Learning Objectives Afier reading this chapter, you will be able to understand: © Negotiable instruments like promissory note, bill of exchange and cheque 1 Types of negotiable instrument Maturity period of negotiable instrument Negotiation, assignment of instrument i Crossing of cheque 1 Dishonour of instrument Noting and protesting @ Hundi 14.1 INTRODUCTION TO NEGOTIABLE INSTRUMENTS In India, there is a reason to believe that instruments to exchange were in use from early times and we find that papers representing money were introduced into the country, by one of the Mohammedan sov ereigns of Delhi in the early part of the fourteenth century. The word ‘hundi’, a generic term used to denote instruments of exchange in vernacular is derived from the Sanskrit root ‘hund’, meaning ‘to collect’ and well expresses the purpose to hich instruments were utilized in their origin, With the advent of British rule in India, commercial activities increased to # great extent. The growing demands for money could not be met by mere supply of coins; and the in- strument of credit took the function of money which they represented. Before the enactment of the Negotiable Instrument Act, 1881 the law of negotiable instruments as prevalent in England was applied by the courts in India when any question relating to such instruments Scanned with CamScanner‘The Negotiable Instrument Act, 1881 | 255 ose between the Europeans. When the parties were Hindu or Mohammedans their personal law was held to apply, Though, neither the law books of the Hindus nor those of the Mohammedan, contain any ference to negotiable instruments such as, the customs prevailing among the merchants of the respec ‘community were recognized by the courts and applied to the transactions among them. During the se of time, there had developed in the country a strong body of usage relating to hundis which even the Legislature could not, without hardship to Indian bankers and merchants, ignore, In fact the [Legislature felt the strength of such local usages and though fit to exempt them from the operation of ihe Act, with a provision that such usage may be excluded altogether by appropriate words. In the ibsence of any such customary law, the principles derived from the English law were applied to the Indians, as rules of equity justice and good conscience. The history of the present act is a long one. The act was originally drafted in 1866 by the India Law Commission and introduced in December 1867 in the Council and it was referred to a Select Committee. (Objections were raised by the mercantile community to the numerous deviations from the English Law ich it contained, The Bill had to be redrafted in 1877. After the lapse of a sufficient period for criticism hy the Local Governments, the High Courts and the Chambers of Commerce, the Bill was revised by @ Select Committee. In spite of this Bill could not reach the final stage. In 1880 by the Order of the Secretary fof State, the Bill had to be referred to a new Law Commission. On the recommendation of the new Law ICommission, the Bill was re-drafted and again it was sent to a Select Committee which adopted most of The additions recommended by the new Law Commission. The draft thus prepared for the fourth time was introduced in the Council and was passed into law in 1881, being the Negotiable Instruments Act, 1881. Negotiable instrument means a promissory note or bill of exchange or cheque payable either to ‘order or to the bearer. ‘An instrument, the property in which is acquired by anyone, who takes it bonafide and for value withstanding any defect in the title of any prior party is known as a negotiable instrument. 442 ESSENTIALS OR CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT The important characteristics of the negotiable instrument are the following: 1. Negotiable instrument must be payable either to order or to bearer. 2, Negotiable instruments are freely transferable from one person to another. 3, Itis transferable infinitum (ie, indefinitely). It means it can be transferred for any number of times | 4, The holder in due course gets a good title to negotiable instrument even though the title of trans- feror is defective. 5. The holder of the instrument is presumed to the owner of the property contained in it 6. A negotiable instrument may name more than one payee, jointly or alternatively. 14.3 PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTS e have been recognized by the Nego- te the business transai ‘A negotiable instrument is subject to certain presumptions. The tiable Instrument Act under Sections 118 and 119, with a view to faci "These are detailed below: 1. Every negotiable instrument was made, accepted and endorsed for consideration, Consideration is not required to be mentioned on the instrument. 2. Every negotiable instrument bearing a date was made or drawn on such date. Scanned with CamScanner256 Business Law 3. Every accepted bill was accepted within a reasonable time after its date and before maturity, 4. Every transfer of a negotiable instrument was made before its maturity. 5. A lost promissory note or bill was duly stamped and signed. 6. The holder of a negotiable instrument is a holder in due course. ie pearrient appearing upon negotiable instrument was made in the order in which they appear jereon, However, these legal presumptions are rebuttable by evidence to the contrary, 14.4 PROMISSORY NOTE—SECTION 4 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— (@) A certain person (b) The order of a certain person 14.5 ESSENTIALS CHARACTERISTICS OF A PROMISSORY NOTE ss the following essentials To be a promissory note, an instrument must po 14.5.1 In Writing The promissory note should be in writing, It could be in hand writin, is not sufficient. ig or printing. An oral promise to pay_ 14.5.2 Express Promise to Pay ‘The promissory note must contain express promise to pay. Mere acknowledgement of indebtedness is. not sufficient. Example “Mr. B1.0.U % 10,000’. There is no promise to pay and therefore this is not a valid promissory note. 14.5.3 Definite and Unconditional Promise If a promise to pay is dependent upon an event which is certain to happen although the unconditional time of its happening is uncertain, the promise to pay is unconditional, Example ‘I promise to pay Bina % 5,00,000 on D's death’. The promise is not conditional but definite since death of D is cer tain. Therefore, the promissory note is valid. 14.5.4 Signed by Maker ‘The promissory note must be signed by the maker. The signatures may be made on any part of the instru- ment. An agent of a trading firm can sign a promissory note on behalf of the firm. 14.5.5 Promise to Pay a Certain Sum The promissory note should contain the promise to pay a certain sum of money. It should contain the promise to pay only money and nothing els Scanned with CamScannerThe Negotiable Instrument Act, 1881 | 257 4. “Ipromise to pay Balwant & 2500 and all other sums which shall be due to him’. Since the amount payable is not certain, itis not a valid promissory note. 2. promise to pay Blawant 1200 and to deliver to him my rabbit on 1 March 2011’. It is not a valid promis: sory note since the promisor is required to deliver rabbit which is not ‘money’. 5.6 Payee Must Be Certain name of the payee must be specified in the promissory note otherwise it will be invalid. .5.7 Stamped he promissory note must be stamped. The stamp duty is paid as per the Stamp Act. .8 Parties person who makes the promissory note is called as maker. His liability is primary and uncondli . The person to whom money is to be paid, is called as payee. F 1200 after deducting there from any money which he owes me. Ist valid promissory nate? Why? to be indebted to'B in % 5000 to be paid on demand for value received’. 's it valid promissory Scanned with CamScannerain | Busines Law 14.6 BILL OF EXCHANGE—SECTION 5 A ‘bill of exchange’ is an instrument in writing containing an unconditional order signed by the make directing a certain person to pay a certain sum of money only to— 1. A certain person. 2, The order of a certain person. 3. The bearer of the instrument. Examples 1 ‘wrote and signed an instrument ordering 'B’ to pay Z 500 to ‘C’ This is a bill of exchange. 2. ‘On demand pay to ‘A’ or order the sum of % 500 for value received’. ‘The characteristics of bill of exchange are almost similar to the promissory note. The essentials chars teristics of a bill of exchange are following: 7" 1, It must be in writing. 2. It must contain an express order to pay. 3. The order to pay must be definite and unconditional. 4, It must be signed by the drawer. 5. The sum contained in the order must be certain. 6. The order must be to pay money only. 7. Drawer, drawee and payee must be certain. The drawer and payee may be same person 8. It must be stamped, Scanned with CamScannerThe Negotiable Instrument Act, 1881 | 259 The person who draws or makes the bill is known as the drawer. His liability is secondary and con- ditional. The person on whom the bill is drawn is called as the drawee, On the acceptance of the bill, the Grawee is called as the acceptor, He becomes liable for the payment of the bill and his liability is pri- mary and unconditional. The person to whom the money is to be paid is known as the payee. accepts a ‘Bill of Exchange’ but write on it ‘Accented but payment will be made when goods delivered e Is sold’. Decide the validity. = i - There are two parties in a Promissory Note—the maker and the payee. In a bill, there are three parties—the drawer, the drawee and the payee 2. A promissory note contains an unconditional promise to pay. A billofexchange contains an uncon- ditional order to pay. 3. The maker of a note is the debtor and he himself undertakes to pay. The drawer of a bill is the "creditor who directs the drawee (his debtor) to pay. 4, The maker of a note corresponds in general to the acceptor of a bill. But the maker of the note cannot undertake to pay conditionally whereas the acceptor may accept the bill conditionally be- cause he is not the originator of the bill 5. The liability of a maker of a note is primary and absolute whereas the liability of the drawer of a bill is secondary and conditional. 6, A note cannot be made payable to the maker himself whereas in a bill, the drawer and the payee may be one and the same person. 7. A note requires no acceptance and itis signed by the person who is liable to pay. A bill, payable after sight or after a certain period must be accepted by the drawee before it is presented for payment. 8, A note cannot be drawn payable to bearer. A bill can be so drawn. But in no case can a note or bill be drawn ‘payable to bearer on demand”. 14.8 CHEQUE—SECTION 7 ‘A cheque is a bill of exchange, drawn on a specified banker and it includes ‘the electronic image of truncated cheque’ and ‘a cheque in electronic form’. The cheque is always payable on demand. A cheque must contain all the characteristics of a bill of exchange. The essentials characteristics of a jeque can be summarized as under— 1, It must be in writing. 2, It must contain an express order to pay. 3. The order to pay must be definite and unconditional. Scanned with CamScanner260 | Business Law Itmust be signed by the drawer. ‘The sum contained in the order must be certain, ‘The order must be to pay money only. Drawer, dtawee and payee must be certain, Itis always drawn upon a specified banker. Itis always payable on demand, FAO Ye e A cheque does not require stamping or acceptance ‘The person, who draws or makes the cheque is called as dt tional. The bank on whom, the cheque is drawn is called as drawer cheque. The person to whom money is to be paid is called as payee. The payee may be the drawer hime self or a third party, A cheque is usually valid for 6 months, However, itis not invalid if itis post dated or antedated. 14.8.1 Truncated Cheque A truncated cheque means a cheque which the clearing house or bank whether paying or receiving payment immedia tronic image for transmission, substituting the further physical movement of the cheque in writing truncated during the course of a clearing cycle either by ely on generation of an elece 14.8.2 Cheque in Electronic Form A cheque in electronic form means a cheque which contains the exact mirror image of a paper cheque and is generated, written and signed in a secure system, ensuring the minimum safety standards with the | use of digital’ signature (with or without biometric signature) and asymmetric crypto system. 14.8.3 Presentment of Truncated Cheque In case of and reasonable suspicion about the genuineness of the electronic image of a truncated cheque (e.g., suspicion as to fraud, forgery, tampering or destruction of the instrument), the paying banker | entitled to demand any further information regarding the truncated cheque. The paying banker can also) demand the presentment of truncated cheque itself for verification 44.9 DIFFERENCE BETWEEN BILL OF EXCHANGE AND CHEQUE Bill of Exchange Cheque Bill of exchange can be drawn on any person. Bill of exchange need not always be payable on demand. It cannot be payable to bearer on demand. It require an acceptance of drawee. It requires stamp as per Stamp Act. It cannot be crossed. Notice of dishonour is usually required. ‘Cheque is always drawn on the bank. Itis always payable on demand. It can be drawn, payable on bearer on demand: Itdo It does not require stamp. not require an act eptance, It can be crossed. Notice of dishonour is not req Scanned with CamScannerThe Negotiable Instrument Act, 1881 | 261 Cheque ‘Truncated Cheque per is not used at any stage in creation of — A truncated cheque is nothing but a paper cheque anclectronic cheque. which is truncated during the clearing cycle. signatures must be used to create an The paper cheque which is afterwards truncated, tronic image of a cheque. Thus, an elec- contains no digital signature. The signatures in ink cheque contains digital signature. appear on the truncated cheque. The original writing of a truncated cheque is on paper, duly signed in ink electronic cheque is inelectronic form. _Trancated’cheque is im paper form. 411 CAPACITY OF A PERSON TO BE A PARTY TO A NEGOTIABLE INSTRUMENT person, capable to enter into contract is capable to make or draw negotiable instrument. A person shall liable on a negotiable instrument (by reason of making, drawing, accepting, endorsing, delivering or tiating a negotiable instrument), only if he is capable of contracting, according to the law to which aeekjece. ‘A minor may draw, endorse, deliver and negotiate any negotiable instrument. All the parties shall bound on such negotiable instrument. However, the minor shall not be bound on such negotiable ‘Amagent who signs in his name on a promissory note, bill of exchange or cheque without indicating that he signs as an agent will be personally liable on instrument. 412 CLASSIFICATION OF NEGOTIABLE INSTRUMENTS negotiable instruments may be classified as under 12.1 Order Instrument—Section 13 ‘negotiable instrument is payable to order— 1. Which is payable to a particular person. 2 Which is payable to a particular person or his order. 3, Which is payable to the order of a particular person Scanned with CamScanner268 | ‘Business Law 14.22 DISTINCTION BETWEEN NEGOTIATION AND ASSIGNMENT Negotiation Negotiation means transfer of a negotiable instrument to any other person, so as to constitute that person the holder of such negotiable instrument. Ifamegotidblejinstrumentisitransferediby way of negotiation, Negotiable Instrument Act, 881 applies. Negotiation can be made for transferring negotiable instruments only, A bearer instrument can be:negotiated merely by delivery and an order instrument can be negotiated by endorsement and delivery. Notice of negotiation is not required to be given to any party. Every negotiable instrument is negotiated for Assignment ‘Transfer of a right to receive the payment of a debt by one person (viz., assignor) to another person (viz., assignee) by way of a written documentis.called as assignment. ‘Where any wightis transferred by way of assignment, the Transfer of Property Act applies, ‘Assignment can be made of any right. Assignment is valid only if it is made in writing, and is signed by the assignor. Notice of assignment must be given by the assignee to the debtor. Assignment can be without consideration. consideration. Negotiation docs not require payment of stamp duty. _ Assignment requires payment of stamp duty. 14.23 CROSSING OF CHEQUE A cheque is either ‘open’ or ‘crossed’. An open cheque can be presented by the payee to the paying banker and is paid over the counter. A crossed cheque cannot be paid across the counter. Crossing means a direction given by the drawer of the cheque to the drawee bank, not to pay the cheque at the counter of the bank but to pay it toa person who presents it through a banker. ‘The crossing makes it possible to trace the person to whom the payment has been made. Thus, it makes the cheque safe and protects the holder of the cheque: 14.23.1 Modes or Types of Crossing—Sections 123-131 (A) 14.23.11 General Crossing The:cheque must contain two parallel transverse lines. The cheque must be paid only to a'banker. In the case of general crossing, the holder cannot get payment over the | counter of bank. a 14.23.12 ‘Special Crossing The cheque must contain the name of a banker. The cheque must be Paid only tothe banker to whom itis crossed. A special crossing may be made only once. The special Crossing cannot ibe converted into general crossing. The.paying banker will pay only to the banker whose name appears across the cheque or to his collecting agent. Scanned with CamScannerThe Negotiable Instrument Act, 1881 | 269 /4.23.1.3 Not Negotiable Crossing The cheque must contain the words ‘not negotiable’. The heque must be crossed generally or specially. The title of the transferee shall not be better than the title ie transferor. Not negotiable crossing does not restrict transferability but restrict negotiability only. 23.1.4 A/c Payee Crossing i.e., Restrictive Crossing The cheque must contain the words Payee’ or ‘A/c Payce onlly’. It is also known as restrictive crossing. The cheque does not remain c anymore. “The cheque must'be crossed generally or specially. It warns the collective banker that the proceeds fe to be credited only to the account of the payee. BOUNCING OR DISHONOUR OF CHEQUES—SECTIONS 31 AND 138 cheque is said to be'bounced or dishonoured'by non-payment when the drawee of cheque makes a in payment in when cheque is presented to him for payment. 1 Liability of Drawee on Dishonour ‘case of default’by the drawee (ive., Banker), the drawee shall compensate the drawer for loss caused im. The liability of a drawee arises by non-payment, if the following three conditions are fulfilled on 1. The drawer has sufficient funds in the account; and ‘2. Such funds are properly applicable to payment of the cheque 3. The drawee is duily required to pay the cheque. Liability of Drawer on Dishonour ithe dishonour of the cheque, the drawer is punishable with imprisonment upto two years or fine not c twice the amount of cheque or both if the following conditions are satisfied: il, The cheque was issued to discharge.a legally enforceable debt. 2. The cheque was returned or dishonoured for insufficiency of funds Scanned with CamScanner: 276 | Business Law | 14.38 PAYMENT FOR HONOUR | A person who pays a bill for honour of any other person is called as ‘payer for honour’, 14.38.1 Conditions for ‘Payment for Honour’ | The bill must have been noted for non-payment. The payment for honour is made— 1. For the honour of any party, already liable under the bill; 2. By any person (whether or not he is already liable under the bill); 3. With the consent of the holder of the bill. The payment must be recorded by Notary Public. 14.38.2 Rights of Payer for Honour The payer for honour is entitled to all the rights of a holder. He can recover all the sums paid by him from the party for whose honour he pays and all the parties prior to such party. 14.39 DISHONOUR BY NON-PAYMENT A negotiable instrument shall he dishonoured by non-payment if default in payment is made by the maker of a promissory note or acceptor of bill. A bill which does not require acceptance shall be dishonoured by non-payment if default in payment is made by the drawer. A cheque shall be dishonoured by non-payment by the drawee. 14.40 NOTICE OF DISHONOUR A notice of dishonour may be given by the holder or any party liable on the negotiable instrument. The notice of dishonour must be given to all the parties to whom the holder seeks to make liable. The notice of dishonour must disclose the fact of dishonour of negotiable instrument. A party (other than the party primarily liable on the negotiable instrument) to whom the notice of dishonour is not given is discharged from liability on the negotiable instrument. The noticé may be oral or in writing. It must be given within reasonable time of dishonour. 14.40.1 When Notice of Dishonour Is Unnecessary or Excused? In the following circumstances or situation, the notice of dishonour is notinecessary: 1. When the notice of dishonour is dispensed with, by a party. 2. Where the drawer of the cheque has countermanded payment, notice to drawer is not required:to be given. When the party entitled to notice, cannot be found even after due search. Where the party bound to give notice, is unable to give notice without any fault of his own. When it is dispensed with or waived by the party. When the party charged could not suffer damage for want to notice When the omission to give notice, is caused by unavoidable circumstances i.e. death. Where the acceptor is also drawee e.g. where firm draws on its branch. » a ek Scanned with CamScanner‘The Negotiable Instrument Act, 1881 | 277 14.41 NOTING AND PROTESTING —SECTIONS 99-104(A) ring the fact of dishonour of a negotiable instrument on the negotiable instrument is known as mating, The notice or minute must be recorded by notary public within a reasonable ime after dishonout xd: must contain the fact of dishonour, the date of dishonour, reason if any. ‘The dishonoured bill is handed over to a Notary Public. The Notary Public presents it again for ne- mnce/payment. I the drawee or acceptor refuses to accept or pay the bill the Notary Public records fact of dishonour on the bill, Noting is optional, Itis not mandatory to get the feet of dishonour noted When the instrument is dishonoured and noting is carried out a certificate issued by the Notary blic, stating the fact of dishonour. This process is known as protesting [4.42 DRAWEE IN CASE OF NEED he name of any person may be given in a bill as only when the bill is not accepted by the drawee nam\ s been dishonoured by the drawee in case of need. ‘drawee in case of need’, His liability arises on the bill, 1ed in the bill. The bill is not dishonoured until it 43 DISCHARGE OF A NEGOTIABLE INSTRUMENT The discharge in relation to a negotiable instrument may be either (i) discharge of instrument or {i discharge of one or more parties. The negotiable instrument is discharged: 4.43.1 Payment in Due Course negotiable instrument is discharged if the party is primarily liable to the payment in due course. hen the payment is made, the negotiable instrument must be cancelled or the fact of payment must be recorded on the negotiable instrument 4.43.2 Cancellation Where the holder cancels the name of the party primarily liable on the negotiable instrument wit “odischarge him, the negotiable instrument is discharged. th intent 14.43.3 Release “Where the holder releases or renounces instrument, the negotiable instrument is discharged. his rights against the party primarily liable on the negotiable 4.43.4 Negotiation Back “Where a party primarily liable on a negotiable instru ‘ment, the negotiable instrument is discharged. ment becomes the holder of the negotiable instru- 44.44 DISCHARGE OF A PARTY ‘When any particular party is discharged, the instrument continues to be negotiable and the undisc parties remain liable on it. harged Scanned with CamScanner