The Negotiable Instruments Act, 1881 A negotiable instrument is a written order to pay a fixed sum of money on demand or at a certain time. A negotiable instrument can be transferred from one person to another. Once the instrument is transferred, the holder obtains full legal title to the instrument. Characteristics of Negotiable Instruments: Written instrument with signature: A negotiable instrument is a written document and is considered as complete and effective only when it is duly signed. Negotiable Instrument made or drawn for consideration: It is presumed by law that every negotiable instrument is made or drawn for a consideration. Transfer/negotiation by endorsement/ delivery Promissory Note: Essential Elements of a Promissory Note: 1. Must be in writing. 2. Promise to pay: The instrument must contain an express promise to pay. 3. Definite and unconditional: The promise to pay must be definite and unconditional. If it is uncertain or conditional, the instrument is invalid. 4. Signed by the maker: The instrument must be signed by the maker, otherwise it is incomplete and of no effect. 5. Certain parties: The instrument must point out who the maker is and who the payee is. 6. Certain sum of money: The sum payable must be certain and must not be capable of contingent additions or subtractions. 7. Promise to pay money only: The payment must be in the legal tender money of India. 1 P a g e
State, giving reasons, whether the following instruments are valid promissory notes: (i) (ii) X promises to pay Y, by a promissory note, a sum of ` 5,000, fifteen days after the death of B. X promises to pay Y, by a promissory note, ` 5000 and all other sums, which shall be due. In the first case, the payment is to be made in fifteen days after the death of B. Though the date of death is uncertain, it is certain that B shall die. Therefore the instrument is valid. In the second case- the sum payable is not certain. Hence the Promissory Note is not a valid one. Bill of Exchange: Essentials of a valid acceptance of a Bill of Exchange: Acceptance must be written. Acceptance must be signed: A mere signature would be sufficient for the purpose. Alternatively, the words accepted may be written across the face of the bill with a signature underneath; if it is not so signed, it would not be an acceptance. Acceptance must be completed by delivery: Acceptance would not be complete and the drawee would not be bound until the drawee has either actually delivered the accepted bill to the holder Acceptance may be either general or qualified Bank Draft: A bank draft is a bill of exchange drawn by one bank upon itself or another bank for a sum of money payable to order on demand. A draft is drawn either against cash deposited at the time of its purchase or against debit to the buyer s operational bank account with the banker. The buyer of the draft generally furnishes particulars of the person to whom the amount thereof should be paid. The banker charges for his services a small commission. 2 P a g e
Cheque: 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. A Cheque shall be signed by the drawer and must contain an unconditional order on a specified banker to pay a certain sum of money to or the order of the specified person or to the bearer of the instrument. Difference between Cheque and Bill of Exchange: 1) In the case of a cheque the drawee i.e., the person on whom the bill is drawn must always be banker whereas in the case of a bill of exchange the drawee may be any person. 2) A cheque is always payable on demand, whereas a bill which is other than a cheque may be either a time bill or it may be payable on demand. 3) No days of grace are allowed in the case of a cheque, and a cheque is as a rule, payable immediately on demand, whereas three days grace is allowed in the case of a bill which is not payable on demand. 4) A cheque may be crossed, whereas a bill cannot be crossed. 5) Cheques do not require to be stamped in India, whereas bills must be stamped according to the law. In England and several other countries, cheques also are required to be stamped. Electronic Cheque Paper is not used in any stage of an electronic cheque Digital Signatures are used to create an electronic cheque Truncated Cheque A truncated cheque is nothing but a paper cheque, which is truncated during the clearing process Here, the signature is done with ink 3 P a g e
Capacity of a MINOR to be a party to a Negotiable Instrument: Question: Kumar is a major and his sister Kirti is a minor. Both executed a promissory note in favour of Girish. Examine the validity of the promissory note with reference to the Negotiable Instruments Act. Answer: A Negotiable Instrument cannot be made invalid only on the reason that one of the party is a minor. Since a minor is not liable to a negotiable instrument, Kumar is liable to pay to Girish and the other party, who is a minor is not liable. Maturity of a Negotiable Instrument: It is the date on which the negotiable instrument falls due for payment. A negotiable instrument is entitled to 3 days of grace. Negotiable Instrument made without consideration: Where a negotiable instrument is drawn without any consideration, then it creates no legal obligation between the parties to the transaction. Question: P draws a bill on Q. Q accepts the bill for without any consideration. The bill is transferred to R without any consideration. Explain whether C can demand any payment from earlier parties? Answer: Where a negotiable instrument is drawn without any consideration, then it creates no legal obligation between the parties to the transaction. Therefore, R cannot demand any payment from either P or Q. 4 P a g e
Question: P draws a bill on Q. Q accepts the bill for without any consideration. The bill is transferred to R without any consideration. R transfers the bill to S for certain consideration. Explain whether S can demand any payment from earlier parties or he can only demand the payment from just R?. What are the rights and liabilities of other parties [Nov 2004, May 2006, May 2008]. Answer: S can recover the amount of the bill from all the prior parties as he the holder for certain value/consideration. No party except S can recover the amount of the bill from any prior party since a negotiable instrument creates no legal obligation of payment if it is drawn, accepted or endorsed or transferred without any consideration. Endorsement: A legal term that refers to the signing of a document which allows for the legal transfer of a negotiable from one party to another. Kinds of Endorsements: General Endorsement: It means an endorsement made by the endorser without writing the name of the endorsee. Special Endorsement: It is an endorsement where the endorser directs to pay a specified sum to a specified person. Restrictive Endorsement: It is the endorsement which restricts the right of further negotiation. 5 P a g e
Differences between Negotiation and Assignment: Negotiation The applicable act is the Negotiable Instruments Act, 1881 Negotiation means transfer of a negotiable instrument. Notice of negotiation is not required to be given to any party. It is presumed that every negotiable instrument was negotiated for consideration Assignment The applicable act is the Transfer of Property Act, 1882 Assignment refers to transfer of any right. Notice of assignment must be given by the assignee to the debtor. There is no such presumption in case of Assignment. Holder and Holder in Due course: Holder means any person entitled in his own name to the possession of the negotiable instrument and to recover or receive the amount due thereon from the parties thereto. A holder in due course on the other hand, means a holder who takes the instrument in good faith for consideration before it is overdue and without any notice of defect in the title of the person who transferred it to him. Whether the person is Holder or not [May 2005, Nov 2008]? X who obtains a cheque drawn by Y by way of gift. Answer: X is is holder as he is entitled to the cheque in his own name. A, the payable of the cheque, who is prohibited by a court order from receiving the amount of the cheque. Answer: A is not a holder as he is not entitled to the amount as per the court order 6 P a g e
State the privileges/advantages of a holder in due course (or) Examine when holder shall be considered a holder in due course Every prior party to negotiable instrument is liable to HDC. A holder who derives title from HDC has the same rights as that of HDC. HDC can claim full amount of negotiable instrument. HDC gets a valid title to the negotiable instrument even though the title of the transferor is defective. No prior party can allege that the negotiable instrument was delivered conditionally. Crossing of Cheques: Any check that is crossed with two parallel lines, either across the whole check or through the top left hand corner of the check. Types of Crossing:- General Crossing: The cheque must contain two parallel lines. Special Crossing: The cheque must contain the name of the banker. Cheque can be paid only to the banker to whom it is crossed. Not negotiable crossing**: The cheque must contain the words Not negotiable. The effect of such crossing is that the transferee cannot get a better title than the transferor. A/c payee / Restrictive crossing**: The cheque must contain the words account payee only. In this type of crossing, the banker is supposed to credit the amount of the cheque to the account of the payee only. 7 P a g e
Whether collecting banker is liable if the endorsement is forged? The drwawer, D is induced by A to draw a cheque in favour of P, who is an existing person. A instead of sending cheque to P, forges his name and pays the cheque into his own bank. Whether D can recover the amount from A s banker? [Nov 2002, Nov 2004, May 2006] Liability of D s Banker: D s banker is not liable. A paying banker is not liable even if it is subsequently found that any endorsement on the cheque has been forged, provided the paying banker made the payment in due course. Liability of A s banker: A s banker is also not liable. Since a collecting banker is not liable for any loss caused to the true owner due to defective title of the holder. Provided, the collecting banker acted in good faith and without negligence while collecting the amount from the cheque. Refusal by a banker to honour a customer s cheque: (or) Grounds on which a cheque may be dishonoured by a banker Death of Customer Insanity of customer Post dated cheque Undated cheque Insolvency of customer Different signatures Insufficient funds 8 P a g e
Bouncing or Dishonour of Cheques: Section 138 lays the liability for dishonor of cheques. To attract this section, the following conditions must be satisfied: 1. The section applies only if the cheque is given for a legally enforceable debt or liability (for example, if a cheque is issued as a gift or charity, then this section will not apply). 2. The dishonor is due to insufficiency of funds. 3. The cheque must have been presented to the bank within 3 months. 4. The holder must have given a notice in writing to the drawer within 30 days from the date of dishonor, demanding/requiring him to pay the dues. 5. Within 15 days from the date of receipt of notice, the drawer has failed to pay the full amount (even if part of the amount is paid, the section applies). 6. After the expiry of 15 days, if the drawer still fails to pay the dues, the holder of the cheque must have made a complaint with the court within 30 days from the end of 15 th day. If a cheque issued by the drawer and is dishounoured due to insufficiency of funds, the drawer is punishable with, upto 2 years imprisonment, or with a fine of upto 2 times the amount of cheque or both. What if the offence is by a company? If the person committing the offence under section 138 is a company, then every person who was in charge and responsible to the company, at the time the offence committed, shall be deemed to be guilty of offence. Whether drawer Is liable if he asks the holder not to present the cheque and issues a stop payment order to the bank? The court in a judgement has stated that, the word Insufficiency of funds shall be given a wider meaning and even though the drawer makes a stop payment request, it will have same effect as if it is dishounoured due to insufficiency of funds. Modi Cements Ltd Vs Kuchil Kumar Nandi 9 P a g e
What do you understand by "Material alteration under the Negotiable Instruments Act, 1881? An alteration called material alteration if it alters the character (legal effect) or the rights and liabilities of any of the parties of negotiable instrument. The following material alterations has been authorized by the act: Crossing of cheques or altering existing crossing Filling blanks of an inchoate instrument Conversion of Bearer instrument into order instrument by deleting the word Bearer Conversion of blank endorsement into endorsement in full. What do you mean by an acceptance of a negotiable instrument? Examine validity of the following in the light of the provisions of the Negotiable Instruments Act, 1881: (i) An oral acceptance (ii) An acceptance by mere signature without writing the word accepted. Meaning of Acceptance: It is only the bill of exchange which requires acceptance. A bill is said to be accepted when the drawee (i.e. the person on whom the bill is drawn), after putting his signature on it, either delivers it or gives notice of such acceptance to the holder of the bill or to some person on his behalf. i) It is one of the essential elements of a valid acceptance that the acceptance must be written on the bill and signed by the drawee. An oral acceptance is not sufficient in law. Therefore, an oral acceptance of the bill does not stand to be a valid acceptance. ii) The usual form in which the drawee accepts the Instrument is by writing the word accepted, across the face of the bill and signing his name underneath. The mere signature of the drawee without the addition of the words accepted is also a valid acceptance. 10 P a g e
Give the answer of the following: (a) A draws a cheque in favour of M,a minor. M endorses the same in favour of X. The cheque is dishonoured by the bank on grounds of inadequate funds. Discuss the rights of X. (b) A promissory note was made without mentioning any time for payment. The holder added the words on demand on the face of the instrument.does this amount to material alteration? (c) A draws a cheque for ` 100 and hands it over to B by way of gift. Is B a holder in due course? Explain the nature of his title, interest and right to receive the proceeds of the cheque. (d) A cheque is drawn payable to B or order. It is stolen and the thief forges B s endorsement and endorses it to C. The banker pays the cheque in due course. Can B recover the money from the banker. Answer (a) A minor may draw, endorse, deliver and negotiate the instrument so as to bind all parties except himself. Therefore, M is not liable. X can, thus, proceed against A. (b) As per the provision of the Negotiable Instruments Act,1881 this is not a material alteration as a promissory note where no date of payment is specified will be treated as payable on demand. Hence adding the words on demand does not alter the business effect of the instrument. (c) B is a holder but not a holder in due course as he does not get the cheque for value and consideration. His title is good and bonafide. As a holder he is entitled to receive ` 100 from the bank on whom the cheque is drawn. (d) The drawee banker is discharged when he pays a cheque payable to order when it is purported to be endorsed by or on behalf of the payee. Even though the endorsement of Mr.B is forged, the banker is protected and he is discharged. The true owner, B, cannot recover the money from the drawee bank. 11 P a g e
A Bill of Exchange is dishonoured by the acceptor. Explain the provisions of Noting and Protest under the Negotiable Instruments Act, 1881. Noting: According to section 99, when a promissory note or bill of exchange has been dishonoured by non-acceptance, or non-payment the holder may cause such dishonour to be noted by a notary public upon the instrument, or on a paper attached to the instrument. Such note must be made within a reasonable time after dishonour, and must specify the date of dishonour, the reason for the dishonor. Protest: When a promissory note or bill of exchange has been dishonoured by nonacceptance or non-payment, 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. Few Cases of Material Alterations: Alteration of date Alteration of time of payment Alteration of place of payment Alteration of amount payable Conversion of blank endorsement into special endorsement Addition of new party to the instrument Types of Acceptance: General: Acceptance of bill without any qualification. Qualified: Acceptance of bill subject to some qualification: Where a drawee accepts the bill only for a part of sum ordered to be paid. Payment dependent on the happening of an event. Where drawee agrees to make the payment at a time other than the time stated in the bill. Agreeing to make the payment at some other place than the place specified in the bill 12 P a g e
J accepted a bill of exchange and gave it to K for the purpose of getting it discounted and handing over the proceeds to J. K having failed to discount it returned the bill to J. J tore the bill in two pieces with the intention of cancelling it and threw the pieces in the street. K picked up the pieces and pasted the two pieces together, in such manner that the bill seemed to have been folded for safe custody, rather than cancelled. K put it into circulation and it ultimately reached L, who took it in good faith and for value. Is J liable to pay the bill under the provisions of the Negotiable Instruments Act, 1881? Answer: The problem is based upon the privileges of a holder in due course, Section 120 of the Negotiable Instruments Act, 1881 provides that No... drawer of a bill shall in a suit thereon by a holder in due course be permitted to deny the validity of the instrument as originally drawn.... A holder in due course gets a good title of the bill. Therefore in the given problem J is liable to pay for the bill. L is a holder in due course, who got the bill in good faith and for value. Bharat executed a promissory note in favour of Bhushan for ` 5 crores. The said amount was payable three days after sight. Bhushan, on maturity, presented the promissory note on 1 st January, 2008 to Bharat. Bharat made the payments on 4 th January, 2008. Bhushan wants to recover interest for one day from Bharat. Advise Bharat, in the light of provisions of the Negotiable Instruments Act, 1881, whether he is liable to pay the interest for one day? Claim of Interest: Section 24 of the Negotiable Instruments Act, 1881 states that where a bill or note is payable after date or after sight or after happening of a specified event, the time of payment is determined by excluding the day from which the time begins to run. Therefore, in the given case, Bharat will succeed in objecting to Bhushan s claim. Bharat paid rightly three days after sight. Since the bill was presented on 1 st January, Bharat was required to pay only on the 4 th and not on 3 rd January, as contended by Bharat. 13 P a g e
In what way does the Negotiable Instruments Act, 1881 regulate the determination of the Date of maturity of a Bill of Exchange. Ascertain the Date of maturity of a bill payable 120 days after the date. The Bill of exchange was drawn on 1 st June, 2005. Answer: The maturity of a bill, not payable on demand, at sight or on presentment, is at maturity on the third day after the day on which it is expressed to be payable (Section 22, para 2 of Negotiable Instruments Act, 1881). Three days are allowed as days of grace. No days of grace are allowed in the case of a bill payable on demand, at sight, or presentment. When the last day of grace falls on a day, which is public holiday, the instrument is due and payable on the next preceding business day In this case the day of presentment for sight is to be excluded i.e. 1 st June, 2005. The period of 120 days ends on 29 th September, 2005 (June 29 days + July 31 days + August 31 Days + September 29 days = 120 days). Three days of grace are to be added. It falls due on 2 nd October, 2005, which happens to be a public holiday. As such it will fall due on 1 st October, 2005 i.e., the next preceding Business Day. 14 P a g e