The Negotiable Instruments Act, 1881.

Introduction The law relating to negotiable instruments is contained in the Negotiable Instruments Act. 1881 which applies and extends to the whole of India.

Definition The word negotiable means transferable by delivery and instrument means a written document by which a right is created in favor of some person or persons. Thus, the term negotiable instrument literally means a written document which creates a right in favor of somebody and is freely transferable. A negotiable instrument is a piece of paper which entitles a person to a certain sum of money and which is transferable from one to another person by a delivery or by endorsement and delivery. Eg - Promissory note, Cheque and a Bill of exchange, documents such as Railway or ST Receipts; Dividend, warrants; Railway Bonds payable etc.

Characteristics of negotiable Instruments Free transferability or easy negotiability Negotiable instrument is freely transferable. Title of holder is free from all defects A person who takes negotiable instrument bona-fide and for value gets the instrument free from all defects in the title. The holder in due course is not affected by defective title of the transferor or of any other party.

Types of Negotiable Instruments Negotiable instruments are of following types Negotiable Instruments recognized by status: Bills of exchange, Cheque promissory notes. 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 certain person or to the bearer of the instrument.

Eg - Mr. X purchases goods from Mr. Y for Rs. 1000/-Mr. Y buys goods from Mr. S for Rs. 1000/-

Then Mr. Y may order Mr. X to pay Rs. 1000/- Mr. S which will be nothing but a bill of exchange. 1.It must be in writing 2.It must contain an order to pay and not a request or promise. 3.There must be three parties- drawer, drawee and payee, one person may assume the role of two parties, he may be drawer as well as payee. In the example Mr. X is the drawer as well as the payee and Mr.S will be drawee. 4.It must be signed by the drawer. 5.The sum payable must be certain. Promissory Note : A promissory note is an instrument in writing [not being a bank-note or a currency-note} containing an unconditional undertaking, signed by the maker; to pay a certain sum of money only to or to the order of a certain person or the bearer of the instrument. Specimen of a promissory note Rs. 5000/Pune November 25, 2008

Three moths after the date, I promise to pay Mr. X of Mumbai or order a sum of Rupees Fifty Thousand for value received. To Mr. Address.. Mumbai Stamp Signature of Mr Y

Essential characteristics of a Promissory Note Promissory note is a negotiable instrument It must be in writing It is a promise to pay money only. It must be definite. The promise to pay must be definite.

It must be unconditional. Undertaking to pay must be unconditional. It must be signed by the maker. Maker of the promissory note must be a certain person and the payee must also be certain. Amount of the promissory note must be certain. Promissory note must be properly stamped according to the provisions of the Indian Stamp Act, 1899.

Cheque A cheque is a bill of exchange drawn on a specified banker and expressed to be payable otherwise than on demand. The maker of a bill of exchange or Cheque is called the Drawer"; the person thereby directed to pay is called the "Drawee". Essential characteristics of a Cheque A cheque is a negotiable instrument. It is always drawn on a specified banker. It is always payable on demand. A cheque requires no acceptance in the ordinary course of business as it is intended for immediate payment. In case of a cheque, a drawee is always a specified bank, a drawer is a person who draws a cheque and who has an account in the bank and payee is a person to whom the amount of cheque is made payable.

Negotiation It is a process of transferring the ownership, right, title, interest of a person in a negotiable instrument to another person so as to give a good title to the transferee and make a transferee a holder of such instrument. Negotiation does not mean a simple transfer. Simple transfer may not necessarily involve the transfer of property in the negotiable instrument but negotiation implies the transfer of property or ownership. Eg -X hands over a cheque to Mr. Y here Mr. X has negotiates the instrument. But if he hands over a cheque to Mr. Y asking him to keep the same in his safe, the cheque is not negotiated to Mr. Y, Mr. Y does not become its holder but only a bailee.

Essentials of negotiation There must be transfer of a negotiable instrument to another person. As a result of such transfer, the transferee must become the holder of the instrument.

Modes of negotiation: Negotiation by delivery The negotiable Instrument is transferred by delivery, actual or constructive. It is physical act of delivering the instrument or handing over the delivery, actual possession of the instrument is not passed. Negotiation by endorsement and delivery The negotiable Instrument payable to order is negotiable by the holder by endorsement and delivery thereof.

Endorsement Literal meaning of the term endorsement is writing on an instrument. Endorser - The person who signs on the back or on the face of the instrument or on the slip is an endorser. Endorsee - The person to whom the instrument is endorsed is called the endorsee. Types of Endorsement General or blank endorsement - Endorser signs his name either on the back or face of the instrument. Full or special endorsement - It specifies the name of the person to whom or to whose order the payment must be made. Partial endorsement Endorsement is made for remaining balance of payment. Conditional endorsement It is the one which makes the transfer of property in a negotiable instrument from the endorser to the endorsee dependent upon the fulfillment of stated condition. Endorsement Sans Recourse- An endorser may by express words in the endorsement ,exclude his own liability thereon if it is dishonored.

Dishonour of negotiable instrument 1.The cheque has been dishonored due to insufficiency of funds only. 2.The cheque should have been presented to the paying banker within 6 months from the date on which it is drawn or within the period of validity, whichever is earlier.

Negotiable instruments, Promissory notes and Cheques may be dishonored by non payment. Bills of exchange may be dishonored by non payment or by non-acceptance as they require acceptance from drawees. DISHONOUR OF NEGOTIABLE INSTRUMENT Promissory notes, cheques and bills of exchange are covered by this Act. Of these negotiable instruments, promissory notes and cheques may be dishonoured by non payment only while bills of exchange may be dishonoured by non payment or by non-acceptance as they require acceptance from drawees. Section 93 of the Act states that when a promissory note or a bill of exchange or cheque is dishonoured by non-acceptance or non-payment the holder thereof, or some party thereto who remains liable thereon, must give notice that the instrument has been so honored to all other parties whom the holder seeks to make severally liable thereon, and to some one of several parties whom he seeks to make jointly liable thereon

Dishonour by Non-acceptance: As mentioned earlier that a bill of exchange is dishonoured by non-acceptance. It stands dishonoured by non-acceptance in the following cases. a). when there are several drawees who are not partners and if all of them refuse to accept. b). If the drawee refuses to accept the bill within forty eight hours from the time of its presentment even though the bill is duly presented for his acceptance. c) where the drawee is not competent to enter into contract. d) When the presentment of a bill of exchange for acceptance is excused and it remains unaccepted. e) where the drawee of the bill of exchange gives a qualified acceptance. f) Where the drawee is a fictitious person and even after a reasonable search, he could not be found. It should be noted that where a drawee in case of need is named in a bill of exchange or even in any other instrument, the bill is not considered to be dishonoured unless it has been dishonoured by such drawee [section 115]. Dishonour by non-payment: A negotiable instrument i.e. a bill, a cheque or a promissory note is said to be. Dishonoured by nonpayment when the maker of the promissory note, acceptor of the bill of exchange or drawee of the cheque makes default in payment upon being duly required to pay the same. [section 2]. A bill or a promissory note is also said to be dishonoured by non-payment when presentment for the payment

is excused expressly by the maker of the note or the acceptor of the bill and the note or bill remains unpaid or at after maturity [section 76] If the bill is dishonoured either by non-acceptance or non-payment, the drawer and all endorsers of the bill are held liable to the holder provided that a notice of such dishonour is given by the holder. If the bill is dishonoured by non-payment, the drawee is held liable.