Unit – 3
Negotiable Instrument Act, 1881
The Negotiable Instruments Act was enacted, in India, in 1881. Prior to its enactment, the supply of the English negotiable instrument Act were applicable in India, and therefore the present Act is additionally based on English Act with certain modifications.
It extends to the entire of India except the State of Jammu and Kashmir. The Act operates subject to the provisions of Sections 31 and 32 of the reserve bank of India Act, 1934.
NEGOTIABLE INSTRUMENTS
What is negotiable?
• Negotiable means transferable.
• The negotiation that goes on refers to the transfer of the instrument between two people, or from one bank to a different, or maybe from one country to a different.
WHAT IS AN INSTRUMENT?
• In the broadest sense, almost any agreed-upon medium of exchange could be considered a negotiable instrument.
• In day-to-day banking, a negotiable instrument usually refers to checks, drafts, bills of exchange, and a few sorts of promissory notes.
According to Section 13 (1) of the Negotiable Instruments Act, 1881
“A negotiable instrument means a promissory note, bill of exchange, or cheque payable either to order or to bearer”. “A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable within the alternative to one of two, or one or some of several payees” [Section 13(2)].
FORMS OF NEGOTIABLE INSTRUMENTS
• A negotiable instrument may be a written, order promising to pay a sum of money.
• A document becomes negotiable when it contains an unconditional promise to pay money and is payable to a bearer or payable on demand.
• It may be a written document by which certain rights are created and or/ transferred to a particular person.
• It must be signed by the maker or the drawer as the case may be.
• There must exist the unconditional order or promise to pay.
• There must be a time mentioned for such payment.
• In particular cases, the drawer’s name should be specifically mentioned.
Promissory Notes
Section 4 of the Act defines, “A promissory note is an instrument in writing (promissory note being a bank-promissory note or a currency promissory note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to or to the order of a certain person, or to the bearer of the instruments.”
The one that makes the promissory note and promises to pay is named the maker. The person to whom the payment is to be made is named the payee.
Examples:
A Signs instruments within the following terms
a) I promise to pay B or order Rs. 500."
b) I promise to pay B Rs. 500 which shall flow from to him.
Bill of exchange
According to Section 5 of the 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 particular person or to the bearer of the instrument”. It’s also called a Draft.
SPECIAL BENEFITS OF BILL OF EXCHANGE:
• A bill of exchange may be a double secured instrument.
• In case of immediate requirement, a Bill could also be discounted with a bank.
Essentials of Promissory Note
Promissory notes must contain the following essentials elements;
- It should be in written shape.
- It must contain a guarantee to give money.
- The promise to give money must be unconditional.
- It must be signed by the maker.
- The maker should be a certain person.
- The payee must also be a certain person.
- The amount must be certain.
- Payment should be of money only.
- Time or period of payment should be fixed.
Essential Features of Promissory Note and Bills of Exchange
ESSENTIAL FEATURES OF A PROMISSORY NOTE
• It is an Instrument in Writing
• It may be a Promise to Pay
• Signed by the Maker
• Other Formalities
• Definite and Unconditional Promise
• Promise to Pay Money Only
• Maker must be a particular Person
• Payee must be sure
• Sum Payable must be sure
• It could also be Payable on Demand or after a particular Period of time
• It can't be Made Payable to Bearer on Demand
ESSENTIAL ELEMENTS OF BILL OF EXCHANGE
• It must be in Writing
• Order to pay
• Drawee
• Signature of the Drawer
• Unconditional Order
• Parties
• Certainty of Amount
• Payment in a similar way isn't Valid
• Stamping
• Cannot be made Payable to Bearer on Demand
Kinds of Promissory Note and Bills of Exchange
TYPES OF PROMISSORY NOTES
Depending upon the kind of promissory loan, notes are of various types. Few are mentioned below.
Personal Promissory Notes – this is often a specific loan taken from family or friends. Though people avoid legal writings when seeking a loan from close contact, the note shows belief and trust within the interest of the borrower.
Commercial – Here, the note is formed when managing commercial lenders like banks. Most of the commercial promissory agreement is similar to personal notes.
Real Estate – this is often almost like commercial notes in terms of nonpayment consequences. If the borrower becomes a defaulter, then the party has the proper to stay the property until the debt is cleared. It’s a bit risky as all the essential details become public, which may hinder the borrower’s credit history within the future.
Investments – The promissory note is occasionally used to raise funds for the business. It’s used as a security purpose and managed by securities laws. It includes terms and conditions related to returns of investment.
CLASSIFICATION OF BILL OF EXCHANGE
Inland and Foreign Bills
Inland Bill:
• It’s drawn in India on an individual residing in India whether payable in or outside India; or
• It’s drawn in India on an individual residing outside India but payable in India. ◦
Foreign Bill:
• A bill drawn in India on an individual residing outside India and made payable outside India.
• Drawn upon an individual who is that the resident of a distant country.
Time and Demand Bills:
Time Bill:
A bill payable after a tough and fast time is termed as a time bill. A bill payable “after date” could also be a time bill. ◦
Demand Bill:
A bill payable at sight or on demand is termed as a requirement bill.
Trade and Accommodation Bills:
Trade Bill:
A bill drawn and accepted for a real trade transaction is termed as “trade bill”.
Accommodation Bill:
A bill drawn and accepted not for a real trade transaction but only to provide financial help to some party is termed as an “accommodation bill”.
PARTIES TO A PROMISSORY NOTE
• Maker:
Maker is that the one that promises to pay the quantity stated within the promissory note.
• Payee:
Payee is that the person to whom the quantity of the promissory note is payable.
• Holder:
He is either the payee or the person to whom the promissory note may are endorsed.
PARTIES TO A BILL OF EXCHANGE
• Drawer:
The maker of a bill of exchange is named the drawer.
• Drawee:
The person directed to pay the money by the drawer is named the drawee.
• Payee:
The person named within the instrument, to whom or to whose order the money are directed to be paid by the instruments are called the payee.
Cheque
Consistent with Section 6 of the act, A cheque is “a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand”. A cheque is additionally, therefore, a bill of exchange with two additional qualifications:
• It is usually drawn on a specified banker.
• It is usually payable on demand.
ESSENTIAL ELEMENTS OF A CHEQUE
• In writing
• Express Order to Pay
• Definite and Unconditional Order
• Signed by the Drawer
• Order to Pay Certain Sum
• Order to Pay Money Only
• Certain Three Parties
• Drawn upon a Specified Banker
• Payable on Demand
Types of Cheque
The purpose of negotiable instruments is to make sure that monetary transactions can happen smoothly and as per the specified specifications. As an example , cash is that the most preferred mode to make immediate payments. For payments which will be accepted at a later date, people accept cheques. Lately, for an immediate account to account transaction, we've credit and debit cards. Each sort of payment features a specific negotiable instrument attached thereto. Just in case of Cheques, there are differing types of cheque which one uses in various circumstances.
Some of the most common forms of cheque are listed here.
1. Bearer Cheque
The first among the kinds of Cheques is that the bearer cheque. This cheque is payable to the bearer of the check or whose name the cheque carries within the column meant for the name of the drawee. Ideally, this cheque has “or bearer” printed at the top of the dotted lines, which is supposed to possess the name of the drawee. This cheque are often presented over the counter of the drawee bank and is payable to the one presenting it. It's a transferable instrument and thus are often passed on to a different by mere delivery, there's no got to endorse this kind of cheque.
2. Order Cheque
In this cheque, the printed word “bearer” is canceled thereby making it payable only to the person whose name is written within the place of drawee. Once “bearer” has been canceled on the cheque, it's automatically understood that this is often an order cheque and therefore the bank can only complete the transaction once they need identified, to their satisfaction, the bearer of the cheque to be an equivalent person, as named in it.
3. Crossed Cheque
In a crossed cheque, the drawer makes two parallel transverse lines at the top left corner of the cheque with or without writing “a/c payee”. This makes sure that regardless of who presents the cheque to the drawer bank, the transaction is formed into the account of the person named within the cheque only. The advantage of cross cheque is that it reduces the danger of cash being given to an unauthorized person because this sort of cheque can only be cashed by the drawee’s bank.
4. Open Cheque
Also known sometimes as an uncrossed cheque. Any cheque that's not crossed comes under open cheque category. This cheque are often presented to the drawer’s bank and is payable to the person presenting it. The drawee of this cheque also can transfer it to a different person by writing their name on the cheque and thereby making them the drawee. To form the cheque open, the word OPEN shouldn't be crossed off, and therefore the refore the person issuing the cheque must ensure his/her signatures on both the front and the back of the cheque. Otherwise, the payee could also be denied the payment by the bank. The payee is additionally expected to sign at the rear of the cheque while receiving the amount.
5. Post- Dated Cheque
A cheque bearing a later date than the one on which it's actually issued, is named as a post-dated cheque. This cheque maybe presented to the drawee bank at any time after its issuance, but the cash won't be transferred from the account of the payer until the date mentioned on the cheque. The payee also can present the cheque after the date mentioned on the cheque too. It'll still be valid, and therefore the money are going to be transferred to the payee’s account.
6. Stale Cheque
As the name suggests, a stale cheque is one which is past its validity period and may not be enchased. Initially, this era was six months from the date of issue. Now, this era has been reduced to 3 months.
7. Travelers’ Cheque
These could also be equated with a universally accepted currency. A travelers’ cheque is out there almost everywhere and comes in various denominations. This is often an instrument issued by the bank itself to form payments from one place to a different. There's no expiry date of a travelers’ cheque and thus it are often used during your next travel also, or you have the option to encash it once you land back in India.
8. Self Cheque
The drawer usually issues a self-cheque to his or her self. The name column of the drawee has the word “self” written in it. A self-cheque is drawn when the drawer wishes to withdraw money from the bank in cash for his use. This cheque can only be encashed within the account holder’s or the drawer’s bank. This cheque must be used carefully because if it's lost, another person may easily catch on encashed by visiting the drawer’s bank.
9. Bankers Cheque
A banker’s cheque, as is self-explanatory here, may be a cheque issued by the bank on behalf of the account holder so as to form payment of a specified sum, by order, to another person within an equivalent city. It's valid just for three months from the date of issue, but if needed, are often re-validated upon fulfilling certain legal obligations.
PARTIES TO A CHEQUE
• Drawer:
Drawer is that the one that draws the cheque.
• Drawee/Banker:
Drawee is that the drawer’s banker on whom the cheque has been drawn.
• Payee:
Payee is that the one that is entitled to receive the payment of a cheque.
MEANING
According to sec. 8, Holder of a negotiable instrument is that the person:
Who is entitled in his own name to the possession of the instrument?
Who has the proper to receive, or recover the quantity due thereon from the parties thereto?
In case the instrument (promissory note, bill or cheque) is lost or destroyed, the one that has entitled in his own name to the possession of it or to receive or recover the quantity due thereon from the parties thereto is that the holder of
Who are often a Holder?
• Payee:
The payee is typically the first holder of an instrument. He remains holder till he endorses the instrument.
• Endorsee :
The person to whom an instrument is endorsed becomes holder of in situ of the endorser. An instrument, when endorsed and delivered, the endorsee becomes the holder.
• Bearer :
In the case of a bearer instrument, the person to whom the instrument is delivered becomes the holder. But every bearer of an instrument cannot become the holder.
Example: a thief or a finder of a bearer instrument or a servant possessing an instrument on behalf of his employer cannot become holder.
• Legal representative or heir- a legal representative or heir of a deceased person can become holder by operation of law albeit he's not the payee or the bearer or the endorsee of the instrument.
Holder in due Course:
Holder in due course may be a one that came into possession of the instrument on payment of consideration and without knowledge of the very fact that the erstwhile owner had a defective title.
The holder in due course features a better title than the holder. Therefore, consistent with sec. 9 of the negotiable instrument Act, holder in due course mans a person who for consideration became the possessor of a note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof, if payable to order before the quantity mentioned in it became payable, and without having sufficient cause to believe that any defect existed within the title of the person from whom he derived his title.[sec. 9].
Rights of Holder in due Course
The rights of a holder in due course of a negotiable instrument are qualitatively, as matters of law, superior to those provided by ordinary species of contracts:
- The rights to payment aren't subject to set-off, and don't believe the validity of the underlying contract giving rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer remains liable on the cheque).
- No notice need tend to any party liable on the instrument for transfer of the rights under the instrument by negotiation. However, payment by the party liable to the person previously entitled to enforce the instrument "counts" as payment on the note until adequate notice has been received by the liable party that a special party is to receive payments from then on. [U.C.C. §3-602(b)]
- Transfer free of equities—the holder in due course can hold better title than the party he obtains it from (as within the instance of negotiation of the instrument from a mere holder to a holder in due course)
- Negotiation often enables the transferee to become the party to the contract through a contract assignment (provided for explicitly or by operation of law) and to enforce the accept the transferee-assignee’s own name. Negotiation are often affected by endorsement and delivery (order instruments), or by delivery alone (bearer instruments). Additionally, the rights and obligations accruing to the transferee are often affected by the rule of derivative title, which doesn't allow a property owner to transfer rights during a piece of property greater than his own.
PRIVILEGES OF A HOLDER IN DUE COURSE
• He can sue every prior party to the negotiable instrument if the instrument isn't duly satisfied.
• When the holder endorses such instrument further, the new owner features a good title unless he's party to fraud.
• The burden of proving his title doesn't lie upon the holder in due course.
Payment in due Course as per Section 10
"Payment in due course" means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to a person in possession thereof under circumstances which don't afford an inexpensive ground for believing that he's not entitled to receive payment of the amount therein mentioned.
Noting Under Section 99
When a note or bill of exchange has been dishonored by non-acceptance or non-payment, the holder may cause such dishonor to be noted by a notary public upon the instrument, or upon a paper attached thereto, or partly upon each.
Such note must be made within a reasonable time after dishonor, and must specify the date of dishonor, the rationale, if any, assigned for such dishonor, or, if the instrument has not been expressly dishonored, the reason why the holder treats it as dishonored, and therefore the notary's charges.
Protest under Section 100
When a note or bill of exchange has been dishonoured by non-acceptance or non-payment, the holder may, within an inexpensive time, cause such dishonour to be noted and authorized by a notary public. Such certificate is named a protest.
Protest for better security:
When the acceptor of a bill of exchange has become insolvent, or his credit has been publicly impeached, before the maturity of the bill, the holder may, within a reasonable time, cause a notary public to demand better security of the acceptor, and on its being refused may, within a reasonable time, cause such facts to be noted and authorized as aforesaid. Such certificate is called a protest for better security.
CONTENTS OF PROTEST AS PER SECTION 101
A protest under section 100 must contain
(a) Either the instrument itself, or a literal transcript of the instrument and of everything written or printed thereupon;
(b) The name of the person for whom and against whom the instrument has been protested;
(c) A press release that payment or acceptance, or better security, because the case could also be , has been demanded of such person by the notary public; the terms of his answer, if any, or a press release that he gave no answer or that he couldn't be found;
(d) When the note or bill has been dishonored, the place and time of dishonor, and, when better security has been refused, the place and time of refusal;
(e) The subscription of the notary public making the protest;
(f) Within the event of an acceptance for honor or of a payment for honor, the name of the person by whom, of the person for whom, and therefore the manner during which , such acceptance or payment was offered and effected.
NOTICE OF PROTEST AS PER SECTION 102
When a note or bill of exchange is required by law to be protested, notice of such protest must tend rather than notice of dishonor, within the same manner and subject to equivalent conditions; but the notice could also be given by the notary who makes the protest.
• It may be a direction given by the customer to the banker that payment shouldn't be made across the counter.
• Crossing is suffering from drawing two parallel transverse lines with or without particular abbreviations.
• A cheque that's not crossed is an open cheque.
• It is a measure of safety against theft or loss of cheques in transit.
TYPES OF CROSSING
• Special
• General
Dishonor of Cheque
Section 138 was inserted into the Act vide amendment of 1988. Dishonor of cheque section 138 covers the provision for dishonor of cheque for insufficiency etc. of funds within the account of drawer. The drawer pays off his liability to the payee through cheque and when bank returns the cheque unpaid because of insufficient balance on the account held by the drawer, the liability/debt remains thanks to the drawer and therefore the amount remains unpaid. Are often " this is often referred to as the dishonor of cheque The return of cheque can be thanks to insufficient funds within the account or due to exceeding the limit of the amount which was agreed to be paid by the bank. Such a default by a person, creates a liability under the said provision.
Section 142 of the Act deals with the cognizance of offences in compliance with the provision of Code of Criminal Procedure, 1973 (“CrPC”).
Prior to 1988, just in case a cheque wasn't honored on presentment, the sole remedy available under the Act was to file a civil suit within the court against the offender. However, this remedy didn't have a desired deterrent effect on offenders and cheque started losing their credibility. Hence, the Act was amended several times to include more stringent provisions to affect dishonor of cheque.
The Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 amended the Act to form dishonor of cheque a criminal liability and offenders were liable to be punished by imprisonment for a term which can reach 1 (one) year, or with fine which can reach twice the quantity of the cheque, or with both. The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 further extended the term of imprisonment to up to 2 (two) years.
DISHONOUR COULD ALSO BE DUE TO 2 REASONS
- Either the amount of cash present within the account is insufficient
- Or the amount to be paid has exceeded the amount to be paid from that account as within the agreement made thereupon bank.
FILING A COMPLAINT UNDER SECTION 138 OF THE ACT
PROCESS:
For filing a complaint, the complainant must follow these steps;
1. Dishonor of Cheque(s):
The complainant should have deposited the cheque drawn in his/its favour, which cheque(s) has been returned unpaid or has been dishonored due to:
• Insufficiency of fund within the account of the drawer;
• Issuance of order instructions by the drawer to the drawer bank;
• Amount of cheque exceeding the arrangement with the drawer bank.
2. Notice asking for payment of dues:
A legal notice for cheque dishonor is necessary before any action. This Act provides that, once the cheque has been dishonored, a notice must be issued (by registered A.D.) to the drawer within 30 days of the receipt of memo from drawee bank that the cheque is dishonored.
3. Filing complaint:
Where on the receipt of notice, if the drawer after the dishonor of cheque remains silent or refuses to pay the cash within 15 days from the date of receipt of notice, then a criminal complaint should be filed against the drawer (“Accused”) within next 30 days from the expiry of time period provided to the drawer.
4. Place of filing the complaint:
The place for filing the complaint shall be determined based on any of the following;
• Place of the bank on which the cheque is drawn;
• Place where cheque is presented to the bank and therefore the same is dishonoured;
• Place of residence/business of the complainant;
• Place of residence/business of Accused;
• Place from where the notice is sent to the drawer of the cheque demanding the cheque amount.
5. Contents of criminal complaint:
A complaint should contain complete details about the complainant, Accused, details of the transaction, details of the notice sent to Accused, jurisdiction clause, limitation clause, prayers posing for compensation and punishment for the Accused. The complaint should even be accompanied with all the important attachments i.e. the list of witnesses, list of all original documents and copies, board resolution giving authority to an individual to file complaint on behalf of the company (if applicable) etc.
6. Issuance of summons:
Upon filing of complaint and completion of all procedural aspects, the Magistrate before whom the complaint is filed shall verify the documents and upon subsequent verification, shall issue summons against the Accused.
7. Post – Issuance of summons:
On issuance of summons, the Accused may appear or might not appear.
On appearance of the Accused; the plea of the Accused shall be recorded and therefore the proceedings shall be conducted as per Section 262 and 265 of CrPC.
Where Accused fails to appear; A Bailable warrant shall be issued against the Accused. Even after this, where the Accused fails to appear, a Non-Bailable warrant are going to be issued. If the Accused appears, the procedure are going to be an equivalent as within the case of issuance of summons.
However, If the Accused fails to secure his attendance, then by courts order, Accused shall be declared absconding and a notice shall be issued in local newspaper in respect of an equivalent. Properties of the Accused are going to be attached and can be sold by public auction. Complainant can recover his dues out of the sale proceeds.
8. Orders:
Upon hearing the parties, the court may pass any of the subsequent orders;
• The Accused could also be acquitted of all the charges; or
• The Accused could also be held guilty of the offence committed under Dishonor of cheque Section 138 of the Act and shall be penalized as follows;
• imprisonment up to 2 years; or
• monetary fine which can extend to twice the amount of cheque; or
• both imprisonment and fine; or
• paying off the dishonored cheque amount to the complainant.
