Negotiable Instruments Act, 1881

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Negotiable Instrument

Means a written document in favour of some person and which is freely transferable. Section 13 defines a Negotiable Instrument as:

A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer. Any other instrument 5/22/12 possessing features of a Negotiable

Essential Characteristics

Free Transferability

Its transferable, by mere delivery where payable to bearer; and by endorsement and delivery where payable to order. An instrument marked non-transferable can never be a negotiable instrument, e.g. FDR.

Negotiability
i.e., title of the transferee who is a holder in due course shall be good even 5/22/12

Essential Characteristics

Transferability Infinitum
A

negotiable instrument can be transferred infinite number of times till its satisfaction.

Subject to certain Presumptions

Every negotiable instrument is deemed to have been made, drawn, accepted, endorsed, negotiated or transferred for consideration. 5/22/12

Types of Negotiable Instruments

Promissory Note Bill of Exchange Cheque

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Promissory Note

A Promissory Note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to, or to the order of, certain person or to the bearer of the instrument (Section 4).
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Characteristics of a Promissory Note

Instrument in writing Contains promise to pay Unconditional undertaking Signed by the maker Maker must be certain Payee must be certain Promise should be to pay money
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Characteristics of a Promissory Note

Amount should be certain May be payable in installments May be payable on demand or after a specified period. Cannot be drawn payable to bearer by any person other than RBI/Central Govt. or under authority from RBI/Central Govt.
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Must be duly stamped.

Bill of Exchange

Section 5 defines a Bill of Exchange as an instrument in writing containing an unconditional order signed by the maker directing to pay a certain sum of money only to, or to the order of a certain person, or to the bearer of the instrument. It is a written undertaking from the creditor to the debtor, to get the payment after a fixed period. 5/22/12

Bill of Exchange

Contains an unconditional order to pay instead of Promise or Request to pay. There are three parties, viz. Drawer, Drawee and Payee. Cannot be drawn payable to Bearer on Demand May be drawn payable on demand or payable to bearer after a certain 5/22/12 period of time

Types of Bills of Exchange

Inland and Foreign Time and Demand Trade and Accommodation

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Cheque

Section 6 of the Negotiable Instruments Act, defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Further, the expression includes the electronic image of a truncated cheque and a cheque in the electronic form.
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Cheque

A truncated cheque means 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.
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Cheque

A cheque is a bill of exchange with additional qualities:

It is drawn on a specific banker It is payable on demand Includes electronic image of a truncated cheque and in electronic form.

All cheques are bills of exchange, however, all bills of exchanges are not cheques.
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Crossing of Cheque

Its a direction to the paying banker that payment should not be made across the counter. Its a coded expression represented by two transverse parallel lines simply or with certain words in between like & Co., Notnegotiable, Payees A/c only or any combination thereof across the face of the cheque. This is also called 5/22/12

Crossing of Cheque

Where a cheque bears across its face name of a particular bank either with or without two transverse parallel lines, it is said to be crossed specially. It may also be accompanied by words like Notnegotiable, Payees A/c only. In case of special crossing, proceeds of the cheque can be collected only through the specified banker and no 5/22/12

Crossing of Cheque

Not negotiable doesnt render the cheque non-transferable. The only effect is that the title of the transferee shall be subject to the title of the transferor, it cannot be superior. A/c Payee only Crossing has the effect of rendering a cheque non5/22/12 transferable.

Crossing of Cheque

Not Negotiable + A/c Payee only Crossing: Not only that the proceeds be credited to the account of payee only but also the payee is a bonafide rightful holder thereof. Opening of Crossing: Crossing may be opened by cancellation of crossing by putting X mark and writing the words Pay cash under the full signatures of the Drawer. 5/22/12

Cheque Bouncing

Section 138 provides punishment for bouncing of cheques, i.e., dishonour for insufficiency of funds. Punishment provided is imprisonment up to 2 years or fine up to double the amount of the cheque or both.
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Cheque Bouncing Conditions

Insufficiency of funds includes:

stop-payment closure of account directing the payee not to present

Legally enforceable debt or liability. Presentment within 6 months from 5/22/12 the date on which it is drawn or

Payee/holder should have given notice demanding payment from the Drawer within 30 days of receipt of information of dishonour of cheque from bank. The drawer must have failed to pay within 15 days of such period of notice.
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Cheque Bouncing Conditions

Inchoate Instruments

Where one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments then in force in India, and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as then case may be, upon it a 5/22/12 negotiable instrument, instrument,

Parties to a Negotiable Instrument

Bill of Exchange:

Drawer Drawee Acceptor Payee Indorser Indorsee Holder Drawee in case of Need

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Parties to a Negotiable Instrument

Promissory Note

Maker Payee Holder

Cheque

Drawer Drawee Payee

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Holder (Sec 8)

A person is the holder of the instrument if he:

Is entitled in his own name to the possession of the negotiable instrument and Is entitled to receive or recover the amount due thereon from the parties thereto.

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In order to constitute the person a

Holder

Mere right to have possession of the instrument will not constitute the possessor a holder thereof. He should be also entitled to recover or receive the amount. Therefore:

The holder must have obtained the instrument in a lawful manner. The holder must have a right to sue in his own name to recover the amount.

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Holder in Due Course (Sec 9)

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 it becomes payable having sufficient cause to

without 5/22/12

Holder in Due Course

Must qualify these essentials:

Must be a holder for valuable consideration Must become a possessor of the instrument before its date of maturity. He must do so in good faith Must accept the negotiable instrument in complete, and regular on the face of it.

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Privileges of a Holder in Due Course

Instrument purged of all defects Rights not affected in case of an inchoate instrument All prior parties liable No effect of conditional delivery No effect of absence of consideration or presence of unlawful consideration
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Liabilities of Parties to Negotiable Instruments

Drawer Maker of a promissory note or drawee of a bill of exchange Bank as the drawee of the cheque Endorser Intervening parties

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Transfer of Ownership of Negotiable Instrument

By Negotiation

Means transfer of an instrument from one person to another, to constitute the person a holder of the instrument.

By Assignment
Means transfer of ownership in an article by means of a written and registered document, under the Transfer of Property Act. 5/22/12

Negotiation

By Delivery

Voluntary transfer of the possession of the instrument.

By Endorsement and Delivery

Writing the name of a person on the back of the instrument, for the purpose of negotiation.

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Kinds of Endorsement

General or Blank Special or Full Partial Restrictive Conditional

Sans Recourse Facultative Sans Frais

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Endorsement

By Legal Representative Intentional Cancellation Of Endorsement Negotiation Back

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Discharge of Parties

By Payment By Cancellation By Release By Default of the Holder By Material Alteration By Bill being in the hands of Acceptor
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Dishonour

By Non-Acceptance By Non-Payment By Insufficiency of Funds

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Dishonour

Noting: Official proof of presentment and dishonour of an instrument. Needed for a bill of exchange or promissory note. Protesting: Formal certificate of dishonour issued by notary to the holder of the instrument. It contains:

The instrument or its copy Names of the parties for and against the

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