncation onwards. Truncation is to be done only during the course of a clearing cycle to reduce the time taken for realization. The paper cheque, after truncation is to be kept in the custody of the Bank/Clearing House that truncated the cheque. Addition of digital signature of the truncating bank/Clearing House to the electronic image of the truncated cheque is optional. Under the concept of truncation, the electronic image will replace the physical cheque. Incidental provisions relating to Truncated Cheque 1. Drawee bank has been given right to demand any further information regarding truncated cheque, from the bank holding the truncated cheque, in case of any suspicion about the genuineness of the instrument. The drawee bank has also been given right to further demand presentment of the truncated cheque itself for verifications thereof and in such case the drawee bank shall have the right to retain such cheque after making the payment. (Section 64) 2. In the ordinary course, the Payee bank retains the instruments. In case cheque is an electronic image of a truncated cheque, the collecting bank is entitled to retain the truncated cheque and a certificate issued on the foot of the print out of the electronic image of truncated cheque by the paying banker, shall be the prima -facie proof of such payment. (Section 81) 3. Any difference between electronic image and the truncated cheque shall be material alteration and it shall be duty of the bank while truncating and transmitting the image to ensure that electronic image of the truncated cheque is exactly the same (Section 89). The paying banker shall verify from the party who transmitted the electronic image that image so transmitted is exactly the same. The collecting banker has to verify the prima-facie genuineness of the cheque to be truncated. The Negotiable Instruments Act 1881- Important Tips The Negotiable Instruments Act was passed in 1881. Some provisions of the Act have become redundant due to passage of time, change in methods of doing business and technology changes. However, the basic principles of the Act are still valid and the Act has stood test of time. The Act extends to the whole of India. There is no doubt that the Act is to regulate commercial transactions and was drafted to suit requirements of business conditions then prevailing. The instrument is mainly an instrument of credit readily convertible into money and easily passable from one hand to another. LOCAL USAGE PREVAILS UNLESS EXCLUDED - The Act does not affect any local usage relating to any instrument in an oriental language. However, the local usage can be excluded by any words in the body of the instrument, which indicate an intention that the legal relations of the parties will be governed by provisions of Negotiable Instruments Act and not by local usage. [section 1]. Thus, unless specifically excluded, local usage prevails, if the instrument is in regional language. BILL OF EXCHANGE AND PROMISSORY NOTES EXCLUDED FROM INFORMATION TECHNOLOGY ACT - Section (1)(4)(a) of Information Technology Act provides that the Act will not apply to Bill of Exchange and Promissory Notes. Thus, a Bill of Exchange or Promissory Note cannot be made by electronic means. However, cheque is covered under of Information Technology Act and hence can be made and / or sent by electronic means. CHANGES MADE BY AMENDMENT ACT, 2002 - (a) Definition of cheque and related provisions in respect of cheque amended to facilitate electronic submission and/or electronic clearance of cheque. Corresponding changes were also made in Information Technology Act. (b) Bouncing of cheque - Provisions amended * Provision for imprisonment upto 2 years against present one year * Period for issuing notice to drawer increased from 15 days to 30 days * Government Nominee Directors excluded from liability * Court empowered to take cognizance of offence even if complaint filed beyond one month * Summary trial procedure permitted for imposing punishment upto one year and fine even exceeding Rs 5,000 * Summons can be issued by speed post or courier service * Summons refused will be deemed to have been served * Evidence of complainant through affidavit permitted * Banks slip or memo indicating dishonour of cheque will be prima facie evidence unless contrary proved * Offence can be compounded. - - The amendments have been made effective from 6-2-2003. Transferee can get better title than transferor Normal principle is that a person cannot transfer better title to property that he himself has. For example, if a person steals a car and sells the same, the buyer does not get any legal title to the car as the transferor himself had no title to the car. The real owner of car can anytime obtain possession from the buyer, even if the buyer had purchased the car in good faith and even if he had no idea that the seller had no title to the car. This provision is no doubt sound, but would make free negotiability of instrument difficult, as it would be difficult to verify title of transferor in many cases. Hence, it is provided that if a person acquires Negotiable Instrument in good faith and without knowledge of defect in title of the transferor, the transferee can get better
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title to the negotiable instrument, even if the title of transferor was defective. This is really to ensure free negotiability of instrument so that persons can deal in the instrument without any fear. DIFFERENCE BETWEEN NEGOTIATION AND TRANSFER/ASSIGNMENT - Difference between Negotiation and assignment/transfer is that in case of negotiation, the transferee can get title better than transferor, which can never happen in assignment/transfer. STATUTORY DEFINITION OF NEGOTIABLE INSTRUMENT - A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer. Explanation (i) : A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable or which is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable. Explanation (ii) : A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank. Explanation (iii) : Where a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option. [section 13(1)]. - - A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees. [section 13(2)]. Promissory Note - A promissory note is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional under taking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument. [Section 4]. Bill of Exchange As per statutory definition, bill of exchange 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. [Para 1 of section 5]. A cheque is a special type of Bill of Exchange. It is drawn on banker and is required to be made payable on demand. DRAWER, DRAWEE AND PAYEE - The maker of a bill of exchange or cheque is called the drawer; the person thereby directed to pay is called the drawee [section 7 para 1]. - - The person named in the instrument, to whom, or to whose order the money is by the instrument directed to be paid, is called the payee [section 7 para 5]. - - However, a drawer and payee can be one person as he can order to pay the amount to himself. AT SIGHT, ON PRESENTMENT, AFTER SIGHT - In a promissory note or bill of exchange the expressions at sight and on presentment mean on demand. The expression after sight means, in a promissory note, after presentment for sight, and, in a bill of exchange, after acceptance, or noting for non-acceptance, or protest for non-acceptance. [section 21]. - - Thus, in case of document after sight, the countdown starts only after document is sighted by the concerned party. Stamp duty on Negotiable Instrument A negotiable instrument is required to be stamped. Stamp duty on Bill of Exchange and Promissory Note is a Union Subject. Hence, stamp duty is same all over India. Hundi a local instrument Hundi is an indigenous instrument similar to Negotiable Instrument. The term is derived from Sanskrit word hund which means to collect. If it is drawn in local language, it is governed by local usage and customs. Provisions in respect of Cheques - A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Cheque includes electronic image of a truncated cheque and a cheque in electronic form. [section 6]. The definition is amended by Amendment Act, 2002, making provision for electronic submission and clearance of cheque. The cheque is one form of Bill of Exchange. It is addressed to Banker. It cannot be made payable after some days. It must be made payable on demand. Crossing of Cheque The Act makes specific provisions for crossing of cheques. CHEQUE CROSSED GENERALLY - Where a cheque bears across its face an addition of the words and company 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 addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally. [section 123] CHEQUE CROSSED SPECIALLY - Where a cheque bears across its face an addition of the name of a banker, either with or without the words not negotiable, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker. [section 124]. PAYMENT OF CHEQUE CROSSED GENERALLY OR SPECIALLY - Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker. Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent for collection. [section 126]. CHEQUE BEARING NOT NEGOTIABLE - A person taking a cheque crossed generally or specially, bearing in either case the words not negotiable, shall not have, and shall not be capable of giving, a better title to the cheque than that which the person form whom he took it had. [section 130]. Thus, mere writing words Not negotiable does not mean that the cheque is not transferable. It is still transferable, but the transferee cannot get title better than what transferor had. Electronic Cheque - Provisions of electronic cheque has been made by Amendment Act, 2002. As per Explanation I(a) to section 6, A cheque in the electronic form means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed by a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system. Truncated Cheque - Provisions of electronic cheque has been made by Amendment Act, 2002. As per Explanation I(b) to section 6, A truncated cheque means a cheque which is truncated during the clearing cycle, either by the clearing
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house 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, substituting the further physical movement of the cheque in writing. Penalty in case of dishonour of cheques for insufficiency of funds - If a cheque is dishonoured even when presented before expiry of 6 months, the payee or holder in due course is required to give notice to drawer of cheque within 30 days from receiving information from bank.. The drawer should make payment within 15 days of receipt of notice. If he does not pay within 15 days, the payee has to lodge a complaint with Metropolitan Magistrate or Judicial Magistrate of First Class, against drawer within one month from the last day on which drawer should have paid the amount. The penalty can be upto two years imprisonment or fine upto twice the amount of cheque or both. The offense can be tried summarily. Notice can be sent to drawer by speed post or courier. Offense is compoundable. It must be noted that even if penalty is imposed on drawer, he is still liable to make payment of the cheque which was dishonoured. Thus, the fine/imprisonment is in addition to his liability to make payment of the cheque. Return of cheque should be for insufficiency of funds - The offence takes place only when cheque is dishonoured for insufficiency of funds or where the amount exceeds the arrangement. Section 146 of NI Act only provides that once complainant produces banks slip or memo having official mark that the cheque is dishonoured, the Court will presume dishonour of the cheque, unless and until such fact is disproved. Calculation of date of maturity of Bill of Exchange - If the instrument is not payable on demand, calculation of date of maturity is important. An instrument not payable on demand is entitled to get 3 days grace period. Presentment of Negotiable Instrument - The Negotiable Instrument is required to be presented for payment to the person who is liable to pay. Further, in case of Bill of Exchange payable after sight, it has to be presented for acceptance by drawee. Acceptance means that drawee agrees to pay the amount as shown in the Bill. This is required as the maker of bill (drawer) is asking drawee to pay certain amount to payee. The drawee may refuse the payment as he has not signed the Bill and has not accepted the liability. In case of Promissory Note, such acceptance is not required, as the maker who has signed the note himself is liable to make payment. However, if the promissory note is payable certain days after sight [say 30 days after sight], it will have to be presented for sight. If the instrument uses the expressions on demand, at sight or on presentment, the amount is payable on demand. In such case, presentment for acceptance is not required. The Negotiable Instrument will be directly presented for payment. Acceptance and payment for honour and drawee in need - Provisions for acceptance and payment for honour have been made in case when the negotiable instrument is dishonoured. Bill is accepted for honour when it is dishonoured when presenting for acceptance, while payment for dishonour is made when Bill is dishonoured when presented for payment. Negotiation of Instrument - The most salient feature of the instrument is that it is negotiable. Negotiation does not mean a mere transfer. After negotiation, the holder in due course can get a better title even if title of transferor was defective. If the instrument is to order, it can be negotiated by making endorsement. If the instrument is to bearer, it can be negotiated by delivery. As per definition of delivery, such delivery is valid only if made by party making, accepting or indorsing the instrument or by a person authorised by him. An instrument can be negotiated any number of times. As per section 118(e), endorsements appearing on the negotiable instrument are presumed to have been made in the order in which they appear on the instrument, unless contrary is proved. [There is no mandatory provision to put date while signing, though advisable to do so]. Section 118(d) provides that there is presumption that the instrument was negotiated before its maturity, unless contrary is proved. As per section 60, Bill can be negotiated even after date of maturity by persons other than maker, drawee or acceptor after maturity. However, person getting such instrument is not holder in due course and does not enjoy protections available to holder in due course. Liability of parties - Basic liability of payment is as follows (a) Maker in case of Promissory Note or Cheque and (b) Drawer of Bill till it is accepted by drawee and acceptor after the Bill is accepted . They are liable as principal debtors and other parties to instrument are liable as sureties for maker, drawer or acceptor, as the case may be. When document is endorsed number of times, each prior party is liable to each subsequent party as principal debtor. In case of dishonour, notice is required to be given to drawer and all earlier endorsees. PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTS - Until the contrary is proved, the following presumptions shall be made : (a) of consideration - that every negoticble instrument was made or drawn for consideration, and that every such instrument, when it has been $ accepted, indorsed, negotiated or transferrgd, was accepted, indorsed, negotiated or transferred for consideration; - - (b) as to date that every negotiable instrument bearing a date was oide or drawn on such date; - (c) as to time of acceptance - that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity; - - (d) as to time of transfer - - that every transfer of a negotiable instrument was made before its maturity; - - (e) as to order of indorsements - that the indorsements appearing upon a negotiable instrument were made in the order in which they appear thereon; (f) as to stamps - that a lost promissory note, bill of exchange or cheque was duly stamped; - - (g) that holder is a holder in due course - that the holder of a negotiable instrument is a holder in due course : provided that, where the instrument has been obtained from its lawful owner, or from any person in lawful custody thereof, by means of an offence or fraud, or has been obtained from the maker or acceptor thereof by means of an of fence or fraud, or for unlawful
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consideration, the burden of proving that the holder in due course lies upon him. [section 118]
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A to Z in Banking - Negotiable Instruments Act 1881 with Amendments

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Que. Define a Bill Of Exchange?

A to Z in Banking - Negotiable Instruments Act 1881 with Amendments

A to Z in Banking - Negotiable Instruments Act 1881 with Amendments

A to Z in Banking - Negotiable Instruments Act 1881 with Amendments

A to Z in Banking - Negotiable Instruments Act 1881 with Amendments

A to Z in Banking - Negotiable Instruments Act 1881 with Amendments

A to Z in Banking - Negotiable Instruments Act 1881 with Amendments

as are approved by Court of Session (Section 144)

A to Z in Banking - Negotiable Instruments Act 1881 with Amendments

A to Z in Banking - Negotiable Instruments Act 1881 with Amendments

A to Z in Banking - Negotiable Instruments Act 1881 with Amendments

A to Z in Banking - Negotiable Instruments Act 1881 with Amendments

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