The Negotiable Instruments Act ,1881

The Negotiable Instruments Act ,1881 -Group 10 Section -A

History 

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A law relating to negotiable instruments Deals with promissory notes, bills of exchange & cheques Act extends to whole of India The Act came into existence on 1st March, 1882 The latest amendment to the act was made in 1988

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Introduction 

What is a negotiable Instrument?

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A negotiable instrument is the one which transfers a debt from one person to another.

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Special class of contracts.

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Characteristics    

Freely transferable Title of holder free from all defects Recovery Presumptions: Consideration, date, time, time of acceptance & transfer, order of indorsements , stamp, holder is a holder in due course, proof of protest

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Types of Negotiable Instruments 

Negotiable by Statute

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Negotiable by custom or usage

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Notes Bills & Cheques Promissory Note : A “promissory note” is an instrument in writing (not a bank-note or a currency-note) containing an unconditional under­taking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument. Parties Involved:  Maker  Payee 08/08/09

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Essentials of Promissory note         

Must be in writing Promise to pay Definite & unconditional Signed by the maker Certain parties Certain sum of money Promise to pay only money No bank note or currency note Other formalities

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Bill of Exchange A “bill of exchange” is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument. Parties Involved:  Drawer  Drawee  Payee 08/08/09

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Essential elements of BOE        

In writing Order to pay Unconditional Requires 3 parties & certain Signed Sum to be certain Order to pay money Other formalities

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Cheque “a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand it includes the electronic image of a truncated cheque and a cheque in the electronic form.” 

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Cheque Marking of Cheques   

At drawer's instance At holder’s instance At collecting Banker’s instance

Crossing of Cheques  

General crossing Special crossing

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Difference  

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Bill Of Exchange Three parties-drawer, drawee, payee Unconditional order Drawer-creditor Liability is secondary Can be drawn payable to bearer Drawer stands in immediate relation with acceptor and not payee.

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Promissory Note Two parties-maker, payee Unconditional promise Maker-debtor Liability is primary Cannot be drawn payable to bearer Maker stands in immediate relation with the payee

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Distinguishing Features   

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Bill of Exchange Drawn on any person Bill must be accepted before drawee can be called for payment Entitled to 3 days of grace Not crossed Requires stamp May be protested for dishonour

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Cheque Drawn on a banker Cheque requires no acceptance Not entitled to any days of grace May be crossed Does not require stamp Not protested for dishonour

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Classification of Negotiable Instruments          

Bearer or order instruments Inland & Foreign instruments Instruments payable on demand Time instruments Accommodation Bill Fictitious bill Documentary or clean bill Escrow Ambiguous Instrument Inchoate Instrument

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Notes Bills & Cheques    

Bill in sets Maturity & days of grace Payment in due course Interest on bills & notes

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Capacity Of Partners: Every person capable of contracting, according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque.       

Minors Persons of unsound mind Corporations Agents Partners Hindu Joint Family Legal Representatives

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Parties to Negotiable Instruments 1) Parties to Bill of Exchange:         

Drawer Drawee Acceptor Payee Holder Indorser Indorsee Drawee in case of need Acceptor of honour

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Parties to Negotiable Instruments 

2) Parties to a Promissory Note: -

Maker, Payee, Holder, Indorser, Indorsee 

3)Parties to a cheque: -

Maker, Drawee, Payee, Holder, Indorser, Indorsee 08/08/09

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Holder: 

The “holder” of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.

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Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.

HOLDER IN DUE COURSE: “Holder in due course” means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee thereof, if payable to order. 08/08/09

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Liability Of Parties: 1) Liability of drawer 2) Liability of drawee of cheque 3) Liability of maker of note and acceptor of bill 4) Liability of indorser 5) Liability of prior parties to a holder in due course

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Negotiation 

When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute the transferee the holder thereof, the instrument is said to be negotiated.

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This Transfer may take place either:

1)By Negotiation  

Negotiation by delivery Negotiation by indorsement & delivery

2)By Assignment 08/08/09

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Indorsement: 

When the maker or holder of a negotiable instrument signs the same for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same, and is called the inndorser

Essentials of Valid Indorsement:   

It must be on the instrument itself It must be signed by the indorser It must be completed by the delivery of the instrument

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Kinds of Indorsement:     

Blank or general Indorsement Full or special Indorsement Restrictive Indorsement Partial Indorsement Conditional Indorsement

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Instruments obtained by unlawful means       

Stolen instruments Coercion or Fraud Unlawful consideration Forged instruments Forged indorsement Without Consideration Lost negotiable instruments

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Presentment of a negotiable instrument. 

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Presentment means showing a negotiable instrument to the drawee, acceptor or maker for acceptance, sight or payment. Types:   

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Presentment of bill of exchange for acceptance. Presentment of promissory note for sight. Presentment of negotiable instruments for payment.. The Negotiable Instruments Act,1881

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Presentment for acceptance. 

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It is only bills of exchange of certain type that require acceptance. A bill is said to be accepted when the drawee put his signature on it. Essentials of a valid acceptanceIt must be written on bill. It must be signed by the drawee personally or through a authorised agent. The accepted bill must be delivered to the holder.

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Modes of acceptance.        

General acceptance. Qualified acceptance. An acceptance is qualified when it is Conditional Partial Qualified as to place and Qualified as to time Acceptance by some of drawees but not all.

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Presentment of acceptance to whom?    

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The drawee All or some of several drawees Drawee in case of need All the drawees in case of several drawees Duly authorized agent of the drawee Legal representative in case of death of the drawee Official Receiver or Assignee in case of insolvency of the drawee

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Presentment for acceptance when and where 

When:

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If a time for presentment for acceptance is specified in the bill. b. If time is not specified in the bill. c. In case of a bill payable after sight. 08/08/09

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Presentment for acceptance when and where  b.

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Where If place for presentment is mentioned in the bill If the place of presentment is not mentioned in the bill The holder must allow the drawee fortyeight hours to consider whether to accept the bill

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Effect of non-presentment

When presentment for acceptance is excused: a. drawee after reasonable search cannot be found b. drawee is dead or insolvent c. drawee is a fictitious person or one incapable of contracting 08/08/09

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Acceptance for honour 

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When the bill is dishonoured by nonacceptance holder may allow any other person to accept it for the honour of drawer or any one of the indorsers. Conditions for valid acceptance for honour: The bill must have been noted or protested.

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Contd….. 

The acceptance for honour must be made with the consent of the holder.

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It must be written on the bill indicating that it is an acceptance for honour of the party liable on the bill.

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It must be signed by the acceptor who must not be already liable on the bill .

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Obligations and rights of acceptance for honour 

Obligation of the acceptor for honour is not absolute. The following conditions has to be fulfilled:

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The bill should once more be presented to the drawee for payment at maturity.

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If the drawee still refuses to pay, the bill should be noted or protested for payment.

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Other forms of presentment 

Presentment for sight.

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Presentment for payment.

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Dishonour of a negotiable instrument 

A bill of exchange may be dishonoured by non-acceptance or non-payment.

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A promissory note and a cheque may be dishonoured by non-payment only.

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Notice of dishonour must be given to all the prior parties in order to make them liable on the instrument.

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Contd….. 

Notice of dishonour by whom?

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Notice of dishonour to whom?

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Form of notice.

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Noting 

Noting means the recording of the fact of dishonour by a notary public upon the instrument or upon a paper attached there to or partly upon each.

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Noting must contain following particulars: The fact of dishonour. Date of dishonour. Reasons, if any assigned. The notary charges.

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Protest Fact of dishonour of bill of exchange or promissory note is noted and certified by Notary Public. Such certificate is called protest. Contents of protest:  The instrument or literal transcript of the instrument.  The name of the person for whom and against whom the instrument has been protested.  The reason for dishonour.  The place and time of dishonour.  The signature of the Notary Public 08/08/09

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Discharge of an Instrument    

By payment in due course Payment of interest (Sec 80) By express waiver By cancellation

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Discharge of a Party or Parties     

By payment [Sec 82(c)] By cancellation [Sec 82(a)] By release [Sec 82(b)] By operation of law By material alteration (Sec 87)

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Material Alteration Instances of material Alteration    

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The date Sum Payable Time of payment Place of payment & addition of place of payment Rate of interest

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ESTOPPEL When a person by his conduct or words spoken or written leads another person to believe that a certain state of affairs exists, he is estopped from denying the facts of that statement later.

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Rules of Estoppel 

Estoppel against denying original validity of instrument (sec 120)

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Estoppel against denying capacity of payee to indorse (sec 121)

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Indorse not permitted to deny the capacity of prior parties (sec 122)

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International Law 1.

Liability: The liability of the maker or drawer of foreign promissory note is determined by the law of place where the instrument has been made .The liability of the acceptor is determined by the law of place where the instrument is payable.

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Dishonour: A promissory note,bill of exchange is made payable in different place from that in which it is made or indorsed,the law of place determines what constitute dishonour

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Instruments made out of India according to the provisions of Indian law

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HUNDIS 

Unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order.

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Expressed in vernacular language also.

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Being a part of the informal system have no legal status and are not covered under the Negotiable Instruments Act, 1881.

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Banker & Customer Banking is defined as an activity of accepting deposits from the public, repayable on demand or otherwise and withdrawal by cheque, draft or otherwise and such acceptance of money is for the purpose of lending or investments.

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Rights & Obligations of Bankers towards Customers 

Honour the cheque

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Maintain records of all the transactions

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Abide by the instructions of the customer

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Not to disclose the state of his customer’s account

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Set off

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When a Banker MAY Refuse (Dishonour) Payment • • • • • • • • 08/08/09

When a Cheque is post-dated and presented for payment before that date Lack of sufficient funds The funds are not available for the purpose Cheque is of doubtful legality When the Cheque is not duly presented Signature doesn't match Cheque presented at a branch where the customer has no account When theTheCheque has become stale 50 Negotiable Instruments Act,1881

When a Banker MUST Refuse (Dishonour) Payment  

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The customer countermands payment A customer dies and the bank has notice of the death Customer has been adjudged insolvent Banker receives notice of customer’s insanity When payment is prohibited by an order of a court Customer gives notice to his banker to close his accounts The Negotiable Instruments Act,1881

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Protection of the Paying Banker:Sec 85 3.

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Paying banker will not be liable if holder of a bearer Cheque is not actual owner of the Cheque [Sec 85(2)]. If a Cheque is crossed generally (Sec 126 Para 1) If a cheque is crossed specially (Sec 126 Para 2) The Negotiable Instruments Act,1881

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Contd…. Paying banker will not be protected if the drawer’s signature is forged and the banker makes the payment on the cheque

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Presented by Akanksha Kedia(FPB0709/007) Anindita Kundu(FPB0709/015) Anupama(FPB0709/020) Isha Mehta(FPB0709/056) Yageshwari Trivedi(FPB0709/158)

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Thank You