Negotiable Instruments Act 1881

Types Of Negotiable InstrumentsPromissory Note

An instrument in writing containing unconditional undertakingSigned by the makerTo pay a definite sum to or to the order of certain person or bearer

Bill of Exchange

An instrumental writingContains unconditional orderSigned by the makerDirecting a certain person to pay Certain sum of money Only to or the order of certain person or to the bearer

Cheque

A bill of a change drawn on a specified bankerExpressed to be payable on demandIncludes electronic image of a truncated cheque and cheque in an electronic form

Characteristics of a Negotiable Instrument

Freely transferable either by delivery or by indorsement and delivery.Title of the holder in due course free from all defectsThe holder in due course can sue in his own name for recovery of the amount. No notice of transfer required

Presumptions (Secs. 118 & 119)Existence of consideration is presumedAcceptance is within a reasonable time of its date and before maturityTransfer is made before maturityIndorsements are made in the order in which they appear thereonLost instrument was duly stampedHolder is holder in due course On proof of protest dishonour is presumed in a suit on dishonour

Capacity of PartiesMinor may draw, indorse, deliver and negotiate so as to bind all parties except himself, i.e., he may operate as a channel to convey title and liability but not to originate itPersons of unsound mind: bills and notes drawn or made are void against Corporation: a trading has implied power and a non trading company must have express power

Parties to Negotiable InstrumentsPromissory NoteMaker; Payee; Holder; Indorsee; IndorserBill of ExchangeDrawer; Drawee; Acceptor; Payee; Holder; Indorser; Indorsee; Drawee in case of need; Acceptor for honourChequeDrawer; Drawee; Payee; Holder; Indorser; Indorsee.

Holder in Due CourseBecame holder for consideration before its maturity.

In good faith, i.e., without sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

Privileges of Holder in Due CourseHe can fill in an inchoate stamped instrument for any amount subject to adequacy of stamping.Every prior party is liable to a holder in due course.Other parties cannot avoid liability on the ground that the delivery of the instrument was conditional or for a specific purpose only.

The instrument gets cleansed of all defects once it passes though the hands of holder in due course.No defense based on fraud or unlawful consideration can be setup.Every holder is a holder in due course.In a suit the validity of the instrument as originally made or drawn cannot be deniedNo indorser is permitted to deny the signature or the capacity of any prior party to the instrument.

LIABILITY OF PARTIES [Secs 30-32 & 35-42]Drawer liable to the holder in case of dishonour of bill or cheque provided notice given.Drawee of a cheque(banker) must compensate the drawer for any loss or damage caused by improper disorder.The maker of a promissory note and the acceptor of a bill liable to pay primarily to the holder on demand. In default to compensate any party for loss or damage.

The indorser before maturity is liable to all subsequent holders in case of dishonour.Every prior party is liable to a holder in due course until the instrument is duly satisfied.An acceptor of a bill already indorsed not relieved by reason of forgery, if he knew or had reason to believe.An acceptor of a bill drawn in a fictitious name, payable to the drawers order, is not relieved from liability to any holder in due course.

Maker of a note or cheque, acceptor of a bill and the drawer of a bill until acceptance liable as principle debtors.Other parties to the instruments are liable as sureties for maker, drawer or acceptor i.e., their liability is secondary and arises only on a default by the parties primarily liable.As between parties liable as sureties each prior party is a principle debtor in respect of each subsequent party.

NEGOTIATIONWhen a negotiable instrument is transferred to any person, the instrument is said to be negotiated [sec 14].

Negotiation maybe by delivery or indorsement and delivery.

TYPES OF INDORSEMENTBlank or general indorsement.Full or special indorsement. Restrictive indorsement.Partial indorsement.Conditional or qualified indorsement.Negotiation back.

PRESENTMENT FOR ACCEPTANCE.Only bill of exchange needs to presented for acceptance.A bill payable on demand or at site or on a fixed date need not be presented for acceptance unless otherwise agreed. An acceptance maybe general or qualified.

Presentment for acceptance maybe made to:-The drawee or his agent.Legal representative, if the drawee is dead.Assignee if the drawee becomes insolvent.To all drawees if there are several unless they are partners or agents of one another.Drawee in case of need.

Presentment for acceptance is excused where:-The drawee is fictitious or incompetent person.Drawee cannot be found.Drawee is dead or insolvent.Acceptance refused on ground other than irregular presentment.Acceptor for honour of some party liable on the bill.

PRESENTMENT FOR SIGHT AND PAYMENT.A promissory note payable after sight must be presented to the maker for sight to determine maturity.All negotiable instruments must be presented for payment to the maker, acceptor or drawee as the case maybe. If default is made all parties other than primarily liable parties are discharged.

Presentment for payment is not necessary where it is prevented by maker,drawee or acceptor or their business is closed or cannot be found or waived or where the bill is dishonoured by non acceptance etcPayment for honour like acceptance for honour maybe by third party for the honour of a party liable to pay the bill

DISHONOURA bill may be dishonoured by non-acceptance or non paymentA promissory note or cheque can be dishonoured only by non paymentNotice of dishonour must be given to all parties by the holderNotice not necessary in certain circumstances like waiver,drawer countermanding payment,party not found,non negotiable promissory note etc

DISCHARGE OF AN INSTRUMENTAn instrument may be dischargedBy payment in due courseBy maker or acceptor becoming holderBy express waiverBy cancellationBy a contract for payment of money

DISCHARGE OF PARTY OR PARTIESA party to a negotiable instrument may be discharged byCancellationReleaseBy allowing drawee more than 48hoursBy delay in presentment of a chequeBy material alterationBy operation of lawBy payment of altered instrument

SPECIAL RULES FOR CHEQUES AND DRAFTSThese rules are contained in chapter 14 of the Act containing sections 123-131ACrossed chequesGeneral crossing is to direct the drawee to pay the amount only to a bankerSpecial crossing is always to the banker whose name appears across a chequeA cheque can be crossed after issue also by the holder

Holder may change the crossing from one form to anotherA banker to whom it is crossed may again cross it specially to another banker for collection If a cheque is crossed generally payment shall be made only to a bankerWhen it is crossed specially the banker on whom it is drawn shall not pay to anybody other than the banker to whom it is crossed or his agent for collection.When a cheque is crossed to more than one banker, the banker on whom it is drawn shall refuse payment except when it is crossed to an agent for purpose of collection.

Payment in due course of crossed cheque:-When the drawee banker pays it in due course it is presumed that he has made payment to true owner of the cheque even though the amount may not reach the true owner.

Payment out of due course:-Any banker paying a crossed cheque otherwise than in due course, i.e., to the banker to whom it is crossed shall be liable to the true owner for any loss he may have sustained

Cheque marked not negotiable:-A person taking a cheque crossed not negotiable, shall not have better title than the one which the person from whom he took had.

Cheque marked account payee:-Its a form of restrictive crossing. Its a warning to the collecting banker that the proceeds have to be credited only to the account of the payee, the failure of which will make the collecting banker liable for losses.

Banker receiving payment of cheque in good faith and without negligence for a customer of a cheque crossed generally or specially to himself shall not incur any liability to the true owner if the title of the cheque is proved defective

The provisions applicable to cheques are also applicable to draft issued by a bank.

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