Negotiable Instruments Act 1881 By Prof. K.S.N. SARMA Faculty Member ICFAI Law School ICFAI University HYDERABAD.
Dec 30, 2015
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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