UNIT – 5

THE NEGOTIABLE INSTRMENTS (AMMENDED) ACT 2015

Q1.  WHAT IS AN INSTRUMENT?

A 1)

 • 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”

Q 2) What are the characteristics of a negotiable instrument?

A 2)

•         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.

Q 3)Give classification of the negotiable instruments.

A 3)

•         Bearer Instruments

•         Order Instruments

•         Inland Instruments

•         Foreign Instruments

•         Demand Instruments

•         Time Instruments

•         Ambiguous Instruments

•         Incomplete instruments

1. Bearer Instruments

There are two important conditions for negotiable instruments to become payable to bearers. Firstly, parties to the transactions must express it to be so payable. Secondly, the only endorsement for it should be an endorsement in blank.

These two requirements basically imply that any holder of such instruments can obtain payment for them. For instance, a bill of exchange is payable to a person who holds it. These bearer instruments include cheque, bills of exchange and promissory notes.

2. Order Instruments

Negotiable instruments can often be payable to order in certain cases. They're payable when the instruments expressly state them to be so. Furthermore, they'll be payable to order only to a selected person. The only requirement is that there should be no prohibition on their transferability.

3. Inland Instruments

Section 11 of the NI Act deals with inland instruments

 This provision basically regulates instruments that are drawn and made payable in India. Alternatively, they'll be payable outside India but as long as they're drawn upon by an Indian resident.

4. Foreign Instruments

Every instrument that's not inland automatically becomes a far off instrument. These instruments are drawn during a foreign country but could also be payable within or outside India. They’ll even originate in India but just for payment to an individual who resides abroad.

5. Demand Instruments

Sometimes, an instrument might not specify a time period during which it remains payable. Such instruments are generally payable whenever the bearer demands. Examples of such instruments include promissory notes and bills of exchange.

6. Time Instruments

Unlike demand instruments, time instruments carry a hard and fast future date for payment. For instance, a note may carry a maturity arising after 24 months of its issue. Such instruments may even become payable upon the happening of a selected future event.

7. Ambiguous Instruments

An ambiguous instrument is essentially 0ne which will be either a bill or a note for its holder. Such situations arise in peculiar circumstances only. For instance, sometimes the Drawee could also be a fictitious person or he could also be incompetent to contract.

Under such circumstances, the holder of such instruments may treat them either as bills of exchange or as promissory notes.

8. Incomplete instruments

Incomplete instruments lack certain essential requirements of typical negotiable instruments. In such cases, the holder of the instrument has the authority to complete it up to the amount mentioned therein. This, in turn, leads to the creation of legally binding negotiable instrument payable by law. Not only the first holder but also any subsequent holder who procures such instruments can complete them.

Q 4) Explain  the types of promissory notes

A 4)

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.

Q5 )What are the features of promissory note?

A 5)

• 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

Q 6) Which are the essential elements of bill of exchange?

A 6)

•         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

Q7) Make a note on the parties to promissory note and bill of exchange.

A 7)

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.

Q 8) Make a list of the types of cheques.

A 8)

•         Bearer Cheque

•         Order Cheque

•         Crossed Cheque

•         Open Cheque

•         Post- Dated Cheque

•         Stale Cheque

•         Travelers’ Cheque

•         Self Cheque

•         Bankers Cheque

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.

Q 9)Who is often a holder?

A 9)

•         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.

Q 10)Explain the distinguish between bills of exchange and cheques

A 10)