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The Negotiable Instruments Act,
1881.
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The word negotiable means transferable by
delivery, and the wordinstrumentmeans a written
document by which a right is created in favour of
some person.
According to Section 13 of the Negotiable Instruments
Act, a negotiable instrument means a promissory
note, bill of exchange or cheque payable either to order
or to bearer.
Thus, the term negotiable instrument literally
means a written document transferable by delivery.
A negotiable instrument may be made payable to two
or more payees jointly, or it may be made payable in
the alterative to one of two, or one or some of several
payees.
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Essential characteristics of a negotiable instrument
Freely transferable
No notice to the debtor
Better title to a Bonafide' transferee
Presumptions
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Promissory note
A promissory note is an instrument in writing
containing an unconditional undertaking, signedby 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 (Sec 4)
Essential elements
Writing
Promise to payDefinite and unconditional
Certain parties
Certain sum of money
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Signed by the maker
Promise to pay money only
It cannot be payable to bearer on demand
Formalities to be followed
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Writing An order to pay
Unconditional order
Three parties
Signed by the drawer.
Amount payable must be certain
Order to pay only money
Not payable to bearer on demand
Payable to bearer on demand
Formalities to be followed
A bill of exchange 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 (Sec 5)
Bill ofexchange
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Distinguish between a bill of exchange & a promissory note
Bill Note1. There are 3 parties to it
(drawer drawee & Payee)1.There are 2 parties (the maker &
the payee)
2. It contains an
unconditional order to
pay
3.It can be acceptedconditional
4.The liability of the drawer
is secondary andconditional
5.The drawer & payee,sometimes may be one &
the same person
6.The drawer of the bill is
the creditor who directs
the drawer to pay.
2.It contains an unconditional
promise to pay
3.It cannot be made conditional
4.The liability of the maker is
primary and absolute
5.A note cannot be made payable to
the maker himself
6.The maker of the note is the
debtor & he himself undertakes
to pay
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7.A bill payable after sight
or after a certain period
must be accepted by the
drawee
Notice of dishonour must be
given to the drawer &
the prior endorsers
7.A note requires no
acceptance as it is signed
by the person who is liable
to pay Such notice is
necessary
Bill Note
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Distinguish between a Chequeand a Promissory note
Cheque Promissory Note1. It contains an order
to pay
2. Cheques are crossed
3. There are 3 parties toit
4. Cheques are exempt
from stamping
5. Cheques can be
made payable tobearer
1. It contains a promise to
pay
2. Promissory note need
not be crossed3. There are only 2 parties
to it
4. Promissory notes
require stamping
5. Promissory note ispayable only to the
payee or his order
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Various types of negotiable instruments
Bearer and order instruments
Inland and foreign instruments
Instruments payable on demand
Time instruments
Fictitious bill
Documentary bill & clean bill
Escrow
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Different parties to a negotiable instrument
Maker/ Drawer
Drawee, Acceptor
Payee
Endorsee
Drawee in case of need
Holder
Holder in due course
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Rules for calculating maturity
Sections 23 to 25 lay down the following rules for calculating
the maturity of a time bill or note:
If it is made payable a stated number of months afterdate or after sight, or after a certain event, it matures (or
becomes payable) three days after the corresponding date
of the month after the stated number of months.
If the month in which the period would terminate has no
corresponding date, the period shall be held to terminate onthe last day of such month.
If it is made payable a certain number of days after date orafter sight, or after a certain event, the maturity is calculated
by excluding the day on which the instrument is drawn or
presented for acceptance or sight or on which the eventhappens. Note that only one day is to be excluded.
If the date on which a bill or note is at maturity is apublic holiday, the instrument shall be deemed to be due on
the next preceding business day.
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If an instrument is payable by instalments, three days
of grace are to be allowed on each instalment (Sec. 67).
The expression public holiday includes Sundays and anyother day declared by the Central Government, by
notification in the Official Gazette, to be a public holiday.
Thus, if the maturity of an instrument falls on an emergency
holiday, the instrument shall be deemed to be due on the
next succeeding business day.
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Distinguish between negotiation and assignment
Formalities: Negotiation requires mere delivery of a bearer
instrument and endorsement and delivery of an orderinstrument to make a transfer. Assignment requires a
written document signed by the transferor irrespective of
whether the instrument is a bearer or order
Notice of transfer: In the case of assignment a notice of transfer of
debt is required to be given by the assignee to the debtor inorder to complete his title. No such notice is required to be
given in the case of negotiation.
Title: In the case of negotiation if the transferee takes the negotiable
instrument for value and in good faith, i.e., as holder in due course, hetakes it free from all defects in the title of the previous transferors.
But in the case of assignment, the assignee takes the instrument
subject to the defects in the title of his assignor, even though he took
the assignment for value and in good faith.
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Kinds of Endorsements
Blank or general endorsement
Endorsement in full or special Endorsement
Partial Endorsement
Restrictive endorsement
Conditional endorsement
Facultative endorsement
Wh t i t t f t ?
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What is presentment for acceptance?
Presentment for acceptance is necessary in case of bills of
exchange only. The following bills, however, must bepresented for acceptance in order to charge the parties with
liability:
A bill payable at a specified period after sight. Such a bill
must be presented to the drawee for sight or acceptance in
order to fix the maturity of the bill. (Sec. 61)
A bill in which there is an express stipulation that it shall be
presented for acceptance before it is presented for payment.
When the drawee of the bill signifies his consent in writingto the drawers order in the bill, by signing across the face of
the bill with or without the word accepted and delivers
back the bill to the holder or gives notice of acceptance to
the holder, the bill is said to have been accepted.
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Types of Acceptance
An acceptance on the bill may be either
(i) general acceptance, or
(ii) qualified acceptance.
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According to Section 99, when a promissory note or a bill of
exchange has been dishonoured by non-acceptance or non-payment, the holder may cause such dishonour to be noted by
a Notary Public upon the instrument, or upon a paper attached
thereto, or partly upon each. For this the holder takes the bill
or note to the notary public who makes a demand for
acceptance or payment upon the drawee or acceptor or makerformally and on his refusal to do so notes the same on the bill
or note. Thus noting means recording the fact of dishonour
and must specify: (i) the date of dishonour; (ii) the reason
assigned for such dishonour; and (iii) the notarys charges.
Noting
Noting is the authentic and official proof of presentment anddishonour of a negotiable instrument. The question of noting does
not arise in the case of dishonour of a cheque.
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Protest
1) Define ProtestProtest is a formal certificate of dishonour issued by
the notary public to the holder of the bill or note, on his
demand (noting is merely a record of dishonour on the
instrument itself) (Sec.100)Contents of Protest (Sec. 101)The protest must contain the following particulars:1. The instrument itself or a literal transcript of theinstrument and of everything written or printedthereupon.2. The name of the person for whom and againstwhom the instrument has been protested.3.
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The fact and the reasons for dishonour, i.e., a statement
that payment or acceptance, or better security, as the casemay be, was demanded by the notary public from the
person concerned and he refused to give it or did not
answer, or that he could not be found.4. The place and time of dishonour.5. The signature of the Notary Public.6. In the case of acceptance for honour or payment forhonour, the names of the persons by whom and for whom it
is accepted or paid.
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Discharge of an instrument and a party
Mode of discharge of instrument
By payment indue course
By partyprimarily liable
becoming holder
By cancellation
By Release
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Mode of discharge of parties
By Payment
By Cancellation
By Release
By Non-presentment of cheque within reasonable time
By Allowing drawee more than 48 hours to accept
By Qualified acceptance
By Material alteration
By Operation of law
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Dishonour of cheque
A person issuing a cheque will be punishable with
imprisonment for a term up to 2 years or with fine twice the
amount of cheque or both, if the cheque is dishonoured due to
insufficiency of funds.
Conditionsa) Cheque should have been in discharge of liability,
ie., it does not indicate gift cheques.
b) Cheque should be presented within period of
validity / 6 months whichever is earlier.
c) Cheque should have been deposited and intimation
of dishonour received stating insufficiency of funds
as reason for dishonour.
d) The holder or payee in due course should give
notice demanding payment within 15 days of hisreceiving notice of intimation of dishonour.
e) If the drawer fails to make payment within 15 days
for receipt of notice, then a person could proceed
for prosecution.
f) Prosecution / complaint to be made only by payee/ holder in due course within 1 month.
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Notice of dishonour
Notice of dishonour means formal communication of the fact
of dishonour. It is given to the party sought to be made liableand, therefore, it serves as a warning to the person to whom
the notice is given that he could now be made liable. Such a
notice also serves the purpose of enabling the person so
notified to protect himself against his prior parties.
Notice by whom?
Notice of dishonour must be given by the holder or by some
party to the instrument who remains liable thereon (Sec.
93). Further, any party receiving notice of dishonour mustalso transmit the same within a reasonable time to all prior
parties in order to render them liable to himself.
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Notice to whom?
Notice of dishonour must be given to all parties (other than the
maker of a note, acceptor of a bill or drawee of a cheque) towhom the holder seeks to make liable or to their duly authorised
agents. Where there are two or more persons jointly liable as
drawers or endorsers, notice to any one of them is sufficient. No
notice need be given to the maker of a note or acceptor of a bill
or drawee of a cheque, who are the principal debtors and havethemselves dishonoured the instrument (Sec. 93). In case of
death of a person, notice must be given to his legal
representative, or, where he has been declared an insolvent, it
must be given to his Official Assignee (Sec.94).
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