DCMS SAFI INSTITUTE OF ADVANCED STUDY ,VAZHAYOOR

NOUSHAD K,

NEGOTIABLE INSTRUMENTS ACT , 1881

In India only three kinds of instruments are recognized as negotiable instruments viz., promissory notes, bills of exchange and cheques.

Negotiable Instruments

Documents of a certain type, used in commercial transactions and monetary dealings, are called Negotiable instruments.

“Negotiable” means transferable by delivery and “instrument” means a written document by which a right is created in favour of some person.

Thus, negotiable instrument means “ a document transferable by delivery”

Negotiable Instruments

Definition:

Negotiable Instruments Act , 1881 states that,

“ A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer”.

---Sec. 13(1)

What is Negotiation?

When a Promissory note, Bill of exchange or cheque is transferred to any person, to make that person the owner of the negotiable instruments, then the instrument is said to be negotiated.

Characteristics of the Negotiability An instrument is negotiable by virtue of the

following features, 1. Transferable by delivery 2. Entitled to receive money 3. Filing a suit

Characteristics of the Negotiable Instruments Freely transferable Negotiability In writing Un conditional order or promise Payment of a certain sum of money Time of payment The payee must be a certain person A negotiable instrument must bear the

signature of its maker

Cont…..

Delivery of instrument is essential Stamping of bill of exchange and promissory

notes is mandatory

Types of negotiable instruments

1. Promissory note 2. Bill of Exchange 3. Cheque

What is Promissory note?

A Promissory note is the simplest and earliest kind of credit instrument.

“It is an unconditional written promise by one person to another in which the maker (payer) promise to pay on demand or at a fixed or determinable date in the future, a stated sum of money to or to the order of a specified person or the bearer of the instrument”.

Promissory Note (Pro-Note or Hand-Note)Definition:“ A promissory note is an instrument in writing (not

being a bank note or currency note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to , or to order of a certain person, or to the bearer of the instrument.”

-------Sec. 4

The person who makes the promise to pay is called the Maker. He is the debtor and must sign the instrument.

The person who will get the money (the creditor) is called Payee.

Essential Elements of a Promissory Note1. The instrument must be in writing.

2. It must be signed by the maker of it. The signature or mark may be placed anywhere on the instrument, not necessarily at the bottoms. It may be at the top or at the back of the instrument.

3. It must contain a promise to pay. It must be expressed not implied or inferred.

e.g. “Mr. Sen I.O.U. Rs. 1000”. Here I.O.U. stands for “ I owe you.” This is only an admission of indebtedness and not a promise to pay. So it’s not a promissory note.

4. The promise to pay must be unconditional. If it is coupled with a condition , it is not a promissory note.

e.g. “ I promise to pay B Rs.300 on D’s death provided D leaves me enough to pay this sum.”

Promise to pay at a specified time or at a specified place or after the occurrence of an event which is certain to occur or payment after calculating interest at a certain rate

---------are not regarded as conditions.

5. The maker of must be certain and definite.

6. It must be stamped according to the Indian Stamp Act.

7. The sum of money to be paid must be certain.

e.g. “ I promise to pay some money on the occasion of his marriage”

8. The payment must be in the legal tender money of India and certain quantity of goods or foreign money.

9. The money must be payable to a definite person or according to his order i.e. payee is indicated by his official designation.

10. It must be payable on demand or after a certain definite period of time.

11. The Reserve Bank Act prohibits the creation of a promissory note payable on demand to the bearer of the note, except by the Reserve Bank or the Government of India.

Essential Elements for a Promissory Note

Specimens of Promissory Notes

“ One year after date I promise to pay B or order Rs. 500.” ---- Sd/X.Y.

Date………… “ On demand I promise to pay A.B of No.37, College

Street or order Rs1000(Rupees one thousand only) with interest at 8 percent per annum, for value received in cash.” Sd/X.Y

Date…………………

Address………………. “ I acknowledge myself to be indebted to B in Rs.

1000 to be paid on demand, for value received.”

Sd/X.Y

Specimen of a Promissory Note

Rs 1,000 New Delhi, 25 Aug’11

One month after date I promise to pay to Mr. A.K.Jha or order the sum of rupees one thousand only, for value received.

Sd/X.Y.

Revenue Stamp

Bill of Exchange

A bill of exchange is playing an important part in the commercial life of the country. The need for it arises where the buyer of goods needs a period of credit before paying it.

It is drawn by the creditors and is accepted by debtor.

Bill of Exchange

Definition:

“ 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

e.g. To A.B.

“ Six months after date pay P.Q. or order Rs. 1000”

Sd/X.Y.

Date………………..

Stamp…………………

The maker of a bill of exchange is called the Drawer. The person who is directed to pay is called the Drawee. The person who will receive the money is called the Payee.

When the payee has custody of the bill, he is called the Holder. It is the holder’s duty to present the bill to the drawee for acceptance. The drawee becomes the Acceptor after signing on the bill.

Sometimes the name of another person is mentioned as the person who will accept the bill if the original drawee does not accept it. Such a person is called the Drawee in case of Need.

Bill of Exchange

Essential Elements of a Bill of Exchange

A Bill of Exchange to be valid must fulfill the following requirements:

1. The instrument must be in writing.

2. It must be signed by the drawer.

3. It must contain an order to pay, which is express and unconditional.

4. The drawer, drawee and the payee must be certain and definite individuals.

5. The amount of money to be paid must be certain.

6. The payment must be in the legal tender money of India.

7. The money must be payable to a definite person or according to his order.

8. It must be properly stamped.

9. The bill may be payable on demand or after a definite period of time. But no one except the Reserve Bank and the Government of India can draw a bill payable on demand to the bearer of the bill.

If any of the requirements mentioned above is not fulfilled, the document is not a bill of exchange.

e.g. “ Please let the bearer have Rs. 1000 and oblige.”

“ We hereby authorize you to pay on our account to the order of X, Rs 6000.”

Essential Elements of a Bill of Exchange

Classification of BOE

Periods 1- Demand bill 2-Term bill Purpose 1-Trade bill 2-Accomodation bill-help party financially Inland bills Foreign bills

Specimen of a Bill of Exchange

Rs 1,000 New Delhi, 25 Aug’11

One month after date pay to Mr. A.K.Jha or order the sum of rupees one thousand only, for value received.

To

Satyender

12 miles

MIM, Ranchi Sd/Ritesh.

Revenue Stamp

Accepted

Sd/-Satyender

Difference between promissory note and bill of exchange1. Two parties

2. Unconditional promise to pay

3. Maker of a note is the dr. & he himself undertakes to pay

4. Liability of maker is primary.

5. A pro-note cannot be made payable to the maker himself.

6. A note requires no acceptance

1. Three parties

2. Unconditional order to pay

3. The drawer of a bill is the creditor who directs the drawee (his dr.) to pay

4. Liability of maker or drawer is secondary.

5. Drawer and payee may be same.

6. It must be accepted by drawee

CHEQUESWhat is a Cheque? A cheque may be defined as written order of

a depositor upon a bank to pay to or to the order of a designated party or to the bearer, a specified sum of money on demand.

The person who draws the check is called drawer, the bank on which the check is drawn is called drawee, and the person to whom payment is to be made is called Payee.

Cheque is always drawn on a specified banker and it is always payable on demand.

Cheque

Definition:

“ A cheque is a bill of exchange drawn upon a specified banker and payable on demand.”

----Sec. 6Specimen of a cheque

Cheques are usually printed in the form shown below.

e.g.

Date……………

Pay A.B. or order (or bearer) the sum of Rupees Five Hundred only Rs. 500/-

To

X.Y. Bank Sd/C.D.

Essentials of a Cheque

It must be unconditional order1. It must be in writing2. It must be drawn on a specified banker3. it must be signed by the drawer4. The order must be for the payment of a certain

sum of money only5. Drawer, drawee and payee must be certain6. The amount must be payable on demand7. The signature must tally with the specimen

signature of the drawer kept in the bank.

A cheque must be dated. A cheque drawn with a future date is valid but it is payable on and

after the date specified. Such cheques are called post-dated cheques.

Essential Features of Cheque

Difference between bill of exchange and cheque

Bill of Exchange

1. A bill of exchange may be drawn on any person

2. A bill must be accepted by the drawee before making payment upon it

3. A bill is entitled to 3 days of grace

Cheque

1. But a cheque is always drawn on a bank

2. But a cheque does not require acceptance

3. A cheque is not entitled to any days of grace

cont

4. A bill may be payable on demand or after the expiry of a certain period

5. No need to crossed

6. A bill must be stamped

7. A payment of a bill cannot be countermanded

4. But a cheque is always payable on demand.

5. A cheque may be crossed

6. A cheque does not require any stamp

7. Payment may be countermanded by the drawer

Types of Check

We have two types of checks; Open Check Crossed check

What is open check?

Open Check: Open checks are those checks which are

paid across the counter of the bank. Open checks has further two types

Bearer check Order check

Types of Open check

Bearer check: If a drawer orders the bank to pay a stated sum of money to

the bearer, it is called a bearer check. Any person who lawfully possesses a bearer check is

entitled to receive payment of that check. Name of the payee need not be written Bank shall take signature of the bearer

Order check: If the check is to the order of a person in whose favour the

check is drawn, it is called order check. The order check is paid by the bank only when the bank is

satisfied about the identity of the payee. Name of the payee should be mentioned Cannot be transferred by mere delivery. Requires

endorsement.

M.I.C.R Cheque(Magnetic Ink Character Recognition)

speed up the cheque clearing process Special quality paper and printing

specifications Code line at the bottom of the MICR cheque

first six numbers indicate the cheque number

next three – city code

next three – bank code

next three - branch code

Truncated cheque

Cheque truncation means that the physical cheque is scanned at the bank of first deposit (presenting bank) and thereafter the electronic image of the cheque is sent to the clearing house.

Electronic cheque

Electronic version of a paper cheque Using email or other transport methods Exact mirror image of a paper cheque Digital signature

Steps to create electronic cheque

Prepare physical paper cheque. it should be signed by drawer

Create electronic image Add digital signature Addition to biometric signatures – only

optional

Crossed cheque

If a cheque is crossed by drawing two parallel lines across the face of the check, with or with out the words & Co or A/c payee only, it is called a Crossed check.

The crossed check cannot be paid on the counter of the drawee bank. It will be deposited in the account of a person in whose order or favor it is drawn.

Objectives of Crossing

The check is crossed to achieve the following objectives; It prevent the payment of the check to a wrongful

holder It ensure safe payment to the concerned receiver It facilitate in tracing the recipient of the payment if

the check is wrongfully crossed Further it is a guard against any cheating or theft.

Kinds of Crossing

Legally there are two kinds of crossing; General crossing Special crossing

Kinds of Crossing

General crossing: The drawing up of two parallel lines on the

face of the check at the top left hand corner with or without the words & Co not negotiable or Account payee only is known as a General Crossing.

The effect of general crossing is that the crossed check cannot be paid at the counter of the bank.

Its payment can only be deposited into the payee’s account only.

Kinds of Crossing

Special crossing: A check is deemed to be crossed specially

when it bears across its face the name of the banker either with or without the words not negotiable.

In case of special crossing the payment can only be made to the bank named therein the check.

A special crossing makes a cheque safer than general

Not negotiable crossing The cheque must contain the words ‘not

negotiable’. The cheque must be crossed generally or specially. The effect of the words ‘not negotiable’ on a crossed cheque is that when such a cheque is endorsed, the endorsee cannot get a better title than that of the endorser.

Not negotiable does not mean not transferable

Restrictive Crossing or account payee crossing

It has been adopted by commercial and banking usage.

In this type , the words a/c payee are added to the general or specific crossing.

It warns the collective banker that the proceeds are to be credited only to the account of the payee.

Further protection

Double crossing

Crossing a cheque specially to more than one banker

A cheque cannot have Double crossing – first crossing is defeated by the second crossing

Obliterating a crossing

Erasing the crossing on the cheque Opening of crossing-if the crossing of cheque

is cancelled ,Then it becomes a open cheque

Dating of Cheques

Ante dated Cheque -date earlier to the date of issue

Post dated cheque – date which is yet to come

Stale cheque – a cheque which is not presented for payment with in reasonable period of time (3 months)

Mutilated cheque-torn into two or more pieces

Holder

Holder (Sec.8)

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

Holder in due course (Sec.9)

Holder in due course, a person must possess the following qualification;

1.He must be a holder

2.He must be holder for valuable consideration

3.He must have become the holder of the negotiable instrument before its maturity

4.He must take the negotiable instrument complete and regular on the face of it

5.He must have become holder in good faith

.

Basis Holder Holder in Due Course

Consideration Not Necessary Only if he obtains NI for Consideration

Maturity Before or After Maturity Only before Maturity

Right to Sue Cannot sue all prior parties Can Sue all the prior Parties

Privileges Less Privileges' than HDC More Privileges than Holder

Good Faith Holder even if he obtains NI other than in Good Faith

HDC only if he obtains NI in good Faith

51

Basis Holder Holder in Due Course

Consideration Not Necessary Only if he obtains NI for Consideration

Maturity Before or After Maturity Only before Maturity

Right to Sue Cannot sue all prior parties Can Sue all the prior Parties

Privileges Less Privileges' than HDC More Privileges than Holder

Good Faith Holder even if he obtains NI other than in Good Faith

HDC only if he obtains NI in good Faith

DEMAND DRAFT

It is an instrument used for effecting transfer of money

Validity 3 months but it can be revalidated on application

A demand draft is an order to pay money drawn by an office of a bank upon another office of the same bank for a sum of money payable to order on demand.

Difference between cheque and DD A cheque is issued by individual but a draft is

issued by banker A cheque is drawn by an account holder of a

bank.A draft is drawn by one branch of bank on another branch of the same bank

In a cheque drawer and drawee are different persons.in a draft both the drawer and draweee are the same bank

Payment of cheque can be stopped by the drawer.the payment of draft cannot be stopped

Cont…

In cheque payment is made after presenting cheque to bank while DD is given after making payment to bank

A cheque can be made payable either to bearer or order. A demand draft is always payable to order of a certain persons

A cheque can be dishonored for want of sufficient balance in account. Draft cannot be dishonored

Endorsement

Indorsum –on the back

The literal meaning of the word endorsement is writing on the back of an instrument. Under the NI Act, it means, writing of the name of the endorsee on the back of the instrument by the endorser under his signature with the object of transferring the rights therein.

If an instrument is fully covered with endorsements and no space is left, further endorsement can be made on a slip of paper (called allonge) annexed thereto

Effects of endorsement

Endorsee gets the right, title or property in the instrument

He also gets the right of further negotiation The endorsee acquires the right of the

instrument as its holder The endorser guarantees to the endorsee

that he had a good title to the instrument The endorse certifies the genuiness of the

instrument

General rules regarding Endorsement Signature of the endorser Spelling No addition or omission of the initial of the

name Prefixes and suffixes should be avoided Endorsement by women Endorsement by illiterate persons Endorsement by firms Endorsement by companies and other

institutions

General rules regarding Endorsement Endorsement by agents Endorsement by liquidators Endorsement by trustees and executors

Kinds of Endorsement

1. Blank or general endorsement

Just put the signature of endorser without mention the name of endorsee

Eg: sd/-

D.Mohan

2. Special or full endorsement

Including the name of endorsee

Eg:

Pay to Ghosh or order sd/-

D.Mohan

.3. Restrictive endorsement

An endorsement, when it prohibits or restricts the further negotiation of the instrument.

Eg: pay to Ghosh only sd/-

D.Mohan

4. Conditional or Qualified

An endorsement is conditional or qualified if it limits or negates the liability of the endorser

Eg: pay to ghosh on Signing a receipt Sd/-

D.mohan

cont

5. Partial endorsement

When an endorser endorses only a part of the amount mentioned in the instrument. it is irregular

6.Sans frais endorsement-sans frais means without expense.

pay aneesh or order ,without expense to me

sd/ M.P Sudheer

Liability of endorser

Instrument will be accepted and paid Dishonur of bill –compensate

Liability

of

an

Endorser

(Sec.35)

Every endorser who endorsed an

instrument before its maturity is liable to the

parties that are subsequent to him.

And his liability arises only if there is a default

by the party who is primary liable to pay

the instrument on maturity.

64

Regularity of endorsement

Marking of cheques

Is a sort of certification given to the cheque by the paying banker

Stamping across the cheque “good for payment”

Marking can be done at the following instance Marking at the request of the drawer Payee or any holder Another bank

Electronic payment

Decreasing technology cost Reduced operational and processing cost Increasing online commerce

Parties of e payment

Payer and payee Financial institutions -2 roles

as an issuer –interacting with the payer

as an acquirer – interacting with payee

Characteristics of electronic payment

No paper Directly from home or office fast, efficient, safe,secure and less costly Fully traceble Same day value of payment Same day money transfer Convenient for the consumer Customer retention

Phases of E-Payment

Registration Invoicing Payment selection and processing Payment authorization and confirmation

Types of E-payment

Cards Internet Mobile payment Financial service kiosks Television set top boxes and satellite receiver Biometric payment Electronic payment networks Person to person payments