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PROMISSORY NOTE (Section 4) 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 BILL OF EXCHANGE (Section 5) 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

Negotiable Instrument Act

CHEQUE (Section 6) A cheque is a Bill of Exchange drawn on a specified banker, and not expressed to be payable otherwise than on demand - it includes the Electronic Image of a truncated cheque and a cheque in electronic form (Cheque Truncation Burman Committee Recommendations) NEGOTIATION Transfer with title is called negotiation. - Transferee gets absolute title even though the transferor has defective title provided the transferee is holder in due course. HOLDER (Section 8) A person becomes holder subject to the following conditions: The instrument is in his name He is in the possession of the instrument - He is entitled to receive/collect the amount from the parties on whom the instrument is drawn HOLDER IN DUE COURSE (Section 9) A person becomes holder in due course subject to the following conditions: He has received the instrument for consideration - He Should have received the instrument before the due date - He did not have any doubt about the title of the transferor at the time of taking the instrument - There is no not negotiable crossing on the face of the cheque - There is no forgery of endorsement (already existing on the back of the cheque by way of endorsement) - The transferee acted with good faith & without negligence INCHOATE (INCOMPLETE) INSTRUMENTS (Section 20) - The holder of an inchoate instrument can recover the amount that is filled in the inchoate instrument provided such holder acts in good faith & without negligence and he is a holder in due course. - For example, A borrowed Rs.875/- from B and signed blank Promissory Note across a Revenue Stamp of 15 ps. B filled it with Rs.5,116/- and endorsed to C and C acted negligently. The stamp duty affixed on DPN is 15 ps. only. It is adequate for a loan amount of maximum Rs.1, 000/-. When the DPN filled for Rs.5,116/-, C should have got the following doubts amount in DPN is overstated if the amount mentioned is correct, the DPN is under stamped

(a) (b)

In the above circumstances, C can not become holder in due course. If DPN is under stamped, it will not be permissible as evidence and it is null & void. - If the Revenue Stamp affixed on captioned DPN is Re.1/-, C can recover the entire amount of Rs.5,116/- mentioned in the DPN irrespective of the contract between A & B. This privilege is available to Holder in Due Course only and not to a Holder. . INLAND BILLS (Section 11) & FOREIGN BILLS (Section 12) Drawer must be in India and Drawee or Payable is in India. PARTY No. (I) PARTY NO (II) (A) DRAWEE DRAWER (B) PAYABLE (Where the bill is paid/payable) A Bill is called Inland Bill if Party No(I),and either Party No. II (A) or (B) are in India - Example: S.N Bill Drawer Drawee Whether Inland or Foreign Bill o Payable at 1. Mumbai Hyderabad Hyderabad Inland Bill 2. Mumbai Hyderabad USA Inland Bill 3. Mumbai USA Hyderabad Inland Bill 4. Mumbai USA Japan Foreign Bill 5. USA Hyderabad Delhi Foreign Bill CALCULATION OF BILL DUE DATE TYPES OF BILLS (A) Demand Bills (B) Usance Bills (Section 22) (payable at sight / on (grace period of 3 days) presentation) After Date Bills After Sight Bills (Due date is counted (Due date is counted from No grace period
from the date of bill) the date of acceptance)

Negotiable Instrument Act

Usance period MONTHS - Take the appropriate date (after date/after sight) - Add the usance period - If the date arrived at is an impossible date (Example.30.02.2008/31.09.2008), take the last date of the month i.e. 29.02.2008/30.09.2008 in the above example. - Add 3 days grace period - Grace Period (Section 22) Drawer has no right to cancel the grace period. It is statutory. - If the date arrived at falls on a holiday (15.08.2008 /2 6.01.2008 etc), the bill is payable on the previous day( i.e. next preceding day) (14.08.2008/25.01.2008 in the above examples)

Date of Bill Date of acceptance Tenor in Months Say Grace days Payable on Due date

13.06.200 8 16.06.08 03(A.D) 13.09.200 8 03 16.09.200 8 16.09.200 8

20.06.200 8 28.06.200 8 03(A.S ) 28.09.200 8 03 01.10.200 8 01.10.200 8

16.10.200 8 22.10.200 8 02(A.S ) 22.12.200 8 03 25.12.200 8 24.12.200 8

19.10.200 7 31.10.200 7 04(A.S) 28.02.200 8 03 03.03.200 8 03.03.200 8

Negotiable Instrument Act

Usance period DAYS - While calculating the due date the Date of Bill 17.06.200 8 Date of acceptance 23.06.200 7 117 days after date Tenor Say Grace days Payable on Say 12.10.200 7 03 15.10.200 7

the first day should be ignored 14.09.200 Days - 117 7 Days J -13 104 22.09.200 123 J -31 73 7 S -08 A -31 42 123 days 115 S -30 12 O -31 after O-12 acceptanc 84 N -30 e 23.01.200 54 D -31 8 23 03 26.01.200 J -23 8 25.01.200 8

- A bill is required to be accepted within 48 hours from presentation excluding public holidays. Otherwise, the bill is deemed as dishonored. - Holidays are declared to Banks u/s 25 of NI Act. DRAWEE IN CASE OF NEED - If a persons name is mentioned in a Bill of Exchange in addition to the name of drawee on whom the bill is to be presented in the event of dishonor of the bill by the original ( first) drawee is called as drawee in case of need. NOTING (Section 99) - The confirmation of the dishonor of a bill by the notary public on the bill of exchange it self or on a piece of paper attached there to is called noting. PROTESTING (Section 100) - If the confirmation of the dishonor of a Bill of exchange (duly noted) is given by Notary Public by way of a certificate it is called protesting. (Noting or Protesting are not compulsory for Inland Bills) ACCEPTANCE FOR HONOUR - When a bill is dishonor for non-acceptance, and the dishonor is confirmed by noting/protesting where ever necessary, then if a third party come forward to accept the bill (After taking the prior consent of the drawer) to save the honor of one of the parties to the transaction, such third party is called acceptor for honor and the transaction is called acceptance for honor. - If such acceptor for honor does not declare, as to save whose honor he is accepting the bill, it will be deemed that he is doing so to save the honor of drawer. PAYMENT FOR HONOUR - When a bill is dishonored for non-payment (duly noted/protested wherever necessary),then if a third party comes forward to pay the bill, such transaction is called payment for honor. AMBIGUOUS INSTRUMENTS (Section 17) - When a Negotiable Instrument is having both the features of a Promissory Note & Bill of Exchange, the holder may treat it as either of them CROSSING - Drawing two transverse parallel lines across the face of cheque is called crossing - All crossings are instruction to Paying Banker not to pay a cheque across the counter

- A/c Payee crossing is an instruction not only to Paying Banker but also to Collecting Banker. - Crossings are 2 types i.e. General Crossing & Special Crossing

Negotiable Instrument Act

- General Crossing (Section 123) if some words are there in between two parallel

transverse lines, and if such words have some meaning, and if such meaning is a relevant for the payment of the cheque treat such words as instructions to banker, otherwise ignore such words. Two parallel transverse lines are compulsory for general crossing. two transverse parallel lines. However these two parallel transverse lines are not compulsory for special crossing. A clearing stamp, collection stamp put on a cheque also amounts to special crossing

- Special Crossing In this type of crossing the name of a bank is inserted in between the

ENDORSEMENT (Section 15) - Endorsement is an instruction by the payee/holder to the paying bank, as to whom the payment of the cheque/draft should be made - Normally endorsement is done on the back side of a cheque/ draft. But as per section 15 of the act, it t can also be done on the face of the instrument; - Endorser/Drawer will have the same rights - If the drawers signature forged, it is not a cheque at all,. Similarly if an endorsement is forged the parties subsequent to the forged endorsement cannot get better title. - Partial endorsement can not be permitted unless the part amount on the bill is already received / paid. For example, A bill is drawn for an amount of Rs.10, 000/- . Out of the Bill amount Rs.4, 000/- was already paid. Then, it can be endorsed for the balance amount of Rs.6, 000/- . - Types of Endorsements (Presumption: A gave a cheque to B) S. Type of Endorsement Example Remarks 1. RESTRICTIVE Pay to C only C cannot further endorse (Section 50) B the cheque to anybody 2. PER PRO Pay to C or order The endorser is the agent of (per procuration Per pro B B Per pro M/s.Shanti Textiles means on behalf of) Authorized Signatory 3. SANS RECOURSE Pay to C or order B is not liable in the (without recourse to Sans Recourse event of bouncing of the the endorser (Dont B cheque ask me if the cheque is bounced) 4. FACULTATIVE Pay to C or order The endorser forgoes his Notice of dishonor right and thereby waived increases his responsibility B 5. NEE Pay to C or order People who change their (Formerly known as) W Nee names especially women B after their marriage make this type of endorsement

PAYMENT IN DUE COURSE (Section 10) - Payment of the instrument as per its tenor (appearing on the face of cheques) - Payment to the presentor - payment in good faith & without negligence ( Honesty & Diligence) - While making the payment of the instrument, the paying banker should not get a doubt about the title of the presenter to receive the payment ( If a person of ordinary prudence is

there in the place of the paying banker he too should not get a doubt about the bonafides of the presenter.)) OTHER DETAILS Date should not be undated/partly dated /Altered/Post Dated. If anti -dated the cheque should not be stale. If the cheque bears an Impossible date the cheque is payable on the last day of the month As per Section 118 of the act,, a cheque shall be deemed to have been written on the date appearing on the face of the cheque. For example, Account opened on 15.09.2008; Cheque book issued on 19.09.2008; The party issued a Cheque with a date of 14.08.2008 Whether we can pay the cheque? (Answer YES) Bearer cheques issued in the name of legal personality i.e. Company, Corporation, Govt. Dept., etc. should not be paid across the counter even though they are payable to bearer.. Section 18 When the amount stated in words & figure differs, t as per law he amount stated in words shall be paid. ( As per the practive we return the cheque)

Negotiable Instrument Act

PROTECTION TO PAYING BANKER S.N Section Risk Type of instruments o No. of NI Act 1. 85 (i) Forgery of Endorsement Order cheques 85 (ii) Forgery of Endorsement Bearer cheques 2. 85-A Forgery of Endorsement Drafts 3. 89 Material Alterations not apparent (on Cheques & Drafts the face) to the naked eye 4. 128 Payment of crossed instruments Cheques/Drafts - The above protections are subject to the following conditions: (a) Payment should be made in due course (b) Payment should be made during normal course of business PROTECTION TO COLLECTING BANKER - Protection is available to the collecting u/s 131 of NI Act(Sec.131 A for drafts) subject against the risk of Conversion (Conversion = Collecting a cheque for a party other than the turn owner) subject to the following conditions: (a) The cheque should have been collected for an account holder, who is properly introduced (KYC Norms) (b) The cheque is crossed before it comes to bankers hands (c) The relationship between Banker & Customer should be that of Agent & Principal (d) Banker should act in good faith & without negligence - Thus Protection u/s 131 is only available for crossed cheques only. There is no protection for (a)open cheques. And (b) cheques purchased by Banks.

BOUNCING OF CHEQUES CRIMINAL LIABILITY (Section 138 142) The cheque should have been issued for consideration The cheque is presented on the banker within its validity period The cheque is bounced for one of the following reasons (a) Insufficient funds (b) Exceeds arrangements (c) Account closed (d) Payment stopped by the drawer (without keeping sufficient balance in the account) (e) The holder of the cheque has to take a decision whether to: Give some more time to the drawer and represent the cheque. This can be done any number of times until the validity of the cheque

Negotiable Instrument Act

Proceed against the drawer legally. The legal actions are of 2 types (a) Civil Suit To recover the cheque amount (b) Criminal Suit:To inflict punishment on the drawer by filing Criminal Case against
the drawee as per Section 138 to 142 of NI Act Civil suit can be filed once the cheque is dishonored, based on the bankers Cheque Return Memo. If the holder wants to take criminal action, the following procedure is to be followed Cause of action lies only once during the life time of the cheque i.e. once the holder wants to take criminal action against the drawer he should strictly follow the following steps rigidly.On the contrary, if the holder gives more time to the drawer over and above the time stipulated in the act, the holder looses/foregoes his right to file criminal case against the drawer. The holder within 30 days from the date of receipt of the bounced cheque should give a notice to the drawer demanding the payment within 15 days from the date of receipt of the notice. If the drawer pays the amount within 15 days from the date of receipt of the notice, he is discharged. No action lies thereafter against him. If the drawer does not pay the amount with in 15 days of receiving the notice, the cause of action arises. The holder within 30 days from the date of cause of action should file a criminal case against the drawer in a Court not lower than Metropolitan Magistrate Court/First Class Judicial Magistrate Court. If he fails to do so, he will loose his remedy i.e. criminal action against the drawer. If the drawer is not in a position to file a criminal case within 30 days from the date of cause of action, he should file an affidavit before the Court of Law explaining the reasons for delay. If the Court is convinced, it may admit the same. Punishment imprisonment up to 2 years or penalty up to double the amount of the cheque or both. Note: It differs in case of summary of suits) Section 139 The cheque in question is deemed to have been received for consideration. The onus of proof for lack of consideration lies on the drawer. Section 140 The defence of the drawer in the Court of Law stating that he had no intention at any point of time to bounce the cheques would not be considered by the Court Section 141 When a cheques issued by a Company is bounced, all the persons responsible for conducting the business of the Company are liable on the bounced cheques (i.e all the directors excepting the nominee directors are liable.) Section 142 Cognizance of offences Normally Courts take cognizance of a criminal offence only when it is routed through police. Cheque bouncing case as per Section 138 is a criminal offence .But it need not be routed through police. A suit can be filed subjected to the following conditions: (a) Cause of action has arisen as per Section 138 (b) A petition is filed within the stipulated time with a Metropolitan Magistrate Court/First Class Judicial Magistrate Court (a Court not inferior to these Courts)

ADDITIONS TO N I ACT (Section 143 147) Sec. Contents of the Section Explanation 143 Power of the Court to try To save time, Courts at their discretion try cases summarily cheque bouncing cases summarily i.e. not conducting a trial Parties to the suit cannot request for summary suit Punishment imprisonment up to 1 year & an amount of fine exceeding Rs.5,000/144 Mode of service of Summons can be served not only by Regd. Summons Post but also by Speed Post/Courier approved by Court 145 Evidence of an affidavit Courts are permitted to considered an affidavit by the parties in lieu of their oral

Negotiable Instrument Act

146 147

Banks slip prima facie evidence of certain facts Offences compoundable are

deposition Until the contrary is proved, a cheques is deemed to have been bounced for the reason mentioned in the cheque return memo Out of court settlements are now permitted in respect of cheques bouncing cases.

PRESUMPTIONS S Presumpti on 1. Consideratio n 2. Date 3. 4. 5. 6.

IN N I ACT (Section 118) Explanation Until contrary is proved, consideration is presumed

A Negotiable Instrument is deemed to have been written on the date which is appearing on the face of the instrument Holder in Every holder is a Holder in Due Course until the contrary is Due Course proved Acceptance An accepted Bill of Exchange is deemed to have been accepted within the reasonable time and within its maturity Transfer / All transfers are deemed to have been made in the sequential Endorsemen order appearing on the back of the instrument, before the due t date Stamp A lost Negotiable Instrument is deemed to have been adequately stamped

CASE STUDIES - On behalf of Mr.A (Principal), Mr.X (Agent) accepted a Bill for Rs.5 lakhs drawn by Mr.Z on
15.03.2008. The bill was due for payment on 15.06.2008. The agency of Mr.X was terminated on 15.05.2008. Whether Mr.A is liable on the Bill accepted by Mr.X and make the payment on 15.06.2008? Answer: The Bill was accepted by Mr.X on behalf of Mr.A. Hence it is binding on Mr.A. Hence Mr.A should make the payment on due date despite the termination of Mr.X the Agent. - Mr.X issued a cheque as a Power of Attorney holder for Rs.5 lakhs in favour of Mr.Z on 15.03.2008. Subsequently, the Power of Attorney of Mr.X was cancelled on 15.05.2008 and on the very same day the Bank was informed accordingly. The aforesaid cheque was presented on the Bank on 15.06.2008. a) Whether the Bank should make the payment keeping the fact in view that Mr.X signed the cheque in fiduciary capacity during the normal course of his agency ( Note: The cheque bears a date prior to the date of termination of the agency) Answer: Once the Bank receives instructions from the customer about revocation of the agency, the Bank as an agent should follow such instructions with immediate effect i.e. Bank should not pay the cheque signed by the agent at all, whatsoever the date of cheque might be. b) In the aforesaid case, instead of termination of the agency of Mr.X on 15.05.2008, presume that Mr.X expired on that date. Whether there would be any change in your decision as regards honoring of the cheque? Answer: Cheques signed by the agent can be honored even after his death provided principal is alive and solvent and not instructed the Bank to stop the payment of the cheque in question.