NEGOTIABLE INSTRUMENTS

VIS-À-VIS CHEQUE

Samir K Mahajan

Meaning: Negotiable Instruments

Negotiable instruments are documents meant for making payments, which can be transferred from one person to another many times before final payments.

they take the form of written order or unconditional promise to pay a fixed sum of money on demand or at a certain time

they (i.e. their Ownership) can be transferred from one person to another before the final payment is made.

Once the instrument is transferred, the holder obtains full legal title to the instrument.

Negotiable instruments are integral part of business mechanism.

Samir K Mahajan

Most Negotiable Instruments

PROMISSORY NOTE

BILL OF EXCHANGE

CHEQUE

Other such instruments which posses features of negotiability

Hundis (a popular indigenous bill prevalent in India) Treasury bills DraftsCertificates of deposits etc

Samir K Mahajan

PROMISSORY NOTE

A promissory note 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 a certain person or to the order of a certain person or to the bearer of the instrument’.

The amount may be payable on demand or after expiry of certain period of time.

Samir K Mahajan

PARTIES TO A PROMISSORY NOTE: Two Parties Involved

Maker or Drawer – the person who makes the note and promises to pay the amount stated therein

Payee – the person to whom the amount is payable.

In course of transfer of a promissory note by payee and others, the parties involved may be

Endorser/ transferor – the person who endorses the note in favour of another personEndorsee/ transferee – the person in whose favour the note is negotiated by endorsement

Endorsement means transfer of any document or negotiable instrument to another person by signing on its back or face or on a slip of paper attached to it.

Samir K Mahajan

Rs. 10,000/- New Delhi

September 25, 2013

On demand, I promise to pay Ramesh, s/o RamLal of Meerut or order a sum of Rs 10,000/- (Rupees Ten Thousand only) for value received.To , Ramesh Sd/ SanjeevAddress…….. Stamp

Specimen of Promissory Note: Payable On Demand

Rs. 10,000/- New Delhi

September 25, 2013Three months after date, I promise to pay Ramesh, s/o RamLal of Meerut or order a sum of Rs 10,000/- (Rupees Ten Thousand only) with interest at the rate of twelve percent per annum until payment, for value received.To , Ramesh Sd/ SanjeevAddress…….. Stamp

Specimen of Promissory Note: Payable after date with interest

Samir K Mahajan

BILL OF EXCHANGE

Bill of exchange 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 the person or to the order of a certain person, or to the bearer of the instrument’.

The amount may be payable on demand or after expiry of certain period of time.

Samir K Mahajan

PARTIES TO A BILL OF EXCHANGE: THREE PARTIES INVOLVED

Drawer of the bill – The person who makes the order for making payment. He is the creditor.

Drawee/Acceptor/payer of the bill – The person to whom the order to pay is made. He is generally a debtor. The drawer must accept the bill issued by drawer.

The Payee of the bill – The person to whom the payment is to be made.

The “drawer” can also draw a bill in his own name thereby he himself becomes the “payee”.

In course of transfer of a bill of exchange by payee and others, the parties involved may be

Endorser/ transferer – the person who endorses the note in favour of another person

Endorsee/ transferee – the person in whose favour the note is negotiated by endorsement Samir K Mahajan

Rs.10,000/- New Delhi September 25, 2013

Five months after date, pay Tarun or to his order the sum of Rupees Ten Thousand only for value received.

To , Sanjoy Accepted Sd/ Rajeeb

Address…….. Sanjoy Stamp

SPECIMEN OF A BILL OF EXCHANGE : PAYABLE AFTER DATE - TIME BILL

SPECIMEN OF A BILL OF EXCHANGE : Payable on Demand –Demand Bill

Rs.10,000/- New Delhi September 25, 2013

For this bill of exchange, pay to us or order of ourselves, the sum of Rupees Ten Thousand only for value received.

To , Sanjoy Accepted Sd/ RajeebAddress…….. Sanjoy Stamp

Samir K Mahajan

CHEQUES

A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.

A cheque is an order by the account holder of the bank directing his banker to pay on demand, the specified amount, to a specified person named therein or to the order of the specified person or to the bearer

In India, a customer with a saving bank account or current account in a bank can issue a cheque in his own name or in favour of others, thereby directing the bank to pay the specified amount to the person named in the cheque

Samir K Mahajan

CHEQUES

Cheque Bill of Exchange

It is drawn only on a banker. It can be drawn on anybody including a banker.

The amount is always payable on demand.

The amount is payable on demand or after a specified period.

It can be crossed. It cannot be crossed.

Acceptance is not required. Acceptance is a must.

Samir K Mahajan

ENDORSEMENT OF CHEQUE

Endorsement means transfer of any document or negotiable instrument (e.g. Cheque) to another person by signing on its back or face or on a slip of paper attached to it.

A negotiable instrument payable otherwise than to a bearer can be negotiated only by endorsement and delivery.

A negotiable instruments in bearer formed need not be endorsed.

 

Samir K Mahajan

TYPES OF ENDORSEMENT

.1. Endorsement in Blank or General Endorsement

2. Endorsement in Full or Special Endorsement

3. Restrictive Endorsement

4. Partial Endorsement

5. Conditional Endorsement

Samir K Mahajan

TYPES OF ENDORSEMENT

.1. Endorsement in Blank or General EndorsementIn case of an endorsement in blank, the payee or endorser does not specify an endorsee and he simply signs his name. Because no payee is specified, such an endorsement essentially turns the instrument into a bearer security. The most well-known example of a blank endorsement is a check made payable to "cash" and endorsed on the back with the signature of the account holder

2. Endorsement in Full or Special EndorsementIn case of special endorsement or endorsement in full, the payee or endorser specifies the person to whom or to whose order the instrument is to be paid. The specified person i.e. the endorsee then becomes the payee of the instrument.

3. Restrictive EndorsementA restrictive endorsement prohibits further negotiation of a negotiable instrument. For example, if B endorses an instrument payable to bearer as: Pay the contents to C only or Pay C for my use, the right of C to further negotiate is excluded.

Samir K Mahajan

TYPES OF ENDORSEMENT (contd.)

4. Partial EndorsementA partial endorsement purports for transfer of a part of the amount payable to the endorsee, or purports to transfer the instrument to more than one endorsees (two or more) separately does not result in negotiation of the instrument. Legally such an endorsement is invalid.

5. Conditional EndorsementA conditional endorsement, by express words in the endorsement, makes the liability of endorser on the instrument or right of the endorsee to receive the amount due thereon dependant on the happening of an particular event.

For example, “pay C if he returns from London”. Thus C gets the right to receive payment only on the happening of a particular event, i.e., if he returns from London.

In such case, the endorser will not be liable to the subsequent holder if the specified event does not take place. Samir K Mahajan

ESSENTIALS OF A VALID ENDORSEMENT

An endorsement in order to operate as mode of negotiation must comply with the following conditions:

Endorsement must be made by the maker or holder of the instrument such as cheque. A stranger cannot endorse it.

Endorsement must be on the instrument and be signed by the endorser. The endorsement may be on the back or the face of the instrument and if no space is left on the instrument, it may be made on a separate paper attached to it . It is not necessary to write the full name initial may be sufficient. Thumb- impression should be attested.

Endorsement must be on the entire bill. A partial endorsement purports to transfer a part of the amount payable to the endorsee, or transfer the instrument to more than one endorsees (two or more) separately. Partial endorsement does not result in negotiation of the instrument.

Samir K Mahajan

ESSENTIALS OF A VALID ENDORSEMENT

Endorsement must be completed by delivery of the instrument. The delivery must be made by the endorser himself or by somebody on his behalf with the intention of passing property therein.

If a person endorses an instrument to another and keeps the same with him rather than delivering the same, and if it is found after his death and then delivered to the endorsee, the latter gets no right on the instrument.

If delivery is conditional, endorsement is not complete until the condition is fulfilled.

Samir K Mahajan

PARTIES TO CHEQUE

Drawer: the person (or persons) who draws/ signs the cheque

Drawee : the bank on whom a cheque is drawn

Payee: the beneficiary named on the cheque/ person in whose favour a cheque is drawn

the “payee” of a cheque can be the “drawer” himself

In course of transfer of a cheque by payee and others, the parties involved may be – Endorser/transferor – the person who endorses the cheque in favour of another person. Endorsee/transferee – the person in whose favour the cheque is negotiated by endorsement.

Samir K Mahajan

DATING OF CHEQUE

A Cheque not dated at all is valid.

Any holder of the cheque including the banker may insert a date.

However bankers generally return a undated cheque.

Cheques may be ante-dated or post-dated or a date on a public holiday, and thus are not invalid for those reasons.

A cheque has a life of three months from the date of the cheque.

Cheque may be :

o Ante-dated Cheque

o Post-dated Cheque

.

Samir K Mahajan

ANTE-DATED CHEQUE

Ante-Dated Cheque bears a date earlier than the date of issue. e.g A cheque issued (by drawer) on 30 September 2013 may bear a date 30 August 2003.

Such a cheque is valid up to three months from the date of the cheque.

A cheque presented for payment after three months from the date of the cheque is stale cheque . A stale cheque is not honored by the bank.

.

Samir K Mahajan

POST DATED CHEQUE

POST DATED CHEQUE

are written by the drawer for payment in a future date.

cannot be honored earlier than the date on the cheque.

. For example, if a cheque presented/issued on 30 September 2013 bears a date of 30 October 2014 , it is a post-dated cheque. The bank will make payment only on or after 30 October 2014.

.

Samir K Mahajan

CHEQUES

1) OPEN CHEQUE

BEARER CHEQUE

ORDER CHEQUE

2)CROSSED CHEQUE

TYPES OF CHEQUE

Samir K Mahajan

Open cheque/ Uncrossed cheque

The payment of "Open Cheque" or an "Uncrossed Cheque” can be obtained at the counter of the bank.

The holder of an open cheque can do the following:

Cash the cheque over the counter at the bank

Deposits the cheque in his own account

Passes /transfers/endorses it to someone else by signing on the back of a cheque

An open cheque may be a bearer cheque or an order one on a specific name. Samir K Mahajan

BEARER CHEQUE

A bearer cheque is made payable to the bearer i.e. the person who presents it to the bank ( at the counter) for encashment. The words ‘or bearer’ mean that (when not crossed) the bank on which the cheque is drawn has authority to pay it to any person in possession of it, even if that person found it or stole it, unless the bank has reason to suspect that the cheque might have fallen into the wrong hands.

appears as 'Pay to Mr X or bearer'.

can be transferred by mere delivery; they need no endorsement.

the words "or bearer" appearing on the face of the cheque are not cancelled /deleted

Samir K Mahajan

such cheque are risky; this is because if such cheques are lost/theft, the finder of the cheque can collect payment from the bank

Bearer cheque can be altered to order cheque by deleting and inserting ‘or order” on it

ORDER CHEQUE If a cheque is an ‘order’ cheque then (when not crossed) the drawee bank should pay it: o to the named payee; or oto any person to whom the named payee has ordered it to be paid, by endorsing the cheque normally appear as 'Pay to Mr. X

or order'

if word "bearer" appears on face of a cheque, it is deleted, and in its place the word "or order" is written.

The payee can transfer/ endorse an order cheque to someone else by signing his or her name on the back of it. The bank then has to pay to the person to whom it is endorsed /transferred).

The bank must take care to ascertain that the person demanding payment is the right person

An order cheque is also paid by the paying banker on being apparently satisfied about the true identity of the presenter of the cheque.

Samir K Mahajan

CROSSED CHEQUE

When  cheque  is  crossed  the drawer is telling the bank not to pay it at the counter but to a banker only for crediting the payees account with the bank. 

The crossing of a cheque is intended 

o To ensure that the cheque is not encashed by a wrong person, by concealing his identity,

o to ensure that its payment is made to the right payee.

A cheque whether in bearer or order form when crossed must be collected by the bank (e.g. into a customer’s account ).

The payment of such cheque is not made over the counter at bank. It is only credited to the bank account of the payee.

‘Crossed cheque’ avoids the danger of theft/loss as in case of open cheque. Samir K Mahajan

Types of crossing.

General Crossing

Special Crossing

CROSSING OF CHEQUE

Objectives of crossing:

It prevents the payment of the cheque to a wrongful holder.

It ensures safe payment.

It facilitates in tracing the recipient of the payment.

Further it is a guard against any cheating or theft.Samir K Mahajan

GENERAL CROSSING

The drawing up of two simple parallel lines on the face of the cheque at the top left hand corner with or without the words such as: & Co., Not negotiable, or Account Payee only is known as general crossing.

The effect of general crossing is that the crossed cheque cannot be paid at the counter of the bank.

Its payment can only be deposited into the payee’s account only.

Section 126 of the Negotiable Instrument Act Act 1881 says that this is a direction to the bank to not to pay the cheque across the counter.

This crossed cheque is no more a bearer cheque where anyone can negotiate and get payment across the counter. Samir K Mahajan

SIGNIFICANCE OF GENERAL CROSSING

General crossing direct the paying banker not to cash the cheque at the counter. Payment is made through an account of the payee(through a banker)

The collecting banker can collect the proceeds of the cheque in the account of the payee (i.e. the person mentioned on the cheque)

The main intention of crossing a cheque is to give protection to the original payee from being misused in case of theft or lost

The cheque crossed generally does not cease to be negotiable further

Both paying banker and collecting banker may be the same

General crossing protect the payee from the loss or theft of a cheque.

Samir K Mahajan

SPECIAL CROSSING

When a banker’s name is written in between the two parallel lines, the cheque is said to be specially crossed.

In fact, drawing of two transverse and parallel lines is not necessary in case of a special crossing.

When a cheque has been specially crossed, the drawee/paying banker will make the payment only to that banker in whose favour/name it has been crossed.

The payment of such cheque is not made unless the bank named in crossing is presenting the cheque.

Samir K Mahajan

SIGNIFICANCE OF SPECIAL CROSSING

the crossed cheque is specially crossed to the payee’s banker. The drawer gives direction to the paying banker that it should pay the amount of cheque only to that of banker the name of which name appears in the crossing or to his agent.

Specially crossed cheques are more safe than a generally crossed cheques. A special crossing gives more protection to the cheque than a general crossing. Because a person, who does not have a real claim for it, would find it difficult to obtain payment.

The banker, in whose favour the cheque has been crossed, knows the payee and his specimen signature well. If there is any forgery, it can be easily detected by the banker. So, the bank will not collect it for any person other than the payee.

Samir K Mahajan

WHO CAN CROSS A CHEQUE?

a) A cheque may be crossed generally or specially by the drawer.

b) Holder may also cross it.

c) Holder may turn a general crossing into special crossing.

d) A banker may cross an uncrossed cheque & it may cross it especially to itself or to another banker for purpose of collection through it.

Samir K Mahajan

OPENING OF CROSSING/CANCELLATION OF CROSSING

If the crossing on a cheque is cancelled, it is called opening of the crossing. The cheque thereafter becomes an open cheque.

Only the drawer of the cheque is entitled to open the crossing of the cheque by writing the words ‘Pay Cash’ and canceling the crossing along with his full signature.

The paying banker must be very careful in ascertaining the validity or genuineness of the drawer’s signature opening the crossing.

If drawer’s signature (already on the cheque) is forged by the holder in order to open the crossing and the payment is obtained at the counter, the banker will remain liable to the true owner of the cheque.

Samir K Mahajan

DOUBLE CROSSING

When a cheque bears two separate special crossing, it is said to have been doubly crossed.

A Cheque cannot be crossed especially twice but there is an exception to in India. A paying banker shall pay a cheque doubly crossed only when the collecting banker is acting only as the agent of the first collecting banker and this has been made clear on the instrument.

Samir K Mahajan

A person who signs the cheque and transfers the instrument is an endorser and in whose favor it is transferred is endorsee.

The endorsee acquires a right to negotiate the instrument to anyone he / she likes.

By making an endorsement the endorser promises that in case of dishonor, he / she provides a guarantee to compensate the holder. Crossing a cheque by making two parallel lines with or without such words as ___& company is general crossing.

Section 126 of the NI Act says that this is a direction to the bank to not to pay the cheque across the counter. This

crossed cheque is no more a bearer cheque where anyone can negotiate and get payment across the counter.

In case of a crossed cheque except A/C payee, the payee is free to make further endorsements.

CAN A CROSSED CHEQUE BE ENDORSED?

Samir K Mahajan