Chapter

Law of Negotiable Instruments

Introduction
Meaning of an Instrument

The term instrument means any written document by which a right is created in favour of some person. The word
negotiable has a technical meaning whereby rights in an instrument can be transferred by one person to another. Thus, a negotiable instrument is a document by which rights

vested in a person can be transferred to another person in

accordance with the provisions of the Negotiable Instruments Act, 1881.

Meaning and definition of a Negotiable Instrument

Meaning of a Negotiable Instrument. An Instrument as referred to in the Act is a legally recognised written document, whereby rights are created in favour of one and obligations are created on the part of another. The word negotiable means transferable from one person to another either by mere delivery or by endorsement and delivery, to enable the transferee to get a title in the instrument.
Cont.

Meaning and definition of a Negotiable Instrument

An instrument is called negotiable if it possesses the following features: Freely transferable Holders title free from defects The holder can sue in his own name A negotiable instrument can be transferred infinitum, i.e. A negotiable instrument is subject to certain presumptions

Essential Elements of a Negotiable Instrument It must be in writing, which includes, typing, computer print out or engraving.

The instrument must be signed by the person who is the maker or a drawer.
There must be an unconditional promise or order to pay.

The instrument must involve payment of a certain sum of money only and nothing else.

Essential Elements of a Negotiable Instrument

The instrument must be payable at a time which is certain to arrive. If it is payable when convenient the instrument is not a negotiable one. In case of a bill or cheques, the drawee must be named or described with reasonable certainty.
Forms in which an Instrument must be Payable so as to Constitute a Negotiable Instrument are: (i) Pay A; (ii) Pay A or order; (iii) Pay to the order of A; (iv) Pay A and B; (v) Pay A or B; (vi) Pay A or bearer; (vii) Pay bearer.

Promissory Notes and Bills of Exchange

Definition of a Promissory Note. 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 to the bearer of the instrument (s.4).

Cont.

Promissory Note
The person who promises to pay is called the

maker, or promisor and the person to whom the payment is made is called the payee. No person in India except Reserve Bank can make or issue promissory note payable to bearer. Promissory note does not include bank note and currency note.

Essentials of a Promissory Note

A promissory must be in writing.
It must contain an undertaking or promise to pay. The promise to pay must not be conditional.

The promissory note must be signed by the

maker. The instrument must point out with certainty the maker and the payee of the promissory note, e.g., son of. resident of, etc.

Essentials of a Promissory Note

The sum payable must be certain or capable of being made certain. It cannot be payable to bearer on demand (s.31 of R. B. I. Act). It cannot be crossed unlike a cheques.

Specimen of a Promissory Note

New Delhi 1100 01 Jan. 10, 2006 On demand [or six months after date] I promise to pay X or order the sum of rupees ten thousand with interest at 12 per cent per annum. To X Sd/-A Address. Stamp Rs 10,000

Parties to a Promissory Note 1. 2. The maker The payee

Cont.

Bill of Exchange
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.

Features of a Bill of Exchange It must be in writing. It must contain an order to pay and not a promise or request. Words, like Please pay Rs 10,000 to A on demand and oblige, do not constitute the instrument a bill of exchange. The order must be unconditional. There must be three parties, viz., drawer, drawee and payee.
Cont.

Features of a Bill of Exchange

The parties must be certain. It must be signed by the drawer/maker. The sum payable must be certain or capable of being made certain. The order must be to pay money and money alone. The number, date and place of the bill are not essential. Oral evidence may be obtained as to date and place of execution.

Specimen of a Bill of Exchange

Rs 10, 000 New Delhi 110 016 Jan. 13, 2006 Six months after date pay to A or order/bearer the sum of ten thousand rupees only for value received. To X Sd/-Y Address Stamp ..

Stamp Duty, Attestation and Registration of a Promissory Note and a Bill

of Exchange. A promissory note as well as a bill of exchange are liable to

stamp duty.

Cont.

Distinction between a Promissory Note and a Bill of Exchange

1. Promissory Note There are only two parties the maker (debtor) and the payee (creditor). A note contains an unconditional promise by the maker to pay the payee. No prior acceptance is needed. Bill of Exchange There are three parties the drawer, the drawee and the payee although drawer and payee may be the same person. It contains an unconditional order to the drawee to pay according to the drawers directions. A bill payable after sight must be accepted by the drawee or his agent before it is presented for payment. The liability of the drawer is secondary and conditional upon non-payment by the drawee. Notice of dishonour must be given by the holder to the drawer and the intermediate endorsers to hold them liable thereon. The maker or drawer does not stand in immediate relation with the acceptor or drawee.

2. 3.

4. 5.

The liability of the maker or drawer is primary and absolute. No notice of dishonour need be given.

6.

The maker of the note stands in immediate relation with the payee.

Cheques
Meaning of a Cheque. A cheque is the

usual method of withdrawing money from a current account with a banker. Savings bank accounts are also permitted to be operated by cheques provided certain minimum balance is maintained.

Cheques
A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

Cheques
. Specimen of a Cheque

Cont.

Requisites of a Cheque 1. Written instrument 2. Unconditional order 3. Drawn on a specified banker only 4. A certain sum of money 5. Payee to be certain 6. Payable on demand 7. Amount of the cheque 8. Dating of cheques 9.Valid for six months

Holder
The Holder of a Negotiable Instrument means

any person entitled in his own name to the possession thereof and to receive and recover, the amount due therein from the party liable thereto. The Holder should be a de-jure holder.

Holder
A holder must satisfy two conditions:
He should be entitled to possess the

instrument in his own name He should have the right the right to receive or recover the amount due on the instrument from the party liable to pay.

Rights of a Holder
Right to possess the instrument in his own

name Entitled to receive or recover payment on the instrument Has a right to give valid discharge of the instrument Can further negotiate the instrument in favor of another party

Holder and holder in due course Meaning. A holder in due course, on the other hand, is a person who for consideration became the possessor of a promissory note, bill of exchange or cheques. Essential Conditions

He must be a holder
He must be a Holder for consideration He must acquire the instrument before maturity Instrument should be complete and regular

Holder must take the instrument in good faith

Privileges of a Holder in Due Course

Good title of instruments Privilege against inchoate stamped instruments Fictitious drawer or payee Right of an endorsee from a holder in due course Estoppel against denial of validity Estoppel against denial of payees capacity Presumption as to title Prior defects (s.58) Endorser not permitted to deny the capacity of prior parties

Negotiation of a Negotiable Instrument

Meaning of Negotiation. The transfer of an instrument by one party to another so as to constitute the transferee a holder

thereof is called negotiation. Negotiation and Assignment. The negotiation of an instrument should be distinguished from assignment. Lets first see what is assignment and what are the common points in negotiation and assignment. When a person transfers his right to receive the payment of a debt that is called assignment of the debt.
Cont.

Negotiation of a Negotiable Instrument

Payable to bearer. An instrument is payable to

bearer (1) where it is made so payable, or (2) where it is originally made payable to order but the only or the last indorsement is in blank, or (3) where the payee is a fictitious person. Endorsement. An endorsement is the mode of negotiating a negotiable instrument. A negotiable instrument payable otherwise than to bearer can be negotiated only by indorsement and delivery.

Kinds of Endorsements 1.

Endorsement in blank

2.
3. 4.

Endorsement in full
Restrictive endorsement Conditional endorsement

5.
6. 7.

Endorsement sans recourse

Facultative endorsement Partial endorsement (s.56)

Effect of Endorsement. An unconditional endorsement of a negotiable

instrument followed by its unconditional delivery has the effect of transferring the property therein to the endorsee. The endorsee acquires a right to negotiate the instrument to anyone he likes and to sue all parties whose names appear on it.

Presentment
Presentment of a negotiable instrument is made for two purposes: (i) for acceptance and (ii) for payment. Maturity (Ss.21-25). Cheques are always payable on demand but other instruments like bills, notes, etc., may be made payable on a specified date or after the specified period of time. The date on which payment of an instrument falls due is called maturity (s.22).

Presentment for Payment. A negotiable instrument must be presented

for payment to the maker, acceptor or drawee thereof, as the case may be, by the holder or his agent.

Dishonour
Dishonour of a Bill. A bill of exchange may be dishonoured either by non-acceptance or by non-payment. A negotiable instrument is said be dishonoured by non-payment when the

maker, acceptor or drawee, as the case may be, makes default in payment upon being duly required to pay the same (s.92). Noting. Noting is a convenient method of authenticating the fact of dishonour. Where an instrument is dishonoured, the holder, besides giving the notice as referred to above, should get the bill or promissory note noted by the notary public.

Dishonor
Protesting (s.100). The protest is the formal notarial certificate attesting the dishonor of the bill and based upon the noting. After the noting has been made, the formal protest may be drawn up by the notary at his leisure. When the protest is drawn up it relates back to the date of noting.

Crossing of Cheques
Meaning of Crossing. Crossing is a unique feature associated with a cheque affecting to a certain extent the obligation of the paying banker and also its negotiable character. Crossing on cheque is a direction to the paying banker by the drawer that payment should not be made across the counter. Significance of Crossing. As payment cannot be claimed across the counter on a crossed cheque, crossing of cheques serves as a measure of safety against theft or loss of cheques in transit.

Types of Crossing
Specimen of general crossing

Cont.

Crossing of Cheques
Not Negotiable Crossing. Crossing whether

general or special may be accompanied by words not negotiable. Account Payee Crossing (A/c Payee Crossing). An A/c payee crossing signifies that the drawer intends the payment to be credited only to the payees account and in none else. The addition of A/c payee to a crossing has no legal sanctity and the paying banker may ignore such a direction without being liable for any damages.

Not Negotiable, A/c Payee Crossing. The combination of

not negotiable and A/c payee, crossing is the safest form of crossing. It has double advantage. The instrument is rendered not negotiable (making the paying banker responsible to see that payment is made to the person who is entitled to receive it) plus A/c payee crossing directs the collecting banker to collect it for the payee only and warns that if the amount is collected for someone else, he may be held liable for damages.

The Paying Banker Payment in Due Course 1. Payment must be in accordance with the apparent tenor of the instrument.
2. Payment must be made in good faith and without negligence. 3. Payment must be made to the person in possession of the instrument.

The Paying Banker

Payment must be made under circumstances which do not afford a reasonable ground for believing that a person is not entitled to receive payment of the amount mentioned therein. Payment must be made in money only.

Dishonor of cheques on ground of insufficiency of funds

Sections 138-142 (Amendment Act -1988)

provide criminal penalty for dishonor of cheques on ground of insufficiency of funds. Punishment up to 2 years imprisonment ,with a fine up to twice the amount of the cheque or with both.

Dishonor of cheques
The following conditions must be satisfied:
The cheque has been dishonored due to

insufficiency of funds only The payment for which the cheque was issued should have been in discharge of a legally enforceable debt.

Dishonor of cheques
The cheque should have been presented

within six months or within the period of validity. Notice in writing demanding payment, should be given to the drawer within 30 days of the receipt of information of dishonor from the bank.

Dishonor of cheques
The holder of the dishonored cheque should

have made a complaint within one month of the cause of action arising out of sec 138.