Negotiable Instruments

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Are Negotiable Instruments a Myth?

Yogesh Bhandari - 9

Jay Bhansali - 11

Samidha Bhase - 12

Deep Gala - 19

Jigar Gala - 20

Ripple Gupta - 24

Medha Mahajan - 33

Prashant Menon - 36

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Definition of Negotiable Instruments Type of Negotiable instruments Characteristics of Negotiable Instruments Presumptions of Negotiable Instruments Essentials of Promissory Note, Bill of Exchange and Cheque Parties to Promissory Note, Bill of Exchange and Cheque Distinction between Promissory Note and Bill of Exchange and Cheque Types of crossing of Cheque Types of Hundis Dishonour of Negotiable Instruments and Actions taken on dishonour Compensation

Agenda

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Definition

‘Negotiable’ means ‘transferable’ by delivery, and ‘Instrument’ means

a ‘written document by which a right is created in favour of some

person’.

According to the section 13(1) of the Negotiable Instruments act of

1881,

A Negotiable instrument means a promissory note, Bill of exchange

or cheque payable either to order or to the bearer.

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Types of Negotiable Instruments

Promissory Note: A promissory note is an instrument in writing

containing an unconditional undertaking signed by the maker to pay

a certain sum of money only to a certain person or the bearer of the

instrument

Bill of Exchange: A bill of exchange is an instrument in writing

containing an unconditional order, signed by the maker, directing a

certain person to pay another person a certain sum of money

Cheque: A cheque is a bill of exchange on a specified banker and

not expressed to be payable otherwise than on demand

Hundis: Negotiable instruments written in any vernacular language

according to the Indian Mercantile common law are called as Hundis

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Specimen of Negotiable Instruments

Promissory Note

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Specimen of Negotiable Instruments

Bill of Exchange

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Specimen of Negotiable Instruments

Cheque

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Characteristics of Negotiable Instruments

Freely transferable

Title of holder free from defects

Recovery

• Holder can sue in his own name

• Can be transferred infinitum

Subject to presumptions

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Presumptions of Negotiable Instruments

As to consideration

As to date

As to acceptance

As to transfer

As to the order of endorsements

As to lost instruments

As to holder-in-due course

As to dishonour

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Essentials of Promissory Note

In writing

Promise to pay

Unconditional

Signed by the maker

Certain parties

Certain sum of money

Promise to pay money only

Number, place, date etc.

Maybe payable in installments

Maybe payable on demand or after a definite period

Must be duly stamped

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Essentials of Bill of Exchange

Must be in writing

Must contain an order to pay and not a promise or a request

Unconditional

3 parties: Drawer, Drawee and Payee

Parties must be certain

Signed by drawer

Sum payable must be certain

Order must be to pay money

Must be duly stamped

Number, date and place not essential

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Essentials of Cheque

Written instrument

Unconditional order

On a specified banker only

A certain sum of money

Payee to be certain

Payable on demand

Amount of the cheque

Dating of cheque

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Parties to Negotiable Instruments - I

Promissory Note• Maker• Payee• Holder• Endorser• Endorsee

Bill of Exchange• Drawer• Drawee• Acceptor• Payee• Holder• Endorser• Endorsee• Drawee• Acceptor of Honour

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Parties to Negotiable Instruments - II

Cheque• Drawer• Drawee• Payee• Holder• Endorser• Endorsee

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Distinction - I

Promissory Note Bill of Exchange

NaturePromise Order

PayeeMaker & Payee Drawer & Payee

AcceptanceNot Required Required

LiableMaker Drawer

NoticeNot Necessary Given to all Prior Parties

Payable to…Bearer Bearer on Demand

SetsCannot be Drawn Can be Drawn

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Distinction - II

Bill of Exchange Cheque

DraweeAnyone Only Banker

AcceptanceNeeds Not Required

PaymentDemand - Time Demand

CrossingNever Crossed May be Crossed

StampProperly Stamp

Noting - ProtestingNeeded Not Needed

CountermandateNot Possible Possible

Notice of DishonourNecessary Necessary

Grace Days3 Days 0 Days

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Types of Crossing of Cheques

There are two types of cheques

1). Open cheques.

2). Crossed cheques.

A cheque is payable in cash across the counter of a bank is called an

open cheque.

A crossed cheque is one on which has two parallel lines or without the

words ‘& co. Types of crossing:-

1). General crossing

2). Special crossing.

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Hundi

Hundies are the negotiable instrument written in vernacular language.

some times these are even like promissory notes. The word hundi is

derived from the Sanskrit word ‘hund’ which means to collect.

Types of hundies:

1. Darshani hundi

2. Muddati hundi

3. Shah jog hundi

4. Nam jog hundi

5. Dhani jog hundi

6. Firman jog hundi

7. Jawabee hundi

8. Jokhami hundi

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Dishonour of Negotiable Instruments

Dishonour by Non Acceptance

Bill of Exchange

Dishonour by Non Payment Promissory Note

Bill of Exchange

Cheque

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Dishonour by Non Acceptance

When a Drawee / Drawees (not being partners) make default in

Acceptance The Presentment for Acceptance is excused and the Bill remains

unaccepted Drawee is incompetent Drawee makes the Acceptance qualified Drawee is fictitious person or absconding

IMP: In case of the note where ‘drawee in case of need’ is named in a bill of exchange,the bill is not dishonoured until it has been dishonoured by such drawee (Sec 115)

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Dishonour by Non Acceptance

A promissory note, bill of exchange or cheque is said to be dishonoured by

non payment when the maker of the note, acceptor of the bill or the frawee

of the cheque makes default in payment upon being duly required to pay

the same(Sec 92)

A promissory note, bill of exchange or cheque is said to be dishonoured by

non payment when payment is excused by the maker of the note or the

acceptor of the bill and the note remains unpaid at or after

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Effects of Dishonour

As soon as the negotiable instrument is dishonoured, the holder

becomes entitled to sue the parties to pay thereon

The drawer of the cheque, the maker of the note, acceptor and drawer of

the bill and all the endorsers are liable jointly to a holder in due course

The holder must give ‘NOTICE OF DISHONOUR’ to all the parties against

whom he intends to proceed

He may also have the instrument ‘NOTED AND PROTESTED’ before a

notary

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Notice of Dishonour

NOTICE BY WHOM:

Holder of the instrument who remains liable(Sec 93)

To be passed to all the other recipient parties(Sec 95)

MODE OF GIVING NOTICE: According to Sec 94,notice can be

oral or written(by post) and sent to the business

NOTICE TO WHOM:

All the parties whom the holder seeks to make liable, such as drawers or endorsers

In case the person concerned is deceased, it may be given to his official assignee(Sec 94)

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Compensation

Compensation to holder

a) Amount due upon instrument

b) Interest on principal sum

c) Expenses incurred in presenting, noting and protesting the instrument.

d) Occurs when the person charged resides at a place different from that at which the instrument was payable.

Compensation to Endorser

Endorser is entitled to receive compensation in case of dishonor of bill

Re-draft

The party dishonouring the bill can give another bill (including the interest amount) as compensation.

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Are Negotiable Instruments a Myth?

Negotiable Instruments are not a myth.

All business do not carry on cash transactions.

Negotiable Instruments are credit devices that are most widely used in trade transactions.

If business were to carry only on cash currency, then there would be less trade. This in result would lead to low job creation, low demand, low consumption of goods and services and low growth of the economy of the country.

Hence Negotiable instruments like Bill of Exchange, Promissory Notes and Cheques are reality and need of the hour.

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Questions