Negotiable Instruments Act, 1881

Unit I

Negotiable Instrument
Sec 13 (1) : A Negotiable Instrument means a promissory note, bill of exchange or cheque pay able either to order or to bearer A negotiable instrument is a written contract evidencing a right to receive money and it may be transferred by negotiation ie. either by delivery or by endorsement. Negotiable means transferable by delivery

Negotiable Instruments Act

This act applies to whole of India and to all persons resident in India, whether foreigners or Indians. The provisions of this Act is not applicable to Hundis and other native instruments for which special customs and local govern. Where no custom is established this Act will equally apply to Hundis.

Examples of Negotiable Instruments

Negotiable Instruments recognized by Statute
Bills of Exchange (A written order to pay a sum of money on a given date to the drawer or to a named payee) Promissory Notes (A signed document containing a written promise to pay a stated sum to a specified person or the bearer at a specified date or on demand) Cheque (a written order directing a bank to pay money)

Difference between Bill of Exchange and Promissory Note

A bill of exchange (BE) differs from a promissory note (PN) on the following points: It is promise to pay (PN); It is an order to pay (BE) There are only two parties the drawer, and the payee(PN); There are three parties, the drawer, the drawee, and the payee (BE) There is no necessity of acceptance (PN); It must be accepted (BE)

Examples of Negotiable Instruments

Negotiable Instruments recognized by usage or custom
Hundis (Offering box, from hun, to sacrifice. A strong box inside Hindu temples into which devotees place their contributions) Share Warrant (a paid-up share which can be transferred by its holder to another party without any need for a registered transfer [UK]) Dividend Warrant (an order of payment [such as a check payable to a shareholder] in which a dividend is paid) Bankers Draft (In situations where a person owes money to a creditor, and the creditor is not prepared to accept a personal cheque because he thinks it might bounce, a banker's draft can provide a solution. It is simply a cheque made out to the creditor by the debtor's bank, and in the eyes of the creditor is much more secure)

Examples of Negotiable Instruments

Negotiable Instruments recognized by usage or custom
Bearer debentures ( These debentures are not registered in the register of the company. They are payable to the bearer and are deemed to be negotiable instruments) Railway receipts (document issued by the railway as the acknowledgment of the receipt of goods; surrender of receipt entitles the delivery of goods) Delivery Orders (In freight shipments, written directions from a consignor or shipper of a shipment to a carrier or freight fowarder to release the shipment to the named delivery party)

Features of Negotiable Instruments

Easy Transferability (bearer instrument : by mere delivery; order instrument : by endorsement and delivery) Title Right to file Suit (for enforcing any right or claim on the basis of instrument) Notice of transfer (not necessary to give notice of transfer to the party liable to pay)

Features of Negotiable Instruments

Presumptions as to Negotiable Instruments Procedure for suits : given in order 37-A in Civil Procedure Code for suits on promissory notes and bills of exchange Number of transfer : infinite times till they are at maturity Rule of evidence : These instruments are in writing and signed by the parties Exchange : considered as substitutes for money

Presumptions as to Negotiable Instruments

Consideration (every negotiable instrument was made or drawn, accepted, endorsed, negotiated for consideration) Date (made or drawn on the date it bears) Time of acceptance (every accepted bill was accepted within a reasonable time after its date and before its maturity) Transfer (made before maturity) Order of endorsement (made in order in which they appear)

Presumptions as to Negotiable Instruments

Stamping (a lost negotiable instrument was duly stamped) Holder in due course (holder of the negotiable instrument) Proof of protest (in case of dishonor, the court shall presume the fact of dishonor)

Parties to Negotiable Instruments

Drawer : Maker of negotiable instrument Drawee : Person on whom the instrument is drawn Acceptor : Person who accepts the instrument of bill of exchange Payee : Person to whom the sum stated in the instrument is payable; can be drawer or any other person (Payee for Honor) Holder : Person to whom the payee has endorsed the instrument; the bearer is the holder in case of bearer instrument

Parties to Negotiable Instruments

Endorser : Holder when he endorses Endorsee : Person to whom instrument is endorsed

Privileges of a Holder in due course

A person who signed and delivered to another a stamped but otherwise incomplete instrument, cannot deny it provided the amount filled is covered by stamp affixed Every prior party to a negotiable instrument is liable to the holder in due course till it is satisfied When a bill of exchange is drawn by a fictitious person and is payable to his order, the holder in due course have to prove that the instrument was endorsed by the same hand as the drawers signature

Privileges of a Holder in due course

The parties to the instrument cannot escape liability (if delivery of instrument was conditional or for specific purpose only) Any person acquiring it takes the instrument free of all defects unless he was himself a party to the fraud Cannot deny the validity of the instrument as originally made or drawn

 Takes instrument for free from all defects (HC); Takes it subject to all defects(H) Acquires the instrument for valuable consideration (HC); Consideration not necessary (H) Should have acquired possession of the instrument before the due date (HC); Could acquire possession after the amount became payable (H) Should not have noticed defects (HC); can take instrument with notice of defects (H) Must have possession (HC); sufficient if he is entitled to possession (H)

Difference between Holder in due Course (HC) and Holder (H)

Negotiation
The transfer of a negotiable instrument by any person to another so as to constitute the transferee the holder of the instrument

Promissory Note
A Promissory note is an instrument in writing (not being a bank note or currency note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money to, or the order of a certain person or to the bearer of the instrument Parties : Promisor, Drawer or Maker, Payee, Promisee or holder and endorser.

Essentials Features
Promissory note must be in writing It must contain an express promise of clear undertaking to pay The promise to pay must be definite and unconditional The maker of the promissory note must be certain It should be signed by the promisor The amount must be certain

Essentials Features
The promise should be to pay money The payee must be certain Must be payable on demand or after certain defined period of time It should bear the required stamping Rate of interest may be specified and payable from the date of the instrument

Bills 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 3 parties : Drawer (Creditor), Drawee (Debtor), Payee (person entitled to receive money)

Essential Features
Must be in writing Must contain an order to pay which is express, certain and unconditional Drawer must be certain Drawee must be certain. Acceptance to be made by writing the word accepted and signed Payee must be certain Must be duly signed by the drawer

Essential Features
Amount of money to be paid must be certain and ascertainable Payment must be in legal tender money Bill may be payable on demand or after a specified or definite period of time Must be payable to a definite person or according to his order Must be properly stamped It must be dated

Acceptance of Bill of Exchange

Mere drawing of bill does not make it valid and legal document; it must be accepted by the drawee.

Essentials of valid acceptance

Instrument in writing Must contain an order to pay, which is express, certain and unconditional Drawer, Drawee and Payee must be certain Instrument must be duly signed by the drawer Amount of money to be paid must be certain and ascertainable

Essential features of a Bill of Exchange

Payment must be in legal tender of money Bill may be payable on demand or after a specified or definite period of time Must be properly stamped as prescribed by Indian Stamp Act It must be dated Bill drawn must be accepted by drawee before payment can be claimed.

Essentials of a Valid Acceptance of a Bill of Exchange

Acceptance must be in writing and oral acceptance is not sufficient Signed by the drawee Acceptance and signature must be on the bill itself whether on its face or back Acceptance must be completed by delivery of the bill to the holder or giving notice of acceptance to him Acceptance can be done only by the drawee

Essentials of a Valid Acceptance of a Bill of Exchange

Acceptance must be absolute and unconditional Presentment for acceptance is compulsory

Maturity and Days of Grace

A Bill of Exchange may be payable on demand or at a specified date and after a specified period on time If time of payment is not mentioned, the instrument is payable on demand Maturity of Bill of Exchange is the date at which it falls due Every bill of exchange is payable at maturity on the third day after the day on which it is expressed to be payable. 3 days are known as days of grace.

 A cheque or promissory note or Bill payable at sight or on demand is not entitled to days of grace.

Presentment for Payment

Should be made by the holder of the bill or his authorised agent Should be made to the acceptor of the bill or to his duly authorised agent Should be made during the usual hours of business Time bills should be resented for payment at maturity including 3 days of grace Demand bills must be presented within reasonable time

Presentment for Payment

Like pro-notes, a Bill of Exchange may be made payable by installments and each installment is entitled to 3 days of grace A bill payable at a specified place and not elsewhere must be presented for payment at that place If place is not specified, it should be presented at the usual place If acceptor cant be found in his place of business or has a fixed residence then presentment can be made to him in person wherever he can be found

Accommodation Bill
When a bill is drawn, accepted or endorsed without any consideration, it is called an accomodation bill. Such bills are drawn to provide financial help to another. When the bill is accepted, it is discounted with the bank and proceeds are shared by the parties

Ambiguous Instruments
An instrument owing to its faulty drafting may be construed either as a bill of exchange or as a promissory note, such instruments are known as ambiguous instruments The holder may treat it either as a bill or a promissory note. Once he elects, he cannot change and treat it in different manner.

Inchoate Instrument
An instrument which is incomplete in some respect is called an inchoate instrument The holder gets authority to make or complete it, for any amount not exceeding the amount covered by the stamp This rule is based on the principle of estopel

Negotiation back or Circuity of Action

When a bill of exchange or promissory note is negotiated back to a prior party, the prior party goes back to his former position, and he cannot enforce payment of the instrument against any intermediate party to whom he was previously liable because of his prior endorsement. An endorser is liable to all parties who come after him but not to prior parties. All prior parties are liable to him. There is an exception when the instrument is negotiated back to a prior party.

Noting
Procedure taken on dishonor of a bill of exchange When a pro-note or a bill of exchange is dishonored the holder, by giving notice of dishonor can sue the drawer and the endorsers. In order to get evidence for that purpose the dishonored instrument is handed to a Notary Public, who present it on behalf of the holder so as to obtain legal proof of dishonor.

Noting
Noting must be made by the Notary within reasonable time after dishonor and must contain
Fact of dishonor Date of dishonor Reasons if any, assigned for dishonor Where the instrument had not been expressly dishonored, the reason why the holder treats it as dishonored Notary charges The reference to the notarys register

Protesting
When a pro-note or a bill has been dishonored by non-acceptance or non-payment, the holder may within a reasonable time, cause such dishonor to be noted and certified by a notary public. Such a certificate is called Protest. Protest is a formal notarial certificate attesting the dishonor of a pro-note or bill

Protesting
A protest in order to be valid, must contain the following
The instrument or literal transcript of the instrument The name of the party for and against whom the instrument is protested The facts and reasons for dishonor The place and time of dishonor or refusal to give better security The signature of the Notary Public making the protest In case of acceptance for honor or payment for honor the name of the person accepting or paying and the name of the person for whose honor it is accepted or paid

Protest for better security

When the acceptor becomes a bankkrut or suspends payment before maturity or when his credit is publicly impeached, the holder may within a reasonable time, cause such facts to be noted and certified and such a certificate is called a protest for better security.

Payment for Honor

When a bill has been noted or protested for nonpayment, any person includin a party already liable under the instrument may pay the same supra protest for honor of any party liable to pay the same. Such payment is called payment for honor and the person so paying is called payee for honor In India noting alone is sufficient to enable a person to pay it for honor It is made after maturity, after default b the drawer or the acceptor and need not be by a person who is not already liable on the bill.

Acceptance for Honor

It has to be made before the bill is overdue and by a person who is not already liable on the bill. Consent of the holder is necessary unlike payment for honor

Dishonor by Non-acceptance
A bill is said to be dishonored if it is not accepted within 48 hours from the time of presentment or it is not paid If bill is not accepted Drawee is incompetent to contract Drawee is fictitious person or after a reasonable search cannot be found Drawee refuses to accept when presentment is made to him

Notice of Dishonor
The drawer and all the endorsers of the bill are liable to the holder if the bill is dishonored. Any person to whom notice of dishonor is not sent is discharged from his obligations.

Notice of Dishonor
Must be given by holder Must be given to all parties Must be given within a reasonable time of dishonor May be oral or written or partly both May be given in person or through messenger or by post Must be sent to lace of business Should give info as to identity of the instrument, date, amount, parties, maturity and whether dishonored by non-acceptance or non-payment.

Discharge of a Bill of Exchange

Payment on or before due date Renewal of Bill Failure to present the bill for acceptance in due time Failure to present the bill for payment in due time Cancellation of the bill by mutual consent of the parties Failure to give notice of dishonor Material alteration in the bill without the consent of other parties

Cheque
A cheque is a bill of exchange and not expressed to be payable otherwise than on demand Sec 6 Amendment Act 2002 substituted the definition for Sec 6 : 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 truncated cheque and a cheque in electronic form

Essentials
Instrument in writing (may be in electronic form) Must contain an order to pay money only Order must be unconditional Cheque must be signed by maker or drawer Cheque must be drawn on a specified banker Sum payable must be certain Cheque is always payable on demand

Essentials
Payee of cheque must be certain Cheque should bear a date Delivery of the cheque is essential Cheque need not be stamped

Parties : Drawer or Maker (Account Holder), Drawee (Bank) and Payee (Person presenting the cheque for payment). There may also be endorser and endorsee

Liability of parties
Drawer Undertakes that on due presentment, the cheque will be paid. Endorser Similar liabilities to the drawer unless the words sans recours or 'without recourse' are added after the endorser's signature. A person who signs a cheque other than as payer or endorser can still be liable if it can be shown that at the time of signing that was their intention.

Liability of parties
Other people who have possession of the cheque at some time:
Holder -- Payee or endorser of a cheque who is in possession of it. -- Bearer of a bearer cheque. Holder for value -- Person to whom the cheque has been negotiated after actual consideration has been introduced into the chain. -- Can enforce it against everyone who became liable prior to the introduction of consideration.

Liability of parties
Other people who have possession of the cheque at some time:
Holder in due course -- Person who has given consideration for the cheque and has no notice of any defect in title of prior holders. -- Can enforce the cheque against all parties liable. -- Can therefore have greater rights than the immediate transferor.

Types of Cheques
Open bearer cheque : Order to the bank to pay to any bearer with good title so that anybody who takes the cheque in good faith and for value gets title to it. Open order cheques : Have 'or order' substituted for 'or bearer', so they must be endorsed by the payee. Bank cheques : Bank cheques (or bank payment orders) are drawn by the bank (or bank) upon itself, and are a guarantee that they will be honoured where the customer has paid for them.

Types of Cheques
Crossed cheques The object of the crossing is to hamper or prevent its negotiation by a person who may have obtained it wrongfully.

Crossing
There are only two kinds of crossing recognised under the Act:
General crossing Two transverse parallel lines drawn across the face of the cheque which act as a direction to the bank that the cheque must be paid into an account. 'Account payee only' This is not recognised under the Act but is still a direction to a collecting institution to make reasonable enquiries if a person other than the payee collects the cheque.

Crossing
There are only two kinds of crossing recognised under the Act:
Not negotiable crossing The addition of the words 'not negotiable' between the two transverse parallel lines. -- Holder therefore takes subject to equities (defects in title). -- A 'not negotiable' crossing is effective against a holder in due course since it puts them on notice that the cheque might be stolen. -- The cheque is still transferable but is now subject to the nemo dat rule. -- It must be paid into a bank account.

Method of negotiation
Bearer cheque By delivery only (i.e. hand over cheque). Order cheque By endorsement plus delivery.
By crossing out the words 'or bearer' it becomes an 'order' cheque.

Dishonour of cheques
When payment must be refused
When the drawer has countermanded payment When the banker has received notice of customers death When the banker has received notice of customers insanity When the bank has received order prohibiting payment out of fund belonging to the customer Money is held in trust and cheque is drawn in breach of trust Bank has knowledge of any defect int itle of party presenting cheque

Dishonor of cheques
When payment may be refused
When form of cheque is doubtful Presented at a branch other than the one at which the drawer has account Account payee cheque If presented outside business hours Drawers signature on the cheques is found forged When cheque is found mutilated Endorsements appearing on cheque are irregular Amount specified in words and figures differ When an undated or post-dated cheque is presented for payment

Cheque Return Memo

Statutory notice demanding payment of value of dishonored cheque within 15 days of notice should be given by payee Such notice should be given within 15 days of receipt of intimation from the Bank that the cheque is dishonored Such intimation is called Cheque Return Memo

Wrongful dishonor of Cheques/ Bouncing of Cheques

If Banker dishonors without proper grounds, he has to compensate the customer for any loss or damage caused by such dishonor. When a cheque is dishonored, Payee or holder has right against the drawer but not against the banker but not against the banker even if dishonor was not justified.

Penal action for dishonor of cheques

Drawer of cheque is liable to penalties in case of dishonor of the cheque for insufficiency of funds in the account Punishment : imprisonment for a term which may extend to one year or with fine which may go upto twice the amount of the cheque or both.

Conditions for penal action

Cheque has been dishonored due to insufficiency of funds only Cheque has been issued in discharge of whole or part of a legally enforceable debt or liability; cheque given as a gift will not fall in this framework Cheque should have been presented within 6 months Payee or holder should give notice demanding payment within 30 days of dishonor and the reason insufficiency of funds.

Conditions for penal action

Drawer can make payment within 15 days of receipt of the notice and only if he fails to do so, he is liable to be prosecuted Complaint can be made only by payee or holder in due course within 30 days of cause of action

Offence by Companies
Person who was in charge of and was responsible to the company for the conduct of the business at the time of offence shall be guilty of offence Director, Manager, Secretary or any other officer shall be liable if offence has been committed with his consent or attributable to any neglect on his part. He will not be liable if
He proves that the offence was committed without his knowledge He exercised all due diligence to prevent the commission of such offence

Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002

Certificate of bouncing issued by banks concrete evidence in the court of law Jail term for accused enhanced to 2 years Period of sending notice by payee to drawer extended to 30 days from 15 days Court can take cognizance of complaint after the prescribed period of one month, provided sufficient cause exists for not filing the complaint Trial shall be conducted as expeditiously as possible and shall be concluded within 6 months

Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002

Court shall presume the fact of dishonor of cheque, unless and until such fact is disproved Provisions of Information Technology Act, 2000 are made applicable to Negotiable Instruments Act in relation to electronic image of truncated cheque and a cheque in electronic form

Statutory Protection to the Collecting Banker

Collecting Banker Bank who collects the cheque through the bankers clearing house Can claim statutory protection if
Protection for collection of crossed cheques only Collection on behalf of customers Collection as an agent of the customer Received payment in good faith and without negligence

Collecting banker will have to be cautious when collecting a third party cheque for a customer

Demand Draft
Also known as Bank Draft Drawn by one office of a bank upon another office of the same bank Similar to cheque An order to pay money Cannot be made payable to bearer on demand

Discharge of Negotiable Instrument

A Negotiable Instrument is said to be discharged when the rights and obligations created under the instrument are extinguished and there is no course of action on it. When an instrument is discharged the drawee is released from liability and it loses the capacity of negotiation

Discharge of Negotiable Instrument

Negotiable Instrument can be discharged by
Payment of amount due Cancellation Lapse of time Operation of law such as an order of insolvency (Court discharging the insolvent) Negotiation back Express Waiver Material Alteration

Discharge of One or More Parties to Negotiable Instrument

A party is said to be discharged from his liability when his liability on the instrument comes to an end When some of the parties to a negotiable instrument are discharged, the instrument continues to be negotiable and the undischarged parties remain liable on it Discharge of one or more parties to an instrument does not discharge the instrument

Discharge of One or More Parties to Negotiable Instrument

By Cancellation (When holder deliberately cancels the name of any party [by drawing a line through the name] liable on the instrument, such party and all subsequent endorsers who have right of action against the party are discharged from liability; if maker / acceptors name is cancelled the instrument is discharged) By Release or Waiver (Holder releases any party by method other than cancellation; i.e., by a separate agreement of waiver, release; all subsequent parties are also discharged)

Discharge of One or More Parties to Negotiable Instrument

By Payment (Payment in due course to the holder or at maturity, all parties are discharged) By not giving notice of dishonor (If any party is not served notice of dishonor is discharged from liability; unless the circumstances are such that no notice of dishonor is required to be sent) By non-presentment for acceptance of a bill (Holder makes a default in not presenting the bill all parties liable are discharged) By delay in presenting cheque

Discharge of One or More Parties to Negotiable Instrument

By material alteration (makes it void; discharges the instrument itself and all parties not consenting to the change are discharged; parties to the instrument after alteration are liable) By Negotiation back (If acceptor becomes holder in due course) By Operation of Law