ASSAM ROJGAR SAMACHAR

Thursday, October 13, 2011

Negotiable Instruments


Introduction:
The term ‘negotiable’ means transferable and the word ‘document’ means ‘in writing’. Therefore, negotiable means a written promise or order to pay money which may be transferred from one person to another.
Section 13 of the Negotiable Instruments Act, 1881 states – “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 alternative to one of two, or one or some of several payees.

Characteristics of a Negotiable Instruments:
a.       Witting and Signature according to the rules: A Negotiable Instrument must be in writing and signed by the parties according to the rules relating to (a) promissory notes, (b) Bills of Exchange and (c) Cheques.
b.      Payable by Money:  Negotiable Instruments are payable by the legal tender money of India.
c.       Unconditional Promise:  If the instrument is a promissory note, it must contain an unconditional promise to pay. If the instrument is a bill or cheque, it must be an unconditional order to pay money.
d.      Freely transferable:  A negotiable instrument is transferable from one person to another by delivery or by endorsement and delivery.
e.      Acquisition of Property:  Any person who possesses a negotiable instruments, becomes its owner and entitled to the sum of money, mentioned on the face of the instrument.
f.        Acquisition of Good Title: The holder in due course, i.e. the transferee of a negotiable instrument in good faith and for value, acquires a good title to the instrument even if the title of the transferor is defective. Further his title will not be affected, by any defect in the title of the transferor.
g.       No Need of Giving Notice:  There is no need of giving a notice of transfer of a negotiable instrument to the party liable to pay the money.
h.      Right of the Holder in Due Course:  The holder in the due course remains unaffected by certain defences, which might be available against previous holders, as for example , fraud, to which he is not a party.

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, or to the order of, a certain person, or to the bearer of the instrument..” [Section 4]

A signs instruments in the following terms:
(a) "I promise to Pay B or order Rs.500".
(b) "I acknowledge myself to be indebted to B in Rs.1,000, to be paid on demand, for value received”.
(c) “I promise to pay B Rs.500/- on 01-10-2005. etc are promissory notes”.

The essentials of a valid Promissory note are :-
a.       Writing: A Promissory note must be in writing.
b.      Express promise to Pay: The promissory note must contain an express promise to pay. A mere implied promise to pay or an acknowledgement of debt is not a promissory note. Therefore illustrations at (c) is not a Promissory note.
c.       Promise to pay unconditional: The promise to pay an amount must be unconditional. However, a Promissory note conditional on an event bound to happen is a valid promissory note. Therefore illustrations at (d) is not a valid Promissory note while (e) is a valid Promissory note.
d.      Promise to pay in terms of money: The instrument must be payable in terms of money and money only.
e.      Sum payable to be certain: The amount payable must be certain. Therefore instrument at (f) and (g) are not valid promissory note.
f.        Parties certain: The parties to the instrument must be certain. The person making the payment and the person receiving the payment must be identifiable.
g.       Must be signed: The instrument is complete only when it is signed by the maker.
h.      Must bear the stamp: A promissory note must be properly stamped in accordance with the Indian Stamp Act, 1899 and must also be properly cancelled.
i.         Other formalities: Formalities such as date, place, consideration, etc. are usally found in a promissory note.
j.        Requisites of a contract to be complied with: All requisites of a valid contract like capacity to contract, consideration, free consent, lawful object must be present.

Rs.1,000                                                                                                                                        Mumbai, July 2, 2005
Three months after date I promise to pay Shyam Sunder or order the sum of one thousand rupees, for value received.

To,
Shyam Sunder
222, D.N.Nagar,
Andheri(W), Mumbai – 400 053.


Bills of Exchange
 As per Section 5 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.”

The essentials of a Bill of Exchange are :-
a.       Number of parties:  A bill of exchange has 3 parties:
1.       the drawer, who draws the bill of exchange
2.       the drawee, who has to make the payment
3.       the payee, who is entitled to the payment.
b.      Sometimes the drawer and the payee can be one and the same person.
c.       Must be writing: The Bill of Exchange must be in writing.
d.      Express order to pay:  This is the essence of a bill of exchange. There must be an ‘order by the drawer to the drawee to pay’. The order must be a command and not an excessive request.
e.      Order must be unconditional:  The order to pay must be unconditional. In other words the happening of the condition must be certain.
f.        Order to pay money only:  Just as a promissory note, the instrument must be for money only.
g.       Sum payable to be certain:  The amount payable must be certain. There should be no ambiguity in the amount to be paid through the Bill of Exchange.
h.      Must be signed:  The instrument is complete only when it is signed by the drawer and the drawee.
i.         Must bear the stamp:  A Bill of Exchange must be properly stamped in accordance with the Indian Stamp Act, 1899 and must also be properly cancelled.
j.        Other formalities:  Formalities such as date, place, consideration, etc. are usally found in a Bill of Exchange.
k.       Requisites of a contract to be complied with:  All requisites of a valid contract like capacity to contract, consideration, free consent, lawful object must be present.

Specimen of Bills of exchange:
Mr. X
Rs.50,000
Assam, April 01,2010
Three months after date pay to me or my order, the sum of rupees Fifty Thousand only, for value received.

To
Mr. Y
Dibrugarh, Assam

Accepted                                                           Stamp
Mr. X                                                                  Sd/-
Tinsukia, Assam

Sd/-
Cheque and its essentials:
A Cheque is a special type of Bill of Exchange. It is drawn on banker and is required to be made payable on demand. A “cheque” is defines as “a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.” [Section 6]
‘Cheque’ includes electronic image of a truncated cheque and a cheque in electronic form. The definition is amended by Amendment Act, 2002, making provision for electronic submission and clearance of cheque. The cheque is one form of Bill of Exchange. It is addressed to Banker. It cannot be made payable after some days. It must be made payable ‘on demand’.

The essentials of a Cheque are :-
a.       Essentials of Bill of Exchange:  As a cheque is a bill of exchange, it must contain the essentials of a bill of exchange. In addition there are few more essentials as below.
b.      Drawn on a specified banker:  The drawee in case of a cheque is always a specified banker.
c.       Payable on demand: The cheque is always payable on demand.
d.      No Stamp:  A Cheque does not require a stamp.
e.      Acceptance:  No acceptance is necessary by the draw before the demand for payment.
f.        Payable to bearer:  A cheque can be made payable to bearer.

When a banker is justified in dishonouring the cheque?
The banker is justified in dishonouring the customer’s cheques in the following cases :-
a)      The signature of the drawer on the cheque does not match with the speciment signature in the records of the Bank.
b)      Funds are not properly applicable to the payment of cheque. For eg. Funds are subject to lien, or banker is entitled to set-off.
c)       Customer becomes insolvent.
d)      Death, lunacy or insolvency of the customer and the banker has notice of the same.
e)      Cheque presented beyond a period of 6 months from the date of issue.
f)       If the banker is not holding sufficient funds of the drawer, unless the banker has agreed to honour the cheque without sufficient funds.
g)      If the customer countermands payment and communicates the same to the bank properly.
h)      Holder gives notice to the banker of loss of cheque.
i)        If the cheque is not presented within the usual banking hours.
j)        Where the cheque is drawn on another branch office of the same bank where the customer does not have an account.
k)      Where a garnishee order has been issued by the Court attaching customer’s balance.

Endorsement:
Endorsement is the act of signing a cheque for the purpose of transferring it to somebody else. Under Negotiable Instruments Act it means the writing of one’s name on the back of the instrument or any paper attached to it with the intention of transferring the rights therein.
 A bearer cheque can be transferred by mere delivery but an order cheque is transferred by endorsement and delivery. Endorsements are usually made on the back of the cheque, though they can be made on its face as well. If, however, no space is left on the instrument, it may be made on a separate paper attached to it.

Endorsements are of various kinds, the most important being as follow:
a.       Blank or general endorsement: A blank or general endorsement is one in which the endorser simply puts down his signature. The name of the endorsee, it should be noticed is not put down. The effect of such an endorsement is to make the cheque a bearer cheque. The property in the cheque can now be transferred by mere delivery, no endorsement being required. Thus an order cheque can be made a bearer cheque by putting down a blank endorsement.
b.      Special endorsement: Special or full endorsement is that which contains not only the name of the endorser but also the name of the endorsee. The effect of special endorsement is that the endorse must endorse it again if he wants to transfer the property in the cheque to somebody else.
c.       Restrictive endorsement: When an endorsement restricts the negotiability or transferability of proprietorship of a cheque, it is known as restrictive endorsement.
d.      Partial endorsement: A partial endorsement is one which means to transfer the cheque only for a part of its value. For instance a cheque for Rs. 500 may be endorsed only for Rs.300. Legally such an endorsement is invalid.

Difference Between Bill of Exchange and Promisory Note.
Basis
Bill of Exchange
Promissory Note
Parties
There are 3 parties – drawee, drawer and payee.
There are 2 parties – maker or promisor and payee or promisee.
Drawer
It is drawn by the creditor
It is drawn by the debtor
Order or Promise
It contains an order to make payment. There can be three parties to it, viz. the drawer, the Drawee and the payee.
It contains a promise to make payment. There are only two parties to it, viz. the drawer and the payee.
Acceptance
It requires acceptance by the Drawee or someone else on his behalf.
It does not require any acceptance.
Payee
Drawer and payee can be the same party
Drawer cannot be the payee of it
Set
A bill of exchange can be drawn in sets.
Promissory note cannot be drawn in sets.

Notice
The maker of the bill of exchange is
secondarily and conditionally liable to payee. He becomes liable to pay only when the drawee refuses to honour the bill. Drawer stands in immediate relation to the drawee or acceptor and not the payee.
The maker of the Promissory note is primarily and absolutely liable to payee. Promisor stands in the immediate relation to the payee.
Notice
In case of its dishonour due notice of dishonour is to be given by the holder to the drawer
No notice needs to be given in case of its dishonour

Difference between cheque and bills of exchange:
Basis
Cheque
Bills of Exchange
Drawee
A cheque is always drawn on a bank or banker.
A bill of exchange can be drawn on any person including a banker.

Acceptance
A cheque does not require any acceptance.
A bill must be accepted before the Drawee can be made liable upon it.
Payment
A cheque is payable immediately on demand without any days of grace.
A bill of exchange is normally entitled to three days of grace unless it is payable on demand.

Stamp
A cheque does not require any stamp.

A bill of exchange must be stamped.
Protection
A banker is given statutory protection with regard to payment of cheques in certain circumstances.
No such protection is available to the Drawee or acceptor of a bill of exchange.

Crossing
A cheque may be crossed.
Bill can never be crossed.
Presentment
If not presented to the banker for payment, it does not discharge the drawer unless he suffers injury or damages.
Drawer is discharged, if bill is not presented for payment to the acceptor.

 Noting and Protesting
A cheque is not required to be noted or protested for dishonour.
A bill of exchange may be noted or protested for dishonour.


Types of Cheques:
Based on this characteristic, cheques can be classified into two main groups. They are:
1. Open cheques; and
2. Crossed cheques
In case of open cheques, the amount of such cheques can be collected by the payee over the counter of the bank. These cheques are of two types:
1. Bearer cheque: The cheque which is payable to the bearer or the possessor, is called the bearer cheque. Such cheque can be transferred by mere delivery without any endorsement. For example, “Pay Ram or bearer” is a bearer cheque, where Ram or any other person who possess the cheque, can collect the amount of the cheque.

2. Order cheque: The cheque which is payable only to a certain person (whose name appears on the cheque) or to his order, is called the order cheque. The word ‘Order’ is written instead of the word ‘Bearer’ on the cheque. The drawer can strick off the word ‘bearer’ and can write the word ‘order’ to make it an order cheque. An order cheque can not be transferred without endorsement and the paying banker takes reasonable care before making the payment of such cheque. For example, “Pay Ram or order” is an order cheque, where payment will be made only to Ram or to the person to whom Ram has endorsed the cheque.

In case of crossed cheques, the amount of such cheques can not be collected over the counter of the bank. The amount of such a cheque is paid through the bank account of the payee. Hence, they are safer as compared to the open cheques. 
A cheque can be crossed by drawing two parallel transverse lines across the face of the cheque with or without the words “and company” or “not negotiable” or “account payee” between the parallel transverse lines. Crossing of a cheque means paying the money to the specified person only by transferring the money to his account and not directly (cash).
A cheque can be crossed by the-
1. Drawer; or 
2. The holder; when the cheque is open; or
3. The collecting banker.

Types of crossing:
1. General crossing: Section 123 of the Negotiable Instruments Act, 1881 defines general crossing as “where a cheque bears across its face, an addition of the word “and company” or any abbreviation thereof between two parallel transverse lines simply, either with or without the words “not negotiable”, that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally.”
It means a cheque can be crossed generally by simply drawing two parallel transverse lines. The parallel lines are generally drawn on the left hand top corner of the cheque. The words “and company” or “not negotiable” may or may not be written in between the parallel lines. 

2. Special crossing: Section 124 of the Negotiable Instruments Act, 1881 defines special crossing as “where a cheque bears across its face, an addition of the name of a banker with or without the words “not negotiable”, that addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially and to be crossed to that banker.”
Thus, in case of special crossing, the name of a particular bank is written in between the parallel lines. The main implication of this type of crossing is that the amount of the cheque will be paid to the specified banker whose name is written in between the lines.

3. Account payee crossing: This type of crossing is done by adding the words ‘Account Payee’. This can be made both in general crossing and special crossing. The implication of this type of crossing is that the collecting banker has to collect the amount of the cheque only for the payee. If he wrongly credits the amount of the cheque to another account, he will be held responsible for the same. 
4. Not negotiable crossing: When the words ‘not negotiable’ is added in generally or specially crossed cheques, it is called not negotiable crossing. A cheque bearing not negotiable crossing cannot be transferred. If a cheque bearing ‘Not negotiable crossing’ is transferred, care must be taken regarding the ownership of title of both the trasferer and transferee.