Negotiable Instruments,1881

8/6/2019 Negotiable Instruments,1881

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NEGOTIABLE

INSTRUMENTS,1881� Documents of a certain type, used in commercial transactions and

monetary dealings, are called Negotiable Instruments.

� µNegotiable¶ means transferable by delivery and µInstrument¶ means a

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

�

The term negotiable instrument, literally means ³ a documenttransferable by delivery´

� The Negotiable Instruments Act of 1881 states that, ³A Negotiable

Instrument means a promissory note bill of exchange or cheque

payable either to order or to bearer´ ±sec 13(1)

� Thus in India only three kinds of instruments are recognized as

negotiable instrument i.e. promissory notes, bills of exchange andcheques.

� Bills of lading, dividend warrants, Hundis and similar other documents

are snot covered by the NI Act but under certain circumstances, the

law applies on them also.



� THE PROMISSORY NOTE

� ³ A Promissory Note is an instrument in writing ( not being abank note or a currency note) containing an unconditionalundertaking signed by the maker, to pay a certain sum of money only to, or to order of a certain person, or to the bearer of the instrument´-sec 4

� The person who makes the promise to pay is called the maker.He is the debtor and must sign the instrument. The person whowill get the money (called creditor ) is called Payee.

� ESSENTIAL ELEMENTS

� 1. The instrument must be in writing.� 2. The instrument must be signed by the maker of it.

� A signature in pencil or buy a rubber stamp of facsimile isgood.

THE PROMISSORY NOTE



� 3. The instrument must contain a promise to pay. The promise

to pay must be express. It cannot be implied or inferred. A mere

acknowledgement of indebtedness is not enough.

� EX: Mr. Sen. I.O.U. Rs 1000. Here I.O.U stands for, I owe You.

This only an admission of indebtedness. There is no promise topay and therefore the instrument is not a promissory note.

� 4. The promise to pay must be unconditional. If the promise to

pay is coupled with a condition it is not a promissory note.

� EX I promise to pay B Rs300 first deducting there out any

money which he may owe me.� EX: I promise to pay B Rs 500 on D¶s death, provided D leaves

me enough to pay this sum

� Ex: I promise to pay B Rs 500, seven days after D¶s marriage

THE PROMISSORY NOTE



� Stipulations of the following type are not regarded asconditions: promise to pay at a specified time or at a specifiedplace or after the occurrence of an even which is certain tooccur, or payment after calculating interest at a certain rate.

� EX: I promise to pay B Rs 500 on Ist Aug, 2007.

� I Promise to pay B Rs 500 on demand at Bombay.

� I promise to pay B Rs 500 seven days after the death of C.

� 5. The maker of the instrument must be certain an definite.

� 6. The promissory note must be stamped according to theIndian Stamp Act.

� The sum of money to be paid must be certain.

� Ex: I promise to pay B Rs 500 and all other sums which shall bedue to him. I promise to pay B some money on the occasion of his marriage. These are not promissory note.

PROMISSORY NOTE



� 8. The payment must be in the legal tender money of India. A

promise to pay certain quantity of goods or a certain amount of

foreign money is not a promissory note.

� 9. The money must be payable to a definite person or according

to his order. T note is valid even if the payee is misnamed or isindicated by his official designation only. Evidence is

admissible to show who the payee really is.

� 10. The promissory note may be payable on demand or after a

certain definite period of time.

�11. The Reserve Bank Act prohibits the creation of promissorynote payable on demand to the bearer of the note, except by

the Reserve Bank and the Government of India.

PROMISSORY NOTE



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 certain sum of money only to, or to the order of a

certain person or to the bearer of the instruments. ± sec 5

� The maker of a bill of exchange is called the Drawer.� The person who is directed to pay is called the Drawee.

� The person who will receive the money is called the Payee.

� When the payee has custody of the bill, he is called the Holder.

� It is the holder¶s duty to present the bill to the Drawee for his

acceptance.

� The Drawee signifies his acceptance by signing on the bill After

such signature the Drawee becomes the Acceptor.



� In a bill of exchange sometimes the name of another person is

mentioned as the person who will accept the bill if the original

Drawee does not accept it. Such a person is called µthe Drawee

in case of Need¶

� ESSENTIAL ELEMENTS OF A BILL OF EXCHANGE� The instrument must be in writing.

� The instrument must be signed by the drawer

� The instrument must contain an order to pay, which is express

and unconditional.

� The drawer, Drawee and the payee must be certain and definiteindividuals.

� The amount of money to be paid must be certain.

� The payment must be in the legal tender money of India.

BILL OF EXCHANGE



� The money must be payable to a definite person or according

to his order.

� A bill of exchange must be properly stamped.

� The bill may be made payable on demand or after a definite

period of time. But no one except the Reserve Bank of Indiaand the Govt. Of India can draw a bill payable on demand to

the bearer of the bill.

� The requirements are more or less the same as in promissory

notes and are subject to similar conditions as regards

signature etc.� If any of the requirements mentioned above is not fulfilled, the

document is not a bill of exchange.

� Ex: Pl let the bearer have seven rupees and oblige.

BILL OF EXCHANGE



DIFFERENCES BETWEEN

PROMISSORY NOTE & BILL OF EXC

� 1. NUMBER OF PARTIES: In a promissory note there twoparties- the maker and the payee. In a Bill of Exchange thereare three parties- the Drawer, the Drawee, and the payee.

� 2. PROMISE AND ORDER: In a promissory note there is apromise to pay. In a bill of exchange there is an order to pay.

� 3.ACCEPTANCE: A PN is signed by the person liable to pay,therefore, no acceptance is necessary. A BE , except in certaincases, requires to be accepted by the Drawee before it isbinding upon him.

� 4. LIABILITY: The maker of a promissory note is primarily

liable on the instrument. The drawer of a bill is liable only whenthe Drawee does not accept the instrument or pay the moneydue.

� 5. RELATIONSHIP: In a PN the maker stands in an immediaterelationship to the payee. In a BE a drawer stands in a



� .Immediate relationship with the acceptor and not to the payee.

� ³ The drawer of a BE stands in immediate relation with theacceptor. The maker of a PN, BE or cheque stands in immediaterelation with the payee and the endorser with his endorsee.Other signers may by agreement stand in immediate relationwith a holder´ sec 44

� 6. NOTICE: In case of non-payment or non-acceptance of a bill,notice must be given to all persons liable to pay. This is calledthe notice of dishonour. In the case of promissory note, noticeof dishonour to the maker is not necessary.

�

7. PROTEST: In case of dishonour, a foreign bill must beprotested if such a protest is necessary according to law theplace where there it is drawn. In case of dishonour promissorynote, protest is not necessary.

DIFFERENCES BETWEEN

PROMISSORY NOTE & BILL OF EXC



CHEQUE

� Cheques are the commonest form of payment through banks.

� Definition- ³A cheque is a bill of exchange drawn on a specifiedbanker and not expressed to be payable otherwise than on demandand it includes the electronic image of a truncated cheque and acheque in the electronic form.´

� Explanations:� A. µa cheque in the electronic form¶ means a cheque which contains

the exact mirror image of a paper cheque, and is generated, writtenand signed in a secure system ensuring the minimum safetystandards with the use of digital signature (with or without biometricssignature)

�

B. µ A truncated cheque¶ means a cheque which is truncated duringthe course of a clearing cycle, either by the clearing house or by thebank whether paying or receiving payment, immediately on generationof an electronic image for transmission, substituting the further physical movement of the cheque in writing.



� Inland Instruments.¶ A promissory note , BE or cheque drawn

or made in India, and made payable in, or drawn upon any

person resident in India shall be deemed to be an inland

instruments -Sec 11

� Foreign Instruments : Sec 12 of the Act says that , ³Any suchinstrument, not so drawn, made, or made payable shall be

deemed to be a foreign instruments´

� Bearer instruments: ³ A promissory note, bill o exchange, or

cheque is payable to bearer which is expressed to be so

payable or on which the only or last endorsement is anendorsement in blank´

� The word µbearer¶ is not defined by the Act. the common sense

meaning of the term is- the person in possession of the

instrument. Thus whosoever is hold the instrument is entitled

for the payment against it.

CLASSIFICATION OF

NEGOTIABLE INSTRUMENTS



� Order instruments: The act reads as-´ A promissory note, bill of exchange, or cheque is payable to order which is expressed tobe so payable or which is expressed to be payable to aparticular person,, and does not contain words prohibitingtransfer or indicating an intention that it shall not betransferable´

� Instruments payable on demand: When we say that aninstrument is payable on demand, we mean thereby that thedebt on the instrument is due and payable immediately.

� Sec-21 : In a PN or BE the expression µat sight¶ or µonpresentation¶ means µon demand¶

� Time instruments: A time instrument specifies a definite timeon the face of it, after which it is payable. The maker or Draweeis under no obligation to pay until the specified time haselapsed. Thus a time instrument is used for credit purposes,where payment by the maker or drawer may be postponed to alater date I promise to pay Rs1000 on 31.08.2007

CLASSIFICATION OF




� Ambiguous instrument: Some negotiable instruments may

possess the features of both- a PN under sec 4 and a BE under

sec 5. Such double faced instruments are called ambiguous

instruments.

�Sec. 17 of NI Act says ³ where an instrument may be construedeither as a promissory note or bill of exchange, the holder may

at his election treat it as either, and the instrument shall be

treated accordingly´

� Ex: P signs an instrument which purports to be an order upon B to

pay a certain sum of money to the order of P and negotiate the

instruments to C. B is non existent person. The instrument is drafted

like a bill but it can be interpreted as a promissory note by P because

B being a non-existent person, P is liable to pay to the holder the

money on due date

CLASSIFICATION OF




� INCHOATE INSTRUMENTS: When an instruments is issued

with certain spaces left blank- for example- the designation of

the payee, or the amount payable, or the promise or order to

pay, or nothing is written on the instrument except the

signature of make, it is termed as µinchoate instrument¶� In other words, it is wholly blank, or incomplete in certain

specific accounts.

� PRESUMPTIONS AS TO THE NEGOTIABLE INSTRUMENTS

� Certain presumptions apply to all negotiable instruments.

� Consideration, Date, Time of acceptance, Time of transfer,Order of endorsement, stamp and Every holder is a holder in

due course (provided it is obtained in a lawful manner)

CLASSIFICATION OF




HOLDER OF A NEGOTIABLE

INSTRUMENT� Holder of a negotiable instrument is the person who is capableof receiving the amount due upon it.

� Definition: sec 8 ± ³the holder of a PN, BE or cheque means anyperson, entitled in his own name, to the possession thereof andto receive or recover the amount due thereon from the partiesthereto´

� Thus a person is a holder when he satisfies two conditions:

� 1. He is entitled to possess the instrument in his own name

� 2. He is entitled to receive or recover the amount due thereon

� ENTITLED TO POSSES: The person entitled to possess the

instrument in his own name may be a PAYEE, ENDORSEE,BEARER, SOMEONE WHO IS GIVEN A BEARER INSTRUMENTBY A THIEF OR FINDER IS A HOLDER AND the heir of adeceased holder or any other person becoming entitled byoperation of law is a holder although he is not the payee.



WHO IS NOT A HOLDER

� Someone who finds or steals a bearer instrument or takes aninstrument under a forged endorsement is not a holder.

� A beneficial holder claiming through a µBenamidar¶ is not aholder.

�

An agent holding an instrument for his principal is not a holder.� A payee prohibited by an order of the court from receiving the

amount of the instrument is not a holder.

� HOLDER IN DUE COURSE: µA holder in due course¶ is a µholder¶who satisfied certain conditions:

� Sec-9 ± Holder in due course means any person who for

consideration became the possessor of a PN, BE or cheque, if payable to the bearer, or the payee or endorsee thereof, if payable to order, before the amount mentioned in it becamepayable, and without having sufficient cause to believe that anydefect existed in the title of the person from whom he derived.



HOLDER IN DUE COURSE

� ESSENTIALS TO BECOME A HOLDER IN DUE COURSE:

� He must be a holder.

� The holder must have paid a valuable consideration.

� The holder must be a possessor in case of a bearer instrument.

� ( possessor means a person in actual p0ossession and notmerely acquired a right)

� The holder must be a payee or endorsee in case of an order instrument.

� He must become holder before the amount of the instrumentbecame payable.

� The holder must have obtained the instrument without asufficient cause to believe that any defect existed in the title of the person from whim he has derived his title.

� The instrument must be complete and regular on the face of it.



DISCHARGE, PRESENTATION

AND DISHONOUR OF A N.I.� The story of a NI starts from its issue, continues when it

passes through several hands, and ends when the primary

party liable upon it makes the payment thereon, and the

instrument is said to be discharged.

�However, there is possibility that the party who is liable to payupon the instrument refuses to honour his commitment. In

such cases, the instrument is treated as dishonoured and the

holder is provided with the cause of action against the

defaulting party.

�

But how can a party established that an instrument has beendishonoured? It can do so only when it can show that it

approached to the primary party and it refused to honour the

instrument. The mode of approaching the primary party is

µpresentation¶



� Presentment is the process of presenting or placing the

instrument before the maker, acceptor or Drawee.

� The presentment of a negotiable instrument may be made for

any of the following purposes:

� Presentment for acceptance- It is required in case of a Bill of Exchange.

� Presentment for sight- It is required in case of a promissory

note only.

� Presentment for payment- It is required in case of all the

negotiable instrument, i.e. PN, BE and cheque� The instrument may be dishonoured at 1st or 3rd instance mentioned above.

When an instrument is presented for acceptance, and the Drawee refuse to

accept it, the holder may treat the instrument dishonoured for non-acceptance

and when the instrument is presented for payment, and the payment is refused

upon it, the instrument is treated as dishonoured for non-payment

PRESENTATION OF A

NEGOTIABLE INSTRUMENT



DISCHARGE OF A NEGOTIABLE

INSTRUMENT� Literal meaning of the term µdischarge¶ is ± release from obligation.

� When a negotiable instrument is issued, it carries a liability to pay

certain amount to the holder.

� When this liability is satisfied, the instrument is said to be discharged.

�

The term discharge in negotiable instruments is used in two senses-one is, discharge of the instrument itself, other is discharge of party

(ies) to the instrument.

� A negotiable instrument is said to be discharged when all the rights of

action on it are extinguished. The instrument, then ceases to be

negotiable, and even a holder in due course has no right of action on

it.� A party stands discharged on the instrument when it is released from

its obligation to pay upon the instrument. The discharge of a party

gives him a right to say that ± I won¶t pay because I was discharged.

Different parties may be discharged at different times.



HOW TO GET A DISCHARGE ON

A NEGOTIABLE INSTRUMENT� The vast majority of negotiable instruments are discharged by

payment. However, , there are certain other ways also in whichan instrument or as party may get a discharge.

� By payment in due course i.e. when the parties primarily liableto the instrument ( maker, acceptor or drawee) pays to a holder the amount due.

� By cancellation: when the holder of a negotiable instruments or his agent cancels the name of any party of the instrument withintent to discharge him, such party and all subsequent parties,who have a right of recourse against the party whose name iscanalled, are discharged from liability to the holder

� By release: If the holder discharges the maker, acceptor or endorser of the instrument by any method other thancancellation, such party is said to be released from his liabilityupon the s instrument.



� Ex: R issues a PN to X, X negotiate it to Y, Y to Z. Afterwards, Z agree with Y

that he will not claim amount of the note from him, and will obtain his payment

from Ram or X. In this case Y is discharged on the instruments.

� Further, Z negotiates the instrument to Sham. Now if Sham receives the

instrument with the knowledge that Y¶s liability has been released by Z, Y

remains discharged as against sham also. However,, if sham had no knowledgeof Y¶s discharge while getting the instrument negotiated, he can hold him liable

upon it.

� By impairing endorser's remedy: Where the holder of a NI,

without the consent of an endorser, destroys or impairs his

remedy against a prior party, the endorser is discharged from

his liability to the holder.� A, the holder of a Be made payable to the order of B, which contains following

endorsements in blank: First endorsement µB¶ Second µP¶ Third µw¶ & fourth µJ¶

In this bill, A strikes out the endorsements made by µP¶ and µW¶ and sues µJ¶

Here A will not be able to recover the money from µJ¶ as he get discharged


A NEGOTIABLE INSTRUMENT



� By delay in presenting a cheque for payment. (closure of bank)

� By operation of law: when a person is declared insolvent, his

liability on the instrument gets restricted to the value of his

estate.

� By material alteration.





� By allowing the drawee of a bill of exchange more than 48hours to accept: The holder of a BE allows the drawee morethan 48 hours, exclusive of public holidays, to consider whether he will accept the same, all previous parties notconsenting to such allowance are thereby discharged from

their liability.� By accepting qualified acceptance: The holder of BE has an

option to treat the qualified acceptance of the drawee of the billas dishonour of the bill or to take the conditionally accepted billas a goods bill. When he takes the conditionally accepted billas a good bill, then all the previous parties who do not consent

are discharged from their liability.� By not giving notice of dishonour by the holder.

� By not presenting the µBE payable after sight¶ for acceptancewithin a reasonable time.





DISHONOUR OF A NEGOTIABLE

INSTRUMENT� An instrument is dishonoured when payment or acceptance is refused

or is not made within the prescribed time period following the proper presentment of the instrument.

� A BE is dishonoured by non-acceptance or non-payment

� A PN or a cheque may be dishonoured only by non-payment.

� NOTING

� When a NI gets dishonoured, the holder of the instrument gets a rightof action against the parties to the instrument.

� For establishing his case, he has to prove at the first instance, that thePN or the BE was presented to the concerned party and gotdishonoured. Sec-99

� The noting works as an official proof of the fact that proper

presentment of instrument was made and that it has beendishonoured.

� Thus by µnoting¶, the fact of the bill or note having been dishonouredcan be evidenced.

� Noting is a minute ( a recording) made on the bill or note by a a NotaryPublic ( or his authorised clerk) upon the instrument, or upon paper



� attached thereto, or partly on the instrument and partly on suchpaper.

� It should contain the following particulars:

� The fact of dishonour

�

The date of dishonour,� The reason, if any, assigned for such dishonour,

� If the instrument has not been expressly dishonoured, thereason why the holder treats it as dishonoured,

� The notary¶s charges, A reference to the notary¶s register.

� The notary¶s initials.

� PROCEEDURE FOR GETTING AN INSTRUMENT µNOTED¶

� When an instrument is to be noted, it is taken to a NotaryPublic. He presents it for acceptance, or payment, as the casemay be, and if the party to whom it is presented refused to pay

DISHONOUR OF A




� on it, the Notary makes a noting of the fact of such dishonour

on the instrument. The noting contains all the particulars

mentioned in the above para. Noting should be made by the

Notary within a reasonable time after dishonour.

�

A ticket or label is also attached to the instrument on which iswritten the reply received by the Notary or his clerk when he

made the presentment.

� Noting is optional in case of a promissory note and inland hbill

of exchange. The older may or may not, as he thinks fit have

the instrument noted, and omission to do so does not in

anyway affect his rights thereon. But in case of foreign bill of

exchange, noting is com0pulsory to ini9tiate a suit for recovery

on the instrument.

DISHONOUR OF A




� PROTEST

� The protest is a formal certificate issued by a Notary Publicattesting the fact of dishonour of the promissory note or the billof exchange. Sec-10

� Protest is only a step ahead of noting inasmuch as a certificatein the form of protest cannot be issued by a Notary unless hehimself has already demanded the acceptance or payment of the instrument concerned.

� Thus, a protest is based on noting only, but there are somedifferent features of noting and protest

�

Noting is a recording on the instrument itself about the fact of dishonour while the protest is a separate certificate of dishonour of the instrument.

� The contents of protest are much more detailed and elaborateas comp0ared to those of noting.

DISHONOUR OF A
