Module 1 Negotiable instruments A negotiable instrument is

Module 1 Negotiable instruments A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to Sec 13 of Negotiable instrument Act 1881, a negotiable instrument means a promissory note, bill of exchange and cheque payable either to order or bearer. A negotiable instrument is a promise of a payment of money. PRESIDENCY COLLEGE

Features of negotiable instruments • A negotiable instrument is freely transferable. Usually, when we transfer any property to somebody, we are required to make a transfer deed, get it registered, pay stamp duty, etc. But, such formalities are not required while transferring a negotiable instrument. The ownership is changed by mere delivery or by valid endorsement and delivery. • Negotiability confers absolute and good title on the transferee. It means that a person who receives a negotiable instrument has a clear title to the instrument. PRESIDENCY COLLEGE

• A negotiable instrument must bear the signature of its maker. Without the signature of the drawer or the maker, the instrument shall not be a valid one. • Delivery of the instrument is essential. Any negotiable instrument like a cheque or a promissory note is not complete till it is delivered to its payee. For example, you may issue a cheque in your brother’s name but it is not a negotiable instrument till it is given to your brother. • Stamping of Bills of Exchange and Promissory Notes is mandatory. This is required as per the Indian Stamp Act, 1899. The value of stamp depends upon the value of the bill. PRESIDENCY COLLEGE

Kinds Of Negotiable Instruments 'Promissory Notes A promissory note is a legal instrument, in which one party(the maker or the issuer) promises in writing to pay a determine sum of money to the other(the payee) either at a fixed or terminable future time or on demand of the payee under specific terms PRESIDENCY COLLEGE

Definition According to sec 4 of NI Act defines Promissory Note as, “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”. PRESIDENCY COLLEGE

PARTIES TO A PROMISSORY NOTE Maker : it is a person who makes the promissory note and promises to pay the money stated therein. PAYEE : it is a person to whom the amount of promissory note is payable i. e. , to whom the promise to pay it made. PRESIDENCY COLLEGE

ESSENTIAL ELEMENTS OF A PROMISSORY NOTE 1. It must be in writing 2. It must contain an express promise or clear undertaking to pay 3. The maker must sign the promissory note 4. The maker must be a certain person 5. The payee must be certain 6. The sum payable must be certain 7. Payment must be in legal money of the country 8. A bank note or currency note is not a promissory note 9. The promise to pay must be unconditional 10. Other formalities PRESIDENCY COLLEGE

BILLS OF EXCHANGE The bills of exchange is also termed as money draft. It can be used in foreign trade and can also be discounted with an acceptance house, bank etc. , A cheque is also a bill of exchange payable on demand drawn on a banker. It is a written order signed by one person (drawer) requiring a second person (drawee) to pay on demand or at a stated date an amount of money to, or to the order of, a specified person or the bearer (payee). PRESIDENCY COLLEGE

DEFINITION According to sec 5 of NI 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 or to the bearer or the instrument”. PRESIDENCY COLLEGE

PARITIES TO BILLS OF EXCHANGE Drawer: the maker of a bill of exchange is responsible for the contents written in the bill. Drawee: the person who is directed to pay. Payee: the person to who the payment is made by the drawee as per the direction of drawer. Holder: the drawer or the payee who is in possession of the bill is called as holder. Acceptor: the person who accepts the bill is termed as ACCEPTOR. He is none other than the Drawee. PRESIDENCY COLLEGE

BASIS BILL OF EXCHANGE PROMISSORY NOTE parties There are three parties to a bill of exchange namely, the drawer the drawee and the payee. But in promissory note, there are only two parties maker and payee. Nature of payment In a bill of exchange, there is an unconditional order to pay. While in promissory note there is an unconditional promise to pay. Acceptance A BOE requires an acceptance of the drawee before it is presented for the payment. While a promissory note does not require any acceptance since it is signed by the person who is liable to pay. liability But the liabilty of the maker of a PN is primary and absolute. The liability of the maker of BOE is secondary and conditional. It is only when the drawee fails to pay that the drawer would be liable as a surety. PRESIDENCY COLLEGE

BASIS BILL OF EXCHANGE PROMISSORY NOTE Notice of dishonor In case of dishonor of bill of exchange either due to non payment of non acceptance , notice must be given to all persons liable to pay. But in case of a promissory note , notice of dishonor to the maker is not necessary. Maker’s position The drawer of a bill of exchange stands in immediate relationship with he acceptor and not the payee. While in case of a promissory note , the maker stands in immediate relationship with payee. Nature of acceptance A bill of exchange can be accepted conditionally. While a promissory note can never be conditional. Copies A bill of exchange can be drawn in But a promissory note cannot be set. drawn in set. PRESIDENCY COLLEGE

Cheques A cheque is a negotiable instrument instructing a financial institution to pay a specific amount of a specific currency from a specified transactional account held in the drawer's name with that institution. Both the drawer and payee may be natural persons or legal entities. Specifically, cheques are order instruments, and are not in general payable simply to the bearer (as bearer instruments are) but must be paid to the payee when demanded. Definition According to sec 6 of NI Act 1881 “a cheque is a bill of exchange drawn on a specified banker, and not expressed to be payable otherwise than on demand”. PRESIDENCY COLLEGE

A cheque is a bill of exchange drawn on a bank payable on demand. A cheque is a BOE with two additional qualification, 1. It is always drawn on a bank 2. It is always payable on demand Special features of a cheque 1. It must be signed by the drawer 2. It must contain an unconditional order on a specified banker to pay a certain sum of money to require acceptance. 3. A cheque is a payment, unless dishonoured the payment becomes effective from the delivery of the cheque and does not wait till it is honoured and money paid. PRESIDENCY COLLEGE

Parties to a cheque 1. The drawer 2. The drawee 3. The payee 4. The holder Under English Law i. Holder ii. Holder for value iii. Holder in due course Under Indian Law i. Holder PRESIDENCY COLLEGE

Bearer cheque Stale Cheque Types of cheque Order cheque Uncrossed/Crossed c Post Dated Cheque Antidated Cheque Crossed Cheque PRESIDENCY COLLEGE

1. BEARER CHEQUE When a particular cheque includes bearer on the face of the cheque and which is not cancelled, the cheque is called a bearer cheque. This type of cheque are payable to the person specified therein or to any other else who presents it to the bank for payment. Cheques are associated with risk, this is because if such cheques are lost, the finder of the cheque can collect payment from the bank. PRESIDENCY COLLEGE

2. Order cheque when a particular cheque in which the word “bearer” appearing on the face is cancelled and when in its place the word “or order” is written on the face of the cheque, the cheque is called an order cheque. Such a cheque is payable to the person specified therein as the payee, or to any one else to whom it is endorsed (transferred). PRESIDENCY COLLEGE

3. Uncrossed/open cheque When a particular cheque is not crossed, it is known as an “open cheque” or an “uncrossed cheque”. The payment of such a cheque can be obtained at the counter of the bank. An open cheque may be a bearer cheque or an order one. PRESIDENCY COLLEGE

4. Crossed cheque When a particular cheque in which two parallel lines are drawn on the face of the cheque with or without additional words like “& Co”. Or “Account payee” or “not negotiable”. A crossed cheque cannot be encashed at the cash counter of a bank but it can only be credited to the payee’s account. PRESIDENCY COLLEGE

5. Anti-Dated cheque When a particular cheque which bears a date earlier than the date on which it is presented to the bank, it is called as “anti-dated cheque. Such a cheque is valid up to six months from the date of the cheque. PRESIDENCY COLLEGE

6. post-dated cheque If a cheque bears a date which is yet to come(future date) then it is known as post-dated cheque. A post dated cheque cannot be honoured earlier than the date on the cheque. PRESIDENCY COLLEGE

7. Stale cheque If a cheque is presented for payment after six months from the date of the cheque it is called stale cheque. A state cheque is not honoured by the bank. PRESIDENCY COLLEGE

Difference between cheque and bills of exchange BASIS CHEQUE BILL OF EXCHANGE Banker Cheque is always drawn on a banker While a bill may be drawn on any one, including a banker Payment The cheque can only be drawn and payable on demand. A bill may be drawn payable on demand, or on the expiry of a certain period after or sight Acceptance A cheque does not require acceptance and is intended for immediate payment A bill must be accepted before payment can be demanded. Grace period No grace period is allowed in case of cheque payment A grace of 3 days is allowed in the case of time bills. Dischargement of drawer Drawer of a cheque is discharged only if he suffers any damage by delay in presentment for payment. The drawer of a bill is discharged, if it is not presented for payment. PRESIDENCY COLLEGE

BASIS CHEQUE BILL OF EXCHANGE Notice of dishonour No notice of dishonour of cheque But notice of dishonour of a bill is necessary. Revocable A cheque being a revocable mandate, the authority may be revoked by countermanding payment and is determined by notice of the customer’s death or insolvency. But this is not so in the case of a bill Crossing The cheque may be crossed But the bill cannot be crossed. PRESIDENCY COLLEGE

Difference between cheque and promissory note BASIS CHEQUE PROMISSORY NOTE Order and promise It contains an order to pay A promissory note contains promise to pay Number of parties In case of cheque may be three parties, the drawer, drawee and payee In case of promissory note are only two parties, the maker and the payee. Object Cheque is used because it is a It is used for receiving and simple and easy medium of giving credit exchange and serving of metallic money Crossing A cheque may be crossed A pro-note cannot be crossed Payable to bearer A cheque is often drawn as payable to bearer A pro-note cannot be drawn payable to bearer Stop payment Its payment can be stopped by giving the notice to the bank A pro-note payment cannot be stopped if once issued PRESIDENCY COLLEGE

BASIS CHEQUE BILL OF EXCHANGE Liability nature In case of cheque when it is dishonoured, the drawer is liable In case of promissory not liability is primary Use of form It is drawn on a printed form Promissory note may be drawn issued by a particular bank on any paper and there is no need of any particular form Drawee A cheque is always drawn to a particular bank were account is available Drawer and payee In case of cheque drawee and In case of pre-note there are payee can be the same two parties and maker cannot person be the payee. A promissory note can be drawn on any person PRESIDENCY COLLEGE

Crossing of cheques A crossed cheque is a cheque which is payable only through a collecting banker and not directly at the counter of the bank. Crossing ensures security to the holder of the cheque as only the collecting banker credits the proceeds to the account of the payee of the cheque. When two parallel transverse lines, with or without any words, are drawn generally, on the left hand top corner of the cheque. A crossed cheque does not affect the negotiability of the instrument. PRESIDENCY COLLEGE

Types of crossing: 1. General Crossing 2. Special crossing 3. Account-payee or restrictive crossing 4. Not-negotiable crossing PRESIDENCY COLLEGE

1. General Crossing A cheque is said to contain a general crossing when two parallel lines are drawn across the face of the cheque. According to sec 123 of NI Act 1881 as where a cheque bear’s across its face an addition of a. The words “and company”, or any abbreviation thereof between two parallel transverse lines, or b. The parallel transverse lines simply, either with or without the words “not negotiable”, PRESIDENCY COLLEGE

2. Special Crossing In the case of special crossing the paying banker is to honour the cheque only when it is presented through the bank mentioned in the crossing or an agent of such bank. According to sec 124 of NI Act 1881 as, “where a cheque bears across its face an addition of the name of a banker, either with or without the words “not negotiable” addition constitutes a crossing and the cheque is crossed special and to that banker. PRESIDENCY COLLEGE

3. Double crossing According to sec 127 of NI Act 1881 states that if a paying banker receives a cheque crossed specially to two bankers he must not pay it, however, if one of the bankers named is acting as an agent for collection for the other, the cheque may be paid to the agent bank. PRESIDENCY COLLEGE

4. Restrictive crossing Some additional forms of crossing have been adopted to commercial and other banks in order to avoid the risk of a thief obtaining payment. These forms consist in adding to the general or special crossing, the words “account payee”, “account payee only” or “account Govinda only”. Crossing of cheque directs the collecting banker that the proceeds are to be credited only to the account of the payee, or the party named, or his agent. If the collecting bankers allows the proceeds of a cheque so crossed to be credited to any other account, then he may be held guilty of negligence in the event of an action for wrongful conversion of the funds. PRESIDENCY COLLEGE

Who may cross a cheque? According to 125 of NI Act 1881 following authorities ad persons can cross a cheque. 1. A cheque may be crossed generally or specially by the drawer. 2. Where a cheque is uncrossed, the holder may cross it specially. 3. Where a cheque is crossed generally or specially, the holder may add the words “not negotiable”. 4. Where a cheque is crossed generally or specially, the holder may add the words “not negotiable” 5. Where a cheque is crossed specially, the banker to who it is crossed may again cross it especially to another banker for collection. 6. Where an uncrossed cheque or a cheque crossed generally is sent to a banker for collection, he may cross it specially to himself. PRESIDENCY COLLEGE

Endorsement: A legal term that refers to the signing of a document which allows for the legal transfer of a negotiable from one party to another. An endorsement consists of the signature of the holder usually made on the back of the negotiable with the object of transferring the instrument. The person making the endorsement is called as an “endorser” and the person to whom the instrument is endorsed is called as “endorsee”. PRESIDENCY COLLEGE

Definition According to sec 15 of NI Act 1881, “where the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiable, 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 “endorser”. PRESIDENCY COLLEGE

• Endorsement: A legal term that refers to the signing of a document which allows for the legal transfer of a negotiable from one party to another. The word ‘endorsement’ in its literal sense means, a writing on the back of an instrument. But under the 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. Thus endorsement is signing a negotiable instrument for the purpose of negotiation. The person who effects an endorsements is called an ‘endorser’ and the person to whom negotiable instrument is transferred by endorsement are called the ‘endorsee’. Allonge (from French allonger, "to draw out"), a slip of paper affixed to a negotiable instrument, as a bill of exchange, for the purpose of receiving additional endorsements for which there may not be sufficient space on the bill itself. PRESIDENCY COLLEGE

Essentials of a valid Endorsement 1. It must be on the instrument. The endorsement may be on the back or face of the instrument and if no space is left on the instrument, it may be made on a separate paper attached to it called allonge. It should usually be in ink. 2. It must be made by the maker or holder of the instrument. A stranger cannot endorse it. 3. It must be signed by the endorser. Full name is not essential. Initials may suffice. Thumb-impression should be attested. Signature may be made on any part of the instrument. PRESIDENCY COLLEGE

4. It may be made either by the endorser merely signing his name on the instrument No specific form of words is prescribed for an endorsement. But intention to transfer must be present. 5. It must be completed by delivery of the instrument. The delivery must be made by the endorser himself or by somebody on his behalf with the intention of passing property therein. Thus where a person endorses an instrument to another and keeps it in his papers where it is found after his death and then delivered to the endorsee, the latter gets no right on the instrument. If delivery is conditional endorsement is not complete until the condition is fulfilled. 6. It must be an endorsement of the entire bill. A partial endorsement i. e. which purports to transfer to the endorsee a part only of the amount payable does not operate as a valid endorsement. PRESIDENCY COLLEGE

Types of endorsements Blank or general endorsement Full or special endorsement Sans recource endorsement Partial endorsement Faculative endorsement Restrictive endorsement Liability dependent upon a contingency Conditional or qualified endorsement Sans freis endorsement PRESIDENCY COLLEGE

1. Blank or General Endorsement According to sec 16(1) and 54 when the endorser signs his name only on the face or back of the instrument, it is known as blank or general endorsement. A blank endorsement specifies no endorsee and the instrument in consequence becomes payable to bearer even though originally it was payable to order. PRESIDENCY COLLEGE

2. Full or special endorsement (sec 16(1)) If the endorser, in addition to his signature, also adds a direction to pay the amount mentioned in the instrument to, or to the order of a specified person, the endorsement is said to be in full PRESIDENCY COLLEGE

2. Full or special endorsement (sec 16(1)) If the endorser, in addition to his signature, also adds a direction to pay the amount mentioned in the instrument to, or to the order of a specified person, the endorsement is said to be in full PRESIDENCY COLLEGE

3. Partial endorsement (sec 56) It purports to transfer to the endorsee only a part of the amount payable on the instrument, such an endorsement does not operate as a negotiation of the instrument and is valid. PRESIDENCY COLLEGE

4. Restriction endorsement (sec 50) an endorsement is said to be restrictive when the endorser, by express words, restricts the right of further negotiation of the instrument or merely entitle the endorsee of the instrument to receive the contents of the instrument for a specific purpose. PRESIDENCY COLLEGE

5. Conditional or qualified endorsement An endorsement is conditional or qualified which limits or negatives the liability of the endorser. The endorser limits or excludes his tow liabilities by putting some condition in the instrument. It differs from restrictive endorsement. The restrictive endorsement prohibits further negotiability of the instrument. PRESIDENCY COLLEGE

5. Conditional or qualified endorsement An endorsement is conditional or qualified which limits or negatives the liability of the endorser. The endorser limits or excludes his tow liabilities by putting some condition in the instrument. It differs from restrictive endorsement. The restrictive endorsement prohibits further negotiability of the instrument. PRESIDENCY COLLEGE

a) Sans recourse endorsement This endorsement is done in such a way that the endorser does not incur any liability to the endorsee. It is done by adding the words “sans recourse”. Eg. , pay to X or order sans recourse. PRESIDENCY COLLEGE

b) Facultative endorsement When the endorser increases to his liability or abandons some rights against the instrument, it is called as facultative endorsement. Eg. , pay to A or order. Notice of dishonour waived. PRESIDENCY COLLEGE

c) Liability dependent upon a contingency An endorser endorses an instrument in such a way that his liability becomes dependent upon the happening of some specified event, which may or may not happen. Eg. , pay to A or order on his marriage with B. PRESIDENCY COLLEGE

d) Sans Frais Endorsement Where the endorser does not want the endorsee of any subsequent holder of the instrument to incur any expenses on his account, the endorsement is known as san frais. PRESIDENCY COLLEGE

Cancellation of endorsement According to sec 40, “where the holder of a negotiable instrument, without the consent of the endorser, destroys or impairs the endorser’s remedy against a prior party, the endorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity”. PRESIDENCY COLLEGE