undefined | unit 3 negotiable instrument act 1881

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Unit-3NEGOTIABLE INSTRUMENTS ACT, 1881 Q1) Explain negotiable instruments.A1)DEFINATION: 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)]. Q2) Explain features of negotiable instruments.A2)• 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.Sorts of negotiable instrument 1. Promissory note2. Cheque3. Bills of exchange Q3) Explain promissory note.A3)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. CHARACTERISTICS 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 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. ESSENTIALS OF PROMISSORY NOTEPromissory 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.

Q4) Explain bills of exchange and cheque.A4)BILLS 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. 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 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. KINDS OF BILLS OF EXCHANGE 1. Inland2. Foreign bills1. Inland bill:• It is drawn in India on an individual residing in India, whether payable in or outside India, or • It is drawn in India on person residing outside India but payable in India.The following are the inland bills: a) A bill is drawn by a merchant in Delhi on a merchant in Chennai. It’s payable in Mumbai the bill is a draft. b) A bill is drawn by a Delhi merchant on an individual in London but is formed payable in2. Foreign draft• A bill drawn outside India & made payable in India. • A bill drawn outside India on a person residing outside India. • A bill drawn in India on an individual residing outside India and made payable outside India. CLASSIFICATION OF BILL OF EXCHANGE Inland and Foreign BillsInland Bill: • It is drawn in India on an individual residing in India whether payable in or outside India; or • It is 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 far-off country. Time and Demand Bills: Time Bill: A bill payable after a hard and fast time is termed as a time draft. A bill payable “after date” may be a time draft. ◦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 supply financial help to some party is termed as an “accommodation bill”.

Basis of difference	Bills of exchange	Cheque
Person/firm	A bill of exchange usually drawn on some person or firm	A cheque is always drawn on bank
Acceptance	It is essential that a bill of exchange must be accepted before its payment can be claimed	A cheque does not require any such acceptance
Payable on demand	The B.O.E. may be drawn payable on demand	A cheque can only be drawer payable on demand
Grace of days	Three days are allowed in case of B.O.E.	In case cheque no grace of days are allowed
Notice of dishonor	It is necessary in B.O.E.	No. such notice is required
Crossing	No crossing of bills of exchange	A cheque may be crossed
Stamp	It must be properly stamped	No stamp is required

CHEQUEConsistent 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. 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. 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 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. Q5) Explain bills of exchange.A5)BILLS 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. 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 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. KINDS OF BILLS OF EXCHANGE 1. Inland2. Foreign bills1. Inland bill:• It is drawn in India on an individual residing in India, whether payable in or outside India, or • It is drawn in India on person residing outside India but payable in India.The following are the inland bills: a) A bill is drawn by a merchant in Delhi on a merchant in Chennai. It’s payable in Mumbai the bill is a draft. b) A bill is drawn by a Delhi merchant on an individual in London but is formed payable in2. Foreign draft• A bill drawn outside India & made payable in India. • A bill drawn outside India on a person residing outside India. • A bill drawn in India on an individual residing outside India and made payable outside India. CLASSIFICATION OF BILL OF EXCHANGE Inland and Foreign BillsInland Bill: • It is drawn in India on an individual residing in India whether payable in or outside India; or • It is 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 far-off country. Time and Demand Bills: Time Bill: A bill payable after a hard and fast time is termed as a time draft. A bill payable “after date” may be a time draft. ◦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 supply financial help to some party is termed as an “accommodation bill”.

Basis of difference	Bills of exchange	Cheque
Person/firm	A bill of exchange usually drawn on some person or firm	A cheque is always drawn on bank
Acceptance	It is essential that a bill of exchange must be accepted before its payment can be claimed	A cheque does not require any such acceptance
Payable on demand	The B.O.E. may be drawn payable on demand	A cheque can only be drawer payable on demand
Grace of days	Three days are allowed in case of B.O.E.	In case cheque no grace of days are allowed
Notice of dishonor	It is necessary in B.O.E.	No. such notice is required
Crossing	No crossing of bills of exchange	A cheque may be crossed
Stamp	It must be properly stamped	No stamp is required

Q6) Explain holder and holder in due course.A6)MEANINGAccording 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 ofWho is 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]. 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. Q7) Explain cheque.A7)CHEQUEConsistent 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. 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. 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 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. Q8) Explain crossing of a cheque.A8)• 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. Q9) Explain types of crossing.A9)DefinitionCrossing of a cheque is nothing but instructing the banker to pay the specified sum through the banker only, i.e. the amount on the cheque has to be deposited directly to the bank account of the payee.The crossing of a cheque is done by making two transverse parallel lines at the top left corner across the face of the cheque.Types of crossing

General crossing – General crossing refers to when two transverse parallel lines are drawn across the face of a cheque at the top left corner with or without using the words not negotiable.

2. Restrictive crossing – Restrictive crossing is also called as account payee crossing. It refers to the words ‘A/c payee’ is written in between the two transverse parallel lines across the face of the cheque.

3. Special crossing – When the name of the banker is written in between the two transverse lines across the face of the cheque with or without using the word ‘not negotiable’ refers to special crossing. In this case the paying banker will pay the sum only to the banker whose name is stated in the cheque or to his agent.

4. Not negotiable crossing - When the words not negotiable are mentioned in between the two transverse parallel lines. This indicates that the cheque can be transferred but the transferee will not be able to have a better title to the cheque.

5. Double crossing – When a cheque bears two special lines refers to double crossing. In this second bank act as agent of the first collecting banker. It is made when the banker in whose favour the cheque is crossed does not have branch where the cheque is paid.

Q10) Explain dishonor and discharge of negotiable instruments.A10)Dishonor is often done by two ways:• By non- acceptance • By non- payment • Notice of dishonor is mandatory • Noting of dishonor is additionally necessaryDishonor is just a Refusal The negotiable instrument could also be dishonored either by; 1) Non-Acceptance of negotiable instrument 2) Non-Payment of mentioned value the dishonor of negotiable instrument can happen even just in case of Promote & Bills of Exchange alongside Cheque. DISHONOUR OF BILLS OF EXCHANGE (BOE) Ex: Suppose Mr. X has purchased some goods from Mr. Z .Hence, Mr. X is meant to pay against the products purchased to Mr. Z. So, Mr. Z will draw a Bills of Exchange on the name of Mr. Here Mr. X Refused to simply accept the Bills of Exchange could also be thanks to dispute or another problem. Such refusal to simply accept the BoE is named as Dishonor by Acceptance. Bills of Exchange are nothing but the order to form payment against value.Ex: Suppose Mr. X has purchased some goods from Mr. Z. Hence, Mr. X is meant to pay against the products purchased to Mr. Z .So, Mr. Z will draw a Bills of Exchange on the name of Mr. X .Here Mr. X Accepted the Bills of Exchange of maturity period of two months. On the day of maturity (after 2 months), if Mr. X refuses to form payment consistent with the BoE is named as Dishonor by Non-Payment NOTING AGAINST DISHONOR OF BILLS OF EXCHANGE When the Drawee (Mr. X) refuses to form payment against Bills of Exchange (Legal Instrument) to the Drawer, it'll be a loss to the Drawer (Mr. Z). Since BoE may be a legal instrument, the Drawer (Mr. Z) can take an action against the defaulter party-Drawee (Mr. X). In such case of Dishonor of BoE, the Drawer can attend the notary within the court to file a complaint by requesting to notice the very fact of non-acceptance (Refusal by Drawee). Notary will write the very fact thereon and Sign & Seal it (BoE). The notary will first approach to the Drawee (Mr. X) asking him to; 1) Either accepts the BoE or 2) Make Payment against BoE to the Drawer. If still, the Drawee (Mr. X) refuses to simply accept or make payment against BoE, the notary will write of the BoE as Dishonored by Mr. X. This process is named as Noting, which becomes a legal evidence for Mr. Z to require further any action against the defaulter. PROTEST AGAINST DISHONOR OF BILLS OF EXCHANGE The drawer can go further and request to notary to issue a certificate mentioning the case of dishonor of BoE alongside Sign and Seal of the notary by paying some fees (Noting Charges). Such certificate obtained by the Drawer from the notary is named as Protest. DISHONOR OF CHEQUE (SEC. 138 TO 142)Suppose Akash has drawn (the Drawer) a Cheque of ICICI bank to form payment to Rahul (the Payee). If the Drawee (ICICI Bank) refuses to form payment (clear the cheque) to Mr. Rahul, is named as Dishonor of Cheque. The Maturity Period of Cheque is merely 3 months from the date of its preparation.CONDITIONS OF DISHONOR OF CHEQUE 1) Insufficient funds within the account of the Drawer 2) If the account is closed either by the account holder or by Bank 3) Order instructions given by the Drawer to his Bank (ICICI) which is additionally called as “Counter Mended Payment”. 4) Signature not matching or incorrect date on Cheque Issue of Cheque by the Drawer to the Payee (Holder) is nothing but a sort of contract is made between the 2 parties. The dishonor of Cheque means Breach of Contract and treated as Criminal Offence The Payee (Holder) now can take an action against the defaulter party (Drawer-Akash). The holder (Rahul) thro’ the notice can provide a period of time (15 days) to Akash to form the due payment. If Drawer makes part payment, still it'll be a dishonor of cheque. Bank Drawee Mr. Rahul Payee/Holder Informs the rationale of Dishonor Payee (Rahul) Mr. Akash Drawer Send a Legal Notice thro’ his Lawyer Within 30 days of Cheque Dishonor. If after 15 days, the Drawer doesn’t make payment to the Payee (balance part payment or entire amount), then the Payee (Rahul) can file a case against the drawer (Akash) within the court within one month of your time after the 15 days grace period over, by producing; 1) The Bank’s statement alongside reason of Dishonor of cheque & 2) The copy of notice given to the drawer thro’ the Lawyer of Payee Penalty: up to 2 yrs. imprisonment and double amount of dishonor.

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