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NEGOTIABLE INSTRUMENTS ACT,1881 -
October 28th, 2009
• INTRODUCTION OF NEGOTIABLE INSTRUMENTS :
o Section 13 of the Negotiable Instruments Act, 1881, defines a negotiable instrument as: “A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.” [Sec.13 (1)].
o Negotiable means transferable. Instrument means document. Negotiable instrument, therefore, means a transferable document. Negotiable instrument entitles holder to the receipt of the money therein. It also gives him the right to transfer the same by delivery or by endorsement thereof. The Act deals with only three types of negotiable instrument, i.e., promissory notes, bills of exchange and cheques.
o The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881. The Act is based upon the English Common Law relating to promissory notes, bills of ex-change and cheques . The Act came into force on 1st March 1882. The Act was enacted with an ob-ject to define and amend the law relating to promissory notes, bills of exchange and cheques. The Act extends to the whole of India. It does not affect any local usage relating to any instru-ments in an oriental language- for example, a hundi. Local usage applies to instruments in oriental language. However, such usages may be excluded by contract to the contrary, in-cluding that the legal relationship of the parties shall be go-verned by this Act (Sec.1). It must be noted that only when the local usage in the contrary to the provisions of this Act, then the local usage would override the Act.
• CHARACTERISTICS OF A NEGOTIABLE INSTRUMENTS :
o Property :
The possessor of the instrument is the holder and owner thereof. A negotiable instrument does not merely give possession of the instrument, but right to property. Whosoever gets possession of the instrument becomes its owner and is entitled to the sum mentioned therein as the holder. The complete right of ownership in a negoti-able instrument passes by mere delivery where instru-ment is payable to ‘bearer’. Where instrument is payable to ‘order’, right of ownership passes by endorsement and delivery.
o Defects in title :
The holder in good faith and for value called the ‘holder in due course’ gets the instrument free from all defects of any previous holder.
o Remedy :
The holder can sue upon the negotiable instrument in his own name. All prior parties are liable to him. A holder is due course can recover the full amount on the instru-ment.
o Rights :
The holder in due course is not affected by certain de-fenses which might be available against previous holder, for example, fraud, to which he is not a party.
o Payable to order :
A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable to a particular person. An instrument which does not restricts its transferability expressly or impliedly is negotiable whether the word ‘order’ is mentioned or not. The word ‘Order’ or ‘Bearer’ is no longer necessary to render an instrument negotiable. Where the instrument prohibits transfer or indicates that it shall not be transferrable is nevertheless valid as between the parties thereto, but it is not a negotiable instrument.
It must be noted that where a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.
o Payable to bearer :
A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank [Sec.13]. It specifies that the person in possession of the bill or note is a bearer of the instrument which is so expressed payable to bearer.
o Payment :
A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one or two, or some of several payees [Sec.13 (2)].
o Consideration :
Consideration in the case of a negotiable instrument is presumed.
o Presumption :
Certain presumptions apply to all negotiable in-struments.
• DIFFERENT TYPES OF NEGOTIABLE INSTRUMENTS :
o Promissory Note:
• A ‘Promissory note’ is an instrument in writing (not being a banknote or a 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. The person who promises to pay is called the “Payee”.
Essential Elements :
• Writing :
o The promissory note must be in writing. Oral engagement or promise is excluded. No par-ticular form of words is necessary. It may be written in ink or pencil or may even be printed or cyclostyled. It may be in any form but the words shall be visible. Intentions to make a note should be clear.
• Undertaking to pay :
o It is not necessary to use the word “Prom-ise” but the intention must clearly show an ‘unconditional undertaking’ to pay the amount.
• Unconditional :
o It must contain definite and an uncondition-al undertaking to pay. Promise to pay should be unconditional. A conditional instrument is invalid. It must be certain of payment.
• Signed :
o The instrument must be signed by the maker thereof. The sign or a mark would constitute signature, if the maker intended to subscribe to the document. Person must sign with his free consent. It should not only be a physical act but with an intention to sign.
• Certain persons :
o The maker and payee of the instrument must be certain and definite persons. A note may be made by several persons jointly to bind themselves jointly or severally. A promissory note cannot be made by two persons payable by either in the alternative.
• Specific sum :
o The sum promised to be paid must be cer-tain and specific.
• Promise to pay must be money only :
o The promise to pay must be money only. Promise to pay anything other than legal tender, in full or in part, is not a promissory note.
• Stamping :
o Promissory notes are chargeable with stamp duty. It is advisable to cancel the stamps with maker’s signature or initials. An unstamped or improperly or insufficiently stamped promissory note is not admissible in evidence. No suit can be maintained upon an unstamped or improperly stamped promissory note.
o Bill of exchange :
• A bill of exchange is an instrument in writing con-taining 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.
Essential Elements :
• Writing :
o It must be in writing and may be in any lan-guage, and in any form. The provisions of promissory note discussed above as regards writing are applicable to a bill of exchange.
• Parties :
o There must be three parties to the bill of ex-change, for example, Drawer, Drawee and Payee.
• Order to pay:
o The Bill of exchange must contain an “Order by the drawer to the drawee to pay” under any circumstances. The order must be im-perative and not in the form of excessive re-quest.
o Conditional bill is invalid.
o The bill must be signed by the drawer.
• Person directed, for example , the drawee must be certain:
o The order to pay must be directed to a cer-tain person. Certainty of the drawee helps the payee to present the bill for acceptance or payment to a certain person and also helps the drawee to know whether it is ad-dressed to him or not. Drawee must be des-ignated with reasonable certainty.
o The order must be to pay money only.
• Payee must be certain:
o It must be payable to a definite person or his order. The payee must be certain.
o Bill of exchange is chargeable with a stamp duty.
• A ‘cheque’ is a ‘Bill of exchange’ drawn on a specified banker and not expressed to be payable otherwise than on demand. It includes the electronic image of a truncated cheque and a cheque in the electronic form.
• A cheque in a 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 stan-dards with the use of digital signature and asym-metric crypto systems.
• 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.
• Clearing house means the clearing house ma-naged or recognized by the reserve bank of India.
• A cheque is drawn on a banker only. A drawee in case of cheque is always a banker .A cheque is an unconditional order on the specified banker to pay on demand, ascertain sum of money to the bearer of the cheque or to his order. A bill of exchange is wider than a cheque. Therefore,”All cheques are Bills of exchange but all Bills of exchange are not cheques”. However, a cheque does not requires acceptance. If the cheque is dishonoured, the holder has no remedy against the banker, because cheque does not amount to assignment of drawer`s funds in the hands of the banker in favour of the holder.
• There is no privity of contract between the payee plus the banker. The banker is liable only to the drawer.
• A cheque is not invalid because it is post-dated or anti-dated. A cheque is payable only on demand or presentation. Usually, a cheque is valid for a period of six months. It may be drawn on Sunday or a holiday.
• A cheque must satisfy the essential requirements of a bill of exchange. The signature of the drawer must be the same as his specimen signature with his banker. A cheque must be dated. Unlike a promissory note and a bill of exchange, cheque may be drawn payable to bearer on demand.
Types of cheques:
• Popularly cheques are of two types-
o Bearer or open cheques and
o Crossed cheques.
• Bearer cheques:
o Bearer cheques are payable at the counter of drawee banker on presentment.
o They are risky of being lost or stolen and the finder may be able to get it encashed easily.
• Crossed cheques:
o Cheques crossed generally:
A cheque is crossed generally when;
• It has two transverse parallel lines marked across its face; or
• It bears an abbreviation “& co.” between the transverse parallel lines; or
• It bears the words “Not negoti-able” between the two parallel lines(sec. 126)
It is generally been paid to the banker through which it is presented.
Crossing of cheques generally does not affect negotiability of instrument except, when the words ‘Not negoti-able’ are added to the crossing.
• Cheques crossed specially:
o Where a cheque is crossed by two trans-verse parallel lines and the name of banker is written between the two transverse parallel lines, with or without words, ‘Not negotiable’ it is called “Special crossing”.(sec. 124)
• It may be noted that two transverse parallel lines are not necessary in special crossing.
• It will be presented only when presented by the banker.
• Cheques crossed ‘A/c. Payee’:
o Often cheques are crossed with two trans-verse parallel lines and in between the two t parallel lines the words “A/c payee” or “A/c payee only” are written.
o This means that the proceeds of the cheque are to be credited to the account of the payee only. This type of crossing is called “Restrictive crossing”. Insertion of words “A/c payee” do not restrict its negotiability.
o It serves a good protection to drawer from loss or theft.
o Bills in sets:
Bill of exchange may e drawn in parts, each part being numbered and containing a provision that it shall continue payable so long as the other parts remain unpaid. all the parts together make a set, but the whole set constitutes only one bill, and is extinguished when one of the parts, if a separate bill, would be extinguished(sec. 132)
Bills are sometimes drawn in several parts. All the parts so drawn are referred as Bill ‘drawn in sets’. All parts form one set and whole set constitutes one bill. Each part is numbered and contains reference to the other parts with a provision that it shall continue to be payable so long as the other parts remain unpaid. Only one part requires to be stamped. The drawer of the ‘Bill in sets’ has to sign all the parts and deliver all the parts but the acceptance should be written only on one part. If drawee accepts more than one part and if such separated accepted parts get into hands of different holders in due course, he and the subsequent endorsers of each parts get into the hands of different holders in due course, he and the subsequent endorsers of each part are liable on every such part as if it were a separate bill. As between the holders in due course of different parts of the same set, he who first acquires title to his part is entitled to other parts and the money represented by the bill (sec. 133). Such a person who first acquires title is deemed to be the owner of the bill and is therefore, entitled to all other parts of the bill and the money represented thereon.
Foreign bills are usually drawn in sets. The advantages of drawing bill in sets are:
• To facilitate prompt and easy presentment for ac-ceptance and payment; and
• To reduce the risk of loss in course of transit.
o When a promissory note, a bill of exchange or a cheque is transferred to any person. So as to constitute that person the holder thereof, the instrument is said to be negotiated (sec.14).
o By negotiation, the third party is put in the possession of the instrument and is also made a holder thereof to entitle him to receive the amount due thereon. We have seen above ‘Negotiation’ means ‘transfer’. Negotiation gives special rights to the holder in due course. Transfer of a negotiable instrument is effected in any one of the following two ways:
By negotiation; or
o Transfer by negotiation is governed by the Negotiable Instru-ments Act. Transfer by assignment is governed by the Transfer of Property Act.
• When is an instrument negotiated?
o An instrument is negotiated hen transferee is constituted the holder of it. Delivery is the important aspect of ‘Negotiability’. It constitutes an essential characteristic of negotiable instru-ment. The making, acceptance or endorsement of a promissory note, bill of exchange or a cheque is completed by delivery, actual or constructive.
o Delivery, therefore, to an agent or any person with an intention to pay and pass the property in the instrument would be sufficient to transfer the property in the instrument to the payee and constitute the payee holder thereof.
o When the maker or holder signs the instrument on the back or the face of it or on slip of paper called “Allonage” or signs stamp paper for that purpose, he is said to have made a valid endorsement.
o Every sole maker, drawer, payee or endorser may endorse and negotiate the instrument. Only a person who is a holder of instrument can endorse and negotiate the instrument.
• Kinds of Endorsements:
o There are seven kinds:
Endorsement in blanks:
• If the endorsee signs his name only, the endorse-ment is said to be blank or general endorsement.
Endorsement in full:
• If the endorsee signs his name and address direc-tion to pay the amount mentioned in the instru-ment.