definition of negotiable instrument1

8/7/2019 Definition of Negotiable Instrument1

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LAW OFLAW OFNEGOTIABLENEGOTIABLE

INSTRUMENTSINSTRUMENTS

Anu KumariB.Com I-A, 4245

PresentedBy


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IntroductionIntroductionThe law relating to negotiable

instruments is contained in theNegotiable Instruments Act. 1881which applies and extends to the

whole of India.


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Definition of NegotiableDefinition of Negotiable

InstrumentInstrument

According to section 13 of the Negotiable

Instruments Act, 1881, a negotiableinstrument meanspromissory note, bill of exchange, orcheque, payable either to order or to

bearer.


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17.3 Types of 17.3 Types of Negotiable InstrumentsNegotiable Instruments

According to the Negotiable Instruments Act,1881 there are just three types of negotiable

instruments i.e., promissory note, bill of exchange and cheque. However many otherdocuments

are also recognized as negotiable instrumentson the basis of custom and usage, like hundis,treasury bills, share warrants, etc., provided

they possess the features of negotiability. Inthe

following sections, we shall study aboutPromissory Notes (popularly called pronotes),Bills of

Exchange (popularly called bills), Cheques andHundis (a popular indigenous documentprevalent

in India), in detail.


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i. Promissory Notei. Promissory NoteSuppose you take a loan of Rupeess Five Thousand

from your friend Ramesh. You can make adocument stating that you will pay the money to

Ramesh or the bearer on demand. Or you canmention in the document that you would like to pay the

amount after three months. This document,once signed by you, duly stamped and handed over to

Ramesh, becomes a negotiable instrument.

Now Ramesh can personally present it before you forpayment or give this document to someother person to collect money on his behalf. He can

endorse it in somebody elses name who inturn can endorse it further till the final payment is

made by you to whosoever presents it beforeyou. This type of a document is called a Promissory

Note.Section 4 of the Negotiable Instruments Act, 1881

defines a promissory note as an instrumentin writing (not being a bank note or a currency note)containing an unconditional undertaking,

signed by the maker, to pay a certain sum of moneyonly to or to the order of a certain person or

to the bearer of the instrument.


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Specimen of a PromissorySpecimen of a PromissoryNoteNote

Rs. 10,000/- New DelhiSeptember 25, 2002On demand, I promise to pay Ramesh,

s/o RamLal of Meerut or order a sumof

Rs 10,000/- (Rupees Ten Thousand

only), for value received. To , Ramesh Sd/ SanjeevAddress.. Stamp


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Parties to a PromissoryParties to a PromissoryNoteNote

There are primarily two parties involved in a promissory note. Theyare i.

The Maker or Drawer the person who makes the note andpromises to pay the amount

stated therein. In the above specimen, Sanjeev is the maker ordrawer.

ii. The Payee the person to whom the amount is payable. Inthe above specimen it is

Ramesh.In course of transfer of a promissory note by payee and others, the

parties involved may be -a. The Endorser the person who endorses the note in

favour of another person. In theabove specimen if Ramesh endorses it in favour of Ranjan and

Ranjan also endorses it infavour of Puneet, then Ramesh and Ranjan both are endorsers.b. The Endorsee the person in whose favour the note is

negotiated by endorsement. In theabove, it is Ranjan and then Puneet.


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ii. Bill of Exchangeii. Bill of ExchangeSuppose Rajiv has given a loan of Rupees Ten Thousand

to Sameer, which Sameer has to return.Now, Rajiv also has to give some money to Tarun. In this

case, Rajiv can make a documentdirecting Sameer to make payment up to Rupees Ten

Thousand to Tarun on demand or afterexpiry of a specified period. This document is called aBill of Exchange, which can be transferred

to some other persons name by Tarun.Section 5 of the Negotiable Instruments Act, 1881

defines a bill of exchange as an instrument inwriting containing an unconditional order, signed by the

maker, directing a certain person to paya certain sum of money only to or to the order of a

certain person, or to the bearer of theinstrument.


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Specimen of a Bill of Specimen of a Bill of ExchangeExchange

Rs. 10,000/- New DelhiMay 2, 2001Five months after date pay Tarun or

(to his) order the sum of Rupees Ten Thousand

only for value received.

To Accepted StampSameer Sameer S/dAddress Rajiv


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Parties to a Bill of Parties to a Bill of ExchangeExchange

There are three parties involved in a bill of exchange. Theyare i.

The Drawer The person who makes the order formaking payment. In the above specimen,

Rajiv is the drawer.Business Studies32ii. The Drawee The person to whom the order to pay

is made.He is generally a debtor of the drawer. It is Sameer in this case.iii. The Payee The person to whom the payment is to

be made. In this case it is Tarun. The drawer can also draw a bill in his own name thereby he

himself becomes the payee. Here thewords in the bill would be Pay to us or order. In a bill where a

time period is mentioned, just likethe above specimen, is called a Time Bill. But a bill may be

made payable on demand also. Thisis called a Demand Bill


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iii.iii.ChequesCheques

Cheque is a very common form of negotiable instrument. If you havea savings bank account or

current account in a bank, you can issue a cheque in your own nameor in favour of others,

thereby directing the bank to pay the specified amount to theperson named in the cheque.

Negotiable Instruments33

Therefore, a cheque may be regarded as a bill of exchange; the onlydifference is that the bank is

always the drawee in case of a cheque. The Negotiable Instruments Act, 1881 defines a cheque as a bill of

exchange drawn on a specifiedbanker and not expressed to be payable otherwise than on demand .

Actually, a cheque is anorder by the account holder of the bank directing his banker to payon demand, the specified

amount, to or to the order of the person named therein or to thebearer


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Specimen of aSpecimen of aChequeCheque

......20.......Pay............................................................

....................................................................................................................

..................................... or BearerRupeesSTATE BANK OF INDIA

Jawaharlal Nehru University, New Delhi 110067MSBL/976 5 3 0 0 3 1 1 0 0 0 2 0 5 6 1 0


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iv. Hundisiv. HundisA Hundi is a negotiable instrument by usage. It is often in the form of a bill of exchange drawn

inany local language in accordance with the custom of the place. Some times it can also be in theform of a promissory note. A hundi is the oldest known instrument used for the purpose of transfer of money without its actual physical movement. The provisions of the NegotiableInstruments Act shall apply to hundis only when there is no customary rule known to the

people.Types of Hundis

There are a variety of hundis used in our country. Let us discuss some of the most commonones.

Shah-jog Hundi: This is drawn by one merchant on another, asking the latter to pay the amount to a Shah. Shah is a respectable and responsible person, a man of worth and known in thebazaar. A shah-jog hundi passes from one hand to another till it reaches a Shah, who, afterreasonable enquiries, presents it to the drawee for acceptance of the payment.Darshani Hundi: This is a hundi payable at sight. It must be presented for payment within areasonable time after its receipt by the holder. Thus, it is similar to a demand bill.Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time. This issimilar to a time bill.

There are few other varieties like Nam-jog hundi, Dhani-jog hundi, Jawabee hundi, Jokhamihundi, Firman-jog hundi, etc.


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Modes of Crossing of ChequeModes of Crossing of Cheque

1. General Crossing: like 2.Special Crossing: like

&

. c o

N o t N e g o t i a b l e

N

o t N e g o t i a b l e

& . C o

S t a t e B a n k o f

I n d i a

A c c o u n t P a y e e

S t a t e B a n k o f I n d i a

N o t N e g o t i a b l e

S t a t B a n k o f I n d i a


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Parties to NegotiableParties to Neg otiableInstrumentsInstruments

Bill of Exchange:-The DrawerThe Drawee

The AcceptorThe PayeeThe Endorser

The EndorseeThe Holder

Drawee in case ofneed

Acceptor for honour1.

Promissory Note:-The MakerThe PayeeThe Holder

The EndorserThe Endorsee

Cheque:-The DrawerThe DraweeThe PayeeThe Holder

The EndorserThe Endorsee


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Holder & Holder in dueHolder & Holder in duecoursecourse

Holder :- According to section (8) of the Act holder of anegotiable instrument meansany person (a) who is

entitled in his own name tothe possession of thenegotiable instrument and(b) who has also the right toreceive or recover the

amount due thereon fromthe parties thereto.

Holder in due course:- meansany person who for theconsideration becomes thepossessor of a promissorynote, a bill of exchange or acheque if payable to bearer,or the payee or endorseethereof, if payable to order,before the amountmentioned in it becomespayable and without havingsufficient cause to believethat any defect existed inthe title of the person fromwhom he derived his title(section 9) .


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Privileges of a holder in duePrivileg es of a holder in duecoursecourse

Every holder is a holder in due course. An Inchoate instrument, if properly stamped, is valid if it

subsequently comes into the hands of a holder in due course. Every prior party is liable to a holder in due course until the

instrument is duly satisfied. The accepter cannot plead against a holder in due course that

the bill is drawn in a fictitious name. No effect of conditional delivery. Instrument obtained by unlawful means or unlawful consideration. Estoppel against denying capacity of instrument. Estoppel against denying capacity of the payee to endorsee.


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Points of Difference b/w Holder &Points of Difference b/w Holder &

Holder in due courseHolder in due course

1. A holder can obtain aninstrument without

consideration while a personcannot be a holder in duecourse unless he obtains aninstrument withconsideration and for value.

2. If an instrument isinchoate, a holder of suchinstrument cannot get goodtitle in the instrument.While holder in due course

acquires a good title even ifthe instrument is inchoate.

3. A holder of an instrument mayacquire the instrument if itbecomes payable. But theperson is not treated as a

holder in due course if heacquires an instrument when itbecomes payable.

4. A holder need not botherabout the defect, if any, in

the title. But no holder isconsidered a holder in duecourse who acquires aninstrument knowingly thedefect of the title.


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PresentmentPresentment Placing of a negotiable instrument before

a drawee is called presentment.Presentment may be for any of thefollowing three purposes:a) Presentment for acceptance.b) Presentment for sight.

c) Presentment for payment.


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NegotiationNeg otiation

According to section 14,

It is a process of transferring theownership, right, title, interest of aperson in a negotiable instrument to

another person so as to give a goodtitle to the transferee and make atransferee a holder of such

instrument.


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ContinuedContinued

Negotiation does not mean a simple

transfer. Simple transfer may notnecessarily involve the transfer of propertyin the negotiable instrument but negotiationimplies the transfer of property orownership .E.g. -X hands over a chequeto Mr. Y hereMr. X has negotiates the instrument.But if he hands over a cheque to Mr. Y

asking him to keep the same in his safe, thecheque is not negotiated to Mr. Y, Mr. Y


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Essentials of negotiationEssentials of neg otiation There must be transfer of a negotiable

instrument to another person.

As a result of such transfer, thetransferee must become the holder ofthe instrument.


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Modes of negotiationModes of neg otiationq Negotiation by delivery The negotiable

Instrument is transferred by delivery,actual or constructive. It is physical actof delivering the instrument or handingover the delivery, actual possession of theinstrument is not passed.

q Negotiation by endorsement and delivery The negotiable Instrument payable toorder is negotiable by the holder by


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EndorsementEndorsement

Literal meaning of the term endorsement

is writing on an instrument.Endorser - The person who signs on the

back or on the face of the instrument oron the slip is an endorser.

Endorsee - The person to whom theinstrument is endorsed is called theendorsee.

i fV i

f


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Various types of Various ty pes of EndorsementEndorsement

General or blank endorsement - Endorser signs hisname either on the back or face of the instrument.

Full or special endorsement - It specifies the name ofthe person to whom or to whose order the paymentmust be made.

Partial endorsement It is made for remaining balanceof payment.

Conditional endorsement The liability of the endorseris limited or negative.

Restrictive endorsement- The endorsee become theholder of the instrument i.e. he gets the right to

receive the payment when due & he can sue theparties.


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Discharge of Parties fromDischarg e of Parties fromLiabilityLiability

Discharge by cancellationDischarge by release

Discharge by payment in due courseDischarge by express waiverDischarge by material alteration or lapse

of time


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Dishonour of a NegotiableDishonour of a Neg otiableInstrumentInstrument

Promissory notes, cheques and bills of exchange arecovered by this Act. Of these negotiable instruments,promissory notes and cheques may be dishonoured bynon payment only while bills of exchange may bedishonoured by non payment or by non-acceptance asthey require acceptance from drawees. Section 93 ofthe Act states that when a promissory note or a billof exchange or cheque is dishonoured by non-acceptance or non-payment the holder thereof, orsome party thereto who remains liable thereon, mustgive notice that the instrument has been so honoredto all other parties whom the holder seeks to makeseverally liable thereon, and to some one of severalparties whom he seeks to make jointly liable


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1988 Amendment1988 Amendment

DRAWERBEWAREBecause, by the said amendment the

DISHONOURED CHEQUE is beingTREATED as an CRIMINAL OFFENCE


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NOTING AND PROTESTINGNOTING AND PROTESTINGNoting means nothing but the recording of the fact of dishonor ofthe instrument by a notary public within a reasonable time afterdishonour. Of course, nothing is not compulsory neither it affectsthe rights of the holder thereon,

Noting contains the following particulars:-a) The fact and the date of dishonour of the instrument.b) The reason or reasons if any, assigned for such dishonour.c) The notary charges incurred.d) If the instrument has not been expressly dishonoured, thereason as to why the holder wants to treat the same as

dishonoured.


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Continued..Continued..Protest: According to section 100 of this Act,

when a promissory note or a bill ofexchange has been dishonoured b non-acceptance or non-payment, the holdermay, within a reasonable time, cause suchdishonour to be noted and certified by anotary public. Such certificate is called aprotest.


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Contents of ProtestingContents of Protesting Either the instrument itself, or a literal transcript of the

instrument and of every thing written or printed thereupon; The name of the person for whom and against whom the instrument

has been protested; A statement that payment or acceptance, or better security, as

the case may be, has been demanded of such person by thenotary public; the terms of his answer. If any, or a statementthat he gave no answer, or that he could not be found;

When the note or bill has been dishonoured, the place and time ofdishonour, and when better security has been refused, the placeand time of refusal;

The subscription of the notary public making the protest; In the event of an acceptance for honour or of a payment forhonour, the name of the person by whom, of the person forwhom, and the manner in which, such acceptance or payment wasoffered and effected.

The signature of the notary public.


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The End The End

Thank You

definition of negotiable instrument1

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