Law of Negotiable Instruments:-

( The Negotiable Instruments Act,1881 )

Submitted To: Prof. Vijay Vora

Submitted By: Ravi Golwala

Jina Devi

Reserve Bank Of India

Negotiable Instruments

Parties Of Negotiable Instruments

Assignment

Indorsement

Content :

Introduction Of RBI:

It is the Central Bank of India Established in1934 under the RESERVE BANK OF INDIA ACT 1934. Its head quarters is in Mumbai (Maharashtra). Its present governor is Dr. Duvvuri Subbarao. It has 26 offices in which four are regional offices located in metropolitan cities.

History Of RBI: It was set up on the recommendations of the

Hilton Young Commission. It was started as share-holders bank with a paid up capital of INR 5 crores. Initially it was located in Kolkata. It moved to Mumbai in 1937. Initially it was privately owned. The govt. had a nominal value of shares of INR 2,20,000. later on in 1949, the bank was nationalised and is fully owned by the Govt. of India.

The Reserve Bank's affairs are governed by a central board of directors and four local boards of directors. The central board performs the functions of general superintendence and direction of the bank’s affairs.

Central board: Appointed/nominated by the GOI for a time period of four years. It includes the following;

Official directors Non-official directors Committee of Central board Board for Financial Supervision(BFS)

Organization of The RBI :

Board for Payment and Settlement system(BPSS) Sub - Committees of the Central Board Local board: There are four local boards, one each

for the four regions of the country situated in Mumbai, New Delhi, Chennai and Kolkata. The membership of each local board consists of five members appointed by the central govt. for a period of four years. The functions of the local board include:

to advise central board on local matters to perform such other functions as may be

delegated by the central board from time to time.

Cont.

Structure Of Indian Banking:

Negotiable means “Transferable”.

Instrument means a “Document”.

Definition:Sec-13(1) of Negotiable Instrument Act,1881

A Negotiable instrument means “A promissory note, bill of exchange or cheque payable either to order or bearer”.

Negotiable Instrument:

1) Property.2) Defects in Title.3) Remedy.4) Rights.5) Payable to order.6) Payable to bearer.7) Payment.8) Consideration.9) Presumptions.

Characteristics:

It is a written document by which certain rights are created and/or transferred to a certain person.

It must be signed by the maker or the drawer as the case may be.

There must exist the unconditional order or promise to pay.

There must be a time mentioned for such payment. In particular cases, the drawee’s name should be

specifically mentioned. It must be capable of being paid either by bearer or

by order.

Features of a Negotiable Instrument :

Freely transferable.

Holder’s title is free from defects.

Can be transferred infinitum.

Elements of Negotiability :

As to consideration As regards time As regards acceptance As regards transfer As regards endorsements As regards dishonor of negotiable

instruments As regards capacity of the parties

Presumptions as to negotiable instruments:

Dishonour of negotiable instrument Can be dishonored in 2 ways – 1.By non-acceptance 2.By non-payment

Notice of dishonor is mandatory.

Noting of dishonor is also necessary.

Protest is mandatory for foreign bills.

Definition:

◦ A written, dated and signed two-party instrument containing an unconditional promise by the maker to pay a definite sum of money to a payee on demand or at a specified future date.

Promissory Notes: (Sec-4)

1. Writing:2. Undertaking to pay:3. Unconditional:4. Signed:5. Certain person:6. Specific sum:7. Promise to pay must be money only:8. Stamping:

Essential Elements Of Promissory Note:

Example:

It is an instrument in writing containing an unconditional order by the maker, directing a certain person to pay a certain sum of money to the bearer of the instrument or to the order of a certain person and it must be signed by the maker.

The same person can be the drawer and the payee at the same time.

NEITHER THE PROMISSORY NOTE NOR THE BILL OF EXCHANGE ARE REQUIRED TO BE ATTESTED OR REGISTERED.

Bill of Exchange: (Sec-5)

I. Writing:II. Parties: 1) Drawer 2) Drawee 3) PayeeIII. Order to Pay:IV. Unconditional:V. Signed:VI. Person Directed:VII. Money:VIII. Payee must be certain:IX. Certain Sum:X. Stamping:

Essential Elements Of A Bill Of Exchange:

EXAMPLE:

Definition: A ‘Cheque’ is a ‘bill of exchange’ drawn

on a specified banker and not expressed to be payable otherwise than on demand.

A cheque is an order by the customer of the bank directing his bank to pay on demand the specified amount to a certain person or to the order of a certain person named therein.

Cheque: (Sec-6)

Cont.. It includes an electronic cheque and the

electronic image of a truncated cheque.

The drawer of the cheque must date it before it leaves his hands.

A cheque may be ante-dated or post-dated.

All cheques are bills of exchange but all bills of exchange are not cheques.

Crossing of Cheques: It is a direction given by the customer to

the banker that payment should not be made across the counter.

Crossing is effected by drawing two parallel transverse lines with or without particular abbreviations.

A cheque that is not crossed is called an open cheque.

It serves as a measure of safety against theft or loss of cheques in transit.

Types of Crossing:GENERAL: SPECIAL:

1. Addition of two parallel transverse lines.

2. Between the lines, the words “Not negotiable”, “A/c Payee”, “& Co.”, “and Co.”, may or may not be written.

1. Drawing of two parallel lines is not always necessary.

2. Addition of the specific name of banker on the face of cheque.

Who can cross a cheque? Both the drawer and the holder can cross a

cheque.

General crossing can be converted into special crossing but special crossing cannot be converted into general crossing.

A cheque crossed in favour of a particular banker can again cross it in favour of a another banker.

Example:

i. Accommodation Bill:ii. Fictitious Bill:iii. Escrow:iv. Instrument payable on demand:v. Bearer and Order instruments:vi. Inchoate stamped instrument:vii. Ambiguous instruments:viii. Inland and foreign instruments:ix. Forged instrument:

Classification Of Negotiable Instruments:

Definition:

Any person:◦Who is entitled in his own name to the

possession of the negotiable instrument.◦Has right to receive or recover the amount

from the parties thereto.

Holder ( Sec.8 )

A principal whose name appears on an instrument as the holder though it is executed in the name of his agent for him.

Where a negotiable instrument is a bearer one, any person who is in the possession of such instrument is the holder.

The endorsee of a cheque is called a holder. If a holder of a negotiable instrument is

dead, the heirs of deceased holder become the holder.

Holder’s Of Negotiable Instrument:

A principal on whose behalf a pro-note is endorsed in blank and is delivered to his agent, he is a holder of the instrument though his name does not appear on the instrument.

Cont…

A thief or a finder of an instruments is not a holder though he is in possession of an instrument.

The word “entitled” used in the definition of a holder shows that the title of the person who claims to be the holder must be acquired in a lawful manner. A person obtaining the instrument under forgery is not a holder.

The Following are not the Holders:

The definition of the holder in due course in section 9 means that any person who for the consideration paid becomes the possessor of a negotiable instrument, before its maturity, in good faith and without any sufficient reason to believe that any defect existed in the title of the person from whom he obtained it.

Holder In Due course: ( Sec.9 )

Liability of prior parties.

Fictitious drawer or payee.

No effect of conditional delivery.

Instrument cured of all defects.

Right & Privileges of Holder in Due course:

Instrument obtained by unlawful means or unlawful consideration.

Estoppel against denying original validity of instrument.

Estoppel against denying capacity of the payee to endorse.

Cont…

Estoppel against denying signature or capacity of prior party.

Inchoate stamped instruments.

Cont…

The maker of a bill of exchange or cheque is called the ‘Drawer’.

The person is directed to pay is called the ‘Drawee’.

When in the bill or in any indorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need, such person is called a “a drawee in case of need.”

Drawer, Drawee In Case of Need:

ASSIGNMENT:

Assignment takes place where the holder of an instrument transfers it to another so as to confer a right on the transferee to receive the payment of the instruments. The main feature of assignment is that the assignee obtains the right of the assignor. Therefore, if the assignor’s title is defective, assignee’s title will also be defective.

Cont.. Bills, notes and cheques represent debts and

as such have been held to be assignable without endorsement. Transfer by assignment takes place when the holder of a negotiable instrument sells his right to another person without endorsing it. The assignee is entitled to get possession and can recover the amount due on the instrument from the parties thereto.

Of the two methods of transfer of negotiable instruments discussed, transfer by negotiation is recognized by the Negotiable Instrument Act.

Cont..

1.Writen document duly signed by the transferor is mandatory for an assignment.

2.The consideration has to be proved in case of an assignment.

3.Informing the creditor about the assignment is mandatory.

4.The activities concerning an assignment are regulated by the transfer of property act,1882.

DISTINGUISHED BETWEEN NEGOTIATION AND ASSIGNMENT :

Negotiation Assignment

1.Consideration is presumed until country is proved.

2.If transferee is a holder in due course,he takes the instrument free from any defects.

3.Notice of transfer is not necessary.

4.Transferee can sue the third party in his own name.

5.There are a number of presumption in favour of holder in due course.

1.Consideration must be proved.

2.Assignee’s title is always subject to defences and equities between the original debtor and assignor.

3.Notice of assignment must be given.

4.Assignee cannot do so.

5.There are no such presumptions.

INDORSEMENT:The person who so signs the instrument is called the ‘indorser’. The person to whom the instrument is indorsed is called the ‘indorsee’. Indorsement thus means, writing any thing on the face or on the back of instrument, for the purpose of negotiation. Such a writing must be signed by the indorser. Simple signature without any words will also constitute indorsement. Any amount of indorsements may be made on the instrument.

Essentials of a valid Indorsement:

The indorsement of a promissory note, bill of exchange or cheque is completed by delivery, actual or constructive. Indorsement constitutes a contract between the indorser and indorsee. Indorser can be liable to the indorsee if indorsement is complete. Indorsement is complete only when :

1. The holder writes or signs on the face or back of the instrument or on a stamped paper;

the instrument is delivered to the indorsee; the instrument is indorsed and delivered with

an intention to transfer the property in the insturument.

Who may indorse and negotiate ?

The maker or holder of a negotiable instrument may indorse, otherwise than as such maker.

The maker or drawer shall indorse or negotiate any instrument only when he is in lawful possession or is holder thereof. Similarly, a payee or indorsee shall indorse or negotiate an instrument only when he is the holder thereof. Therefore, a thief cannot indorse the imstrument.

Effect on indorsement: The indorsement of a negotiable instrument

followed by delievery transfers to the indorsdee, the property therin with the right of further negotiation. The indoresement may, by express words, restrict or exclude such right, or may merely construct the indorsee an agent to indorse the instrument, or to receive its contents for the indorser or for some other specified person.

Kinds of indorsements:

There are seven kinds of indorsement. Indorsement in blank Indorsement in full Partial indorsement Conditional or Qualified indorsement Restrictive indorsement Facultative indorsement Forged indoesement.

1) Indorsement in blank:

If the indorser signs his name only, the indorsement is said to be ‘in blank’. A blank indorsement is also called ‘general indorsement’. The name of indorsee is left blank. The indorser singns the instrument.

2) Indorsement in full: If the indorser singns his name and adds a direction

to pay amount mentioned in the instrument to the order of a specified person, the indorsement is said to be ‘in full’. Where one person specifies the name of other person to whome money is to be paid and sings the instrument, it is a case of ‘indorsement in full’. Indorsement in full is also known as ‘special indorsement’.

3) Partial indorsement: No writing on a negotiable instrument is valid for the

purpose of negotiation if such writing purports to transfer only a part of the amout appearing to be due on the instrument. But,where such amount has been party paid, a note to that effect may be indorsed on the instrument, which may then be negotiated for the balance.

4) Conditional or Qualified indorsement : The indorser of a negotiable instrument may, by

express words in the indorsement, exclude his own liability thereon, or make such liability or the right of the indorsee to receive to receive the amount due thereon dependant upon the happening of a specified event, although such event may never happen. Where an indorser so excludes his liability and afterwards becomes the holder of the instrument, all the intermediate indorsers are liable to him.

5) Restrictive indorsement : The indorsement may, by express words, restrict or

exclude the right of further negotiation, i.e., it puts an end to negotiability. The last indorsee can sue upon the instrument. An indorsement may not restrict further transfer of an instrument though it may prohibit further negotiation.

6) Facultative indorsement : When the indorser abandons some right or increases his

liability under an instrument, the indorsement is called “Facultative”.

7) Forged indorsement : Forgery is nullity. Where an instrument is negotiated by a

forged indorsement, no person can acquired the rights of a holder in due course, even if he has obtained the instrument for value and in good faith.