Negotiable Instruments Act, 1881

PUTTU GURU PRASAD

INC GUNTUR

Importance of NI

Facilitates payment and settlements in the businesses

Easy transferability of value of instrument

It has been amended in 1988

(Dishonor of Cheques and for penalties and 2002 (modified

for requirements as per the electronic commerce)

The payments through the NI are widely accepted

throughout the world.

Meaning and characteristics of NI NI means “ a promissory note, bill of exchange or cheque

payable either to order or to bearer Free transferability –

*by delivery (payable to bearer) or

*by endorsement and delivery

(payable to order) Holder presumed to be the owner Holder in due course gets the title from all defects, if the title

is acquired with good faith and for consideration. Can also sue for recovery of the sum

The instrument transferable till maturity.

Kinds of NI’so Negotiable by statute- NI Act only recognizes three kinds

of NI i.e.

PN, BOE and Cheque

o Negotiable by custom or usage- certain instruments which have acquired the characteristics of the NI by usage and custom of trade.

E.g. the Government PN, Banker’s Draft, Pay orders, hundies, delivery orders , railways receipts for goods are all held to be NI.

Presumptions relating to NIo Sections 118 and 119 of the NI act has certain presumptions

in order to facilitate business transactions:o It shall be presumed that every NI is drawn for

considerationo Every bill is accepted within a reasonable time before its

maturityo The instruments are endorsed in the order, in which they

appear on it.o Every holder is presumed to be a holder in due course

All the above presumptions are rebuttable by evidence to the contrary.

The burden of proof lies on the defendant and not upon the plaintiff

Classification of the NI Bearer Instruments- payable to bearer Order Instruments- expressed to be payable to order Inland Instruments- drawn and made in India upon any

person resident in India, even though payable in a foreign country

Foreign Instruments- Not an Inland Instrument, must be drawn outside India and made payable outside or inside India

Demand Instruments- Time for payment is specified in PN and BOE/ payable at sight

Ambiguous Instruments- which can be treated as PN or BOE by the holder

Continued

Inchoate or incomplete instruments- when the person signs and delivers a instruments which is wholly blank or incomplete and gives the authority to make it complete to the holder

Accommodation Bills- A bill drawn , accepted or endorsed without consideration

a) Party lending his name to oblige to the other party is Accommodating or accommodation party

b) The party so obliged is called the party accommodated Trade Bills- When a bill is drawn, accepted or endorsed for

consideration it is called a “ genuine trade bill” Escrow- When the NI is delivered conditionally or for special

purpose as a collateral security or for safe coustody only and not for transferring the absolutely.

Promissory Notes ( Section 4)

PN is an instrument in writing not being a bank note or a currency note

It contains an unconditional undertaking Signed by the maker to pay a certain sum of money only To or to the order of certain person, or to the bearer of the

Instruments Parties to the PN-

a) Maker- the person making or executing the note promising to pay the amount stated therein

b) Payee- The person to whom the amount is payable

To comply with other formalities like date, place, consideration, stamp etc

Bill of Exchange (Section 5)

BOE 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 Certain person or to the bearer of the instrument

Distinction between PN and BOE In a PN there are only two

parties- maker and the payee

It contains an unconditional promise by the maker to the payee

No acceptance is necessary

The liability of the maker or drawer is primary and absolute

The maker stands in immediate relationship with the payee

No notice of dishonor need to be given.

In a BOE, there are three parties- drawer, the drawee and the payee

It contains an unconditional order to the drawee or his agent to pay according to the drawer’s directions.

A bill has to be accepted if it is a bill payable “ after sight”

The liability of the drawer secondary i.e. when there is non payment by the drawee.

Notice of dishonor to be given by the holder to the drawer

The maker and the drawee do not stand in immediate relationship.

Parties to a Bill of Exchange

Drawer- Person who draws the bill Drawee- the person on whom the bill is drawn Acceptor- person who accepts the bill ( he may be the drawee

or a stranger on behalf of drawee) Endorser- person who endorses the bill in favour of another

person Endorsee- person in whose favour the bill is endorsed Bill in sets – They are usually drawn in set of three, which are

called as ‘Via’. The whole set constitutes only one bill

Cheque

Signed by the drawer Contains an unconditional order to a specified banker to

pay on demand A certain sum of money to or to the order of a specified

person or the bearer of the instrument

Therefore all cheques are bills of exchange but whereas all bills of exchange are not cheques.

It can be ante-dated or post dated In case of a cheque till it becomes stale ( on expiry of 6

months from the date of issue). It may be made payable to two or more or one of two alternatively or some of several payees.

Differences between Cheque and BOE

BOE The drawee liable only after it is

accepted Days of grace (three) are allowed

in case of a bill except for payment on demand

Drawee may be any one including the banker

It should be presented for payment, otherwise it may dischare the liability of the drawer

BOE cannot be crossed A notice of dishonor has to be

given to the drawer

Cheque A cheque does not

require acceptance and it is intended for immediate payment

No days of grace The drawee is always a

banker Delay in presenting does

not discharge the drawwer from his liability

It may be crossed

Crossing of Cheques A cheque can be an open or crossed cheque Open cheques can be encashed directly across the counter

by presenting to drawee bank. But if it is lost or stolen it can be encashed by any body unless countermanded (stop payment)

Crossing of the cheque was introduced with a view to avoid the losses that may result from the open cheques

Crossing is a direction to the bank to pay the money generally to a bank or to a particular bank

It is made with the intention to make the payment secured Its negotiability is not affected unless

“Not Negotiable“ is inserted but it is still transferable

Modes of Crossing

Where a cheque bears across it face an addition of words "and company” or any abbreviation thereof, between two parallel traverse lines, or of two parallel simply, the addition shall be deemed a crossing and it is known as ‘general crossing’.

General Crossing- In general crossing it is the responsibility of the drawee bank not to make payment otherwise than a bank

continued….

Other modes Special Crossing -Across its face it bears an addition of the

name of a banker with or without the words “ Not Negotiable”.

Restrictive Crossing-” Account payee” are added to the general or special crossing. The amount has to be credited to the account of the payee. They are not negotiable.

Not Negotiable Crossing- It means that the title of the transferee cannot be better than the transferor. It is crossed so, as a protection to the drawer or holder of the cheque against miscarriage or dishonesty in the course of transit by making it difficult to get cashed, until it reaches its destination.

Crossing after issue of the cheque

If the cheque is not crossed, the holder of the cheque may cross it either generally or specially.

If the cheque is crossed generally, the holder may cross it specially

The holder may add the words "Not Negotiable” to the crossing

If it is crossed to specified banker, it may be again crossed to another specified banker, or agent for collection.

Parties to a Negotiable Instrument Capacity of parties- Every person capable of contracting may

bind himself and be bound by the making, drawing, acceptance, indorsement, delivery and negotiation of the NI

The capacity of the party to a NI is co-extensive with the capacity of his or her contract capacity to contract

Minor can draw, indorse, deliver and negotiate such instruments as to bind all other parties other than himself.

Minor can also acquire all rights under it, and if he is a holder he is entitled to sue all the prior parties to the instruments.

If minor is one of the parties and all others are adults, then other than the minor all are liable. Adults are not discharged from liability even if the minor is discharged.

Holder ( Sec 8) A person who is entitled to hold the negotiable instruments

in his own name, to possess the instrument and to recover or receive its amount due from the parties thereto is called a holder.

To be a holder the person must be named in the instrument as a payee, or the endorsee or a bearer thereof

Holder in due course (HDC)

If a person proves that he acquired the instrument for a valuable consideration, then he is known as holder in due course.

The holder in due course should show that for consideration he became the payee or indorsee of the instrument , if it is payable to the order.

In such cases, the instrument should have been indorsed and delivered to him, as his title to the instrument will be incomplete without delivery.

Other essentials to be a holder in due course

The HDC should have acquired the instrument any time before the amount became payable.

If a person takes the instrument after the day the amount becomes payable, such a person cannot take the place of HDC, and the rights acquired by him are only co-extensive with that of his immediate transferor.

The HDC should have acquired the title without notice of the defect in the title

Privileges of a HDC

The presumption is that the HDC obtains title to the

instrument free from equity.

If the instrument is stamped but otherwise inchoate, the

person who has signed and delivers is prevented from

asserting against the HDC as the stamp in itself is

sufficient to cover the amount, though the instrument was

incomplete

Until the instrument is duly satisfied, every prior party to a

NI is liable thereon to a holder in due course.

Cont….

Continued.. If the bill or note is negotiated to a HDC , then the

negotiating parties cannot avoid liability if there was a condition or special purpose attached to it.

Once the NI passes through the hands of the HDC, the NI get cleansed of all its defects, provided the holder is not a party to the fraud

No defence can be set up against the holder in due course The validity of the instrument as originally made or drawn

cannot be denied by the maker/ drawer/ acceptor for honor The endorser cannot deny the signature or capacity to the

contract of any prior party to the instrument

Liabilities of Parties (Drawer)

Liability of the drawer- the drawer is liable to compensate in case of dishonor by the drawee or acceptor, provided due notice has been given to or received by the drawer.

The liability of the drawer in case of bill is secondary in nature. It is the acceptor who is primarily liable to make the payment.

By drawing a bill, the drawer undertakes that on presentment of the same to the acceptor, it will be accepted and duly honored and

If it is dishonored by the acceptor or not accepted, the drawer will compensate to the holder or the indorser, provided due notice is given to him.

Cont…..

Continued…..

The drawer can also limit his or her liability by using the

sans recourse indorsement

If the holder fails to give notice , then the drawer is not

liable and beyond this he is discharged from his/her

liability.

This is not only with reference to the bill but also upon the

original debt.

Liability of the Drawee

The relationship between the banker( drawee) and customer is that of debtor and creditor.

The banker has to undertake to honor the customers cheque until the funds are available with the bank in the customers account.

Banker can refuse to honor the customers in certain instances like,

a) bankers lien,

b) no amount to honor in the customers account,

c) post dated fund presented before the date,

d) if the instrument is ambiguous,

e) if the customer been declared insolvent,

f) if the customer has countermanded the cheque,

g) if the bankers receives the notice of death or insanity

Liability of the Drawee Bank for Wrongful Dishonour

Cheques to be presented during the usual banking hours.

If there is sufficient fund in the customers fund and still the bank does not honor the cheque , it has to fulfill the monetary loss of the customer and also the injury to reputation of the customer.

This remedy against the bank is available only to the drawer of the cheque and not the holder of the cheque.

Liability of the Drawee Bank Where the Drawer’s Signature is Forged

If bank honor’s a cheque which is forged, the bank cannot get the statutory protection, even if the sign could not be distinguished.

The Act provides protection to the drawee bank paying a cheque that carries a forged indorsement.

This section applies if the bank pays a cheque that carries a forged indorsement and it is payable to order and it purports to be indorsed by or on behalf of the payee. ………..

If the bank on which is drawn , makes the payment in due course, then the bank is discharged from its liability even if the signature of the payee might be forged.

Liability of the ‘Maker of the note’ and ‘Acceptor of the bill’

Both the maker and the acceptor are liable to make the payment.

The liability of the maker in case of note and acceptor in case the bill is absolute, Unconditional and primary. The liability exists only when he signs and delivers the note

But to make the acceptor liable only signature is not enough, it has to be accepted i.e. notice of acceptance should be given and the bill has to be delivered.

As the acceptor is not the originator of the bill as in case of the note, the acceptor can have an option to give a qualified acceptance.

Liability of endorser Every indorser after dishonor is liable as upon an instrument

payable on demand to every subsequent holder. The indorser is in a position of a new drawer and the liability

of the indorser is conditional. By endorsing the bill the endorser undertakes that the

instrument will be accepted and paid as per the tenor of presentment.

If it is dishonored, he will compensate the holder or subsequent indorsers who is compelled to pay for it subject to due notice of dishonor.

The indorsers liability as per this provision

(sec 35) will not commence until the indorsed instrument is delivered to the transferee. The indorser has to make good the loss but he can make qualified indorsement by using ‘sans recourse indorsement’

Liability of the other parties

Every prior party to the indorsement will be liable to the subsequent party until the instrument is duly discharged or satisfied.

If the indorser knows that bill was forged, he cannot later deny the liability by pleading forgery as a reason.

The indorser cannot challenge the holder’s title. He will be liable twice. One to the holder and the other to the true owner of the instrument.

Acceptor of the bill drawn in fictitious name and payable to the drawer’s order is not, by reason that such name is fictious, relieved from liability to any holder in due course.

Negotiation

Negotiation of an instrument may be either by delivery or by indorsement. Delivery of NI is an essential ingredient in order to bind the parties as they are incomplete and revocable.

The delivery should be with an intention to passing of the property . A PN , BOE or Cheque is considered to be completed only when it is delivered i.e., actual or constructive

As between the immediate parties, delivery to be effectual must be made by the party making , accepting or indorsing the instrument or by a person authorized by such person

For other parties, other than HDC it has to been shown that the instrument was delivered conditionally or for special purpose only and not for the purpose of transferring absolutely the property therein. All the NI’s are negotiable by delivery after indorsement.

Endorsements / Indorsements

A bearer instrument is defined as an instrument where the only or last indorsement is an indorsement in blank.

Partial Indorsement- No writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to transfer only a part of the amount appearing tobe due on the instrument, …….

But where such amount has been [partly paid, a note to that effect may be indorsed on the instrument, which may then be negotiated for the balance ( This is called partial indorsement)

Features of indorsement

Intention should be there for negotiating the instrument. Effected by the signature of drawer or holder of a

negotiable instrument. Indorsement can be made on the back or face of

instrument generally – it can be made on a plain paper or on a stamp paper)

The person who signs is called – Indorser/endorsor The person in whose favour it is made is called-

Indorsee/endorsee. The additional slip pf paper, if used for indorsement is

called as “ allonge”

Legal aspects of endorsement

Negotiation The endorsee acquires the property or interest in the

instrument as a holder. He can further pass the title negotiation, other than for restrictive endorsement (Transfer)

It can be negotiated till the payment is made Endorsement in part is invalid If the endorser dies before delivery, endorsement becomes

invalid. Presumption- Endorsement made in the order it appears Endorsers signature-Not to be in block letters Endorser should spell his name in the same way as it

appears on the cheque. Need not include prefixes and suffixes

Kinds of endorsement

Endorsement in blank: If there is only name of the endorser ( payable to bearer)

Endorsement in full- If it made to a specified person, A blank endorsement may be converted into full.

Sans recourse endorsement- Exclude his personal liability by limiting the liability.

Conditional endorsement- If a condition is specified by the endorser

Restrictive endorsement- if it specified to one person only Facultative endorsement-If the provisions of giving notice of

dishonor is waived by the endorse

Difference between Assignment and Negotiation

Assignment should be in writing

Notice of transfer of actionable claims must be given by the transferee to the debtor in case if the assignment in order to complete the title

The title is subject to all the defects, equities of the assignor

Transferee to prove consideration for transfer

Negotiation by delivery / endorsement and delivery

No notice of such kind required in negotiation

The title of the transferee is better than the transferor

Consideration is presumed in negotiation

Instruments obtained by unlawful means

Stolen instruments- Acquires no title Instruments obtained through fraud or coercion- usually not

liable , but liable if due and reasonable care not taken Instruments obtained for unlawful consideration- Does not

create a legal obligation but HDC obtains good title Forged instruments- Generally it cannot convey title Forged endorsement-depends of the different situations

Presentment

Meaning- Showing an instrument to the drawee, acceptor or

maker for acceptance, sight or payment.

The three kinds of presentment are:

a) Presentment of BOE for acceptance

b) Presentment of PN for sight

c) Presentment of NI for payment

Presentment must be made in a place and time

specified or in the place of business or residence

or where ever the person is found.

Presentment when excused

Presentment is excused and the instrument can be treated as dishonored in the following circumstances-

a) When the drawee cannot be found after

reasonable search

b) Where the drawee is a fictitious person or

incapable of contracting

c) Where the presentment is irregular,

acceptance has been refused on some

other ground.

d) Where the drawee becomes bankrupt or is dead

Dishonor of a NI

Non-acceptance of the bill or non- payment results in

dishonor of the instruments.

Dishonor by non- payment happens when the maker,

drawee of the cheque or acceptor of the bill makes a

default in payment upon being duly required to pay the

same.

It is considered to be dishonored by non-payment when the

presentment for payment is excused and the overdue

remains unpaid

Dishonor continued…

Dishonor by non- acceptance happens in the

following ways:

a) When the drawee does not accept within 48 hours of presentment

b) when presentment for acceptance is excused and the bill remains unaccepted.

c) When the drawee is incompetent

d) When the acceptance by the drawee is qualified

e) when the drawee is fictitious person or cannot be found after reasonable search

A notice of dishonour is a must to all prior parties whom the holder wants to make liable except in those cases where the law considered it as unnecessasry.

Noting and protest

A noting is a process of recording of dishonor by the notary public upon the instrument within a reasonable time of dishonor.

It is the discretion of the holder to get it noted. A bill that is noted must contain the fact of dishonor, the

date, the reasons. It will also have the notary charges. When the process of noting is certified, it is called protest.

Dishonor of cheques ( Sec 138-142)

> After the Amendment Act of 1988, the NI Act provide for criminal penalties in the event of dishonor of cheques for insufficiency of funds.

> The drawer may be punished under sec 138 with imprisonment for two years (after 2002 Amendment Act) or with fine which may extend to twice the amount of the cheque or with both.

> (The Amendment has inserted five new sections 143- 147 for the procedure to be followed for the trial)

Conditions to attract criminal penalty under sec 138 are: The cheque is dishonored due to insufficiency of funds The payment for which the cheque was issued was for the

discharge of a legally enforceable debt or liability in whole or part of it. ( If it is a gift , then the liability will not arise)

The cheque has to be presented to the paying bank within six months from the date that it was drawn.

The payee or the HDC should have been given a notice of dishonor of the cheque from the bank.( The court to take cognizance of the complaint, if it given by the payee or the HDC)

The drawer will be liable only if he fails to make the payment within days of such notice period.

The payee or HDC of the cheque should have made a written complaint within one month of cause of action.

Discharge of a Negotiable Instrument

Discharge of parties

a) By cancellation

b) Release

c) Payment

d) If the holder gives more time to the draweethan 48 hours

e) by default in presenting the cheque within a reasonable time

f) Dissenting parties discharged by qualified or limited

acceptance

g) Material alteration etc………..

******************