Transcript NEGOTIABLE INSTRUMENTS

MODULE THREE
MEANING
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A written document which creates a right in
favour of some person and which is freely
transferable.
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Negotiable instrument means a promissory
note, a bill of exchange or a cheque.
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A negotiable instrument is one, the legal title
of which can be transferred by mere delivery
or endorsement and delivery.
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The title thus transferred is free from all
defects and the transferee can sue in his own
name.
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Negotiability implies ‘easy transferability
from one person to another, in return for
consideration.
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Free transfer (negotiability): There is no
formality to be complied with the transfer
of a negotiable instrument. It can be very
easily transferred from one person to
another, either by mere delivery or by
endorsement and delivery.
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Transfer free from defects (title): it confers an
absolute and good title on the transferee.
Even if the transferor has a bad title to the
instrument, he can still pass on a good title
to any holder who takes it in good faith and
without negligence and for valuable
consideration
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Right to sue (recovery): it confers a right on the
holder to sue in his own name, in case of need.
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No notice to transfer: the transferor of a
negotiable instrument can simply transfer the
document, without serving any notice of transfer,
to the party who is liable on the instrument to
pay.
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A negotiable instrument is always subject to
certain presumptions:
◦ Every NI was drawn, accepted and endorsed, made
or transferred for CONSIDERATION.
◦ The date it bears is the date on which it was made.
◦ all endorsements were made before maturity.
◦ Every endorsements were made in the same order
they appear.
◦ Every holder is a holder in due course.
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Holder who has received the instrument, in
good faith and for value before its maturity
and without any notice as to the defect in the
title of a previous holder.
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.
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It is an instrument in writing
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It is a promise to pay : there must be an express
undertaking or promise to pay.
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Use of the word ‘promise’ is not necessary, if it is
implied.
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The payment should not depend upon
contingencies which may or may not happen.
I promise to pay Mr. Y after marriage with Ms.
X. (marriage may or may not take place).
I promise to pay as soon as possible a sum of
Rs. 1000
When able I promise to pay Ms. Brinda or
order a sum of Rs. 1000 for value received.
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Even though written by the promisor, it must
be signed by him.
It may be in any part of the instrument.
It may be in pencil or ink, a thumb mark or
initials.
Can be signed by authorised agent, but agent
must expressly state as to whose behalf he is
signing, otherwise he himself may be held
liable.
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The pronote must show clearly who is the
person agreeing to undertake the liability to
pay the amount.
In case two or more persons promise to pay,
they may bind themselves jointly or jointly
and severally.
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The instrument must point out with certainty
the person to whom the promise has been
made.
In case there is a mistake in the name of the
payee or his designation, the note is valid, if
the payee can be ascertained by evidence.
When the name of a dead person is entered in
ignorance of his death, his legal
representative can enforce payment.
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A promise to deliver goods either in
alternative or in addition to money does not
constitute a promissory note.
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The following are not promissory notes
◦ I promise to pay B Rs. 500 and all other sums which
become due
The sum does not become indefinite merely
because of the following reason:
Promise to pay amount with interest specified at a
rate.
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The words ‘value received’ and ‘promise’ are
unnecessary .
Date of instrument is material when the
promise is to pay money after the expiry of a
fixed term.
The Indian stamp act requires the negotiable
instrument to be stamped (except cheque).
Value of stamp depends on value of the note
or bill. It may be stamped before or at the
time of execution.
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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.
There are usually three parties to a bill
◦ Drawer
◦ Acceptor or drawee
◦ payee
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Must be in writing
Signed by the drawer
Drawer, drawee and payee must be certain.
The sum payable must also be certain
It should be properly stamped.
Must contain and express order to pay money
and money alone.
Order must be unconditional
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I shall be highly obliged if you make it
convenient to pay Rs. 1000 to suresh.
Please pay Rs. 500 to the order of A
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Number of parties: three and two
Promise and order
Acceptance: bills after sight requires
acceptance of the drawee before it is
presented for payment while a pronote does
not.
Nature of liability: primary and absolute in
case of pronote.
In case of bill its secondary and conditional.
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Maker’s position: In promissory note maker
stands in an immediate relationship with a
payee, whereas in a bill of exchange the
maker stands in immediate relationship with
the acceptor and not the payee.
Formalities in the case of dishonour:
I.
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Notice to prior parties
copies
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Inland and Foreign Bills
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Time and Demand bills
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Trade and Accommodation bills
SEC 6 defines a cheque as
‘A bill of exchange drawn on a specified banker
and not expressed to be payable otherwise
than on demand and it includes the electronic
image of a truncated cheque and a cheque in
the electronic form.’
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Cheque is also a bill of exchange with three
additional qualifications:
◦ It is always drawn on a specified banker
◦ It is always payable on demand
◦ It includes the electronic image of a truncated
cheque and also a cheque in the electronic form.
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Bill drawn on some person or firm; cheque
always drawn on bank.
Drawer cannot hold the drawee liable on a bill
of exchange unless the latter has accepted it.
Cheque does not require acceptance.
Cheque is always payable on demand; bill
may be payable on demand or on the expiry
of a fixed period.
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Cheque is payable on demand without any
days of grace but in the case of a time bill of
exchange three days of grace are allowed
from the due date .
Stamp
Bill must be presented, else the drawer will be
discharged. Drawer of a cheque is not
necessarily discharged from the liability by
delay of the holder in presenting it for
payment. He is discharged only to the extend
of the damage If any suffered by him (holder).
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Bill of exchange cannot be crossed
Cheques usually are not intended for
circulation but for immediate payment.
Payment of a bill cannot be countermanded
by the drawer.
A cheque is not required to be ‘noted’ or
‘protested’ for dishonour, but a bill may be
‘noted’.
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Demand draft is drawn by one branch of a
bank on another branch of the same bank,
instructing the latter to pay a specified sum
of money to a named payee or to his order.
It is drawn by bank’s branch on another
branch.
It cannot be made payable to bearer.
Its payment cannot be stopped or
countermanded
It is always payable on demand.
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It has been introduced by RBI for speeding up
the cheque clearing process.
Standardisation of quality/ size, printing of
cheques.
The code line contains the following
information:
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First six numbers……cheque number
Next three numbers…..city code
Next three numbers….bank code
Next three numbers…branch code
Two numbers……Transaction code
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An instrument, which in form is such that it
may be treated as a bill of exchange or as a
promissory note.
In the following cases the bill is taken as
ambiguous:
◦ When drawer and drawee are the same person
◦ Where drawee is a fictitious person
◦ Where drawee is a person incapable of entering into
a contract.
◦ Holder will have to decide once for all.
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Incomplete instrument
One person signs and delivers to another
person a stamped incomplete instrument.
Holder gets the authority to complete the
instrument up to the value mentioned.
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Drawer: maker of the bill of exchange is
called the drawer.
Drawee: the person directed to pay the
money.
Acceptor: person who accepts (signed his
assent on the bill) the bill is called the
accepttor.
Payee: the person named in the instrument,
to whom or to whose order the money is
directed to be paid is called the payee.
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Indorser: when the holder transfers or
indorses the instrument to any one else, the
holder becomes the indorser.
Indorsee: the person to whom the bill is
indorsed is called the indorsee.
Holder: the person who is legally entitled to
possession of the negotiable instrument
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Drawee in case of need: when in the bill or in
any endorsement the name of any person is
given, in addition to the drawee, to be
resorted to in case of need, such a person is
called ‘drawee in case of need’.
If the bill is dishonoured by drawee then it
must be presented to ‘drawee in case of
need’.
Acceptance for honour:
It implies that the bill has been accepted by a
third party, who is not having any obligation
thereon, to save the honour of drawer or
endorser.
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Section 15: when the maker or drawer of a
negotiable instrument signs the same,
otherwise than as such maker, for the
purpose of negotiation, on the back or face
thereof or on a slip of paper annexed thereto
or so signs for the same purpose a stamped
paper intended to be completed as a
negotiable instrument, he is said to have
endorsed the same and is called endorser.
Endorsement in blank/ General Endorsement/
bearer Endorsement
The endorser signs his name only. He does
not specify the name of endorsee. The effect is
that, the Instrument becomes payable to
bearer.
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Endorsement in full/ Special Endorsement
Signature + direction to pay the amount to, or
to the order of specified person.
For ex. A cheque is endorsed in blank by X
and delivered to Y. Y, may convert the
endorsement in blank into an endorsement in
full by writing above X’s signature “pay to Z or
order”
Restrictive endorsement
The endorsement may by express words,
restrict or exclude the right to negotiate OR
may merely constitute the endorsee an agent
OR to receive payment for endorser or for
some other specified person.
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Pat the contents to C only
Pay C for my use
Pay C or Order for the account of B
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Conditional endorsement: If any condition is
added while endorsing the instrument, it is
called conditional endorsement or qualified
endorsement.
This type of endorsement restricts the liability
of the endorser. Conditional endorsement are
of the following types◦
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Sans recourse Endorsement
Sans frais Endorsement
Facultative endorsement
Liability of endorser depends upon a contingency.
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Endorsement ‘Sans Recourse’: an endorser of
the negotiable instrument may, by express
words in the endorsement, exclude his own
liability thereon(sec52)
for example: if R endorses a cheque as
follows
◦ Pay to X or order at his own risk
◦ Pay to C without recourse to me
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He will not be liable to X or subsequent
employees if cheque dishonours.
But if the endorser who excludes his liability
afterwards becomes the holder of instrument,
all intermediate endorsers are liable to him.
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‘Sans frais’ endorsement
Where the endorser does not want the
endorsee or any subsequent holder, to incur
any expense on his account on the
instrument, the endorsement is ‘sans frais’
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Facultative Endorsement: generally the
endorsee must give notice of dishonour of
the instrument to the endorser.
In facultative endorsement the endorser
waives this duty of endorsee by writing in the
endorsement ‘notice of dishonour waived’
The endorser remains liable to the endorsee.
Liability of endorser depends upon a
contingency
In this type of endorsement, the liability of the
endorser depends upon the happening of an
event. If the event does not take place, the
liability of the endorser does not arise.
For example, if Mr. A makes an endorsement
as “Pay Mr. B on his arrival”
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Crossing is an instruction given to the paying
banker to pay the amount of the cheque
through a banker only and not directly to the
person presenting it at the counter.
A cheque bearing such an instruction is called
‘crossed cheque’.
Others without such crossing are open
cheques which may be encashed at the
counter of the paying banker.
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Where a cheque bears across its face an
addition of the words ’and company’ or any
abbreviation thereof, between two parallel
transverse lines, or two parallel transverse
line simply, either with or without the words
‘not negotiable’ that addition shall be
deemed a crossing and the cheque shall be
deemed to be crossed generally.
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Drawing of two parallel lines constitutes
crossing
Line must be on the face of the cheque
Parallel to each other
In cross direction
Inclusion of words ‘& company’ is immaterial
and of no special consequence.
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Cheque must be presented to the paying
banker through any banker and not by the
payee himself at the counter
The collecting banker credits the proceeds to
the account of the payee or the holder of the
cheque. The latter may thereafter withdraw
the money.
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Where a cheque bears across its face an
addition of the name of a banker either with
or without the words ‘not negotiable’, that
addition shall be deemed as a crossing and
the cheque shall be deemed to be crossed
specially and to be crossed to that banker.
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Drawing of two parallel lines on the face of
the cheque is not essential in case of special
crossing. In case of general crossing it is a
must.
Special crossing on the cheque is a direction
to the paying banker to honour the cheque,
only when it is presented through the bank
mentioned in the crossing and no other bank.
Not Negotiable Crossing
A cheque crossed ‘Not Negotiable’ can be
transferred like any other cheque, but the
transferee cannot obtain a better title than that
of the transferor.
The object of this type of crossing is to give
protection to the true owner of the cheque by
preserving his right against any subsequent
holder.
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These words constitute an instruction to the
collecting banker that he should collect the
amount of the cheque for the benefit of the
payee’s account only, i.e., to credit the
amount to the account of the payee only and
nobody else.
There is no provision in Law regarding this
type of crossing. But this has been developed
in practice. If the words, ‘A/C Payee’ are
added to a crossing , it becomes an A/C
Payee crossing.
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If the banker to whom cheque is specially
crossed, does not have a branch at the place of
the paying banker, or if he, otherwise, feels the
necessity , he may cross the cheque specially to
another banker, who acts as his agent for the
purpose of collection of the cheque.
It is essential that the words “as agent for
collection” must be included in double crossing.
If crossed to more than one banker then paying
banker may refuse payment thereof.
The collecting banker cannot refuse to collect
such a cheque.
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If the crossing on a cheque is cancelled, is
called opening of the crossing. The cheque
there after becomes an open cheque
Only the drawer of the cheque is entitled to
open the crossing of the cheque by writing ‘
‘pay cash’
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Safety: cheques crossed specially are more
safe than the generally crossed cheque.
Evidence of the transaction.