Negotiable Instrument Act 1881

NEOGOTIABLE INSTRUMENT ACT 1881

A) Definition:
Section 13 of Negotiable Instrument Act 1881 defines a negotiable instrument as “ A negotiable instrument means a promissory note, bills of exchange or cheque payable either to order or to bearer” [Sec 13(1).

Negotiable literally means ‘transferable’. Instrument means a document. TheNegotiable Instrument means a transferable instrument.

B) Characteristics of A Negotiable Instrument:

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. The complete right of ownership in a negotiable instrument passes by a mere delivery where instrument is payable to bearer.

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.

Remedy: The holder can sue upon the negotiable instrument in his own name. All prior parties are liable to him. A holder in due course can recover the full amount on the instrument.

Rights: The holder in due course is not affected by certain defences, which might be available against previous holder for example fraud to which he is not party.

Payable to order: A promissory note, bill of exchange is payable to order which is expected to be. So payable or which is expressed to be payable to a particular person.

Payable to bearer: Where the negotiable instrument is payable to bearer, the property in it passes from one person to another by delivery.

Payment: A negotiable instrument may be made payable to two or more payees jointly, or in may be made payable in the alternative to one or two, or some of several payees [sec 13(2)]

Consideration: Consideration in the case of a negotiable instrument is presumed. Every such instrument, when it has been accepted, negotiated or transferred, was accepted endorsed, negotiated or transferred for consideration.

D) PROMISSORY NOTE (Sec.4)

I) Definition: Sec 4 of Negotiable Instrument Act 1881 defines a promissory note as “an instrument in writing 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 promise to pay is called the “maker”. The person who is promised the payment is called the “ payee”.

II) Essential Elements of a Promissory Note

a) In writing: A promissory note must be in writing. Oral engagement or promise is excluded. It may be written in ink or pencil or may be printed. The intention to make a note must be clear.
b) Undertaking to pay: It is not necessary to use the word “promise” but the intention must be clearly shown an unconditional undertaking to pay the amount.
c) Unconditional: It must contain definite and an unconditional undertaking to pay. Promise to pay should be unconditional. A conditional instrument is invalid. It must be certain of payment.
d) Signed by the maker: 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 also a mental act with an intention to sign.
e) Certain persons: 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.
f) Specific sum: The sum promised must be certain and specific. Uncertain amount will make the instrument invalid.
g) Stamping: Promissory notes are chargeable with stamp duty. It is advisable to cancel the stamps with maker’s signature or intials. An unstamped or improperly or insufficiently stamped promissory not is not admissible in evidence. No suit can be maintained upon an unstamped or improperly stamped promissory note.

Specimen of Promissory Notes

ABC
Mumbai – 400016
Rs. 1,00,000/-
6th September 2007
Three months after date I promise to pay XYZ or his order a sum of Rupees One Lakh only for the value received.
Sd/-
ABC
To,
XYZ
Mumbai - 400031

BILLLS OF EXCHANGE (Sec.5)

I) Definition: Section 5 of Negotiable Instrument Act 1881 Act defines a bill of exchange as “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 the bearer of the instrument.”

II) ESSENTIAL ELEMENTS OF A BILL EXCHANGE:

Writing: It must be in writing and may be in any language, and in any form.

Parties: There must be three parties to the bill of exchange, for example, Drawer, Drawee and Payee. The person who draws a bill is called ‘Drawer’ or ‘Maker’. The person on whom the bill is drawn is called a ‘Drawee’ and the person to whom the money is to be paid is called a ‘Payee’.

Order to pay: The bill of exchange must contain an ‘order by the drawer to the drawee to pay’ under any circumstance. The order must be imperative and not in the form of excessive request.

Unconditional: The order in the bill must be unconditional, for example, payable under all events and circumstances.

Signed by the Maker: The bill must be signed by the drawer. A bill without signature is incomplete.

Person directed must be certain: The order to pay must be directed to a certain person. Certainty of the drawee helps the payee to present the bill for acceptance or payment to certain person.

Money: The order must be to pay money only.
Payee must be certain: It must payable to a definite person or his order. The payee must be certain. Bill may be made payable to two or more payees jointly or in the alternative.

Certain sum: The sum payable must be certain. The sum payable may be ‘certain’ although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange.

Stamping: Bill of Exchange is chargeable with stamp duty.

Specimen of Bills of Exchange

XYZ
Mumbai – 400016
Rs. 5,000/-
6th September 2007
Sixty days after date pay to ABC or order the sum of Rupees Five Thousand only for value received.
Sd/-
XYZ
To, Accepted
PQR Sd/-
Mumbai – 400031 PQR

F) CHEQUE (Sec.6)
I) Definition: 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.

II) ESSENTIAL CHARACTERISTICS OF TA CHEQUE:
The following are the essential characteristics of a cheque:
1) A cheque must be in writing.
2) There should be an express order to pay and not a request to pay money.
3) The order must be definite and unconditional.
4) The cheque must be signed by the drawer.
5) The order must be to pay a certain amount of money only.
6) There should be three parties i.e. drawer, drawee and payee which must be certain and must be stated clearly in the instrument.
7) A cheque is always drawn upon a specified banker.
8) A cheque should always be payable on demand.

Specimen of a Cheque
S/B 06.09.2007
PAY………………………………………………………………………………………………
…………………………………………………………………………………OR BEARER
RUPEES…………………………………………………………………………………………

Rs.


A/c No.

THE BANK OF INDIA Sd/-
MUMBAI XYZ
340218 400013020


III) CROSSING OF CHEQUES:
Section 123 to 131 of the Negotiable Instrument Act 1881 provide for crossing of chques.
1) Meaning of Crossing: A cheques is said to be crossed when it bears across its face two parallel transverse lines which are usually drawn on the left hand top corner of the cheque. It is an alteration which is authorised by the Act.

2) Purpose of Crossing: The general purpose of crossing is to direct the drawee (banker) to pay the amount of cheque only to a banker so that party to whose account is credited can be easily traced or identified in case of need.

3) Types of Crossing: There are two types of crossing general crossing and special crossing:
(a) General Crossing (sec 123 & 126): A cheque is said to be crossed generally when ;
i. it has two transverse parallel lines marked across its face; or
ii. it bears an abbreviation “& Co.” between the transverse parallel lines; or
iii. it bears the words “not negotiable” between the two parallel lines
Specimens of General Crossing

(b) Special Crossing: A cheque is said to be crossed specially when it bears across its face the name of a banker without lines or between two parallel lines as under:





(c) Cheque crossed ‘A/c. Payee’: The words “A/c Payee” are sometime entered on the face of a cheque crossed whether generally or specially as under:








Classification of Negotiable Instrument

1) Accommodation bill (Sec.43):
When a bill of exchange is drawn, accepted, or endorsed without consideration, it is called an “accommodation bill”.
Eg: A is need of Rs.10,000/-. He approached his friend B for borrowing the amount. As B is not in a position to lend, he suggests that A might draw a bill on B, which he would accept. It A’s credit is good, he would get the bill discounted with his banker. On the due date, A would pay Rs.10,000/- to B, who would meet the bill.
The person who signs, accept or endorses a bill without receiving any consideration is said to have lent his name to an ‘Accommodation Bill’.
The person who so draws, accepts, endorses, or accommodates is called “Accommodation Party”.

2) Ambiguous Instruments (Sec. 17 & 18)
An instrument which is vague and cannot be clearly identified either as a promissory note or as bill of exchange, is an ambiguous instrument. Where an instrument may be construed either as a promissory note or a bill of exchange, the holder may at his option treat it as either, and the instrument shall henceforth shall be treated accordingly.
If the amount undertaken or ordered to be paid is stated differently in figures and in words, the amount stated in words shall be the amount undertaken or ordered to be paid (sec.18).

3) Foreign Instrument (Sec. 12)
The Foreign Instrument is one which is –
a) Instrument drawn and made payable outside India.
b) Instrument drawn in India, upon persons resident outside India and payable outside India.
Foreign bills of exchange must be protested for dishonour when such protest is required by the law of the place where they drawn.

4) Inland Instrument (Sec. 11)
A promissory note, bill of exchange or cheque drawn or made in India and made payable in, or drawn upon any person resident in India shall be deemed to be an inland instrument.

Following instruments are inland instruments:
i) An instrument drawn and made payable in India;
ii) An instrument drawn in India, upon some person resident in India, though payable in a foreign country;

5) Inchoate Stamped Instrument (Sec. 20)
An inchoate stamped instrument is an incomplete instrument. Sec. 20 lays down: “ Where one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments then in force in India, and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as the case may be, upon it a negotiable instrument, for any amount specified therein and not exceeding the amount covered by the stamp”.
Instrument may be incomplete as regards date, amount, drawer, payee, etc. The holder may fill in any of the particulars to make it a negotiable instrument. As long as the instrument is blank or incomplete, it is not a valid negotiable instrument. The liability of a person signing a blank instrument, therefore, arises only when the instrument is complete.

CRIMINAL PENALTIES IN THE CASE OF DISHONOUR OF A CHEQUE
(Section 138 – 142)

Whenever a cheque has been issued to discharge a legally enforceable debt or liability has been dishonoured due to paucity of fund, the drawee or holder in due course must within 30 days of receiving information of dishonour, give 15 days time to make the payment. He shall be liable, if he fails to do so. In which case, the payee or holder in due course can make a complaint within 1 month of cause of action. A court not lower than that of the Metropolitan Magistrate or Judicial Magistrate of First Class shall try the matter.

The trial shall be conducted expeditiously and endeavour shall be made to conclude the trial within 6 months from the date of filing of the complaint.

The punishment may be imprisonment upto 2 years or fine up to twice the mount of the cheque or both.

When Banker is justified in Dishonouring the Cheque?
1) Funds are not properly applicable to the payment of cheque for Eg. Funds are subject to lien, on banker is entitled to set-off.
2) Cheque is irregular or ambiguous Cheque.
3) Customer become insolvent.
4) Death, lunancy or insolveny of the customer and the banker has the notice of the same.
5) Post dated cheque is presented before its ostensible date.
6) Cheque presented beyond the period of six months from the date of issue.
7) If the drawer’s signature does not tally with his specimen signature.
8) If the banker is not holding, sufficient funds of the drawer unless the banker has agreed to honour the cheque without sufficient funds.
9) If the customer countermands payment and communicates the same to the bank properly.
10) Holder gives notice to the banker of loss of cheque.
11) If the cheque is not presented within the usual banking hours.
12) Where a garnishee order has been issued by the court attaching customer’s balance. (Garnishee is a person liable to pay to debt on behalf of the Judgment Debtor).


Holder in Due Course

The property in a negotiable instrument is acquired by anyone who takes it bonafide and for value inspite of any defect of the title in the person from whom he took it.

Such a person who takes an instrument in good faith and form value becomes the true owner of the instrument and is called a “holder in due course”.

[S-9] says “Holder in due course” means any person-

a) who for consideration became the possessor of a promissory note, bill of exchange OR cheque if payable to bearer, or
b) the payee or indorsee thereof, if payable to order,
c) before the amount mentioned in it became payable and
d) without having sufficient cause to believe any defect existed.
e) In the title of the person from whom he derived his title.