Legal Environment of Business - Module 3 – Part 1

MBA - MG University

Prepared By

Manu Melwin Joy

Assistant ProfessorIlahia School of Management Studies

Kerala, India.

Phone – 9744551114Mail – manu_melwinjoy@yahoo.com

Kindly restrict the use of slides for personal purpose.Please seek permission to reproduce the same in public forms and presentations.

• Negotiable instrument – Definition.

• Types of negotiable instrument.

• Characteristics of negotiable instrument.

• Kinds of negotiable instruments.

• Bill of exchange, Promissory note, Cheque –Definition.

• Parties involved.

• Essentials of a Bill of exchange, Promissorynote, Cheque.

• Dishonor of negotiable instrument –Definition.

• Types of dishonor.

• Notice of dishonor.

• Bouncing of cheques.

• Noting and protesting.

• Discharge of negotiable instrument –Definition.

• Different modes of Discharge of negotiableinstrument.

• Material Alteration.

• Acceptor for honor.

• Forged instrument.

Definition

Section 13 (1) of theNegotiable InstrumentsAct states that “ ANegotiable Instrumentsmeans a promissory note,bill of exchange or chequepayable either to order orto bearer.”

Types of negotiable instrument

• Negotiable instruments

recognized by statute are

only of three Types:

1. Promissory Notes.

2. Bills of exchanges.

3. Cheques.

Characteristics of negotiable instrument

1. Property.

2. Freely transferable.

3. Title of holder free from all defects .

4. Recovery.

5. Presumption.

6. Prompt payment.

7. As good as cash.

8. Transferability.

Kinds of negotiable instruments

1. Inland instrument.2. Foreign instrument.3. Ambiguous Instrument.4. Inchoate instrument.5. Accommodation bills.6. Fictitious bill.7. Bearer instrument.8. Order instrument.9. Instrument payable on demand.10.Instrument payable at a future time

Bill of Exchange - Definition

• “A bill of Exchange is aninstrument in writingcontaining theunconditional order, signedby the maker, directing acertain person to pay acertain sum of money onlyto or to the order of acertain person or to thebearer of the instrument”.

Parties of Bill

• The maker of bill ofexchange is called theDrawer.

• The person who isdirected to pay is calledDrawee.

• The person who willreceive the money iscalled the Payee.

Essential elements of bill of exchange

• In writing.

• An order to pay - expressedand unconditional.

• Three parties - drawer,drawee and payee.

• Signed by the drawer.

• The amount of money to bepaid must be certain.

• Payment-legal tendermoney of India.

Promissory note - Definition

• A promissory note is aninstrument in writingcontaining anunconditional undertakingsigned by the maker, topay a certain sum ofmoney only to or to theorder of a certain personor to the bearer of theinstrument.

Parties involved

• The person who makesthe promissory note andpromises to pay is calledthe maker. The person towhom the payment is tobe made is called payee.

Essentials of a promissory note

1. In writing.

2. Promise to pay must be express.

3. Definite and unconditional.

4. To be signed by the maker.

5. Certain in the case of parties.

6. Certainty in the case of sum of

money.

7. Promise to pay money only.

8. Formalities are not necessary.

Cheque - Definition

• A cheque is a bill ofexchange drawn upon aspecified banker and notexpressed to be payableotherwise than on demandand it includes theelectronic image of atruncated cheque and acheque in the electronicform.

Types of cheque

• Open Cheque.

• Crossed Cheque.

Modes of crossing a cheque

• General crossing.

• Special crossing.

• Restrictive crossing.

• Not negotiable crossing.

General crossing

Special crossing

Restrictive crossing

Dishonor of negotiable instrument Definition

• When a negotiableinstrument is dishonored,the holder must give anotice of dishonor to all theprevious parties in order tomake them liable on theinstrument. If he fails to doso, except in cases whennotice of dishonor may beexcused, he forfeits his rightof action against the priorparties.

Types of dishonor

• Dishonor by non

acceptance.

• Dishonor by nonpayment.

Notice of dishonor

• How is given? – Notice.

• By whom given? – Holder.

• To whom given? – All parties.

• Mode of notice – Sent bypost.

• The rule for giving notice ofdishonor – Notice to be sentnext day.

Bouncing of cheques

• A cheque is said to bebounced or dishonoredwhen there is insufficiencyof funds in the drawer’saccount.

Noting and protest

• Noting means the recordingof the fact of dishonor by anotary public upon theinstrument within areasonable time afterdishonor.

Noting and protest

• Protest - When apromissory note or bill ofexchange is dishonored bynon acceptance ornonpayment, the holdermay within a reasonabletime cause such dishonor tobe noted and certified by anotary public.

Noting and protest

• Difference – Noting ismerely a record of the factof dishonor. When thenotary public issues acertificate stating theparticulars regarding thedishonor, it is called aprotest.

Discharge of negotiable instrument Definition

• An instrument is said to bedischarged when all rightsof action under it arecompletely extinguishedand when it ceases to benegotiated. This wouldhappen when the partywho is ultimately liable onthe instrument isdischarged from liability.

Different modes of discharge of an instrument

• By payment in due course.

• Any party primarily liable

becoming holder.

• By express waiver.

• By cancellation.

• By discharge as a simple

contract.

• By material alteration.

Material alteration

• An alteration which in anyway alters the operation ofthe instrument and theliabilities of the partiesthereto or which alters thebusiness effect of theinstrument is a materialalteration.

• For example, (1) alterationof date (2) alternation ofname (3) alteration ofamount etc.

Acceptor for honor

• Normally a stranger cannotaccept the bill. But when aBill of exchange has beennoted and protested for non– acceptance or for bettersecurity, any person who isnot already liable on thenegotiable instrumentunder reference can accept.He is called acceptor forHonor.

Forged instrument• Forgery is the fraudulent making

or alteration of a writing to theprejudice of another man’s right.

• It may include fraudulentlywriting the name of an existingperson, signing the name of afictitious person etc. A forgeddocument confers not title tothe holder.

• For example: On a note for Rs2000, A forges B’s signature to itas a maker. X, the holder, whotakes it bonafide and for valueacquires no title to the note. Hecan’t sue upon the note.