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LAW OF NEGOTIABLE INSTRUMENTS ACT

The Negotiable Instruments Act 1881 in Sec. 13 means a


promissory note, bill of exchange or cheque payable either
to order or bearer.
More broadly Negotiable Instrument may be defined as an
instrument the property in which is acquired by anyone who
takes it bona fide, and for value, notwithstanding any defect
of title in the person from whom he took it , from which it
follows that an instrument cannot be negotiated unless it is
such and in such a state that the true owner could transfer
the contract or engagement contained therein by simple
delivery of the instrument.
A negotiable instrument is, therefore, that which when
transferred by delivery or by endorsement and delivery as
the case may be , passes to the transferee a good title in the
transferor , provided he is bona fide transferee of the value.
Salient Features of Negotiable Instrument
Following are the elements of the negotiable instruments:
1. Freely transferable : The property in a negotiable instrument
passes by mere delivery if the instrument is payable to bearer
and by endorsement if payable to order.
2. Defect free title to the transferee : transferee can enjoy title
to the instrument even if the title of transferor is defective.
3. Recovery : holder-in-due course is presumed to be the owner
of the property and is entitled for the same.
4. Ceiling on number of transfers: any number of times till its
maturity.
5. Payable to order: for instrument to be negotiated it should be
payable to order
6. Payable to bearer : paid to the holder of the instrument
7. Payment: may be made payable to two or more payee jointly
or it may be made payable in alternative to one or two or
several payee
Classification of Negotiable Instruments
1. Bearer Instrument negotiated by mere delivery. The
bearer may be required to acknowledge the receipt of
money by putting his signature on the back. There are
exceptions to the bearer instruments e.g. bill of
exchange, promissory note cannot be made payable
to bearer.
2. Order Instrument- an instrument can be negotiated
by endorsement and delivery.
3. Inland Instrument- an instrument which is drawn in
India and payable in India except promissory note
which can be made in India and paid in foreign
country.
4. Foreign Instrument- an instrument which is not
inland.
5. Time Instrument- which is payable at sometime in
future. A promissory note or Bill of Exchange shall be
time instrument if it is payable: -after a fixed period,
-on a specified day
- on happening of an event
- after sight i.e. after showing to maker
6. Demand Instrument- payable on demand
7. Ambiguous Instrument- instrument which can be
treated as bill of exchange or as promissory note
depending on holders choice.
8. Inchoate Instrument- implies incomplete instrument,
an instrument duly signed and stamped and left
blank or incomplete in some respect is called
inchoate instrument
Kinds of Negotiable Instruments
Sec. 13 recognizes only three kinds of instruments
i.e. Promissory note, bills of exchange, cheque,
however the Act has not excluded any other
instrument if it entitles a person a sum of money
and is transferable on delivery and the transferee
can acquire better title. Hence following
instruments are also negotiable :
Share/ dividend warrants, bearer debenture,
Government bonds payable to bearer, treasury bills,
hundis, etc.
Promissory Notes
This is an instrument in writing 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 the bearer of the instrument. A
promissory note must possess following essentials:
1. Must be in writing
2. Must contain an express promise or clear undertaking to pay
3. Must be unconditional
4. Must be signed
5. Must be made to certain person
6. The sum payable must be certain
7. Must be stamped as per the Indian Stamp Act.
8. Must contain number, place and date
9. The payment must be in currency of the country
A promissory note or Bank draft cannot be made payable to bearer, no
matter where it is payable on demand or after certain time
Bill of Exchange
This is an instrument in writing containing an unconditional,
signed by the maker, directing a certain person to pay a
certain money only to, or to the order of, a certain person or
to the bearer of the instrument.
Parties to Bills of Exchange:
Drawer person who signs the bill
Drawee person on whom the bill is drawn
Acceptor person accepting the bill i.e. drawee or person to
whom bill is endorsed
Payee person to whom money is payable
Holder person in possession of the bill after being drawn
i.e. original payee, endorsee and bearer in case of bearer bill
Endorser either drawer or holder who endorses the bill by
signing on the back
Endorsee person in whose favour the bill is endorsed.
Distinction Between Promissory Note (PN) and Bill
of Exchange (BOE)
1. PN is two-party instrument-debtor and creditor,
in BOE there are three parties- drawer, drawee
and payee.
2. A PN cannot be made payable to the maker
himself, while in a BOE the drawer and payee
may be the same person.
3. PN contains unconditional promise by maker to
pay to the payee or his order, in BOE there is an
unconditional order to the drawee to pay
according to the direction of the drawer.
4. PN is presented without any prior acceptance of
the maker. A BOE payable after, sight must be,
accepted by the drawee or some one else on his
behalf before it can be presented for payment.
5. The liability of the maker of a pro-note is
primary and absolute, but liability of the
drawer of a bill is secondary and conditional.
6. Foreign bills must be protested for dishonor
but no such process is necessary in case of
note.
7. When bill is dishonored due notice of
dishonor is to be given by the drawer and the
intermediate endorsees, but no such notice
need be given in case of a note.
Forms of Bills of Exchange
The BOE can be classified as below:
Inland bill-drawn & payable in India & drawee must be in India
Foreign bill- bills which are not inland bills
Trade bill bill is drawn, accepted & endorsed for trade transaction
e.g. sell of goods on credit.
Accommodation bill is drawn, accepted with consideration
Documentary bill documents of title to the goods or other
documents such as invoice, bill of lading etc are attached to
BOE.
Clean bill no documents are attached normally for inland trade.
Escrow an instrument is delivered conditionally or for special
purpose as a collateral security or for safe custody only & not
transferring the property therein.
Bank draft- known as demand draft can be treated as BOE.
Cheque
A cheque is bill of exchange drawn on a specified
banker, and not expressed to be payable otherwise
than on demand. A cheque is a BOE with two
additional qualifications viz.,
1. It is always drawn on a banker
2. It is always payable on demand
Since cheque is bill of exchange it must satisfy all
the requirements of bills, it does not however
require acceptance
Distinction between Bill of Exchange & Cheque
1. BOE can be drawn on any one including banker,
cheque is always drawn on banker.
2. BOE can be payable on demand or on expiry of the
specified period after sight or date, cheque can be
payable only on demand.
3. BOE must be accepted before payment can be
demanded, a cheque does not require acceptance
and is intended for immediate payment.
4. A grace of three days is allowed in case on BOE, while
no grace is given in case of cheque.
5. The drawer of BOE is discharged, if it is not presented
for payment, but the drawer of cheque is discharged
only if he suffers any damage by delay in presentation
for payment.
6. Notice of dishonour of bill is necessary, but not
in the case of a cheque.
7. The cheque being irrevocable mandate, the
authority may be revoked by countermanding
payment , but this is not so in case of bill.
8. The cheque may be crossed but not bill.
9. The BOE needs to be adequately stamped and
stamping is not required in case of cheque.
10. The payment of BOE cannot be stopped, but
the payment can be revoked in case of cheque.
CROSSING OF CHEQUE
A crossing is a direction to paying banker to pay
the money generally to a banker or to a particular
banker not to pay otherwise.
The object of the crossing is to secure payment to
the banker so that it could be traced to the
person receiving the amount.
To restrain negotiability addition of words Not
Negotiable or Account Payee only is necessary.
MODES OF CROSSING
There are two types of crossing
General where the cheque bears across its face an
addition of two parallel transverse lines/or the
addition of and Co between them.
Special where a cheque bears across its face an
addition of the name of a banker, either with or
without the words not negotiable that addition
constitutes special crossing.
Accounts Payee Crossing restricts negotiability of a
cheque. The proceeds of the cheque are to be
credited only to the account of the payee.
ENDORSEMENT
When the maker or holder of a negotiable instrument
signs the same for the purpose of negotiation on the
back or on the face thereof, he is said to endorse the
same and is called endorser and the person to whom
the instrument is endorsed is called endorsee.
CLASS OF ENDORSEMENT
1. Blank or General: where the endorser merely signs
on the back of the instrument and the instrument
so endorsed becomes payable to bearer, even
though originally it is payable to order.
But the holder of instrument endorsed in blank
may convert the endorsement in blank into
endorsement in full or special by writing above the
endorsers signature a direction to pay the
instrument to another person of his order.
2. Special or Full: If endorser signs and adds direction to pay
the amount mentioned in the instrument to, or to the
order of a specific person then it is specific endorsement.
3. Restrictive : which prohibits the further negotiation of the
instrument. Pay A only
4. Partial: is one which purports to transfer to the endorsee
an a part only of the amount payable on the instrument. A
partial endorsement does not operate as a negotiable
instrument.
5.Conditional or Qualified: this limits the ability of the
endorser by:
a. by making it clear that he does not incur the liability of
an endorser to the endorsee or subsequent holder and he
is liable if the instrument is dishonoured.
b. by making his liability depend upon the happening of a
specific event which may or may not happen, e.g. Pay A
or order on his marrying B only
HOLDER
Sec.8 of the Act states a person is a holder of a
negotiable instrument who is entitled in his own
name
(i) To the possession of the instrument and
(ii) To recover or receive its amount from the
parties thereto
Thus as per Indian Law it is not every person in
possession of the instrument is called the holder. To
be the holder the person must be named in the
instrument as a payee or the endorsee or he must
be the bearer thereof.
Thus if the person holds the instrument by theft is
not a holder.
HOLDER IN DUE COURSE
(i) A person who for consideration , obtains
possession of the negotiable instrument if payee is
bearer
(ii) The payee or endorsee thereof, if payable to order,
before its maturity and without having sufficient
cause to believe that any defect existed in the title
of the person from whom he delivered his title.
A holder in due course can recover the amount from
all previous parties, although, no consideration was
paid by some if the previous parties to the instrument
or there was defect of title in the party from whom he
tool it.
NOTING
Where note or bill is dishonored the holder is
entitled after giving due notice of dishonor to
sue the drawer and the endorser. This is a
convenient method of authenticating the fact of
dishonor .
The noting must be recorded by the notory
within a reasonable time after the dishonor and
must contain the facts of the dishonor, date and
reason is any assigned for such dishonor.
Protesting
The protest is the formal notarial certificate
attesting the dishonor of the bill, and based upon
the noting which has been effected on the dishonor
of the bill.
Foreign bill must be protested for dishonor when
such protest is required by law of the place where
they are drawn, however foreign promissory notes
need not be protested.
The protest to be valid must contain on the
instrument itself or a lateral transcript thereof, the
names of the parties for and against whom protest
is made, the fact and reasons for dishonor together
with the place and time of dishonor and signature
of the public notary.
DISHONOUR OF CHEQUES AND REMIDIES
SECTION 138 NEGOTIABLE INSTRUMENTS ACT 1881
Section 138 Negotiable Instruments Act as it is at present after
coming into force of The Negotiable Instruments (Amendment And
Miscellaneous Provisions) Act, 2002:
138. Dishonour of cheque for insufficiency, etc., of funds in
the account:
Where any cheque drawn by a person on an
account maintained by him with a banker for payment of any
amount of money to another person from out of that account for
the discharge, in whole or in part, of any debt or other liability, is
returned by the bank unpaid, either because of the amount of
money standing to the credit of that account is insufficient to
honour the cheque or that it exceeds the amount arranged to be
paid from that account by
an agreement made with that bank, such person shall be
deemed to have committed an offence and shall, without
prejudice. to any other provision of this Act, be punished with
imprisonment for a term which may extend to two years, or with
fine which may extend to twice the amount of the cheque, or with
both:
Provided that nothing contained in this section shall apply unless-
(a) the cheque has been, presented to the bank within a period of
six months from the date on which it is drawn or within the period
of its validity, whichever is earlier;
(b) the payee or the holder in due course. of the cheque as the case
may be, makes a demand for the payment of the said amount of
money by giving a notice, in writing, to
the drawer of the cheque, within thirty days of the receipt of
information by him from the bank regarding the return of the
cheque as unpaid; and
(c) the drawer of such cheque fails to make the payment of the said
amount of money to the payee or, as the case may be,
to the holder in due course of the
cheque, within fifteen days of the receipt of the said
notice.
Explanation.-For the purposes of this section,
debt or other liability means a legally enforceable debt or other
liability.
INGREDIENTS OF OFFENCE UNDER SECTION 138
The cheque should have been issued for the discharge ,
in whole or part, of any debt or other liability
The cheque should have been presented within a
period of six months or within its validity period
whichever is earlier.
The payee or holder in due course should have issued a
notice in writing to the drawer within 30 days of the
receipt of information by him from the Bank regarding
the return of the cheque as unpaid.
After receipt of the said notice from the holder in due
course, the drawer should have failed to pay the
cheque within 15 days of receipt of the said notice.
GROUNDS FOR DISHONOUR OF CHEQUE
Funds Insufficient :
Section 138 describes the above ground of insufficient funds in the
account of the drawer of the cheque in the following words:
The amount of money standing to the credit of the account of the
drawer on which the cheque is drawn is insufficient to honour the
cheque, or
The cheque amount exceeds the amount that can be paid by the
bank under an arrangement entered into between the bank and the
drawer of the cheque.
However, besides the above, the Courts have also accepted some
other heads which though expressly do not say insufficient funds
but are implied to mean the same and a cheque dishonoured on
any of these grounds can be used for the purpose of prosecution
under section 138 Negotiable Instruments Act. Some of theses
grounds are:
1. Account Closed: It is an offence under section 138 of the Act
Closure of account would be an eventuality after the entire
amount in the account is withdrawn It means that there was no
amount in the credit of that account on the relevant date when
the cheque was presented for honouring the same
2. Stop Payment instructions:
Once the cheque has been drawn and issued to the payee and the
payee has presented the cheque, stop payment instructions will
amount to dishonour of cheque.
3. Refer to drawer:
.. makes out a case under section 138 of the Negotiable
Instruments Act, 1881 which expression means that there were not
sufficient funds with the bank in the account of the respondent
4. Not a clearing member:
Cheque returned with endorsement not a clearing member. To
attract the provisions of section 138 NI Act, the cheque should be
presented with the bank on which it I drawn- If the cheque is not
presented to the bank on which it is drawn, then provisions of sec
138 would not be attracted. If bank on which the cheque is drawn is
not a clearing member of the Reserve Bank of India unpaid return
of the cheque would not attract section 138.
5. Effect of other endorsements:
It has been repeatedly held by courts that manifest dishonest
intention of the drawer resulting in dishonour of the cheque would
lead to prosecution under section 138 Negotiable Instruments Act
regardless of the actual ground of dishonour.
COMPLAINTS AGAINST A COMPANY:
Section 141 of Negotiable Instruments Act says:
141. Offences by companies:
(1) If the person committing an offence under section 138 is a company, every
person who, at the time the offence was committed, was in charge of, and was
responsible to, the company for the conduct of the business of the company, as
well as the company, shall be deemed to be guilty of the offence and shall be
liable to be proceeded against and punished accordingly:
- Provided that nothing contained in this sub-section
shall render any person liable to punishment if he proves
that the offence was committed without his knowledge, or that he
had exercised all due diligence to prevent the commission of such offence.
- Provided further that where a person is nominated as a Director of
a company by virtue of his holding any office
or employment in the Central Government or State Government or
a financial corporation owned or controlled by the Central Government or the
state Government, as the case may be, he shall not be liable for prosecution
under this Chapter.
(2) Notwithstanding anything contained in sub-section (1), where any offence
under this Act has been committed by a company and
it is proved that the offence has been
committed with the consent or connivance of, or is attributable to, any neglect
on the part of, any director, manager, secretary or other officer of
the company, such director, manager, secretary or other officer shall also be
deemed to be guilty of that offence and shall be liable to be
proceeded against and punished accordingly,
Explanation-For the purposes of this section,-
(a)company means any body corporate and includes a firm or other association
of individuals; and
(b) director, in relation to a firm, means a partner in the firm.
The Honble Supreme Court has held that merely being a director of a company is
not sufficient to make a person liable under section 141 of the Act. A director in a
company cannot be deemed to be in charge of and responsible to the company for
the conduct of its business. The requirement of section 141 is that the person
sought to be made liable should be in charge of and responsible for the conduct of
the business of the company at the relevant time. This has to be averred as a fact
and there is no deemed liability of a director in such cases. AIR 2005 (SCW) 4740;
AIR 2005 SC 3512, AIR 2007 SC 1682
Supreme Court has also held that for the directors of the company to be made
liable for an offence under sec 138, the complaint must contain specific allegations
against directors as to how directors are in charge and responsible for conduct of
business of company. Mere allegation in complaint that accused persons are
directors and responsible officers of the company is not sufficient. AIR 2007 SC
1454

COMPLAINT AGAINST PARTNERS


Averment in a complaint that accused (partners) at relevant time were in charge of
and responsible to the partnership firm for conduct of its business are necessary to
initiate process against them for an offence under sec 138 NI Act. In absence of
requisite averments in complaint, the offence against accused / partners could not
be made out.

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