THE NEGOTIABLE INSTRUMENT ACT

THE NEGOTIABLE INSTRUMENT ACT - Transcript

THE NEGOTIABLE INSTRUMENTS ACT 1881
NEGOTIABLE INSTRUMENTS
By virtue of Sec 13 a a negotiable instrument means a promissory note bill of exchange or cheque payable either to order or bearer whether the words order or bearer appear on the instrument or not Any other instruments if satisfies the conditions of transferability by delivery or endorsement and is capable of being sued upon by the person holding it in his own name may also be included as negotiable instrument The definition simply mentions the names of Negotiable Instruments and does not explain their nature in the act
Characteristics of Negotiable Instruments
Requirements of Negotiable Instruments An NI must be in writing signed by the maker or the drawer must be an unconditional promise or order to pay must call for payment in money only which should be a certain sum of money payable at a certain time and the drawee must be named or described
1 Free transferability or easy negotiability
2 Title of holder is free from all defects
3 Recovery
Presumptions as to Negotiable Instruments Section 118
Until the contrary is proved the following presumptions shall be made
a of consideration
b as the date
c as to time of acceptance
d as to time of transfer
e as to order of endorsements
f as to stamps
g as to a holder in due course
h as to Proof of protest Section 119
Types of negotiable instruments
Negotiable instruments are of two types which are as follows
Negotiable instruments recognized by statute
Negotiable instruments recognized by usage or customs of trade
Bill of Exchange
Bill of Exchange Section 5 is an instrument in writing containing 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
Where a bill is lost the drawer is under obligation Sec 45A to issue a duplicate bill
Parties to a BOE are drawer drawee acceptor payee holder endorser endorsee drawee in case of need an acceptor for honour
Following are some of the important essential characteristics of a bill of exchange
1 It must be in writing
2 It must contain an order to pay and not request
3 The order must be unconditional
4 The parties to the bill of exchange i e drawer drawee and payee must be certain
5 Bill of exchange must be signed by the drawer and accepted by the drawee
6 The sum payable must be certain
7 Bill of exchange must contain an order to pay money only
8 Bill of exchange must be stamped properly
9 Bill of exchange originally drawn cannot be made payable to bearer
Essential characteristics of a Promissory Note
Promissory note Section 4 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
Matters of form like no place date etc are usually found given in notes but they are not essential in law
Parties to a promissory note are a maker payee holder endorser and endorsee
Promissory note is a negotiable instrument
It must be in writing
It is a promise to pay money only
It must be definite The promise to pay must be definite
It must be unconditional Undertaking to pay must be unconditional
It must be signed by the maker
The maker of the promissory note must be a certain person and the payee must also be certain
Amount of the promissory note must be certain
Other formalities Other formalities like number date consideration place etc are generally found in the promissory notes but they are not essential in law
10 Promissory note must be properly stamped according to the provisions of the Indian Stamp Act 1899
Cheque
Section 6 of the Negotiable Instruments Act defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand
Essential characteristics of a cheque
A cheque is a negotiable instrument
It is a bill of exchange
It is always drawn on a specified banker
It is always payable on demand
A cheque can be bearer order or crossed
A cheque requires no acceptance in the ordinary course of business as it is intended for immediate payment
In the case of a cheque a drawee is always a specified bank a drawer is a person who draws a cheque and who has an account in the bank and payee is a person to whom the amount of cheque is made payable
Trade Bill and Accommodation Bill
Fictitious Bill
Documentary and Clean Bills
Inchoate Instrument
Ambiguous Instruments
Distinction between a Bill of Exchange and a Promissory Note
In a bill of exchange there three parties i e the drawer the drawee and the payee while in a promissory note there are two parties and they are the maker or drawer and the payee
The drawer of the bill is the creditor while the drawer of the promissory note is the debtor
A bill of exchange contains an unconditional order to pay while a promissory note contains an unconditional promise to pay
In a bill of exchange the acceptance by a drawee is required while the maker of a promissory note is the promiser and is liable to pay
The liability of the drawer of a bill of exchange is secondary and conditional whereas that of a maker of a promissory note is promisary and absolute
In the bill of exchange the drawer and the payee can be one and the same person but a promissory note cannot be made payable to the maker himself
The drawer of a bill of exchange stands in relation with the acceptor and not with the payee but the maker of the promissory note stands in immediate relation with the payee
Distinction between a Cheque and a Bill of Exchange
i A cheque is always drawn on a specified banker and therefore a banker bank is always the drawee A bill of exchange can be drawn on any person or any bank
ii A Cheque is always payable on demand while a bill other than a cheque may be payable on demand or at the expiry of a time
iii A cheque requires no acceptance whereas a bill of exchange must be accepted by the drawee before he is called upon to pay the amount of the bill
iv In the case of a bill of exchange three days of grace are allowed unless it is made payable on demand while in the case of a cheque no such days of grace are allowed and it is always payable on demand
A cheque can be crossed but not a bill
vi A cheque does not require any stamp to be affixed on it whereas a bill of exchange except in certain cases must be stamped
vii The payment of a cheque is not discharged from his liability if there is any delay in presenting the cheque A bill of exchange is required to be presented according to the law to the acceptor
viii The drawer of a cheque is not discharged from his liability if there is any delay in presenting the cheque A bill exchange is required to be presented according to the law to the acceptor
ix The drawer draws a cheque against his own funds while a bill of exchange may also be drawn to provide the credit to the parties to the bill of exchange
A cheque is not required to be noted or protested for dishonour while a bill if dishonoured may be noted or protested
A cheque is not required to be noted or protested for dishonour while a bill if dishonoured may be noted or protested
xi In the case of cheque if it is dishonoured no notice is essential But in the case of a bill of exchange the notice of dishonour is essential
Capacities of parties to the negotiable instruments
Section 26 says that every erson capable of contracting according to the law to which he is subject may bound himself and be bound by making drawing acceptance endorsement delivery and negotiation of a promissory note bill of exchange or cheque
a Minor
b Lunatics or persons of unsound mind
c Insolvent
d Agent
e Partnership firm
f Joint stock company
g Legal representatives
h Hindu joint family
Honder and holder in due course
Holder
The definition given in section 8 implies that
any person a who is entitled in his own name to the possession of the negotiable instrument and b has right to receive or recover the amount from the parties thereto
a Possession of instrument
b Entitled to receive the amount
Following persons are considered the holders of the negotiable instruments
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
Where a negotiable instrument is in the name of a partner of a firm it naturally becomes a holder as it is not a separate entity from the partner
The endorsee of a cheque is called a holder
If a holder of a negotiable instrument is dead the heirs of the deceased holder become the holders
A principal on whose behalf a pronote 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
However the following persons are not called holders
i A thief or a finder of an instrument is not a holder though he is in possession of an instrument
ii 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
iii When the endorsement of a bill is for collection only the endorsee cannot be a holder
iv The above mentioned lists are not complete
Holder in Due Course
The definition of holder in due course in Section 9 means that any person who for the consideration paid becomes the possessor of a negotiable instruments 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
a He must be a holder in due course
b He must be a holder of valuable consideration
c He must become a holder of the negotiable instrument before the date of maturity
d He must become a holder of the negotiable instrument in good faith
If
a he obtains the negotiable instrument after its maturity or
b he obtains it by way of a gift or
c he obtains it for any unlawful consideration or
d he obtains it by some illegal method or
e he does not obtain it bonafide
he is not considered to be a holder in due course
Right and Privileges of a Holder in Due Course
a Liability of prior parties
b Instalment purged or cleansed of all defects
c Privilege in case of inchoate stamped instrument not affected
d No effect of conditional delivery or of special delivery
e No effect of absence of consideration or presence of an unlawful consideration
f Privilege in case of a fictitious bill
g Estoppel against denying original validity of instrument
h Estoppel against denying capacity of payee to endorsee
i Estoppel against endorser to deny capacity of prior parties
Distinction between holder and holder in due course
A holder can obtain an instrument without consideration while a person cannot be a holder in due course unless he obtains an instrument with consideration and for value
If an instrument is inchoate a holder of such instrument cannot get good title in the instrument While holder in due course acquires a good title even if the instrument is inchoate
A holder of an instrument may acquire the instrument if it becomes payable But the persons is not treated as a holder in due course if he acquires an instrument when it becomes payable
A holder need not bother about the defect if any in the title But no holder is considered a holder in due course who acquires an instrument knowingly the defect of the title
Procedure of transfer or modes of negotiation
A negotiable instrument can be transferred to another person in the following two ways
a Negotiation by delivery and
b Negotiation by endorsement and delivery
Instruments payable to bearer can be transferred by mere delivery while instruments payable to the order are transferred by endorsement and delivery
a Negotiation by delivery
Section 46 of the Act throws light on the term delivery It states that The making acceptance or endorsement of a promissory note bill of exchange or cheque is completed by delivery actual or constructive
As between parties standing in immediate relation delivery to be effected must be made by the party making accepting or endorsing the instrument or by a person authorized by him in that behalf
As between parties and any holder of the instrument other than a holder in due course it may be shown that the instrument was delivered conditionally or for a special purpose only and not for the purpose of transferring absolutely the property therein
A promissory note bill of exchange or cheque payable to bearer is negotiable by the delivery thereof
A promissory note bill of exchange or cheque payable to order is negotiable by the holder by endorsement and delivery thereof
Types of Endorsement
General or blank endorsement
Full or special endorsement
Partial endorsement
Restrictive endorsement
Conditional endorsement
An endorsement may be conditional in one of the following ways
i Sans recourse endorsement
ii Facultative endorsement
iii Sans frains endorsement
iv Liability depends upon a contingency
Negotiable Instruments Act
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Dr Subhash Gupta