LEGAL ASPECTS OF BUSINESS

LAW OF NEGOTIABLE INSTRUMENTS ACTThe Negotiable Instruments Act 1881 in Sec. 13 means a promissory note, bill of exchange or cheque payable either to order or bearer. More broadly Negotiable Instrument may be defined as an instrument the property in which is acquired by anyone who takes it bona fide, and for value, notwithstanding any defect of title in the person from whom he took it , from which it follows that an instrument cannot be negotiated unless it is such and in such a state that the true owner could transfer the contract or engagement contained therein by simple delivery of the instrument.A negotiable instrument is, therefore, that which when transferred by delivery or by endorsement and delivery as the case may be , passes to the transferee a good title in the transferor , provided he is bona fide transferee of the value. Salient Features of Negotiable InstrumentFollowing are the elements of the negotiable instruments:Freely transferable : The property in a negotiable instrument passes by mere delivery if the instrument is payable to bearer and by endorsement if payable to order.Defect free title to the transferee : transferee can enjoy title to the instrument even if the title of transferor is defective.Recovery : holder-in-due course is presumed to be the owner of the property and is entitled for the same.Ceiling on number of transfers: any number of times till its maturity.Payable to order: for instrument to be negotiated it should be payable to orderPayable to bearer : paid to the holder of the instrumentPayment: may be made payable to two or more payee jointly or it may be made payable in alternative to one or two or several payeeClassification of Negotiable InstrumentsBearer Instrument negotiated by mere delivery. The bearer may be required to acknowledge the receipt of money by putting his signature on the back. There are exceptions to the bearer instruments e.g. bill of exchange, promissory note cannot be made payable to bearer.Order Instrument- an instrument can be negotiated by endorsement and delivery. Inland Instrument- an instrument which is drawn in India and payable in India except promissory note which can be made in India and paid in foreign country.Foreign Instrument- an instrument which is not inland.Time Instrument- which is payable at sometime in future. A promissory note or Bill of Exchange shall be time instrument if it is payable: -after a fixed period, -on a specified day - on happening of an event - after sight i.e. after showing to maker6.Demand Instrument- payable on demand7.Ambiguous Instrument- instrument which can be treated as bill of exchange or as promissory note depending on holders choice.8.Inchoate Instrument- implies incomplete instrument, an instrument duly signed and stamped and left blank or incomplete in some respect is called inchoate instrument

Kinds of Negotiable InstrumentsSec. 13 recognizes only three kinds of instruments i.e. Promissory note, bills of exchange, cheque, however the Act has not excluded any other instrument if it entitles a person a sum of money and is transferable on delivery and the transferee can acquire better title. Hence following instruments are also negotiable :Share/ dividend warrants, bearer debenture, Government bonds payable to bearer, treasury bills, hundis, etc.Promissory NotesThis is an instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of money to, or to the order of, a certain person or the bearer of the instrument. A promissory note must possess following essentials:Must be in writingMust contain an express promise or clear undertaking to payMust be unconditionalMust be signedMust be made to certain personThe sum payable must be certain Must be stamped as per the Indian Stamp Act.Must contain number, place and date The payment must be in currency of the country A promissory note or Bank draft cannot be made payable to bearer, no matter where it is payable on demand or after certain timeBill of Exchange This is an instrument in writing containing an unconditional, signed by the maker, directing a certain person to pay a certain money only to, or to the order of, a certain person or to the bearer of the instrument. Parties to Bills of Exchange: Drawer person who signs the billDrawee person on whom the bill is drawnAcceptor person accepting the bill i.e. drawee or person to whom bill is endorsedPayee person to whom money is payableHolder person in possession of the bill after being drawn i.e. original payee, endorsee and bearer in case of bearer billEndorser either drawer or holder who endorses the bill by signing on the back Endorsee person in whose favour the bill is endorsed.

Distinction Between Promissory Note (PN) and Bill of Exchange (BOE)PN is two-party instrument-debtor and creditor, in BOE there are three parties- drawer, drawee and payee.A PN cannot be made payable to the maker himself, while in a BOE the drawer and payee may be the same person.PN contains unconditional promise by maker to pay to the payee or his order, in BOE there is an unconditional order to the drawee to pay according to the direction of the drawer.PN is presented without any prior acceptance of the maker. A BOE payable after, sight must be, accepted by the drawee or some one else on his behalf before it can be presented for payment.

The liability of the maker of a pro-note is primary and absolute, but liability of the drawer of a bill is secondary and conditional. Foreign bills must be protested for dishonor but no such process is necessary in case of note.When bill is dishonored due notice of dishonor is to be given by the drawer and the intermediate endorsees, but no such notice need be given in case of a note.Forms of Bills of ExchangeThe BOE can be classified as below:Inland bill-drawn & payable in India & drawee must be in IndiaForeign bill- bills which are not inland billsTrade bill bill is drawn, accepted & endorsed for trade transaction e.g. sell of goods on credit.Accommodation bill is drawn, accepted with considerationDocumentary bill documents of title to the goods or other documents such as invoice, bill of lading etc are attached to BOE.Clean bill no documents are attached normally for inland trade.Escrow an instrument is delivered conditionally or for special purpose as a collateral security or for safe custody only & not transferring the property therein.Bank draft- known as demand draft can be treated as BOE.ChequeA cheque is bill of exchange drawn on a specified banker, and not expressed to be payable otherwise than on demand. A cheque is a BOE with two additional qualifications viz.,It is always drawn on a bankerIt is always payable on demandSince cheque is bill of exchange it must satisfy all the requirements of bills, it does not however require acceptance Distinction between Bill of Exchange & Cheque BOE can be drawn on any one including banker, cheque is always drawn on banker.BOE can be payable on demand or on expiry of the specified period after sight or date, cheque can be payable only on demand.BOE must be accepted before payment can be demanded, a cheque does not require acceptance and is intended for immediate payment.A grace of three days is allowed in case on BOE, while no grace is given in case of cheque.The drawer of BOE is discharged, if it is not presented for payment, but the drawer of cheque is discharged only if he suffers any damage by delay in presentation for payment.

Notice of dishonour of bill is necessary, but not in the case of a cheque. The cheque being irrevocable mandate, the authority may be revoked by countermanding payment , but this is not so in case of bill.The cheque may be crossed but not bill.The BOE needs to be adequately stamped and stamping is not required in case of cheque. The payment of BOE cannot be stopped, but the payment can be revoked in case of cheque.

CROSSING OF CHEQUEA crossing is a direction to paying banker to pay the money generally to a banker or to a particular banker not to pay otherwise.The object of the crossing is to secure payment to the banker so that it could be traced to the person receiving the amount.To restrain negotiability addition of words Not Negotiable or Account Payee only is necessary.

MODES OF CROSSINGThere are two types of crossingGeneral where the cheque bears across its face an addition of two parallel transverse lines/or the addition of and Co between them.Special where a cheque bears across its face an addition of the name of a banker, either with or without the words not negotiable that addition constitutes special crossing. Accounts Payee Crossing restricts negotiability of a cheque. The proceeds of the cheque are to be credited only to the account of the payee. ENDORSEMENTWhen the maker or holder of a negotiable instrument signs the same for the purpose of negotiation on the back or on the face thereof, he is said to endorse the same and is called endorser and the person to whom the instrument is endorsed is called endorsee.CLASS OF ENDORSEMENTBlank or General: where the endorser merely signs on the back of the instrument and the instrument so endorsed becomes payable to bearer, even though originally it is payable to order. But the holder of instrument endorsed in blank may convert the endorsement in blank into endorsement in full or special by writing above the endorsers signature a direction to pay the instrument to another person of his order.2. Special or Full: If endorser signs and adds direction to pay the amount mentioned in the instrument to, or to the order of a specific person then it is specific endorsement.3. Restrictive : which prohibits the further negotiation of the instrument. Pay A only4. Partial: is one which purports to transfer to the endorsee an a part only of the amount payable on the instrument. A partial endorsement does not operate as a negotiable instrument. 5.Conditional or Qualified: this limits the ability of the endorser by: a. by making it clear that he does not incur the liability of an endorser to the endorsee or subsequent holder and he is liable if the instrument is dishonoured. b. by making his liability depend upon the happening of a specific event which may or may not happen, e.g. Pay A or order on his marrying B only HOLDERSec.8 of the Act states a person is a holder of a negotiable instrument who is entitled in his own nameTo the possession of the instrument andTo recover or receive its amount from the parties theretoThus as per Indian Law it is not every person in possession of the instrument is called the holder. To be the holder the person must be named in the instrument as a payee or the endorsee or he must be the bearer thereof. Thus if the person holds the instrument by theft is not a holder.HOLDER IN DUE COURSEA person who for consideration , obtains possession of the negotiable instrument if payee is bearerThe payee or endorsee thereof, if payable to order, before its maturity and without having sufficient cause to believe that any defect existed in the title of the person from whom he delivered his title.A holder in due course can recover the amount from all previous parties, although, no consideration was paid by some if the previous parties to the instrument or there was defect of title in the party from whom he tool it. NOTINGWhere note or bill is dishonored the holder is entitled after giving due notice of dishonor to sue the drawer and the endorser. This is a convenient method of authenticating the fact of dishonor .The noting must be recorded by the notory within a reasonable time after the dishonor and must contain the facts of the dishonor, date and reason is any assigned for such deishonor.ProtestingThe protest is the formal notarial certificate attesting the dishonor of the bill, and based upon the noting which has been effected on the dishonor of the bill. Foreign bill must be protested for dishonor when such protest is required by law of the place where they are drawn, however foreign promissory notes need not be protested.The protest to be valid must contain on the instrument itself or a lateral transcript thereof, the names of the parties for and against whom protest is made, the fact and reasons for dishonor together with the place and time of dishonor and signature of the public notary. DISHONOUR OF CHEQUES AND REMIDIESSECTION 138 NEGOTIABLE INSTRUMENTS ACT 1881Section 138 Negotiable Instruments Act as it is at present after coming into force of The Negotiable Instruments (Amendment And Miscellaneous Provisions) Act, 2002:138. Dishonour of cheque for insufficiency, etc., of funds in the account:Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice. to any other provision of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply unless- (a) the cheque has been, presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier; (b) the payee or the holder in due course. of the cheque as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, tothe drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and (c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.Explanation.-For the purposes of this section, debt or other liability means a legally enforceable debt or other liability.

INGREDIENTS OF OFFENCE UNDER SECTION 138The cheque should have been issued for the discharge , in whole or part, of any debt or other liabilityThe cheque should have been presented within a period of six months or within its validity period whichever is earlier.The payee or holder in due course should have issued a notice in writing to the drawer within 30 days of the receipt of information by him from the Bank regarding the return of the cheque as unpaid.After receipt of the said notice from the holder in due course, the drawer should have failed to pay the cheque within 15 days of receipt of the said notice.

GROUNDS FOR DISHONOUR OF CHEQUEFunds Insufficient :Section 138 describes the above ground of insufficient funds in the account of the drawer of the cheque in the following words:The amount of money standing to the credit of the account of the drawer on which the cheque is drawn is insufficient to honour the cheque, orThe cheque amount exceeds the amount that can be paid by the bank under an arrangement entered into between the bank and the drawer of the cheque.However, besides the above, the Courts have also accepted some other heads which though expressly do not say insufficient funds but are implied to mean the same and a cheque dishonoured on any of these grounds can be used for the purpose of prosecution under section 138 Negotiable Instruments Act. Some of theses grounds are:1. Account Closed: It is an offence under section 138 of the Act Closure of account would be an eventuality after the entire amount in the account is withdrawn It means that there was no amount in the credit of that account on the relevant date when the cheque was presented for honouring the same

2. Stop Payment instructions:Once the cheque has been drawn and issued to the payee and the payee has presented the cheque, stop payment instructions will amount to dishonour of cheque.3. Refer to drawer: .. makes out a case under section 138 of the Negotiable Instruments Act, 1881 which expression means that there were not sufficient funds with the bank in the account of the respondent4. Not a clearing member:Cheque returned with endorsement not a clearing member. To attract the provisions of section 138 NI Act, the cheque should be presented with the bank on which it I drawn- If the cheque is not presented to the bank on which it is drawn, then provisions of sec 138 would not be attracted. If bank on which the cheque is drawn is not a clearing member of the Reserve Bank of India unpaid return of the cheque would not attract section 138. 5. Effect of other endorsements:It has been repeatedly held by courts that manifest dishonest intention of the drawer resulting in dishonour of the cheque would lead to prosecution under section 138 Negotiable Instruments Act regardless of the actual ground of dishonour.

COMPLAINTS AGAINST A COMPANY:Section 141 of Negotiable Instruments Act says:141. Offences by companies:(1) If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:- Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence.- Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the state Government, as the case may be, he shall not be liable for prosecution under this Chapter.(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly,

28Explanation-For the purposes of this section,-(a)company means any body corporate and includes a firm or other association of individuals; and(b) director, in relation to a firm, means a partner in the firm.The Honble Supreme Court has held that merely being a director of a company is not sufficient to make a person liable under section 141 of the Act. A director in a company cannot be deemed to be in charge of and responsible to the company for the conduct of its business. The requirement of section 141 is that the person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact and there is no deemed liability of a director in such cases. AIR 2005 (SCW) 4740; AIR 2005 SC 3512, AIR 2007 SC 1682Supreme Court has also held that for the directors of the company to be made liable for an offence under sec 138, the complaint must contain specific allegations against directors as to how directors are in charge and responsible for conduct of business of company. Mere allegation in complaint that accused persons are directors and responsible officers of the company is not sufficient. AIR 2007 SC 1454

COMPLAINT AGAINST PARTNERS Averment in a complaint that accused (partners) at relevant time were in charge of and responsible to the partnership firm for conduct of its business are necessary to initiate process against them for an offence under sec 138 NI Act. In absence of requisite averments in complaint, the offence against accused / partners could not be made out.