1 ni act 27-3-13 def,charecteristics.ppt gfgujkf hfj fhuf hui hjkhfjl ghujl fhuri ghjl fhbrjl hriuyt...

7/27/2019 1 NI ACT 27-3-13 DEF,CHARECTERISTICS.ppt gfgujkf hfj fhuf hui hjkhfjl ghujl fhuri ghjl fhbrjl hriuyt yhukl njk bjkl bhjl shkjl gh ghtiuhuriyu5i hjk bnkj bjklhiurg

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CLASS

NEGOTIABLE INSTRUMENTS

ACT 1881


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What is a Negotiable Instrument?

Negotiable Instruments are essentially creditinstruments with features of negotiability.

Therefore, to clearly understand them one

should first understand their commercialcharacter.

Credit is the privilege to buy now and pay later.

It also includes borrowing of money now with a

view to pay later. Instruments which evidence or acknowledge

such credits are called Credit Instruments.


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There are some credit instruments which

are not negotiable.

That is they are credit instruments but they

do not have the features of negotiability.

postal order is an example of such non-

negotiable credit instruments.


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Of the negotiable instruments, some are negotiableunder law (i.e. Negotiable Instruments Act of 1881).

Others are negotiable because of mercantile usage andcustom.

Bills of exchange, promissory notes, and the chequesare the three instruments which are negotiable underlaw.

Government of India Bonds and dividend warrants areexamples of instruments which are negotiable accordingto usage and custom.

This is so because Government of India Bonds aresimilar to promissory notes and dividend warrants aresimilar to cheques.


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WHY NIs

Suppose A sells goods worth Rs. 1,000 to B on credit.The credit so allowed may be secured by means ofdifferent instruments

. 1.A may draw an unconditional order on B to pay themoney to himself or some other specified person, whichB accepts and signs. Such an order is called a Bill ofexchange.

2. B may execute an unconditional promise to pay themoney to A or his order. The instrument containing thepromise is called promissory note.

3. B may draw a unconditional order on his banker (withwhom he has deposited money on Current Account) topay A or his order a sum of Rs. 1,000 only. Such anorder on the banker is called a cheque.


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DEFINITION OF NI

13. "Negotiable instrument". (l) A negotiable instrumentmeans a promissory note, bill of exchange or chequepayable either, to order or to bearer.

Explanation (I). --- A promissory note, bill of exchange or

cheque is payable to order which is expressed to be sopayable or which is expressed to be payable to aparticular person, and does not contain wordsprohibiting, transfer or indicating an intention that it shallnot be transferable.

Explanation (II). A promissory note, bill of exchange orcheque is payable to bearer which, is expressed to be sopayable or on which the only or last endorsement is anendorsement in blank.


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DEFINITION OF NI

Explanation (III), A promissory note, bill of

exchange or cheque, either originally or by

endorsement, is expressed, to be payable to the

order of a specified person, and not to him or hisorder it is nevertheless payable to him or his

order at his option.

(2) A negotiable instrument may be made

payable to two more payees jointly, or it may bemade payable in the alternative to one of two, or

one or some of several payees


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Definition of Negotiable

Instruments - Explanation The Negotiable Instruments Act does not define a

negotiable instrument and merely states that anegotiable instruments means a promissory note, bill ofexchange of cheque payable either to order or bearer

(Section 13). This does not indicate the characteristics of negotiable

instrument but only states that three instruments-cheque,bill of exchange and promissory note are negotiableinstruments.

These three instruments are, therefore, negotiableinstruments by statute. Section 13 does not prohibit anyother instruments, which satisfy the essential features ofnegotiability, to be treated as negotiable instrument


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Instruments - Explanation Justice K.C. Willis defines a negotiable instrument as

one the property in which is acquired by any one whotakes it bonafide, and for value not withstanding anydefect of title in the person from whom he took it.

Another useful definition is given by Thomas who statesthat an instrument is negotiable when it is, by a legallyrecognized custom of trade or by law, transferable bydelivery or by endorsement and delivery, without noticeto the party liable, in such a way that

a) the holder of its for the time being may sue upon it in

his own name, and b) the property in it passes to a bona fide transferee for

value free from any defect in the title of the person fromwhom he obtained it.


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Instruments - Explanation

These definitions clearly reveal the true natureof a negotiable instrument.

A negotiable instrument is a transferable

document either by the application of the law orby custom.

The special feature of such an instrument is theprivilege it confers on the person who receives it

bona fide and for value, to posses good titlethereto even if the transferor had no title or haddefective title to the instrument.


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Three essential qualities of a

negotiable instrument Firstly, a negotiable instrument must be transferable,

that is the property in it - the legal ownership - must betransferable by mere delivery, accompanied, in the caseof an instrument payable to order, by endorsement.

No instrument of transfer is required and no notice oftransfer need be given to the party/parties liable on theinstrument.

Secondly, it must give to the person who takes it in goodfaith, for value and without notice of any defect in the titleof the transferor, an indefeasible title against all comers.

Also the title passes free from equities and counter-claims between previous parties of which the transfereehas no notice.


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Three essential qualities of a

negotiable instrument

Thirdly, a negotiable instrument must

contain a right of action in itself, the

possessor of it is deemed to be the true

owner capable of enforcing any claimsthereon-he is under no duty to justify his

title in the first instance.


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Delivery

Delivery is defined as a transfer of possession from oneperson to another and is essential for the negotiation of anegotiable instrument.

If an instrument is to be negotiable, it must be possible to

pass title of the instrument and the rights embodied in itby mere delivery or by delivery and endorsement,depending upon whether it is payable to bearer or order.

A document is not negotiable if title to it can only betransferred by some separate document of transfer

and/or the transfer is to be recorded in some register oftitle as, for example, shares registered in the books ofthe issuing company and represented by a sharecertificate.


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Delivery

On the other hand, a share warrant in

bearer form and a bearer debenture which

can be transferred by delivery, are

negotiable.

Delivery may be actual or constructive

(Sec. 46).


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Delivery

Actual delivery takes place by actual change ofpossession of the instrument from one person toanother.

The instrument must be handed over physicallyto whom it is actually intended to be delivered orto his authorized agent.

For instance, when A, the holder of a negotiable

instrument payable to bearer, delivers it to Bsagent to be kept for B, the instrument has beennegotiated.


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Delivery

Constructive delivery implies that the instruments is notdelivered or handed over to the person to whom it isinterned to be delivered but the possession of theinstrument is in law deemed to have been transferredwhen delivery is completed by some act which change

the possession in the eyes of law from the transferor tothe transferee.

In such a case the question of intention comes in.

For example A, the holder of a negotiable instrumentpayable to bearer, which is in the hands of As banker

directs the banker to transfer the instrument to Bsaccount with him.

The bank on accepting the instructions now holds theinstrument as an agent of B.

The instrument has been negotiated and B has become

the holder of it.


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Mode of Transfer

The mode of transfer provided by the Negotiable,Instruments Act depends upon the character ofinstrument. According to Section 13 a negotiableinstrument may be payable to :

i) bearer, or ii) specified person or order

While a bearer cheque passes by simple delivery, anorder cheque passes by endorsement and delivery.

An instrument is said to be payable to bearer which issimply so expressed Pay bearer, or which is expressedthus. Pay to Sham Lal or bearer.


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Mode of Transfer

Or an instrument which having been made

payable to a specified payee or his order has

been endorsed in blank, that is, he has written

nothing more than his signature. In effect, an endorsement in blank converts the

order instrument into a bearer instrument. The

legal right to the proceeds of a bearer cheque

passes from the drawer to whoever presents itfor pay.


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Mode of Transfer

An instrument is payable to order which ispayable to order of a specified person or whichis payable to a specified person or his order.

An instrument in the form of Pay to the order of

A is of the same effect as one drawn payable toA or order which is payable to A or his order.

With an order cheque the legal right to theproceeds of the cheque passes from the drawer

to the payee. If the payee wishes it to pass to another personbe must endorse the cheque to pass on the title.


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Mode of Transfer

An instrument made payable to a particularperson and not containing word prohibitingtransfer or indicating an intention that it shall notbe transferable is defined to be instrumentpayable to order and is negotiable.

Thus, the word order or bearer are notnecessary to render a cheque negotiable.

For example, if a cheque is drawn Pay Awithout the words or order or or bearer thecheque is transferable and negotiable and notpayable only to A in person.


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Notice or Instrument of Transfer

Not Necessary

Notice of Transfer or Instrument of Transfer NotNecessary: When a negotiable instrument, saya cheque, is endorsed to someone, there is noneed for either the endorser or endorsee toinform the drawer or to complete any ancillarydocument.

This characteristic is not true of non-negotiableinstruments, as, for example, when any lifeinsurance policy is assigned to a banker assecurity for an advance, notice of assignmentwill have to be given to the insurance company.


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Transfer of Title

The phrases free from equities andperfect title occur frequently in describingthe rights of a holder of a negotiable

instrument. Other common phrase is free from

defects of title.

These phrases all have the same ultimatemeaning and it is important that themeaning is grasped soundly.


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Transfer of Title

An equity defence or a defect refers to a sustainablereason for disputing or refusing payment of the bill.

If a cheque is issued for goods which prove to bedefective or substandard, the drawer has grounds for

stopping the cheque and refusing payment. This is an equity or defence against the payee.

A bearer cheque which has been lost or stolen hasthereafter an equity or defence attached to it.

The finder or thief is a wrongful possessor.


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Transfer of Title

The drawer has the right to refuse payment asthe finders or thiefs title is defective.

In both these instances, under the basic rule of

transferability, the new holder would take thecheque subject to equities.

That is he would inherit all the weaknesses inthe title of his transferor and any defence or

argument which could be raised against thetransferee could be sustained equally wellagainst the new holder.


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Transfer of Title

A negotiable instrument gives to a party who takes it ingood faith, for value and without notice of any defect inthe title of the transfer, an indefeasible title against allparties and he will not be affected by any prior defect in

the title. The title to the instrument passes free from defects in the

title of previous parties and from all counter-claimsbetween the parties.

So paramount is the quality of conferring a good title that

a party taking a stolen negotiable instrument under theconditions just mentioned would have a good titleagainst the party from whom it has been stolen.


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Transfer of Title

The recipient party and the holders of the

documents subsequent to him may

disregard the defects in title and enforce

the document as if it were in every respectperfect.


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Transfer of Title

The legal relationship between the person first

bound and the person first entitled on a

negotiable instrument is one of contract and in

law there is a basic principle that only theimmediate parties to a contract may be entitled

on and be bound by it.

The principle of negotiation, applicable to bills of

exchange (including cheques), is an exceptionto the aforesaid basic principle as shown above.


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Transfer of Title

Again, in law there is a principle that a person with adefective title to property may not normally give a personto whom he transfers the property a better title than hehimself has.

This is often expressed in the Latin maxim nemo dat

quod non habet (Nobody can give what he has not got). If the transferor had a defective title, the same defective

title is the only title which he could transfer. When aperson obtains property from one who is dealing with itwithout the authority of the true owner, no title is

acquired against the true owner unless the principle ofestoppels operates against him.

Thus, a buyer cannot get a valid title to stolen goods soldto him by the thief even if the buyers has no notice oftheft. Negotiability is also an exception to this principle.


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Transfer of Title

In the case of negotiable instrument, a bonafidetransferee for value acquires a good title subject to hissatisfying certain conditions even if the title of thetransferor were defective.

Such a transferee is known as a holder in due course,

and he may, in fact gets a better title than the transferor. For instance, if a bearer cheque is stolen and the thief

transfers it for value to an innocent third party, the latterwould get a perfect title provided he qualifies as holder indue course.

The transferee is generally not required to investigatethe transferors title to the instrument because thenegotiable instruments are intended to be dealt withspeedily


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Transfer of Title

Thus, it is the exception to these two principles of nemodat quod non habet and privity that constituties theessence of negotiability.

In other words, when a bill of exchange (including

cheque) is negotiated (either by delivery or by deliveryplus endorsement) the new holder can, under specifiedcircumstances, take the bill free from equitiesarguments, disputes or reasons for refusing paymentagainst the original holder cannot be raised against the

new holder. Because of the characteristics mentioned above,

negotiable instruments can pass freely from hand tohand.


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Transfer of Title

The negotiability can, however, be destroyed if it

contains words to that effect as, for example, in

the case of cheque crossed Not Negotiable

If a cheque or bill is dishonoured whenpresented for payment, the holder can sue on it

in his own right. He does not have to claim

through who transferred the instruments to him.

There is right of action in the instrument itself.


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Restriction on Negotiability

Generally the negotiable instruments possess allthe essential features discussed above.

But sometimes the drawer or the holder maytake away the essential characteristic ofnegotiability and thus the instrument ceases tobe a transferable or negotiable instrument.

Examples: i) If a cheque is payable to a specific

person only and not to his order or the bearer, itcannot be transferred to any other person andhence it loses its negotiability.


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Restriction on Negotiability

ii) if a cheque is crossed Not Negotiable,

it can be transferred but without conferring

on the transferee absolute and good title in

all cases.

The transferee of such a cheque will stand

at par with the transferee of any other

commodity and shall not posses title betterthan that of his transferor.


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PARTIES TO A CHEQUE

A Buys goods from B

A does not give cash.

He issues to B a cheque on his accountwith SBI( says Pay B or orderRs)

A is the DRAWERof the cheque

SBI is the DRAWEE B is the PAYEE


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PARTIES TO A PROMISORY

NOTE

A borrows cash of Rs. 40,000/- from B andpromises that he will return it when B makes ademand.

What if A does not do so?

The usual method of securing repayment isthrough a PROMISORY NOTE

A is called the PROMISORor the EXECUTOR

of the PROMISORY NOTE. B is called the

PROMISEE,CREDITOR,LENDER


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PARTIES TO BOE

A Buys goods from B for Rs 10,000/-

A does not give cash. (So A becomes adebtor of B who is the creditor)

So, B the seller draws a bill forRs.10,000/- on A

In this Bill, B can order A to pay to any

person the Rs.10,000/- owed by A to him.For example C

A the accepts this bill and signs it


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PARTIES TO BOE

A is the DRAWER of the Bill

B is the DRAWEE of the Bill

B is also the ACCEPTOR of the Bill C is the PAYEE of the Bill

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