Negotiable Instruments Act 1881 By Prof. K.S.N. SARMA Faculty Member ICFAI Law School ICFAI University HYDERABAD.

Negotiable Instruments Act 1881

By

Prof. K.S.N. SARMA

Faculty Member

ICFAI Law School

ICFAI University

HYDERABAD.

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Meaning of the term ‘Negotiable Instrument’.

Negotiable Instrument means:

- A written document

- which entitles - the bearer or

- a person specified therein

- to a certain sum of money

- on a particular date.

The Property in the Instrument is negotiable.

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What is a Negotiable Instrument?

• One - the property in which is acquired by any one

- who takes it bonafide and - for value – notwithstanding any defect of title in the

person from whom he took it. - Wallace (J)

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From this definition of Wallace, it follows:

• That an instrument cannot be negotiable unless

- it is such and in such a state - that a true owner could transfer the

contract or engagement contained therein

- by simple delivery of the instrument.

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POINT – 1.• A negotiable instrument is

- a chose-in-action - with the feature of negotiability

attached to it.• It is this feature of negotiability that

distinguishes an ordinary chose-in-action from a negotiable instrument.

• An assignee or a transferee of a chose-in-action cannot claim higher or superior or better title or rights than his transferor -

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• Because – the rule relating to transfer of ownership in goods is nemo dat quod non habet – i.e. No one can convey a better title than what he has.

• Thus, if a person entitled to a chose-in-action has got a defective title on account of some vitiating element – coercion, fraud or undue influence – the assignee or transferee from him will get a title subject to those defects.

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But, to this rule – A Negotiable Instrument is an exception.

POINT – 1.

• In the hands of a bonafide holder, for value, a NI would

- entitle him to claim all the rights appearing on the face of the instrument

- without being affected in the least by the defective title of his transfer.

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POINT – 2.• In order to transfer ownership in a negotiable

instrument - no formalities are necessary

- mere delivery of the instrument is in itself constitutes a valid transfer.

• These two characteristics (Point1and Point 2) constitute negotiability and

A chose-in-action having these two characteristics is - a negotiable instrument.

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• Negotiable Instruments

- negotiable by statute [Sec-13]

- negotiable by custom or usage [Sec-1]

• Section – 1: Nothing herein contained affects any local usage relating to any instrument in an oriental language.

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• The Transfer of Property Act also recognizes the negotiability of instruments by law or custom.

- Nothing in the foregoing sections of this chapter applies to stocks, shares or debentures or to instruments which are for the time being by law or custom negotiable or to any mercantile document of title to goods. [Sec–137 of TP Act ]

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• In India

A negotiable instrument means [Sec- 13]

- a Promissory note [Sec – 4]

- a Bill of exchange [Sec – 5] or

- a Cheque [Sec – 6]• It also means [Sec-1 of NI Act and

Sec-137 of TP Act]

- Banker’s draft or pay orders

- Hundis

- Delivery orders

- Railway Receipts and

- Goods Receipts and so on

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RBI Act and Negotiable Instruments Act.• Object of Section 31 of the RBI Act is to prevent

private persons from infringing the monopoly of the Government in Note-issue in India.

Section 31 • 1. No person, other than the Reserve Bank or

Central Government can draw, accept, make or issue any bill of exchange, hundi or promissory note ‘payable to bearer on demand’

• 2. No person, other the RB or Central Govt. can make or issue any promissory note ‘Payable to the bearer of the instrument’.

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• Exceptions to the RBI restrictions:

1. A Bill or note on being indorsed in blank, can become payable to bearer

on demand

2. A Cheque is also payable to bearer

on demand.

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• 1. It is a contract: usually to pay certain sum of money.

• 2. Written Document • 3. Signed• 4. Stamped, ad valorem, under the

Stamp Act, 1963 [Exception: Cheque]

Characteristics of Negotiable Instruments.

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• 5. Negotiability: implies that the transferee gets a right - to possess the instrument

- to recover the amount mentioned in it on due date

- to sue upon it on his own name, in case of dishonour

- to negotiate further, if need be.• 6. Consideration : Presumed to have been

passed, unless the contrary is proved. • 7. Notice of negotiation to payer unnecessary• 8. Better title to holder in due course

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Promissory Note [Sec – 4]

• Is an instrument in writing (not being a bank-note or a currency-note)

• 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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Illustrations

• A signs instruments in the following terms:

a) I promise to pay B or order Rs. 500.

b) I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on demand, for value received.

c) Mr. B, IOU Rs. 1,000.

d) I promise to pay B Rs. 500 and all other sums which shall be due to him.

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e) I promise to pay B Rs. 500 – first deducting thereout any money which he may owe me.

f) I promise to pay B Rs. 500 – seven days after my marriage with C.

g) I promise to pay B Rs. 500 on D’s death, provided D leaves me enough to pay that sum.

h) I promise to pay B Rs. 500 and to deliver to him my Bajaj Scoter on 1st January next.

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Main Features or characteristics of Promissory Note

Written InstrumentExpress promise to payUnconditional undertakingPayment of money onlyCertain partiesNote: Bank note or Currency note are not

regarded as Promissory Notes. Why so?This is because – they are money by themselves

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Bill of Exchange [Sec – 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

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Main Features or characteristics of Bill of Exchange

Instrument in writingContains an order to pay as opposed to

request to payThe order to pay is unconditionalThe order is to a certain sum of money

only and not delivery of goods.Note: GRs and RRs not Bills of Exchange

because the order contained therein relates to delivery of goods.

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There are 3 parties -

- Drawer, the person making the bill

- Drawee, the person ordered to pay

- Payee, the person to whom money is

payable.Drawer must sign the bill

and Drawee must accept the bill

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Specimen of a Bill of ExchangeA from Hyderabad draws a Bill of Exchange

on B at Chennai in favour of C.

Rs: 1,25,000/= Hyderabad 15 th December, 2004

To

B, at Chennai

Three months after date pay to C or bearer/order the sum of rupees one lakh twentyfive thousand only for value received.

Accepted Stamps affixed

Sd. B Sd. A

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Cheque [Sec – 6]• Is a bill of exchange• Drawn on a specified banker, and• Payable on demandNote: Cheque has all the characteristics or

features of a Bill of Exchange. In addition to it, the following two additional characteristics:

A cheque is drawn upon a BankerIt must be payable on demand.

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Specimen of a Cheque

SB:A/C No: …..… Code No: UB 10023

State Bank of IndiaLocal Head Office Branch, Bank Street, Kothi,

Hyderabad.Pay to ………………………........................or bearer/order

Rupees…………………………………………………………

Rs:……………

Cheque No: 10023 01234 Signature of the Drawer

Ledg

er F

olio

: …

……

……

.

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Distinguish between

Promissory Note

Bill of Exchange

1. Parties to the Instrument

Two parties - Maker - Payee

Three parties - Drawer - Drawee - Payee

2. Content of Instrument

Unconditional promise to pay

Unconditional order to pay

3. Need of acceptance

Not required – because Maker is the payer

Before payment acceptance by the drawee is a must.

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Distinguish between

Promissory Note

Bill of Exchange

4. Liability Of maker is primary

Of drawer is secondary and conditional

5. Notice of dishonour

No notice to be given to the maker because it is he who refused payment

Notice is must be given to the drawer and prior endorsers whom he wants to hold liable to pay.

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Distinguish between

Promissory Note Bill of Exchange

6. Possibility of

making it payable to maker.

It cannot be made payable to maker

In this case, drawer and payee can be the same person.

7. Protest. Not required In case of dishonour of Foreign Bills of Exchange, protest is a must.*

*If the law of the country in which they are drawn requires it.

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Distinguish between Bill of Exchange Cheque

1. On whom drawn

Drawn upon any person

Drawn upon a banker only

2. Acceptance Acceptance of the drawee before payment required

Acceptance is not required, because it is payable on demand

3. Time of payment

Can be payable on expiry of certain period after date or of demand

Always payable on demand

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Distinguish between Bill of Exchange Cheque

4. Grace period A grace of 3 days for calculating the date of payment

No such grace is allowed in case of cheque.

5. Crossing An ordinary Bill of Exchange cannot be crossed

It can be crossed.

6. Noting and Protesting for dishonour

Essential Not required at all

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Distinguish between Bill of Exchange Cheque

7. Right to countermand

the payment.

Drawer cannot countermand the payment.

Drawer can countermand the payment.

8. Discharge from liability

Drawer is discharged if the payee fails to present it for payment to the acceptor at the appointed time

Drawer is discharged only if he suffers any damage by default of payee to present at appointed time, only to the extent of the damage

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Distinguish between Bill of Exchange Cheque

9. Consequences

for dishonour

Civil suit for damages

Dishonour of cheque for insufficiency of funds is a criminal offence.

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When can a banker refuse to honour the cheque drawn upon it?

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