3rd Law of Negotiable Instruments

7/31/2019 3rd Law of Negotiable Instruments

1/40

9

Law ofNegotiable Instruments


2/40

IntroductionMeaning of an Instrument

The term instrument means any written document by which

a right is created in favour of some person. The wordnegotiable has a technical meaning whereby rights in an

instrument can be transferred by one person to another.

Thus, a negotiable instrument is a document by which rights

vested in a person can be transferred to another person in

accordance with the provisions of the Negotiable

Instruments Act, 1881.


3/40

Meaning and definition of a Negotiable Instrument

Meaning of a Negotiable Instrument. An

Instrument as referred to in the Act is a legally

recognised written document, whereby rights arecreated in favour of one and obligations are

created on the part of another. The word

negotiable means transferable from one personto another either by mere delivery or by

endorsement and delivery, to enable the

transferee to get a title in the instrument.Cont.


4/40

Meaning and definition of a

Negotiable Instrument

An instrument is called negotiable if itpossesses the following features:

Freely transferable

Holders title free from defects The holder can sue in his own name

A negotiable instrument can betransferred infinitum, i.e.

A negotiable instrument is subject tocertain presumptions


5/40

Essential Elements of a Negotiable InstrumentIt must be in writing, which includes, typing,

computer print out or engraving.

The instrument must be signed by the personwho is the maker or a drawer.

There must be an unconditional promise or order

to pay.

The instrument must involve payment of a

certain sum of money only and nothing else.


6/40

Essential Elements of a Negotiable

Instrument

The instrument must be payable at a time which iscertain to arrive. If it is payable when convenient theinstrument is not a negotiable one.

In case of a bill or cheques, the drawee must be namedor described with reasonable certainty.

Forms in which an Instrument must be Payable so as toConstitute a Negotiable Instrument are: (i) Pay A; (ii) Pay Aor order; (iii) Pay to the order of A; (iv) Pay A and B; (v)Pay A or B; (vi) Pay A or bearer; (vii) Pay bearer.


7/40

Promissory Notes and Bills of ExchangeDefinition of a Promissory Note. A

promissory note is an instrument in writing

(not being a bank or a currency note)containing an unconditional undertaking,

signed by the maker to pay a certain sum of

money to the bearer of the instrument (s.4).

Cont.


8/40

Promissory Note

The person who promises to pay is called themaker, or promisor and the person to whomthe payment is made is called the payee.

No person in India except Reserve Bank canmake or issue promissory note payable tobearer.

Promissory note does not include bank note

and currency note.


9/40

Essentials of a Promissory Note

A promissory must be in writing.

It must contain an undertaking or promise to pay.

The promise to pay must not be conditional.

The promissory note must be signed by themaker.

The instrument must point out with certainty themaker and the payee of the promissory note,

e.g., son of. resident of, etc.


10/40

Essentials of a Promissory Note

The sum payable must be certain orcapable of being made certain.

It cannot be payable to bearer on

demand (s.31 of R. B. I. Act). It cannot be crossed unlike a cheques.


11/40

Cont.

Specimen of a Promissory Note

Rs 10,000 New Delhi 1100 01Jan. 10, 2006

On demand [or six months after date] I promise to pay X or order the sum of rupeesten thousand with interest at 12 per cent per annum.To X Sd/-A

Address. Stamp

Parties to a Promissory Note

1. The maker

2. The payee


12/40

Bill of Exchange

A Bill of Exchange is an instrument in writingcontaining an unconditional order, signed bythe maker, directing a certain person to pay a

certain sum of money only to or to the orderof, a certain person or to the bearer of theinstrument.


13/40

Cont.

Features of a Bill of Exchange

It must be in writing.It must contain an order to pay and not a

promise or request. Words, like Please pay Rs

10,000 to A on demand and oblige, do notconstitute the instrument a bill of exchange.

The order must be unconditional.

There must be three parties, viz., drawer,

drawee and payee.


14/40

Features of a Bill of Exchange

The parties must be certain.

It must be signed by the drawer/maker.

The sum payable must be certain or capable of

being made certain.The order must be to pay money and moneyalone.

The number, date and place of the bill are not

essential. Oral evidence may be obtained as todate and place of execution.


15/40

Cont.

Specimen of a Bill of Exchange

Rs 10, 000New Delhi 110 016Jan. 13, 2006

Six months after date pay to A or order/bearer the sum of ten thousand rupees only forvalue received.

To X Sd/-YAddress Stamp

..

Stamp Duty, Attestation and Registration of a Promissory Note and a Bill

of Exchange. A promissory note as well as a bill of exchange are liable to

stamp duty.


16/40

Distinction between a Promissory Note and a Bill of ExchangePromissory Note Bil l of Exchange1. There are only two parties the maker

(debtor) and the payee (creditor).There are three parties the drawer, the drawee andthe payee although drawer and payee may be the

same person.

2. A note contains an unconditional promise by

the maker to pay the payee.

It contains an unconditional order to the drawee to

pay according to the drawers directions.

3. No prior acceptance is needed. A bill payable after sight must be accepted by thedrawee or his agent before it is presented forpayment.

4. The liability of the maker or drawer isprimary and absolute.

The liability of the drawer is secondary andconditional upon non-payment by the drawee.

5. No notice of dishonour need be given. Notice of dishonour must be given by the holder tothe drawer and the intermediate endorsers to hold

them liable thereon.6. The maker of the note stands in immediate

relation with the payee.The maker or drawer does not stand in immediaterelation with the acceptor or drawee.


17/40

Cheques

Meaning of a Cheque. A cheque is theusual method of withdrawing money froma current account with a banker. Savings

bank accounts are also permitted to beoperated by cheques provided certainminimum balance is maintained.


18/40

Cheques

A cheque is a bill of exchange drawn on aspecified banker and not expressed to bepayable otherwise than on demand and it

includes the electronic image of a truncatedcheque and a cheque in the electronic form.


19/40

Cheques

.

Specimen of a Cheque

Cont.


20/40

Requisites of a Cheque

1. Written instrument

2. Unconditional order

3. Drawn on a specified banker only

4. A certain sum of money

5. Payee to be certain

6. Payable on demand

7. Amount of the cheque

8. Dating of cheques

9.Valid for six months


21/40

Holder

The Holder of a Negotiable Instrument meansany person entitled in his own name to thepossession thereof and to receive and

recover, the amount due therein from theparty liable thereto.

The Holder should be a de-jure holder.


22/40

Holder

A holder must satisfy two conditions:

He should be entitled to possess theinstrument in his own name

He should have the right the right to receiveor recover the amount due on the instrumentfrom the party liable to pay.


23/40

Rights of a Holder

Right to possess the instrument in his ownname

Entitled to receive or recover payment on the

instrument Has a right to give valid discharge of the

instrument

Can further negotiate the instrument in favorof another party


24/40

Holder and holder in due courseMeaning. A holder in due course, on the other hand, is a

person who for consideration became the possessor of a

promissory note, bill of exchange or cheques.

Essential Conditions

He must be a holder

He must be a Holder for consideration

He must acquire the instrument before maturity

Instrument should be complete and regular

Holder must take the instrument in good faith


25/40

Privileges of a Holder in Due Course Good title of instruments

Privilege against inchoate stamped instruments Fictitious drawer or payee Right of an endorsee from a holder in due course Estoppel against denial of validity Estoppel against denial of payees capacity

Presumption as to title Prior defects (s.58) Endorser not permitted to deny the capacity of prior

parties


26/40

Negotiation of a Negotiable Instrument

Meaning of Negotiation. The transfer of an instrument by one

party to another so as to constitute the transferee a holder

thereof is called negotiation.

Negotiation and Assignment. The negotiation of an

instrument should be distinguished from assignment. Lets first

see what is assignment and what are the common points in

negotiation and assignment. When a person transfers his right

to receive the payment of a debt that is called assignment ofthe debt.

Cont.


27/40

Negotiation of a Negotiable Instrument

Payable to bearer. An instrument is payable tobearer (1) where it is made so payable, or (2)where it is originally made payable to order butthe only or the last indorsement is in blank, or (3)

where the payee is a fictitious person. Endorsement. An endorsement is the mode of

negotiating a negotiable instrument. A negotiableinstrument payable otherwise than to bearer can

be negotiated only by indorsement and delivery.


28/40

Kinds of Endorsements

1. Endorsement in blank

2. Endorsement in full

3. Restrictive endorsement

4. Conditional endorsement

5. Endorsement sans recourse

6. Facultative endorsement

7. Partial endorsement (s.56)

Effect of Endorsement. An unconditional endorsement of a negotiable

instrument followed by its unconditional delivery has the effect of

transferring the property therein to the endorsee. The endorsee acquires

a right to negotiate the instrument to anyone he likes and to sue all

parties whose names appear on it.


29/40

Presentment

Presentment of a negotiable instrument is made for two purposes: (i) for

acceptance and (ii) for payment.

Maturity (Ss.21-25). Cheques are always payable on demand but other

instruments like bills, notes, etc., may be made payable on a specified

date or after the specified period of time. The date on which payment of

an instrument falls due is called maturity (s.22).

Presentment for Payment. A negotiable instrument must be presented

for payment to the maker, acceptor or drawee thereof, as the case may

be, by the holder or his agent.


30/40

Dishonour

Dishonour of a Bill. A bill of exchange may be dishonouredeither by non-acceptance or by non-payment. A negotiable

instrument is said be dishonoured by non-payment when the

maker, acceptor or drawee, as the case may be, makes

default in payment upon being duly required to pay the

same (s.92).

Noting. Noting is a convenient method of authenticating the

fact of dishonour. Where an instrument is dishonoured, theholder, besides giving the notice as referred to above,

should get the bill or promissory note noted by the notary

public.


31/40

Dishonor

Protesting (s.100). The protest is the formal

notarial certificate attesting the dishonor

of the bill and based upon the noting.

After the noting has been made, the formal

protest may be drawn up by the notary at

his leisure. When the protest is drawn up

it relates back to the date of noting.


32/40

Crossing of Cheques

Meaning of Crossing. Crossing is a unique feature associated with a

cheque affecting to a certain extent the obligation of the paying bankerand also its negotiable character. Crossing on cheque is a direction to

the paying banker by the drawer that payment should not be made

across the counter.

Significance of Crossing. As payment cannot be claimed across the

counter on a crossed cheque, crossing of cheques serves as a measure

of safety against theft or loss of cheques in transit.

Types of Crossing

Specimen of general crossing

Cont.


33/40

Crossing of Cheques

Not Negotiable Crossing. Crossing whethergeneral or special may be accompanied bywords not negotiable.

Account Payee Crossing (A/c Payee Crossing). An

A/c payee crossing signifies that the drawerintends the payment to be credited only to thepayees account and in none else. The addition ofA/c payee to a crossing has no legal sanctityand the paying banker may ignore such a

direction without being liable for any damages.


34/40

Not Negotiable, A/c Payee Crossing. The combination ofnot negotiable and A/c payee, crossing is the safest form

of crossing. It has double advantage. The instrument is

rendered not negotiable (making the paying banker

responsible to see that payment is made to the person who

is entitled to receive it) plus A/c payee crossing directs the

collecting banker to collect it for the payee only and warns

that if the amount is collected for someone else, he may beheld liable for damages.


35/40

The Paying Banker

Payment in Due Course

1. Payment must be in accordance with the

apparent tenor of the instrument.

2. Payment must be made in good faith and

without negligence.

3. Payment must be made to the person inpossession of the instrument.


36/40

The Paying Banker

Payment must be made undercircumstances which do not afford areasonable ground for believing that a

person is not entitled to receivepayment of the amount mentionedtherein.

Payment must be made in money only.


37/40

Dishonor of cheques on ground of

insufficiency of funds

Sections 138-142 (Amendment Act -1988)provide criminal penalty for dishonor ofcheques on ground of insufficiency of funds.

Punishment up to 2 years imprisonment,with a fine up to twice the amount of thecheque or with both.


38/40

Dishonor of cheques

The following conditions must be satisfied:

The cheque has been dishonored due toinsufficiency of funds only

The payment for which the cheque wasissued should have been in discharge of alegally enforceable debt.


39/40

Dishonor of cheques

The cheque should have been presentedwithin six months or within the period ofvalidity.

Notice in writing demanding payment, shouldbe given to the drawer within 30 days of thereceipt of information of dishonor from thebank.


40/40

Dishonor of cheques

The holder of the dishonored cheque shouldhave made a complaint within one month ofthe cause of action arising out of sec 138.

Documents

3rd Law of Negotiable Instruments