Legal Aspects of Business

• Module III: Negotiable Instruments Act, 1881

Meaning of Negotiability and Negotiable

Instruments—Cheques, Bills of Exchange and Promissory Note—Crossing of cheques—Endorsement--Dishonour of Cheques.

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Negotiable Instruments Act 1881

Negotiable Instruments ActCharacteristics of a Negotiable Instruments: (meaning of negotiability) Free Transferability Holder is the owner Holder in due course (good faith for consideration and right of

recovery) Validity period—6 months –Stale and Post dated Presumptions as to NI: a) consideration; b) date; c) time of

acceptance and payment;- accepted before maturity and transferred before maturity; d) instruments are endorsed in the order in which they appear; e) holder is a holder in due course; f) lost instruments, it is presumed that it was stamped; g) Proof of protest is enough for proving dishonour. IN all these cases burden of proof lies on the defendant and not on the plaintiff

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Kinds of Negotiable Instruments Act

Kinds of Negotiable Instruments

Bearer Instruments Order Instruments Inland Instrument Foreign Instrument Demand Instrument Ambiguous instrument Inchoate or incomplete Instrument Escrow (conditionally as a security)

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Negotiable Instruments ActPromissory Notes: Characteristics:In writing;Express promise (on demand or after a definite time but cannot be made

payable to bearer on demand.Undertaking definite and unconditionalSignature;MakerJointly or jointly and severallySum payable must be certain without any scope of contingent additions or

subtractionsPayment in money only and not in kind;Payee should be specifiedBank note or currency note is not a promissory note.Consideration, date and Place –formalities

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Negotiable Instruments Act Bill of Exchange: Parties to a B/E & Characteristics: In writing Express Order (unconditional order) Signature of the drawer Drawer, drawee and Payee. The parties must be certain Acceptor, Acceptor for Honour Holder Indorser and Indorsee Jointly or jointly and severally Sum payable must be certain without any scope of contingent

additions or subtractions Payment in money and not in kind Payee should be specified Number, Consideration, date and Place --formalities

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Negotiable Instruments ActBill of Exchange: Parties to a B/E & Characteristics:Accommodation Bill• Where a bill of exchange is drawn to accommodate another

party without underlying commercial transaction of buying or selling goods or services, such a bill of exchange is called ACCOMMODATION BILL. Bankers will not extend credit on accommodation bill.

• In other words, where a bill is drawn without any consideration is called an accommodation bill.

DA Bill and DP Bills and Clean Bills• Documents against Acceptance and Document against

Payment.

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Negotiable Instruments ActCHEQUES-Parties to a cheque and characteristics Cheque is a bill of exchange drawn on a specified banker and payable on

demand and include the electronic image of a truncated cheque and a cheque in the elctronic form

In writing in the prescribed cheque book or electronic format. Express Order (unconditional order) by the customer to his banker to pay

the amount to the payee or the last payee in case of endorsement. Payment only on demand. Signature of the drawer Drawer, drawee and Payee. Drawee is always the bank branch. Holder Indorser and Indorsee Sum payable must be certain without any scope of contingent additions

or subtractions Payment in money and not in kind Payee should be specified Number, Consideration, date and Place --formalities

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Negotiable Instruments ActTruncated Cheques:Truncated cheque 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 further physical movement of the cheque in writing.

Crossing of Cheques:• Crossing of cheques is a direction to the banker to pay through an

operative account and not directly by cash. i.e, cheques will be credited to an operative account –SB or CA or OD and the payee has to draw from that account in any mode of payment.

• General Crossing and Special Crossing• Not Negotiable crossing (title not better than that of the

transferor)• Restrictive Crossing

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Negotiable Instruments Act

Legal Provisions Holder and Holder in Due Course Negotiation Indorsements. In full, in blank, Cheques—Electronic Cheques, Truncated Cheques Crossing of Cheques—General Crossing, Special crossing,

Restrictive Crossing, Not-Negotiable Crossing Protection to a paying Banker Payment in Due Course of open cheques and crossed cheques Payment of altered instruments Protection to a Collecting Banker Good faith and without negligence

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Negotiable Instruments ActLegal Provisions (contd..)• Escrow: Where a negotiable instrument is delivered

conditionally or for a special purpose as a collateral security or for safe custody only, and not for the purpose of transferring the absolute property in the instrument, it is called an ESCROW.

• Inchoate Instruments (Filing up the blanks)• Interest on bills and notes—due dates, holidays etc

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Endorsements• Cheques and Bills of Exchange can be endorsed• The correct term is INDORSEMENT which means writing a

person’s name OTHERWISE THAN AS MAKER.• It must be on the face or back of a negotiable instrument or

on a piece of paper attached (called ALLONGE) for the purpose of negotiation.

• The person so signing is known as INDORSER and the person to whom it is negotiated is known as INDORSEE.

• The first indorsement can be made by the payee. The subsequent indorsements can be made by the holder. The first signature of the drawer is not indorsement because INDORSEMENT means signing otherwise than as a MAKER. The second and subsequent signature including of the maker is known as INDORSEMENT.

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EndorsementsEssentials of a Valid Endorsement:a) On the instrument itself or on an ALLONGEb) Signed by the indorser for the purpose of negotiation. The

first signature of the maker and the last signature of the payee is not indorsement

c) Indorsement is complete when the instrument is delivered.d) INDORSEMENT IN BLANK ( Mere signature and delivery)e) FULL INDORSEMENT OR SPECIAL ( indorsement with a

direction )f) RESTRICTIVE INDORSEMENT (Restricts further negotiation)g) PARTIAL INDORSEMENT ( a part of the amount– not

permitted as negotiation)h) CONDITIONAL INDORSEMENT ( limits or negates the liability

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Negotiable Instruments Act

Legal Provisions: Dishonour of Negotiable Instruments Liability of Drawer Liability of drawee bank (wrongful dishonour, forged signature) Liability of maker of note and acceptor of a bill Liability of indorser Dishonour of cheques-- a criminal office Sec 138 to 147 Rethinking about criminal cases where cases are filed by the

creditors on dishnour of cheques which were obtained postdated at the time of sanction of loans. Recovery of loans—customers may become incapable of payment should not be tried under criminal cases. Dishnour of cheques on payments other than loan recovery should only be under the purview of criminal cases.

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