THE NI ACT, 1881

THE NI ACT, 1881

negotiable means transferable by delivery and
instrument means a written document by which a right is created in favor of some person Thus, the term negotiable instrument literally means a written document which creates a right in favor of some person 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 person to another person by delivery or by endorsement and delivery. Eg. - Bill of Exchange, Promissory Note, Cheque, documents of title such as Railway or Lorry Receipts, Dividend Warrant, etc.

Types of Negotiable Instruments

Negotiable instruments are of two types which

are as follows: Negotiable Instruments recognized by statutes: e.g.-Bill of Exchange, Promissory Note & Cheque. Negotiable Instruments recognized by usage or customs of trade: e.g.-Bank Note, Share Certificate, Dividend Warrant, etc.

BILL OF EXCHANGE
A bill of exchange is an instrument in
writing, signed by the maker, containing an unconditional order, 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 purchases goods from Mr. Z for Rs. 1000/-. Then, Mr. Y may order Mr. X to pay Rs. 1000/- to Mr. Z, which will be nothing but a bill of exchange.

Parties to a Bill of Exchange

Drawer, Drawee Acceptor Payee Holder Endorser, Endorsee Drawee In Case Of Need Acceptor For Honour

Essential Characteristics of a Bill of Exchange

A Negotiable Instrument It must be in writing It must be signed by the maker It must contain an order to pay money only It must be unconditional It must be definite Parties must be certain Amount must be certain Presumptions

Promissory Note
A promissory note is an instrument in writing (not being a bank note or a currency note), signed by the maker, containing an unconditional undertaking, to pay a certain sum of money, only to or to the order of a certain person or the bearer of the instrument. SPECIMEN:Abad, April 1, 2010 Rs.5,000/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. X, Abad Stamp Signature of Mr. Y

Parties to a Promissory Note

Maker Payee Holder Endorser, Endorsee

Essential Characteristics of a Promissory Note A Negotiable Instrument It must be in writing It must be signed by the maker It must contain a promise to pay money only It must be unconditional It must be definite Parties must be certain Amount must be certain Presumptions It must be properly stamped according to the provisions of the Indian Stamp Act, 1899

Promissory Note
Currency Note

The RBI Act, 1934

No Person can draw, accept, make and/or issue any bill of exchange; No Person can make or issue any promissory note;

PAYABLE TO THE BEARER OF THE INSTRUMENT

CHEQUE

A cheque is a bill of exchange drawn on a specified banker and expressed to be payable on demand.

Parties to a Cheque

Maker Drawee Payee Holder Endorser, Endorsee

Essential Characteristics of a Cheque

A Negotiable Instrument It is a Bill of Exchange It is always drawn on a specified banker It is always payable on demand A cheque can be a bearer cheque or a crossed cheque A cheque requires no acceptance in the ordinary course of business as it is intended for immediate payment

Crossing of Cheques
Open Cheque - payable in cash across the counter Crossed Cheque - payment can be obtained only through a specified banker Types of Crossing :1. General Crossing - drawee banker shall not pay it unless it is presented by a banker 2. Special Crossing - drawee banker shall pay it only to the banker on whom it is crossed

Crossing of Cheques

DIFFERENCE
PROMISSORY NOTE two parties, maker & payee contains unconditional promise to pay maker of a note is debtor liability of maker is primary & absolute BILL OF EXCHANGE three parties, drawer-drawee-payee unconditional order to pay drawer of the note creditor liability is secondary & conditional

can not be made payable to maker the drawer & the payee may be one himself and the same person requires no acceptance can not be drawn payable to bearer must be accepted by the drawee can be so drawn

maker of note stands in immediate drawer of the bill stands in immediate relation with payee relation with the acceptor & not the payee in case of disowner no notice is notice is required to all the person who required are to be made liable to pay

DIFFERENCE
BILL OF EXCHANGE drawn on any person including banker must be accepted before payment entitled for 3 days grace may be payable on demand CHEQUE always drawn on a banker requires no acceptance not entitled to any grace period always payable on demand

must be duly presented for payment to drawer of cheque is not the acceptor or else drawer will be necessarily discharged from discharged from liability liability by delay of the holder in presenting for payment may not be crossed must be stamped payment can not be countermanded may be crossed does not require any stamp payment may be countermanded to be

may be noted and protested for is not required disowner noted/protested

Types of NI
Inland Instrument
(An instrument both drawn/made and payable in India or drawn upon any person resident in India is an inland instrument)

Foreign Instrument Payable on demand Payable at sight A Genuine Trade Bill/Accommodation Bill

-a bill without any consideration is called an accommodation bill -eg.:- A is in need of Rs.10,000/-. He approaches B, but, B is not is position to lend. B suggests that A might draw a bill on him which he would accept. A can get the bill discounted with his banker. On the due date, A would pay Rs.10,000/- to B who would meet the bill. This is an accommodation bill.

Types of NI
Fictitious Bill Escrow (conditional, as a collateral security or for safe custody) Ambiguous Instrument Inchoate Instrument (an incomplete instrument) Bills In Sets

PRESUMPTIONS
As to consideration As to date As to time of acceptance As to time and number of endorsements As to stamps As to a holder in due course As to time and place of transfer

HOLDER s.8
Holder of a negotiable instrument means any person(a) who is entitled in his own name to the possession of the negotiable instrument; (b) who has also the right to receive or recover the amount due thereon from the parties thereto POSSESSION OF INSTRUMENT -A thief, though in possession of the negotiable instrument, is not a holder in the absence of a legal title to it. -An agent holding a negotiable instrument for his principal is also not a holder though he has a right to receive the payment. ENTITLED TO RECEIVE THE AMOUNT The person must be entitled to receive the amount of the instrument and give a valid discharge to the buyer.

HOLDER IN DUE COURSE s.9

A person who takes a negotiable instrument bonafide and for valuable consideration gets the instrument free from all defects. Such holder in due course is not affected by defective title of the transferor or of any other party Holder In Due Course means any person, who, for consideration, becomes the possessor of a bill of exchange, a promissory note or a cheque without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title

NEGOTIATION
When a promissory note, a bill of exchange or a cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated. It is a process of transferring the ownership, right, title and 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. A negotiable instrument can be transferred in the following two ways: (i) Negotiation by delivery; (ii) Negotiation by endorsement and delivery. Instruments payable to bearer can be transferred by mere delivery, while instruments payable to order can be transferred by endorsement and delivery.

Negotiation By Delivery
Negotiation by delivery involves a voluntary transfer of possession of the negotiable instrument. When an instrument is negotiated by delivery, it is not necessary for a transferor to put his or her signature on the instrument and therefore, there is no privity of contract between the transferor and any subsequent transferee.

Negotiation By Endorsement And Delivery

Types of Endorsement 1. GENERAL OR BLANK ENDORSEMENT When an endorser signs his name either on the back or face of the instrument, the endorsement is said to be blank or general. In a blank endorsement, endorsee is not specified and therefore the instrument becomes payable to bearer. 2. FULL OR SPECIAL ENDORSEMENT When an endorser signs the instrument and adds a direction to pay the amount mentioned therein to or to the order of a specified person, the endorsement is said to be in full.

Negotiation By Endorsement And Delivery

Types of Endorsement 3. PARTIAL ENDORSEMENT No writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to transfer only a part thereof, but, where such amount has been partly paid, a note to that effect may be endorsed on the instrument, which may then be negotiable for the balance amount. 4. RESTRICTIVE ENDORSEMENT Restrictive endorsement restricts the further negotiability of the negotiable instrument.

Negotiation By Endorsement And Delivery

Types of Endorsement 5. CONDITIONAL ENDORSEMENT In a conditional endorsement, the liability of the endorser is limited or negative. A conditional endorsement is different from a restrictive endorsement inasmuch as a conditional endorsement limits or negatives the liability of the endorser while a restrictive endorsement places certain restriction on the negotiability of the instrument.

DISHONOUR OF NEGOTIABLE INSTRUMENT

A Promissory Note and a Cheque may be dishonoured by non-payment only, while, a Bill of Exchange may be dishonoured by non-acceptance or by non-payment.

The holder / holder in due course must give notice that the instrument has been so dishonoured, to all other parties whom the holder seeks to make severally or jointly liable thereon.

NOTING AND PROTEST

NOTING The holder / holder in due course must give notice of dishonor to all other parties whom the holder seeks to make severally or jointly liable thereon. Prior to giving such notice, the holder / holder in due course can get the fact of dishonour of the instrument authenticated through noting by a notary public. Noting is the authentic and official proof of presentment and dishonour of the negotiable instrument. Noting means nothing but the recording of the fact of dishonor of the instrument by a notary public, within a reasonable time, after dishonour. Of course, noting is not compulsory, neither does it affect the rights of the holder thereon.

NOTING AND PROTEST

PROTEST When a Promissory Note or a Bill of Exchange has been dishonoured by nonacceptance or by non-payment, the holder / holder in due course may, within a reasonable time, cause such dishonour to be noted and certified by a notary public. Such a certificate is called a protest.

dishonour of cheque due to insufficiency of funds-s.138

the payee or holder in due course is required to give notice to drawer of cheque within 30 days from receiving information from bank; the drawer should make payment within 15 days of receipt of notice; if he does not pay within 15 days, the payee has to lodge a complaint with Metropolitan Magistrate or JMFC, against the drawer within one month from the last day on which drawer should have paid the amount; the penalty can be upto two years imprisonment or fine upto twice the amount of cheque or both

Offences by Companies
If the person committing an offence is a company, every person, whether a director, a manager, secretary or any other officer of the company who was in charge of and was responsible for the conduct of companys business, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

DISCHARGE OF A NI
BY PAYMENT IN DUE COURSE BY PARTY PRIMARILY LIABLE BECOMING HOLDER OF THE NI BY EXPRESS WAIVER BY CANCELLATION BY DISCHARGE CONTRACT AS A SIMPLE

Material Alteration
An alteration to a negotiable instrument is said to be material if, 1.Character or identity of the instrument is changed, 2.Rights and liabilities of the parties are changed, 3.Operation of the instrument is altered. Instances of Material Alteration include changes in Date/Sum payable/Time or Place of Payment/Rate of Interest/Mutilation, etc.

HUNDIS
A hundi is an indigenous negotiable instrument written in a vernacular language subject to local usages and customs. There are two main kinds of hundis:1.Darshni Hundi i.e a hundi payable at sight; 2.Muddati or Miadi hundi i.e. a hundi payable after a specific period Other kinds of Hundis:shah jog hundi, payable to a shah, a respectable person; nam jog hundi, payable to or to the order of a specified person named in the hundi;

HUNDIS
Other kinds of Hundis:dhani jog hundi, payable to the bearer/holder; firman jog hundi, payable to order; jawabee hundi, a hundi which is used for remitting money from one place to another; i.e. the person who is to receive the money, on receipt of the money, has to send an answer, i.e jawab, to the remitter; jokhami hundi, a combination of Bill of exchange and an insurance policy. Khoka :a hundi when paid up and cancelled is called a khoka. Peth :a duplicate of a hundi if original is lost is called a peth.