negotiable Instruments ower 137 11.1 MEANING AND CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT The term ‘negotiable’, Means transferable and the word ‘document’ means ‘in writing’. Therefore, negotiable instrument means a written promise or order to pay money, which may be transferred from one person to another. The Act, does not specifically define what is a negotiable instrument. In fact S. 13 merely states what are the negotiable instruments. $.13 -"A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.” (Note: Although the Act states of only three kinds of negotiable instruments, there are number of instruments which are recognised as negotiable instruments by custom of trade like delivery orders, bankers draft, railway receipts, Shah jog hundis, etc.). Characteristics of a Negotiable Instrument: Essentials of a negotiable instrument (i) (2) (3) (4) (5) (6) iu} at Unconditional Freely 5 Essentials Writing Money promise/order transferable Property | | Presumptions of contract (1) Writing: All negotiable instruments must be in writing and signed in accordance with the rules of the instrument. (2) Payable by money: All negotiable instruments are payable by money, the legal tender. Further the money stated in the instrument must be specific or certain. (3) Unconditional promise or order: 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. (4) Freely transferable: A negotiable instrument is transferable from one person to another by delivery or by endorsement and delivery. The instrument can be transferred till the final settlement of payment. (5) Property: The person in possession of the instrument is having the property rights over it and is entitled to the amount. Any person who takes it for value and in good faith is called a ‘holder in due course’. His property rights are unaffected by any defect in the rights of the transferor or prior parties. (6 Presumptions: Unless contrary is proved, there are presumptions in every negotiable instruments with regard to consideration, date, signature holder in due course etc. These presumptions are called special rules of evidence. (1 Essentials of contract: As negotiable instruments involve entering into contract essentials like capacity, consideration, free consent, lawful object must be there.11.4 PROMISSORY NOTE (A) Definition of a Promissory Notes: Ss. 4, which teads 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.” (B) Essentials of a Valid Promissory Note: Essential Characteristics of a Promissory Note U} 2) @) (4) 6) (6) Express Definite and Promise to P a . a pay romise to pay In writing Parties ae to eee money only certainaum (7 (@) | ~ (9) (10) (11) (12) i i i Intention and Requisites of ia ee Bea Se) Formalifes delivery contract140, @ (2) (3) (a) (5) (6) (8) (9) — Vipul’s™ Business Lay (ey In writing: A promissory note must be in writing. _ : Parties: There are minimum two parties. The person promising to pay : calleg promisor or the maker of the instrument, while the person in whose favoyr the Promise is made is called the promise. , Express promise to pay: The promissory note must ae an ies promise 0 pay. A mere implied promise to pay is not sufficient, so al ae a enedgems of a debt is nota promissory note. However, wordings used to express the Promise are not material, The wordings must convey a promise to pay. Examples: (i) 1, promise to pay INR 1,000/- on demand. Valid (41) 1, acknowledge my debt of INR 1,000/- to X and accept to pay on } Promissory demand, note (iii) 1, owe you INR 100/-. Nota (iv) 1, acknowledge receipt of INR 100/-. } promissory note The promise to pay must be unconditional: The Promise to pay must not be conditional, The promise to pay should not depend upon a condition, which ma or may not happen. However, a promissory note conditional on an event, which s bound to happen, is valid, Examples: (i) ‘A’, promises to pay ‘B’, INR 1,000/- on 1-1-2018. ya ; ime , Valid instrument (ii) ‘A’, promises to pay ‘B', INR 10,000/- after D's death, (ii) ‘A’, promises to pay ‘B’, INR 1,000/- as soon as possible Invalid instrument Must contain promise to pay in terms of money only: The instrument must be payable in terms of money and money only. If the instrument contains a promise to Pay something other than money or something in addition to money, it will not be a valid promissory note. Example: “I, promise to pay ‘A’, INR 2000/- and 2 bags of rice,” — not a promissory note, The sum payable to be certain: The amount pa’ Example: “I, promise to pay ‘A’, INR 1,000/- Invalid note, Parties certain: The parties to the instrument must be certain. The person making the payment and the person Teceiving the payment must be identifiable. The person making the payment is the maker of the instrument and the person to whom the payment is made is called the payee. Must be signed: The instrument is com; igns i instrument written by the maker and abo ears ae make ire is absent. Must bear the stamp: A Promissory with the Indian Stamp Act, 1899 and able must be specific. and all other sum likely due to him”. note must be Properly stamped in accordance must also be Properly cancelled.xegatiale instruments wr 141 ao) Other formalities: Formalities such as date, place, consideration, etc. are usually found in a promissory note. These are only formalities, as an instrument will not | pecome invalid if any of them are lacking. a Intention and delivery: An instrument to be a promissory note must be such as to show the intention to make a promissory note and must be delivered to the payee. (a2) Requisites of a contract to be complied with: All requisites like capacity, consideration, free consent, and lawful objects must be present. Specimen of a Promissory Note Mumbai i 4st March 2018 I promise to pay ‘B’ or order a sum of INR 1,000 for value received on demand. To, Mr. B Address . [Sr | (C) Kinds of Promissory Notes: There are four kinds of promissory notes: (1) Promissory note payable on demand. (2) Promissory note payable after date. (3) Joint promissory note. (4) Joint and several promissory note. (1) Promissory note payable on demand: Here no specific time for payment is made. It becomes payable, whenever the payee demands. In fact it becomes payable the moment the instrument is created. Promissory note payable after date: Here the promissory note becomes payable at a specified future date. (3) Joint promissory note: A promissory note, which is made by two or more persons jointly. The liability of the makers is joint. In the event of non-payment, the payee can bring an action against all, any or some of them. But only one right exists. Example: ‘A’, ‘B’ and ‘C’ agree to pay “D’ INR 3,000 on demand. All other formalities of @ promissory note have been complied with. In the event of non-payment, ‘D’ can bring only one action i.e. against all, any or some of them. ( Joint and several promissory notes: Here, two or more persons make a promissory Note jointly and severally. The liability is both individual as well as collective. On non-payment by the makers, the payee can bring multiple actions namely against all, any, some or one after another. In India there is no difference in joint, joint and several promissory notes. © Inland and Foreign Promissory Note: [The explanation is given in Bill of Exchange]. (2)weT Vipul’s™ Business Lay, ta 11.5 BILL OF EXCHANGE (A) Definition of a Bill of Exchange: ' S. 5 reads as “An instrument in writing containing an unconditional order, sj tgneq by the maker, directing a certain person to pay certain sum of moncy only to or to the gr of a certain person or to the bearer of the instrument. (B) Essentials of a Bill of Exchange: Essential Characteristics of a Bill of Exchange I G) () 6) (] (9 (8) (9) fon al @ ns “, L | 5 order ini ler to pay Parties | In writing CET unconditional order Money only © | a @ | @ | (10) | al (11) | | Ordetopay | | Signed by - Intention [Pew cern the drawer Stamp | | Fomalies | | delivery A conta @) Number of parties: A bill of exchange has three parties: (a) The drawer, who draws the bill of exchange. (b) The drawee, who has to make the payment. (© The payee, who is entitled to the payment. Sometimes the drawer and the payee can be one and the same Person. The parties must be certain. (Note: When the drawee accepts the bill, he is known as acceptor). It must be in writing: As it is a negotiable instrument, it must be in writing. Express order to pay: This is the essence of a bill of exchange. There must beat ‘order by the drawer to the drawee to pay’. The order must be a command and not an excessive request. Example: @)‘B’, pay INR 500/- to ‘C’ or order. (Valid bill of exchange) «@ a eae 7 ae obliged if you make it convenient to pay INR 500/: to ‘C’.(Inead Order must be unconditional: Th ra words the happening of the condition mast bear Be wcenditona: so Orie Pay OnE Or Lhe «promt nt the inrument mut The sum payable must be certain. Instrument must be signed. Instrument must bear the stamp, Other formalities may be complied with,0 Kinds of Bills of Exchange: Following are the different kinds of bills of exchange: (1) Bill of exchange payable on demand. (2) Bill of exchange payable after date. (3) Inland bill of exchange. (4) Foreign bill of exchange. (5) Accommodation bill of exchange. (6) Bills in sets (7) Drawee in case of need. (1) Bill of exchange payable on demand: A bill payable on demand, at sight or on presentment is known as bill of exchange payable on demand. (2) Bill of exchange payable after date: Is a bill of exchange payable on a specified date in future, is known as a bill of exchange payable after date. Inland bill of exchange: It is used for inland trade. Inland bill of exchange is one: (i) Where the drawer and drawee are in India, or (ii). Where the drawer and payee are in India. Foreign bill of exchange: is generally used for foreign trade. Foreign bill of exchange is one: () Where the drawer is in India, the drawee is in India while the payee may or may not be in India, or (ii) The drawer is in India while both the drawee and payee are outside India. Accommodation bill of exchange: Here the bill is drawn, accepted or endorsed without consideration. It is drawn and accepted, to help some other person to provide him with funds. Such bill is not supported by trade transaction. : ‘A’, IR 50,000/-. He approaches his friend “B’, for the same. ‘dow mS ey ot anes At draw a il on him rable to eo (A) and B accepts. If ‘A’s credit is good, he will get it discounted with his banker. Here, ‘B’ is called the ‘accommodating party’ and ‘A’ is called the ‘accommodated party’. (3) @) 611.9 CHEQUES (A) Definition: = S. 6 defines cheque as “a bill of exchange drawn ona specified banker nj expressed to be payable otherwise than on demand and it includes the electronic. of a truncated cheque and a cheque in the electronic form. (B) Essentials of a Cheque: Essential Characteristics of a Cheque a | @ @) | | | Requisites of bill | | Drawn upon a Payableon | | 0 No of exchange specified banker demand stamp acceptance (1) As cheque is a bill of exchange, it must contain the essentials of a bill of ex (Refer — Essential of Bill of exchange) In addition to these essentials, the following requisites are also to be satisfiet (2) Drawn on a specified banker: The drawee in case of a cheque is always a banker. (3) Payable on demand: A cheque is always payable on demand. (4) No stamp: A cheque does not tequired a stamp. (5) Acceptance: No acceptance is neces: demas Caer sary by the drawee before the (6) Payable to bearer: A cheque can be made payable to bearer.Instruments vegottle wr ae Specimen of a Cheque * pe AlcNo. Lr | INTS. STATE BANK OF INDIA MSB/181 DILSHAD GARDEN, DELHI - 110095 92854, 110002356; 10 Cheque in the Electronic form: It 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 biometrics signature) and asymmetric crypto system. Truncated cheque: It means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing. Overdue, Stale or Out of date Cheque: A cheque is overdue or becomes statue barred after three years from its due date of issue. But a holder is required to present it for realization within a reasonable time. In India, a cheque, which has been in circulation for more than six months is regarded by bankers as stale, overdue or out of date cheque. Note: If on account of the delay in presenting, the payee suffers any loss, the drawer is discharged from liability to the holder. (C) Types of Cheques: There are two kinds of cheques: (1) Bearer cheque. (2) Crossed cheque. () Bearer cheque: are also known as open cheque. Bearer cheque are payable across the counter. (2) ssed cheque: Crossing of cheque is drawing two parallel transverse lines on the top left hand corner of the cheque and with or without words written within it. In this cheque, the payment is made only toa banker so that the party who receives the Payment of the cheque can be easily traced. There are three types of crossings: (i) General crossing. (ii) Special crossing. (iii) Restrictive crossing. (i) General crossing: is when the crossing occurs in any of the following ways:able Instruments si wT ca 11,10 DISTINCTION BETWEEN ‘CHEQUE’ AND “BILL OF EXCHANGE’ Criteria Onlya Cheque Bill of exchange q, Drawee banker can bea drawee. | Any one can bea drawee, including a banker. fp Acceptance A cheque requires no acceptance. [Tt mar presented for acceptance. Drawee is liable only after his acceptance. 3, Payment Payable on demand without any _ | A bill is normally entitled to three days of grace. days of grace after maturity, unless payable on demand. 7, Presentment If not presented to the banker for _| Drawer is discharged, if bill is not Payment, it does not discharge the | presented for payment to the drawer unless he suffers injury or | acceptor. damages. fs. Notice In case of dishonour no notice of _ | Notice of dishonour is to be given dishonour is necessary. to all the parties liable to pay. 6, Crossing A cheque may be crossed. Bill of exchange can never be crossed. 7. Stamp Cheque requires no stamp. Bill must be properly stamped. __| f. Countermanding | Payment of cheque may be Payment of the bill cannot be payment countermanded by the drawer. __| countermanded by the drawer. 9, Noting and ‘A cheque is not required tobe | A bill may be noted or protested protesting noted or protested for dishonour. _| for dishonour. 10. Payable to bearer | It can be drawn so. Ttcannot be drawn 50. on demand