Ch 7 Negotiable Instruments Act, 1881
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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’s o
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 NI o o o o o
Sections 118 and 119 of the NI act has certain presumptions in order to facilitate business transactions: It shall be presumed that every NI is drawn for consideration Every bill is accepted within a reasonable time before its maturity The instruments are endorsed in the order, in which they appear on it. 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 PNa) 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 calledIndorsee/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:
Presentment of BOE for acceptance
Presentment of PN for sight
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 circumstancesa) 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 remains unpaid
and the overdue
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 drawee than 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……….. ******************
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’s o
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 NI o o o o o
Sections 118 and 119 of the NI act has certain presumptions in order to facilitate business transactions: It shall be presumed that every NI is drawn for consideration Every bill is accepted within a reasonable time before its maturity The instruments are endorsed in the order, in which they appear on it. 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 PNa) 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 calledIndorsee/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:
Presentment of BOE for acceptance
Presentment of PN for sight
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 circumstancesa) 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 remains unpaid
and the overdue
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 drawee than 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……….. ******************
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