Social & Legal Issues

Negotiable Instruments

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Definition Every document which entitles a person to a sum of money and which is transferable by delivery or by endorsement and delivery, is entitled to be called a negotiable instrument.

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Characteristics of a Negotiable Instrument

A negotiable instrument must be in writing A negotiable instrument must be signed by its maker. A negotiable instrument must contain an unconditional promise or order to pay some money. A negotiable instrument must contain a certain amount of money only. A negotiable instrument must be freely transferable from one person to another. On the transfer of a negotiable instrument , the transferee who receives it in good faith and for value, has the right to recover the amount mentioned in the instrument in his own name. Such a person is known as holder in due course. His rights are not affected by any defect in the title of the transferee or any other prior party.

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Presumptions About Negotiable Instrument

Consideration Date Time of acceptance Order of endorsement Stamp Holder in due course Fact of dishonour The above facts are presumed unless and until contrary is proved. In other words these presumptions are rebuttable by evidence

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Kinds of Negotiable Instrument

Negotiable by Statute: Promissiory Note: Cheque Bill of Exchange Negotiable by custom or usage

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Promissory Note
Acc to Section 4 of negotiable Instruments Act: A promissory note is an instrument in writing 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 bearer of the instrument

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Parties to a Promissory Note Maker Payee

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Essentials of a Valid promissory Note

It must be in writing It must contain an express promise to pay The promise to pay may be unconditional The promise is to pay in terms of money only The promise to pay a definite amount of money only It must contain certain parties It must be signed by the maker Intention to make a promissory note and its delivery Other formalities

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Bill of Exchange
Section 5 of Negotiable Instruments Act; 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 to the bearer of the instrument.

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Parties to a Bill of Exchange

There are 3 main parties to a bill of exchange: Drawer Drawee Payee

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Essentials of a Valid Bill of Exchange

It must be in writing It must contain an express order to pay The order to pay may be unconditional The order is to pay in terms of money only It contains an order to pay a definite amount of money only. It must contain certain parties It must be signed by the drawer Intention to make a bill of exchange and its delivery Other formalities

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Points of Distinction between Bill and Promissory Note

Number of parties Order and Promise Nature of Relationship Acceptance Nature of Liability Immediate Action Notice to prior parties Sets Protest Conditional Acceptance Acceptor for Honour Payable to the maker himself

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Cheque Section 6 of Negotiable Instruments Acts: A cheque is a bill of exchange draw on a specified banker and not expresses to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in electronic form. Crossing of Cheque Bouncing of Cheque Offences by companies

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Crossing of cheque
General: Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than a banker Special: The payment of a specially crossed cheque can be obtained only through the particular banker whose name appears across the face of the cheque or between the transverse lines if any Restricted: A/C payee

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Bouncing of cheque
Imprisonment for two years or with a fine which may be extend to twice the amount of the cheque or with both. A)cheque should have been dishonored due to insufficiency of funds Stop payment instructions to the payee bank Request the payee not to present the cheque till further intimation Cheque received from the payee bank with the remark account closed B) cheque must be presented within its validity C)The payee is to give notice demanding payment within thirty days, from the drawer, on receipt of the information D)The drawer is liable only if he fails to make payment within fifteen days of such notice E)Written complaint to a metropolitan magistrate or a judicial magistrate of the first class is made within one month of cause of action arising

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Offence by Companies
Section 138Dishonour of cheque for insuffiency of funds Includes partnership firms, corporate bodies or directors etc In charge is deemed to be guilty A)without the knowledge B)exercised due diligence Consent or the neglect of the director Prosecution of the in charge is independently or jointly

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Essentials of a Valid Cheque It must have all the essentials of a bill of exchange . It must be drawn on a specified banker It must be payable on demand

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Points of Distinction between Cheque and Bill of Exchange

Drawee Payable on Demand Payable to the bearer on Demand Acceptance Days of Grace Supposition Crossing Discounting Failure to present Primary Liability Statutory Protection Noting and Presenting Sets Stamping Countermanding Circulation

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

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Parties to Negotiable Instruments

Drawer Drawee Acceptor Payee Endorser Holder Holder in Due course Endorsee in the case of Need Acceptor for Honour

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Endorsement
When the maker or holder of a negotiable instrument signs the same, otherwise than such a maker, for the purpose of negotiation, on the back or face thereof or on the slip pf 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 endorse the same; and is called the endorser.

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Types of Endorsement
Conditional or Qualified Blank or General Endorsement: limits and Endorsement negates the liability of the Full or special Endorsement endorser Restrictive Endorsement: restricts the right of further Sans Recourse Endorsement: exclude his liability thereon negotiation Sans Frais: no expense Partial Endorsement: part should be incurred on of instrument is transferred account of the bill Faculative Endorsement: waives right to receive notice of dishonor