The Negotiable Instruments Act, 1881.

The Negotiable Instruments Act, 1881 came into force on 1st March,1881. The Act deals with the Law relating to three specific classes of Negotiable instruments.

Classes of Negotiable instruments

Promissory Note

Bill of Exchange

Cheque

The word negotiable means transferable by delivery, and the word instrument means a written document by which a right is created in favour of some person. Thus, the term negotiable instrument literally means a written document transferable by delivery.
According to Section 13 of the Negotiable Instruments Act, a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.

A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alterative to one of two, or one or some of several payees.

Essential characteristics of a negotiable instrument

Freely transferable

No notice to the debtor

Better title to a Bonafide' transferee Presumptions

Promissory note
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 the bearer of the instrument (Sec 4) Essential elements Writing Promise to pay

Definite and unconditional Certain parties

Certain sum of money

Signed by the maker

Promise to pay money only It cannot be payable to bearer on demand Formalities to be followed

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 (Sec 5) Writing An order to pay Unconditional order Three parties Signed by the drawer. Amount payable must be certain Order to pay only money Not payable to bearer on demand Payable to bearer on demand Formalities to be followed

Distinguish between a bill of exchange & a promissory note

Bill

Note

1. There are 3 parties to it (drawer drawee & Payee) 2. It contains an unconditional order to pay 3.It can be accepted conditional 4.The liability of the drawer is secondary and conditional 5.The drawer & payee, sometimes may be one & the same person 6.The drawer of the bill is the creditor who directs the drawer to pay.

1.There are 2 parties (the maker & the payee) 2.It contains an unconditional promise to pay 3.It cannot be made conditional 4.The liability of the maker is primary and absolute 5.A note cannot be made payable to the maker himself 6.The maker of the note is the debtor & he himself undertakes to pay

Bill
7.A bill payable after sight or after a certain period must be accepted by the drawee Notice of dishonour must be given to the drawer & the prior endorsers

Note
7.A note requires no acceptance as it is signed by the person who is liable to pay Such notice is necessary

A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Its characteristics are:
In writing Definite and unconditional order

Signed by the drawer Order to pay

Order to pay money only

Certain three parties

Drawn upon a specified banker Payable on demand

Distinguish between a Cheque and a Promissory note Cheque 1. It contains an order to pay 2. Cheques are crossed 3. There are 3 parties to it 4. Cheques are exempt from stamping 5. Cheques can be made payable to bearer Promissory Note 1. It contains a promise to pay 2. Promissory note need not be crossed 3. There are only 2 parties to it 4. Promissory notes require stamping 5. Promissory note is payable only to the payee or his order

Types of Crossing

General

Crossing
Not negotiable crossing

Restrictive Crossing

Special Crossing

Various types of negotiable instruments

Bearer and order instruments Inland and foreign instruments Instruments payable on demand Time instruments Accommodation bill Fictitious bill Documentary bill & clean bill Escrow

Different parties to a negotiable instrument

Maker/ Drawer

Drawee, Acceptor
Payee Endorsee Drawee in case of need Holder Holder in due course

Rules for calculating maturity Sections 23 to 25 lay down the following rules for calculating the maturity of a time bill or note:

If it is made payable a stated number of months after date or after sight, or after a certain event, it matures (or becomes payable) three days after the corresponding date of the month after the stated number of months. If the month in which the period would terminate has no corresponding date, the period shall be held to terminate on the last day of such month. If it is made payable a certain number of days after date or after sight, or after a certain event, the maturity is calculated by excluding the day on which the instrument is drawn or presented for acceptance or sight or on which the event happens. Note that only one day is to be excluded.

If

the date on which a bill or note is at maturity is a public holiday, the instrument shall be deemed to be due on the next preceding business day.

 The expression public holiday includes Sundays and any other day declared by the Central Government, by notification in the Official Gazette, to be a public holiday. Thus, if the maturity of an instrument falls on an emergency holiday, the instrument shall be deemed to be due on the next succeeding business day. If an instrument is payable by instalments, three days of grace are to be allowed on each instalment (Sec. 67).

Distinguish between negotiation and assignment Formalities: Negotiation requires mere delivery of a bearer instrument and endorsement and delivery of an order instrument to make a transfer. Assignment requires a written document signed by the transferor irrespective of whether the instrument is a bearer or order Notice of transfer: In the case of assignment a notice of transfer of debt is required to be given by the assignee to the debtor in order to complete his title. No such notice is required to be given in the case of negotiation.
Title: In the case of negotiation if the transferee takes the negotiable instrument for value and in good faith, i.e., as holder in due course, he takes it free from all defects in the title of the previous transferors. But in the case of assignment, the assignee takes the instrument subject to the defects in the title of his assignor, even though he took the assignment for value and in good faith.

Consideration: Consideration is always presumed in the case of transfer by negotiation, whereas there is no such presumption in the case of transfer by assignment, where the burden of proof of consideration lies upon the assignee.

Endorsement
Section 15 defines endorsement as follows: When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, 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 negotiable instrument, he is said to indorse the same, and is called the endorser. Thus, an endorsement consists of the signature of the holder usually made on the back of the negotiable instrument with the object of transferring the instrument. If no space is left on the back of the instrument for the purpose of endorsement, further endorsements are signed on a slip of paper attached to the instrument.

Kinds of Endorsements

Blank or general endorsement Endorsement in full or special Endorsement Partial Endorsement Restrictive endorsement Conditional endorsement Facultative endorsement

What is presentment for acceptance?

Presentment for acceptance is necessary in case of bills of exchange only. The following bills, however, must be presented for acceptance in order to charge the parties with liability: A bill payable at a specified period after sight. Such a bill must be presented to the drawee for sight or acceptance in order to fix the maturity of the bill. (Sec. 61) A bill in which there is an express stipulation that it shall be presented for acceptance before it is presented for payment. When the drawee of the bill signifies his consent in writing to the drawers order in the bill, by signing across the face of the bill with or without the word accepted and delivers back the bill to the holder or gives notice of acceptance to the holder, the bill is said to have been accepted.

Types of Acceptance

An acceptance on the bill may be either (i) general acceptance, or

(ii) qualified acceptance.

Notice of dishonour
Notice of dishonour means formal communication of the fact of dishonour. It is given to the party sought to be made liable and, therefore, it serves as a warning to the person to whom the notice is given that he could now be made liable. Such a notice also serves the purpose of enabling the person so notified to protect himself against his prior parties.

Notice by whom?
Notice of dishonour must be given by the holder or by some party to the instrument who remains liable thereon (Sec. 93). Further, any party receiving notice of dishonour must also transmit the same within a reasonable time to all prior parties in order to render them liable to himself.

Notice to whom?
Notice of dishonour must be given to all parties (other than the maker of a note, acceptor of a bill or drawee of a cheque) to whom the holder seeks to make liable or to their duly authorised agents. Where there are two or more persons jointly liable as drawers or endorsers, notice to any one of them is sufficient. No notice need be given to the maker of a note or acceptor of a bill or drawee of a cheque, who are the principal debtors and have themselves dishonoured the instrument (Sec. 93). In case of death of a person, notice must be given to his legal representative, or, where he has been declared an insolvent, it must be given to his Official Assignee (Sec.94).

Mode of giving notice According to Section 94 the notice of dishonour may be oral or written. If it is written it may be sent by post. A notice duly addressed and posted is good even though it may be miscarried. The notice may be in any form but the language used must indicate that the instrument has been dishonoured and in what way dishonoured, and that the recipient will be held liable thereon.

Noting
Noting is the authentic and official proof of presentment and dishonour of a negotiable instrument. The question of noting does not arise in the case of dishonour of a cheque. According to Section 99, when a promissory note or a bill of exchange has been dishonoured by non-acceptance or nonpayment, the holder may cause such dishonour to be noted by a Notary Public upon the instrument, or upon a paper attached thereto, or partly upon each. For this the holder takes the bill or note to the notary public who makes a demand for acceptance or payment upon the drawee or acceptor or maker formally and on his refusal to do so notes the same on the bill or note. Thus noting means recording the fact of dishonour and must specify: (i) the date of dishonour; (ii) the reason assigned for such dishonour; and (iii) the notarys charges.

Protest
1) Define Protest Protest is a formal certificate of dishonour issued by the notary public to the holder of the bill or note, on his demand (noting is merely a record of dishonour on the instrument itself) (Sec.100) Contents of Protest (Sec. 101) The protest must contain the following particulars: 1. The instrument itself or a literal transcript of the instrument and of everything written or printed thereupon. 2. The name of the person for whom and against whom the instrument has been protested.

3.

The fact and the reasons for dishonour, i.e., a statement that payment or acceptance, or better security, as the case may be, was demanded by the notary public from the person concerned and he refused to give it or did not answer, or that he could not be found. 4. 5. The place and time of dishonour. The signature of the Notary Public.

6. In the case of acceptance for honour or payment for honour, the names of the persons by whom and for whom it is accepted or paid.

Discharge of an instrument and a party

Mode of discharge of instrument

By payment in due course

By party primarily liable becoming holder

By Release By cancellation

Mode of discharge of parties

By Payment By Cancellation By Release By Non-presentment of cheque within reasonable time By Allowing drawee more than 48 hours to accept By Qualified acceptance By Material alteration By Operation of law

Dishonour of cheque
A person issuing a cheque will be punishable with imprisonment for a term up to 2 years or with fine twice the amount of cheque or both, if the cheque is dishonoured due to insufficiency of funds. Conditions a) Cheque should have been in discharge of liability, ie., it does not indicate gift cheques. b) Cheque should be presented within period of validity / 6 months whichever is earlier. c) Cheque should have been deposited and intimation of dishonour received stating insufficiency of funds as reason for dishonour. d) The holder or payee in due course should give notice demanding payment within 15 days of his receiving notice of intimation of dishonour. e) If the drawer fails to make payment within 15 days for receipt of notice, then a person could proceed for prosecution. f) Prosecution / complaint to be made only by payee / holder in due course within 1 month.