NEGOTIABLE INSTURMENTS

NEGOTIABLE INSTRUMENTS ACT, 1881

 Money is the most common medium of exchange in modern business. This is because money has the exchange value and also freely transferable. In commercial transactions, it is not always possible for a businessman to carry huge amounts of cash with him. It is inconvenient and sometimes risky. Therefore, the need for some safe and effective substitute for money lead businessmen to adopt a method of exchanging documents Bills of Exchange, cheques, etc. , in place of money. These documents, which are used as a substitute for hard cash (money) are known as negotiable instruments. The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881.

INTRODUCTION

WHAT IS A NEGOTIABLE INSTRUMENT?

NEGOTIABLE means transferable by delivery or by endorsement and delivery. INSTRUMENT means a written document by which a right is created in favor of some person or entity. Thus, NEGOTIABLE INSTRUMENT means a written document transferable by delivery. According to NI Act, A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

Freely transferable The property in a negotiable instrument passes from one person to another by delivery, if the instrument is payable to bearer, and by endorsement and delivery if it is payable to order. Title of holder free from all defects A person taking an instrument bona fide and for value, known as a holder in due course, gets the instrument free from all defects in the title of the transferor. He is not in any way affected by any defect in the title of the transferor or of any prior party. He is also not affected by certain defenses which might be available against previous holders, for example, fraud, provided he himself is not a party to it. Recovery The holder in due course can sue upon a negotiable instrument in his own name for the recovery of the amount. Notice The transferee of the instrument need not give notice of transfer to the party liable to pay.

KINDS OF NEGOTIABLE INSTRUMENTS

Two kinds: 1. Negotiable by statute: The NI Act mentions only three kinds of instruments, i.e., Promissory note, Bill of Exchange and Cheque. 2. Negotiable by custom or usage: Though the NI Act speaks of only three kinds of negotiable instruments, it does not mean that there cannot be any other negotiable instruments. Example: Hundi, treasury bills, bankers draft, share warrants, bearer warrants, bearer debentures, etc., are negotiable instruments recognized by the custom, usage or Company Act. However, postal order, money order, deposit receipt, bills of lading, railway receipts, dock warrants, etc., are not negotiable instruments although these documents are transferable by delivery and endorsement, but they cannot give a better title to the transferee.

PRESUMPTIONS
Presumptions Certain presumptions apply to all negotiable instruments, unless contrary is proved. [S. 118 and 119] Consideration: Every negotiable instrument is presumed to have been made, drawn, accepted, indorsed, negotiated or transferred for consideration. This would help a holder to get a decree from a court without any difficulty. Date: Every negotiable instrument bearing a date is presumed to have been made or drawn on such date. Time of acceptance: When a bill of exchange has been accepted, it is presumed that it was accepted within reasonable time of its date and before its maturity. Time of transfer: Every transfer of a negotiable instrument is presumed to have been made before its maturity.

 Order of endorsement: The endorsements appearing upon a negotiable instrument are presumed to have been made in the order in which they appear thereon. Stamp: When an instrument has been lost, it is presumed that it was duly stamped. Holder in due course: Every holder of a negotiable instrument is presumed to be a holder in due course. Proof of protest: In a suit upon an instrument which has been dishonored, the court, on proof of the protest, presumes the fact of dishonor, unless and until such fact is disproved.
The above presumptions are rebuttable by evidence. If anyone challenges any of the presumptions, he has to prove his allegation. These presumptions would not arise where an instrument has been obtained by any offence, fraud or unlawful consideration.

NEGOTIABLE INSTRUMENTS NOT DULY STAMPED

The effect of the negotiable instruments not being duly stamped or of non-cancellation of their adhesive stamps is that the same is inadmissible in evidence.

PROMISSORY NOTE (S.4)

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 only to, or to the order of a certain person, or to the bearer of the instrument. Bank notes and currency notes are not treated as promissory notes. The word or to the bearer of the instrument in the definition of the promissory note are inoperative in view of the provisions of the Reserve Bank of India Act which prohibits the issue of a promissory note payable to bearer by anybody other than the Reserve Bank or Central Government. The person who makes the promissory note is called the maker. The person to whom the payment is to be made is called the payee.

ESSENTIALS OF A PROMISSORY NOTE

It must be in writing. It must contain an express undertaking or promise to pay. The promise to pay should be unconditional. It must be signed by the maker. The parties, i.e., the maker and the payee, must be certain. The sum payable must be certain. It must contain a promise to pay money. It must bear the necessary stamp under the Indian Stamp Act, 1899.

SPECIMEN OF A PROMISSORY NOTE

Sri. Ram Mohan, R 7/25, Raj Nagar, Meerut 250001 April, 15,2008 Rs. 20,000/- only
PAYEE

Three months after date I promise to pay to Prakash Rao or to his order the sum of rupees Twenty Thousand for the value received.

To Sri. Prakash Rao 140 Divya Nagar, Meerut 250001

Stamp

MAKER
Signature Ram Mohan

PROMISSORY NOTE - ILLUSTRATION

S. NO 1. 2. 3. 4. 5. I owe B Rs. 1000. I am liable to pay A Rs.1000. I have borrowed Rs. 5000 from Y. I promise to pay B Rs.1000 after receiving money from Y. I promise to pay B Rs.1000 as soon as I am able to. INSTRUMENT REMARKS Acknowledges debt but no promise to pay. -do-doConditional promise to pay. -do-

6.
7. 8.

I promise to pay B Rs.1000 after his successful completion of studies.

I promise to pay B Rs.500 and other charges. I promise to pay Rs.500 but after deducting money owed by him.

-doPayable sum is uncertain. -do-

9.
10.

I promise to pay B or his order Rs.500.

I acknowledge myself to be indebted to B in Rs.1000 to be paid on demand, for value received.

Promissory Note. Payable sum certain.

Promissory Note.

BILL OF EXCHANGE (S.5)

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. There are three parties to a bill of exchange The person who makes the bill is called the drawer. The person who is directed to pay is called the drawee. The person to whom the payment is to be made is called the payee.

SPECIMEN OF BILL OF EXCHANGE

Sham of Delhi buys goods on credit from Krishnan of Bombay for Rs.500 to be paid 3 months after date. Krishnan buys goods from Ram of Delhi for Rs. 500 on similar terms. Now Krishnan may order Sham to pay the sum of Rs. 500 to Ram. This order will be a bill of exchange.

Bombay, July 10, 1987

PAYEE Rs. 500 Three months after date pay to Ram or order the sum of five hundred rupees, for value received. DRAWEE/ACCEPTOR

To Sham 235, Subhash Marg, Delhi 110 006

Accepted Sham Sd/-

Stamp Krishan Sd/DRAWER

ESSENTIALS OF BILL OF EXCHANGE

It must be in writing. It must contain an order to pay. The order must be unconditional. It requires three parties, i.e., drawer, drawee and payee. It must be signed by the drawer. The sum payable must be certain. It must contain an order to pay money. It must bear the necessary stamp under the Indian Stamp Act, 1899.

CHEQUE (S.6)
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. Explanation I For the purpose of this section, the expressions
a) 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 in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system; 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.

b)

Explanation II For the purpose of this section, the expression clearing house means the clearing house managed by the Reserve Bank of India or a clearing house recognized as such by the Reserve Bank of India.

SPECIMEN CHEQUE
CROSSING OF CHEQUE

Date..

PAYEE

Pay .....or bearer Rupees .

SBGEN A/c. No. 628601506868

. ..

DRAWEE/BANKER DRAWER

Sd/Pankajan

CROSSING OF CHEQUE
A crossed cheque is payable only through a collecting banker and not directly at the counter of the bank. A cheque is said to be crossed when two parallel transverse lines, with or without any words, are drawn on the left hand top corner of the cheque. The crossing may be of three types: general, special or restrictive. In case of not negotiable crossing the title of the transferee cannot be better than that of the transferor. A cheque may be crossed by the drawer or the holder, or the banker.

GENERAL CROSSING (S.123)

Where a cheque bears across it face, two parallel transverse lines either with or without any words, that shall be deemed to be crossed generally. The words used are & Co., Not Negotiable or a combination of both. Where a cheque is crossed generally, the drawee banker shall not pay it unless it is presented by a banker.(S.126)

SPECIMENS OF GENERAL CROSSING

SPECIAL CROSSING (S.124)

Where a cheque bears across it face an addition of the name of a banker, either with or without the words not negotiable, and company, the cheque is deemed to be crossed specially. The payment of a specially crossed cheque can be obtained only through the particular banker whose name appears across the face of the cheque or between the transverse lines, it any.

SPECIMEN OF SPECIAL CROSSING

RESTRICTIVE CROSSING
In addition to the two statutory types of crossing (general or special) discussed above, there is another type which has been adopted by commercial and banking usage. In this type of crossing the words A/c Payee are added to general or special crossing. The words A/c Payee on a cheque are a direction to the collecting banker that the amount collected on the cheque is to be credited to the account of the payee. A/c Payee cheques are negotiable.

SPECIMEN OF RESTRICTIVE CROSSING

NOT NEGOTIABLE CROSSING (S.130)

The effect of the words not negotiable on a crossed cheque is that the title of the transferee of such a cheque cannot be better than that of its transferor. The addition of the words not negotiable does not restrict the further transferability of the cheque. The object of crossing a cheque not negotiable is to afford protection to the drawer or holder of the cheque against miscarriage or dishonesty in the course of transit by making it difficult to get the cheque so crossed cashed, until it reaches its destination. Example: W drew a cheque cross not negotiable in blank and handed it to his clerk to fill in the amount and the name of the payee. The clerk inserted a sum in excess of her authority, and delivered the cheque to P in payment of a debt of her own. Held, that the clerk had no title to the cheque and as such P had no better title and therefore W was not liable. [Wilson & Meerson v. Pikering, (1946) K.B. 422]

BOUNCING OF CHEQUE (S.138)

A drawer of a dishonored (bounced) cheque shall be deemed to have committed an offence. For this offence, the punishment provided in the Act is imprisonment upto two years or with fine which may extend to twice the amount of the cheque or with both.

CONDITIONS TO BE FULFILLED FOR DISHONOR OF CHEQUE

Cheque should have been dishonored due to insufficiency of funds. The court have held the following amounting to dishonor for insufficiency of funds:
i. ii. iii. iv. Stop payment instructions to the payee bank. Request to payee not to present the cheque till further intimation. Cheque received back from the payee bank with the remarks Account Closed. However, remarks Refer to Drawer will not constitute dishonor for insufficiency of funds because a cheque may be referred to a drawer for reasons other than insufficiency of funds.

The cheque should be presented within 6 months or within the period of validity.

The cheque was issued for the discharge of legally enforceable debt or other liability (not for charity, marriage or birthday presents). The payee is to give notice demanding payment, within thirty days, from the drawer, on receipt of information of dishonor of cheque from the bank. The drawer is liable only if he fails to make payment within fifteen days of such notice period. A written complaint is made to a Metropolitan Magistrate or a Judicial Magistrate of the first class is made within one month of cause of action (a claim in law and fact sufficient to demand judicial attention) arising.

DISHONOR OF CHEQUE OFFENCES BY COMPANIES (S.141)

The word company means any body corporate and includes a partnership firm, or other association of individuals. Every person who at the time when the offence was committed, was in-charge of, and was responsible to, the company for conducting it business, shall be deemed to be guilty as also the company itself of the offence.

 Persons in-charge not liable if they can prove that:

The offence was committed without their knowledge, or They had exercised due diligence to prevent the commission of such offence.

The remedy available to the payee (or any other holder) of a cheque dishonored for the reasons mentioned in S.138 of the Act is an additional remedy. Since, the amount of the cheque dishonored basically constitutes a debt, the holder of the cheque can sue the drawer under the civil law to claim his debt.

CLASSIFICATION OF NEGOTIABLE INSTRUMENTS

BEARER AND ORDER INSTRUMENTS

A negotiable instrument is payable to bearer When it is expressed to be so payable, or (any person who is in lawful possession of an instrument payable to bearer, as a holder, is entitled to enforce payment due on it) When the only or last endorsement on the instrument is an endorsement in bank. S.13,Exp.2 A negotiable instrument is payable to order When it is expressed to be so payable, or Example: Pay to A or order, Pay to the order of A. When it is expressed to be payable to a particular person, and does not contain words prohibiting or restricting its transfer. S.13,Exp.1 (Pay A One Hundred Rupees)

INLAND AND FOREIGN INSTRUMENTS

A promissory note, bill of exchange, or cheque drawn or made in India and made payable in India, or drawn upon any person resident in India , is deemed to be inland instrument. S.11 (Example: A bill is drawn in Delhi on a merchant in London and accepted payable in Kolkata) All instruments which are not inland instruments are deemed to be foreign instruments. S. 12 Usance: It is the time fixed for the payment of bills drawn in one country and payable in another. It is fixed by the custom of the countries and the length of the usance varies in different countries.

DEMAND AND TIME INSTRUMENTS

A promissory note or bill of exchange is payable on demand
When it is expressed to be payable on demand or at sight or on presentment, or When no time for payment is specified in it. A cheque is always payable on demand.

A bill or note is a time instrument if it is stated to be payable

At a fixed period after its date, or At a fixed period after sight (i.e., after it has been shown to the maker), or On a specified day, or On the happening of an event which is certain to happen.

 A bill drawn, accepted or endorsed without any consideration. Example: A is in need of Rs.1000. He approaches his friend B for borrowing the amount. B is not in a position to lend, but he suggests that A might draw a bill on him which he would accept. If the credit of A is good, he would get the bill discounted with his banker. On the due date, A would pay Rs. 1000 to B who would meet the bill. The bill is an accommodation bill. A is the accommodated party. B is the accommodating party. B signs the accommodation bill as drawer, acceptor, or endorser without receiving value for it and for lending his name to some other person. He is liable on the bill to the holder, and it is immaterial whether, when such holder took the bill, he knew such party to be an accommodating party or not.

ACCOMMODATION BILL

ESCROW (S. 46, Para 3)

When a negotiable instrument is delivered conditionally or for a special purpose as a collateral security or for safe custody only, and not for the purpose of transferring absolutely property therein, it is called Escrow. Example: A and B enter into an agreement on sale of a cottage owned by B at Vagamon. Both, A and B agree that the cheque of Rs. 5 Lakhs as consideration for the cottage shall be delivered by A to C, a reputed person in the locality, on the condition that C will deliver the cheque to B only after As lawyers verify the documents of the property and certify that B has a clear title. The delivery of cheque to Cs safe custody by A is called Escrow and he has to deliver the cheque to B after the conditions of the agreement are fulfilled, otherwise not.

AMBIGUOUS INSTRUMENT (S.17)

Is an instrument which owing to it faulty drafting can be interpreted either as a promissory note or a bill of exchange. Example: A bill is drawn Pay A or order the sum of one thousand rupees. In the margin, the amount stated is Rs.100. This is a bill for Rs.1000.

INCHOATE INSTRUMENT (S.20)

An instrument which is incomplete in some respect. When a person signs and delivers to another a blank or incomplete stamped paper, he authorizes the other person to make or complete upon it a negotiable instrument for any amount not exceeding the amount covered by stamp. The person so signing is liable, in the capacity in which he signed the same, to any holder in due course for such amount. Example: A bill is drawn payable to . or order. Any holder in due course may write his own name as payee in the blank and sue upon the instrument. Example: A owes B Rs. 1000. He gives B a blank acceptance on a bill which is sufficiently stamped to cover any amount upto Rs.2000. B endorses the bill to H, a holder in due course. H who fills up the amount as Rs.2000 can recover the amount.

 When a promissory note or bill of exchange is payable after a specified period, the date on which it falls due, known as date of maturity, has to be calculated. Every instrument payable otherwise than on demand is entitled to three days of grace. Example: A bill or note payable on a specified date, a bill or note payable after sight, a bill or note payable at a certain period after date, and a bill or note payable at a certain period after the happening of a certain event. The instruments which are not entitled to days of grace are:
1. A cheque (as it is intended for immediate payment). 2. A bill or note payable at sight or on presentment or on demand, and 3. A bill or note in which no time is mentioned.

MATURITY AND DAYS OF GRACE (S.22)

 Example: A bill dated 1st January, 2011 is payable four months after date. It falls due on 4th May, 2011. Example: A bill dated 1st January, 2011 is payable 60 days after date. It falls due on the 4th March, 2011 Example: A bill payable thirty days after sight is presented for sight on 1st March, 2011. It falls due on 3rd April, 2011. Example: A bill, dated 13th January, 2007, is payable three months after date. It falls due on 16th April, 2007, which happens to be a Sunday. As such it will fall due on 15th April, 2007, i.e., the preceding business day. (S.25 When the day on which a promissory note or bill of exchange is at maturity is a public holiday, the instrument is deemed to be due on the next preceding business day).

PAYMENT IN DUE COURSE

It means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any 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. S.10

 The capacity of a person to incur liability as a party to a bill of exchange, promissory note or cheque is co-extensive with his capacity to contract. Minor: A minor may draw, indorse, deliver and negotiate a negotiable instrument so as to bind all parties except himself that is; he may operate as a cannel to convey title and liability but not to originate it. Persons of unsound mind: Bills and notes drawn or made by persons of unsound mind are void as against them (though the other parties are liable).

CAPACITY OF PARTIES

 Corporation: A trading company has implied power, and a non-trading company must take express power, to draw, make, indorse, accept, negotiable instruments. Agent: An agent who signs a negotiable instrument for his principal may bind his principal if he
Signs the principals name or states on the face of the instrument that he signs as agent, and Acts within the scope of his authority.

Partners: In a trading firm each partner has implied authority to bind his co-partners by drawing, indorsing, accepting or negotiating bills, notes and cheques.

HOLDER AND HOLDER IN DUE COURSE

Holder is any person entitled in his own name
To possession of an instrument, and To receive or recover the amount due thereon from the parties thereto. S.8 Holder in due course is 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 indorsee thereof if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived this title. S.9

PRIVILEGES OF A HOLDER IN DUE COURSE

He can fill in an inchoate stamped instrument for any amount provided the stamp is sufficient to cover the amount. S.20 Every prior party to a negotiable instrument is liable thereon to him until the instrument is duly satisfied. S.36 If a bill or note is negotiated to him, the other parties to the bill or note cannot avoid liability on the ground that the delivery of the instrument was conditional or for special purpose only. S.46 Once a negotiable instrument passes through his hands, it gets cleansed of all its defects. S.52

 The defenses on the part of a person liable on a negotiable instrument that it has been lost, or obtained from him by means of an offence or fraud or unlawful consideration, cannot be set against him. S.58 In a suit on a negotiable instrument by him, the validity of the instrument as originally made or drawn cannot be denied. S.120 No endorser of negotiable instrument is, in a suit thereon by a subsequent holder, permitted to deny the signature or capacity to contract of any prior party to the instrument. (Sec.122)

NEGOTIATION
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. S.14 Example: A hands over a cheque to B asking B to keep it in safe custody, the cheque is not negotiated to B, because the delivery of the cheque to B, as a bailee, does not make him its holder. If an instrument is payable to bearer, it is negotiable by delivery thereof. S.47 Example: A is the holder of a negotiable instrument payable to bearer. He delivers it to Bs agent against price of goods purchased from B. The instrument has been negotiated. If an instrument is payable by order, it is negotiable by the holder by endorsement and delivery thereof. S.48 Example: A owes B Rs. 1000. He makes a promissory note for the amount payable to B. He dies and the note is afterwards found among his papers and delivered to B. B cannot sue upon the note if delivery to him.

INDORSEMENT
It means writing of a persons name on an instrument for purpose of negotiation. The person who endorses the instrument is called the endorser and the person to whom it is indorsed is called the endorsee.

TYPES OF INDORSEMENT

BLANK OR GENERAL
An endorsement is said to be blank or general if the endorser signs his name only on the face or back of the instrument. S. 16(1) A blank endorsement specifies no endorsee and the instrument in consequence becomes payable to bearer even though originally it was payable to order (Sec.54) Example: A bill is payable to the order of Ram. Ram signs on the back of the bill. This is endorsement in blank by Ram. In this case the property in the bill may pass by mere delivery as if the bill is payable to bearer.

SPECIAL OR FULL
If an endorser signs his name and adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person. Example: An endorsement Pay Ram or order, or Pay to Ram followed in both the case by signature of the endorser is an endorsement in full.

RESTRICTIVE
An endorsement is said to be restrictive when it prohibits or restricts the further negotiability of the instrument. It merely entitles the holder of the instrument to receive the amount on the instrument for specific purpose. Example: (Restrictive) Pay the contents to C only, Pay C for my use, Pay C or order for the account of B. Example: (Does not restrict) Pay C, Pay C value in account with the Canara Bank.

PARTIAL
When an endorsement purports to transfer to the endorsee a part only of the amount of the instrument, the endorsement is said to be partial. A partial endorsement does not operate as a negotiation of the instrument. Example: A is the holder of a bill for Rs.1000. He endorses it thus: Pay B or order Rs.500. This is a partial endorsement and is invalid for the purpose of negotiation.

CONDITIONAL OR QUALIFIED
An endorsement is conditional or qualified if it limits or negatives the liability of the endorser. Example: Pay A or order on the arrival of the ship TITANIC at Mumbai.

NEGOTIATION BACK
When the endorser, after he has negotiated an instrument, again becomes it holder before its maturity, the instrument is said to be negotiated back to the holder. In such a case none of the intermediate holders is liable to him. Example: A bill is drawn payable to A or order. A indorses it to B, B to C, C to D and D to E and E again to A. The endorsement by E to A is a negotiation back. A having been relegated to his original position, cannot sue other parties, for that would only lead to circuity of action.

STOLEN AND LOST INSTRUMENTS

A person who steals or finds a lost negotiable instrument does not acquire a title to the instrument as against the rightful owner. He cannot enforce payment on it against any party thereto. If he obtains payment on it, he is liable to true owner. If the bill or note is payable to bearer, he can negotiate it to a bona fide transferor for value who acquires a good title to it. But, if the bill or note is payable to order and the thief or finder forges the Endorsement, the rightful owner, even a bona fide transferee for value, acquires no title to it.

INSTRUMENTS OBTAINED BY COERCION OR FRAUD

If a negotiable instrument is obtained by coercion or fraud, the person defrauding is not entitled to recover anything. But the defense of coercion or fraud cannot in general be set up against a holder in due course. Examples: On a note for Rs.1000 A forges Bs signature to it as maker. C, a holder, who takes it bona fide and for value. B acquires no title to the bill.

FORGED INSTRUMENTS
Forgery is the fraudulent making or alteration or a negotiable instrument to the prejudice of another mans rights. If any of the signatures on the instrument is forged, the signature in question is wholly inoperative and no person, even if acting in good faith, can acquire rights under it. Example: A bill is endorsed Pay John Brown or order. John Brown must endorse the bill, and if his signature is forged, the bill is worthless.

NEGOTIABLE INSTRUMENTS AND CONSIDERATION (S.43)

Until a contrary is proved it is presumed that every negotiable instrument was made or drawn for consideration. A negotiable instrument made without consideration creates no obligation of payment between parties to the transaction. The defense of absence or failure of consideration is available only between parties in immediate relationship with each other. It is not available against the holder in due course or a person deriving title from him.

As between same parties Example: A, the holder of a bill, transfers it to B, without consideration. B transfers it to C without consideration. C transfers it to D for value. D transfers it to E without consideration. The immediate parties are; A and B, B and C, C and D and D and E. B, C, and E cannot recover the amount from their immediate prior parties, i.e., A,B and D respectively because of absence of consideration.

As between remote parties Example: In the example given above, E can recover the amount of the bill from A, B and C in the manner as D would have done because D is a holder of value. The fact that E gave no value for the bill and that A received none, makes no difference. But, as between E and D, E has got no right as against D because as between these two immediate parties, no consideration passed from E to D.

PRESENTMENT OF A NEGOTIABLE INSTRUMENT

Presentment means showing the instrument to the drawee, acceptor or maker for:
Acceptance, or Sight, or Payment

PRESENTATION FOR ACCEPTANCE

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

MODES OF ACCEPTANCE
An acceptance may be general or qualified.
General acceptance: The acceptance is general when the drawee, while accepting the bill, does not attach any condition or qualification to it. Qualified acceptance: The acceptance is qualified when it is given subject to some condition or qualification. The holder may refuse to take the qualified acceptance, and treat the bill as dishonored by non-acceptance. But, if he takes it he does so at his own risk and discharges all parties prior to himself unless he obtains their consent to such acceptance.

 An acceptance is qualified when it is

1. Conditional Accepted payable when in fund or Accepted payable when a cargo consigned to me is sold. 2. Partial When bill is drawn for Rs.1000 and is Accepted for Rs.200 only. 3. As to Place Accepted payable at the Bank of India or Accepted payable at the Bank of India and nowhere else. 4. As to Time Accepted payable six months after date. 5. Accepted by some of the drawee, but not all - A bill drawn on A, B and C (who are not partners) but accepted by A only.

PRESENTMENT FOR ACCEPTANCE TO WHOM

Presentment for acceptance may be made
To the drawee or his duly authorized agent. To his legal representative if the drawee had died. To his assignee, if the drawee has been declared insolvent. To all the drawees, if there are several drawees unless they are partners or agents of one another. To drawee in case of need.

PRESENTMENT FOR ACCEPTANCE EXCUSED

Presentment for acceptance is excused where:
The drawee is fictitious or incompetent person. He cannot after reasonable search be found. He is dead or insolvent. Although the presentment has been irregular, acceptance has been refused on some other ground. Acceptor for honor-Normally a stranger to a bill cannot accept it, but he may, with the consent of the holder accept the bill in place of the drawee, for the honor of some party liable on the bill. Such an acceptor is known as acceptor for honor.

PRESENTMENT FOR SIGHT

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

PRESENTMENT FOR PAYMENT

Promissory notes, bills of exchange and cheques must be presented for payment to the maker, acceptor or drawee thereof respectively, by or on behalf of the holder. If default is made, the parties other than the parties primarily liable are discharged of their liability. S. 64

TIME FOR PRESENTMENT

It must be made At the place of payment specified in the instrument. If no place is specified, at the place of business or residence. In any other case, wherever the party liable to pay can be found.

PRESENTMENT FOR PAYMENT TO WHOM

Presentment for payment may be made To the duly authorized agent of the drawee, maker or acceptor, as the case may be; Where the drawee, maker or acceptor has died, or his representative; Where he has been declared insolvent, to his assignee. Delay in presentment for payment is excused if it is caused by circumstances beyond the control of the holder.

PRESENTMENT FOR PAYMENT IS NOT NECESSARY

Where it is intentionally prevented by the maker, drawee or acceptor. Where the business of the maker, drawee or acceptor is closed or he cannot after due search be found, or there is no person at the place of payment. Where there is promise to pay notwithstanding nonpresentment. Where the presentment is expressly or impliedly waived. Where the bill is dishonored by non-acceptance. Where the drawee is a fictitious person. Where the presentment becomes impossible. Payment for honor Just as a bill may be accepted for the honor of a party to the bill, it may also be paid for the honor of a party liable to pay the bill.

DISHONOR OF A NEGOTIABLE INSTRUMENT

A bill may be dishonored by
Non-acceptance, or S. 91 By Non-payment S.92 A promissory note or cheque can be dishonored only by non-payment.

 When a negotiable instrument is dishonored, the holder must give a notice of dishonor to all the parties whom he wants to make liable on the instrument. If he fails to do so, except in cases when notice of dishonor may be excused, all the prior parties liable thereon are discharged of their liability. (S.93)
Notice by whom: Notice of dishonor may be given by the holder or by any of the parties liable on the instrument to the prior parties. S.93 Notice to whom: Notice of dishonor must be given to all the prior parties whom the holder seeks to make liable. Such a notice need not be given to the maker of a note, acceptor of a bill or drawee of a cheque. S.93 Form of notice: The notice of dishonor may be oral or in writing and may be sent by post. It may be in any form but it must inform the party to whom it is given that the instrument has been dishonored. It must be given within a reasonable time at the place of business or residence of the party for whom it is intended. S.94

NOTICE OF DISHONOR

NOTICE OF DISHONOR UNNECESSARY: S.98

No notice of dishonor is necessary When it is dispensed with by the party entitled thereto. To charge the drawer, when he has countermanded payment. When the party charged could not suffer damage for want of notice. When the party entitled for notice cannot after due search be found. To charge the drawer when the acceptor is also a drawer. In case of promissory note which is not negotiable. When the party entitled for notice promises to pay unconditionally.

NOTING AND PROTESTING

Noting means the recording of the fact of dishonor by a Notary Public on a dishonored bill, or upon a paper attached thereto or partly upon each. S.99 When a promissory note or bill of exchange 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 formal certificate by the Notary Public is called protest. S. 100

RULES AS TO COMPENSATION (S.117)

The compensation payable in case of dishonor of a negotiable instrument includes, besides the principal amount and interest due, all proper expenses for noting, protesting and for exchange. An endorser who has paid the amount on the instrument is entitled to the amount paid with interest at the rate of six per cent from the date of payment until tender or realization of the instrument and all proper expenses caused by the dishonor. Further the party entitled to compensation may draw a bill at sight or on demand on any party liable to compensate him. Such a bill is referred to as a redraft. The re-draft must be accompanied by the dishonored bill and its protest, if any.

DISCHARGE OF NEGOTIABLE INSTRUMENT

An instrument is said to be discharged when all rights of action under it are completely extinguished and when it ceases to be negotiable. If one or more of the parties (excepting the party who is ultimately liable to pay) is discharged from liability the instrument continues to be negotiable and the other parties continue to be liable on it.

 An instrument is discharged
By payment in due course. S.81 By maker or acceptor becoming the holder. S.90 By express waiver. By cancellation. It may also be discharged like a contract for the payment of money.

 A party to a negotiable instrument may be discharged from liability By payment. S. 82 (c ) By cancellation. S.82 (a) By release. S.82 (b) By allowing drawee more than 48 hours. S.83 By delay in presentment of a cheque. S. 84 By material alteration. Sec. 87 Example: (instances) date, sum payable, time of payment, place of payment, addition of place of payment, rate of interest. These alterations vitiate the instrument. Payment of altered instrument. (Note, Bill or cheque materially altered but do not appear to be so altered, payment on these discharges the party liable if payment is a per apparent tenor of the instrument (as altered). S.89 (1)

 By operation of law which includes discharge by

An order of Insolvency Court discharging the insolvent. Merger (When a judgment is obtained against the acceptor, maker or endorser, the debt under the bill is merged into judgment debt). Lapse of time when the remedy becomes time barred.