NEGOTIABLE INSTRUMENT, 1881:
| Negotiable Instrument: Meaning and Elements. | A Negotiable Instrument is one which entitles a person holding it, to a sum of money. Further, it is transferable by delivery. The following are the characters of negotiable instrument: 1) It can be transferred to another by mere delivery by making an endorsement. It is almost like delivery of currency. 2) The transferee of negotiable instrument will have absolute title. 3) To transfer the instrument or recovery money under it no notice is required. 4) It always presumed that person is possession of instrument is holder in due course and received it for sufficient consideration. |
| Kinds of Negotiable Instruments: | Law recognizes three kinds of Negotiable Instruments. They arePromissory Note, Bill of exchange, Cheque. |
| What is Promissory Note? | Pro-Note: It’s 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 to the bearer of the instrument. |
| What is Bill of Exchange? | A Bill of Exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay the bearer of the instrument. |
| What is cheque? | A cheque is a bill of exchange drawn upon a specified banker and payable on demand.Three Parties: Drawer, Drawee. Payee. The person who gives the order to pay or who makes the bill is called the drawer. The person who is directed to pay is called the drawee. The person to whom the payment is to be made is called the payee |
| Who is a Holder in Due course? | Holder in due course: A HDC is a person who for consideration became the possessor of a Pron note, BOE or Cheque if payable to bearer or the payee or indorsee thereof, if payable to order, before the amount mentioned in it became payable and without having sufficient cause to believe that any defect existed in the title of the person from whim he derived the title. |
| What are the privileges of Holder in due course? | Special Rights and Privileges of a HDC: 1) Every holder is prima facie deemed to be HDC unless the contrary proved. 2) Transferor of NI is precluded from asserting as against a HDC, that the instrument has not been filled in accordance with the authority given by him, the stamp being sufficient to cover the amount. 3) Every prior party to a NI continues to be liable thereon to a HDC, until the instrument is duly paid on or after its maturity. 4) Defects in the title of the NI can’t be pleaded against the HDC. 5) Where an instrument is negotiated to a HDC, the other parties to the instrument can’t avoid liability on the ground that the delivery of the instrument is conditional or for a special purpose only. 6) A holder who receives an instrument from a HDC gets the rights of the HDC, even though he had knowledge of the prior defects unless he himself was a party to them. Thus, once a NI passes through the hands of a HDC, it gets cleansed of all its defects. 7) The person liable to pay on an instrument cannot as against a HDC contend that he had lost it or that it was obtained from him by means of an offense or fraud or for an unlawful consideration. For instance, where a cheque was given to an employee to withdraw money for payment of worker’s wages and he instead transferred the cheque to a bank for consideration, it was held that the bank having acted in good faith was not affected by the employee’s fraud. 8) The indorser of NI can’t in a suit thereon by a holder, deny the signature or capacity to contract of any prior party to the instrument. |
| What are the special rules of evidence relating to Negotiable Instrument? | Rules of evidence: 1) Presumption as to Consideration: Every NI is presumed to have been made, drawn, accepted, indorsed, negotiated or transferred for consideration. But if the party liable shows that the instrument was taken from him without consideration, then the holder have to prove that he received the instrument from his transferor for a valuable consideration. 2) Presumption as to date: Every NI is presumed to be drawn or made on a date specified therein. 3) Presumption as to time of acceptance: Every bill of exchange is presumed to have been accepted within a reasonable time of its making and before its maturity. 4) Presumption as to time of trans fer: Every instrument is presumed to have been transferred before its maturity. 5) Presumption as to order of Indorsements: An instrument is presumed to have been indorsed in the order of indorsements appearing thereon. 6) Presumption as to Stamp: An instrument, which has been lost, is presumed to be duly stamped. 7) Presumption as to HDC: Every holder of an NI is presumed to be a HDC i.e., he is presumed to have obtained it for value and in good faith. 8) Presumption as to Dishonour: An instrument is presumed to have been dishonoured, on proof of the protest, unless and until such fact is disproved. Rules of Estoppel(E): 1) E against denying the validity: The maker of a Pron note, the drawer of a bill or cheque and the acceptor of a bill for the honour of drawer are not permitted as against a holder in due course to deny the validity of the instrument as originally made or drawn. 2) E Against denying payee’s capacity to indorse: The maker of a pronote and the acceptor of a bill payable to order are not permitted, as against a HDC, to deny the payee’s capacity to indorse the note or bill. 3) E against Indorser: The indorser of a NI is not permitted as against a subsequent indorser, to deny the signature or capacity of any prior party to the NI |
CROSSING OF CHEQUES:
| What is meant by Crossing of Cheque? | A crossed cheque is one which bears on its face two parallel transverse lines, usually on the top left hand corner of the cheque. The payment of a crossed cheque can be obtained only through a banker. The holder has first to open an account with some banker and then deposit the cheque into his account to enable the banker to collect its payment on his behalf and credit it into his account. This makes it easy to trace the receipt of money, if it subsequently turns out that some wrongful person has obtained the payment. On other hand if such crossing is absent such cheque is called open cheque. An open cheque is therefore, prone to a great risk. If the rightful holder of a cheque loses it, any wrongful person who finds it may go to the bank and obtain payment, unless the payment has already been stopped. |
| What are Different types of Crossing? | Types of Crossing: 1) General Crossing 2)Special crossing. a) General Crossing: A cheque is said to be crossed generally when two parallel transverse lines are drawn with or without the words ‘and company’, ‘account payee only’ or ‘not negotiable’ or any abbreviation thereof, between the lines, but there is not the name of any bank. When a cheque is crossed generally, the drawee bank shall not pay it unless it is presented by a banker. a) Non-Negotiable Crossing: When the crossing carries the words ‘not negotiable’, it is said to be ‘not negotiable’ crossing. According to S.130. a, mere writing words Not negotiable‘ does not mean that the cheque is not transferable. It is still transferable, but the transferee cannot get title better than what transferor had. The cheque remains fully negotiable but is negotiable value is diminished. Any person taking such a cheque doesn’t become a HDC, he only gets the rights of the transferor. Ex: Anil drew a blank cheque crossed ‘not negotiable’ and handed it over to his agent to fill in the amount and the name of the payee. The agent fraudulently completed the cheque and transformed to one P, in payment of a debt of his own. Held, the agent had no title to the cheque and as such P had no better title to the cheque. b) Account Payee only Crossing: Theoretically speaking, a cheque crossed ‘account payee only’ remains transferable. In Practise, however, the transferee will find it difficult to get the cheque collected for him. Account payee only crossing is a direction to the collecting banker that the proceeds of the cheque shall be received only for the payee and credited to his account. If the banker receives the proceeds of such a cheque for and on behalf of any person other than payee, the banker will be guilty of negligence. Thus a cheque crossed account payee only becomes non-negotiable for all practical purposes. 2) Special Crossing: A cheque is said to be crossed specially, when the lines of crossing carry the name of a banker with or without any additional words, in between the lines. The payment of a special crossed cheque can be obtained only through the particular banker whose name appears in between the lines or through its agent bank for collection. A cheque may be crossed by drawer, holder, banker. Drawer: The drawer of a cheque may cross it generally or specially. Holder: Where the cheque is open the holder may cross it generally or specially. Where the cheque is crossed generally, the holder may cross it specially. Banker: Where the cheque is crossed generally or specially, the holder may add the words ‘not negotiable’ Banker: where the cheque is crossed specially, the banker to whom it is cross may against cross it specially to another banker or his agent for collection. This is also known as double crossing and is generally resorted to when the banker in whose favour the cheque is specially crossed is not a member of the clearing house or doesn’t have a branch where the cheque is to be paid. |
Status of Lost or unlawfully obtained Negotiable Instrument:
| Lost Instruments | a) The finder of lost instruments doesn’t acquire any title to it, as against its rightful owner. b) the holder of the instrument, who has lost it, should give notice of the loss to all the parties liable on it, and also a public notice by an advertisement. c) the holder, from whose possession the instrument is lost, may apply to the drawer for a duplicate instrument of the same tenor, giving security to the drawer to indemnify him against loss. d) the party who has lost the instrument must apply to the drawee for payment on its due date. If the drawee refuses to make payment, the holder must give notice of dishonour to all the parties liable on it, otherwise he will lose his remedy against the drawer and indorsers. e) where the acceptor or makes makes payment in due course or a lost bill r note, as the case may be, to its finder, he will discharged from his liability to the right full owner. But the right full owner can recover the money from the finder. f) Where an instrument payable to bearer or indorsed in blank, is lost and the finder negotiates it to a bonafide transferee for value, the later acquires a valid title to the instrument as a HDC and is entitled to claim payment thereon. g) Where an instrument payable to order, s lost and the finder negotiates it by forging indorsement, even a boanfide transferee for value shall not acquire the rights and title to that instrument. |
| Stolen Instruments | A person who steals a N.I, cannot claim payment on it against any party thereto. The rightful owner can get back the instrument from him. If he received payment on that instrument, the true owner can recover the amount due on the instrument from him. If he negotiates a bearer instrument to a bonafide transferee for value, the latter acquires a good title to it(as HDC) and can claim payment thereon. But if the instrument is payable to order, and thief forges the Indorsement of the right full owner and negotiates it to a bonafide transferee for value, the latter shall not acquire any rights in that instrument. |
| Obtained due to coercion or fraud | Instruments obtained by coercion or fraud don’t entitled to recover anything on that instrument. But if such an instrument passes into the hands of a holder in due course, he will acquire a good title to the instrument. |
| Obtained for unlawful consideration/against law. | Instruments obtained for unlawful consideration which is illegal, or opposed to public policy, or immoral or specially prohibited by statute, is void and creates no obligation between the parties thereto. But HDC acquires a good title. |
| Forged Instruments | Forgery is the fraudulent making or alteration of a writing to the prejudice of another’s right. Forgery may be in any of the following forms, viz- a) fraudulently writing the name of an existing one b) signing the name of a fictious person with the intention that it may pass as that of a real person. c) signing one’s own name with the intention that the signature should pass as the signature of some other person of the same name. A forgery doesn’t confer any title and the property in the instrument remains in the person who was the holder at the time of forgery. Even if a forged instrument passes into the hands of a holder in due course, the defects in the instrument are not cured and that holder shall not acquire a good title. A person who has paid money by mistake on a forged instrument, may recover it from the person to whom he has paid it. |
| Forged Indorsement | If a NI payable to order is negotiated by means of a forged indorsement, the indorsee, though he be purchaser for value and in good faith, cannot acquire the rights of a holder in due course. He acquires no title to the instrument. However, where a bearer instrument or an insdorsement in blank is negotiated by mere delivery, the holder acquires a good title to such instrument, notwithstanding a forged indorsemnt. |
Persons competent to make, draw, accept, delivery and negotiable Instrument:
Every person who is competent to contract may become a party to a NI and bind himself by making, drawing, acceptance, delivery and negotiation of a NI. If a party is incompetent to contract, he doesn’t incur any liability as a party to NI, doesn’t in any way diminish the liability of the other competent parties.
Minor: A minor may draw, indorse, deliver, and negotiate a NI so as to bind all parties except himself. Thus, an instrument doesn’t become void merely by reason that a minor is a party to it; it remains binding upon all other parties. But a minor’s rights under an instrument are not affected. If a minor is a payee or indorsee or holder, the payment can be enforced by him or on his behalf.The same is the case with persons of unsound mind. However, such a person may bind himself to NI executed by him during a lucid interval.
Corporations – A corporation being an artificial creation of law, it possesses only those rights which are conferred upon it by the charter of incorporation or the Memorandum of Association. If it exceeds its owners and executes a bill or note, the instrument being ultravires, is void and incapable of ratification even by the unanimous consent of all its members. Such an instrument cannot be enforced even by a bona fide holder in due course.
Agents: An agent can bind his principal by acting on his behalf only in manner in which he is duly authorised to become a party to a NI. A general authority to transact business and to receive and discharge debts doesn’t confer upon an agent the power if accepting or indorsing bills of exchange so as to bind his principal. The agent has to make it clear that he is acting in representative capacity. The form of signature must show that he intends to act as agent or that he does not incur personal liability otherwise he is personally liable.
Legal Representative: A legal representative of a deceased person is entitled to all the instruments. He can sue on them for the recovery of the amount. If the LR signs his name to an instrument, he is personally liable thereon unless he expressly limits his liability to the extent of the assets of the deceased received by him as such.
Different Kinds of Parties to a Negotiable Instrument:
Drawer: The maker of a note, bill or cheque is called the drawer.
Drawee: The person on whom a bill or cheque is drawn and who is thereby directed to pay is called the drawee. In case of a cheque, the drawee is always a banker.
Acceptor: In case of a BOE, the drawee becomes the acceptor when he signs his assent upon the bill and delivers the same or gives notice of such acceptance to the holder or to some person on his behalf. A cheque is not required to be accepted by the drawee.
Payee: The person named in the note, BOE or cheque to whom or to whose order the money is by the instrument is directed to be paid is called the payee. In a BOE or a cheque, the drawer himself may be the payee.
Indorser: The person who indorses the NI in facour of another is called the indorser.
Indorsee: the person to whom a NI is indorsed iscalled the Indorsee.
Holder: The holder of a NI is a person, entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. Where the NI is lost or destroyed, its holder is the person who person so entitled at the time of loss or destruction. Therefore, a person who has obtained possession of an instrument by theft, or under a forged indorsemnt, is not a holder, as he is not entitled to recover the amount of the instrument. However, the LR or the person entitled by operation of law, who can give a valid discharge to the maker or acceptor of the instrument, becomes a holder and can sue on the instrument.
Holder in due course: A holder in due course is a person who for consideration became the possessor of a Pron note, BOE or Cheque if payable to bearer or the payee or indorsee thereof, if payable to order, before the amount mentioned in it became payable and without having sufficient cause to believe that any defect existed in the title of the person from whim he derived the title.
Thus holder of a NI becomes a holder in due course if – i) he receives the instrument for consideration ii) he receives it before its date of maturity; and iii) he takes the instrument in good faith and without notice of any defect either in the instrument or in the title of the endorser.
NEGOTIATION :
| Importance of Negotiation | This is a very important aspect under negotiable instrument as Negotiable instrument can be transferred by mere delivery. |
| Negotiation meaning : | Negotiation means the transfer of property or ownership in the instrument from one person to another in such a manner as to convey title and to constitute the transferee, the holder thereof. |
| How negotiation is done | negotiation can done by two ways: a) Indorsemnt and delivery, if, it is payable to order b) Mere delivery without any indorsemnt, if it is payable to bearer. |
| Negotiation by delivery | Negotiation by delivery: A NI payable to bearer is negotiable by delivery thereof. However, an is instrument delivered on a condition that it is not to take effect except in a certain event is not negotiable unless such even happens. To complete negotiation, it is essential that the instrument must be delivered so as to constitute the person to whom it is delivered as the holder thereof. Delivery may actual or constructive. |
| Negotiation by indorsemnt and delivery | Negotiation by indorsemnt and delivery: An instrument payable to order (i.e., payable to a specified person or his order) can be negotiated by indorsemnt and delivery. An indorsemnt is made when the maker or holder signs his name, usually, on the back of the instrument or on a slip of paper annexed thereto(called as Allongee). |
| Negotiation Back | When an indorser, after he has negotiated an instrument against becomes its holder, the instrument is said to be ‘negotiated back” to that indorser. The effect of negotiation back is that all the intermediate indorsers in the circuit, are discharged from their liability. This rule which aims to prevent circuit, is an exception to the general rule that a holder in due course may recover from all prior parties.For example: A indorsed a bill to B, B indorsed it to C, C to D, D to E and E indorsed it to B against. B though a holder in due course, has no cause of action against either C, D or E. B can,however, recover the bill from prior parties to the instrument. i.e, A. Similarly, where the acceptor of an instrument, becomes its holder, the instrument is negotiated back and the right and liabilities of all the parties are extinguished. |
INDORSEMENT:
| Indorsement | The act of signing on the back of the instrument by the transferor so as to complete negotiation is called as Indorsement |
| Who may indorse: | The first indorsemnt of an instrument is made by its payee. Subsequent indorsemnts may be made by an person who becomes holder of the instrument. |
| Essentials of Indorsement: | i) The Indorsement must be made either on the instrument itself or on a separate slip of paper annexed thereto. ii) the instrument must be signed by the indorser for the purpose of negotiation. iii) the indorser may specify the name of the person to whom or to whose order the instrument is payable. iv) the Indorsement is completed by delivery of the instrument to the indorsee. |
| Kinds of Indorsement: | 1) Blank Indorsement and Full Indorsement 2) Conversion of Blank Indorsement into full Indorsement 3) Blank Indorsement followed by full Indorsement 4) Restrictive Indorsement 5) Partial Indorsement 6) Conditional Indorsement 7) Cancellation of Indorsement |
| Blank Indorsement: | Blank Indorsement:when the indorser signs only his name on the face or back of the instrument, with a view to indorsing it, the Indorsement is said to be blank or general. A blank Indorsement doesn’t specify the indorsee and the instrument, consequently, becomes a bearer instrument, even though it was originally payable to order. The instrument can then be negotiated by mere delivery. |
| Full Indorsement: | Full Indorsement: When the indorser adds to his signature, a direction to pay the amount to or to the order of a specified person, the Indorsement is said to be full or special. For example, pay to ram or order. An instrument having an indorsement in full, is payable only to the indorsee and casn be further negotiated by the Indorsement. Conversion of Blank Indorsement into full Indorsement: The holder of an instrument in blank may, add the name of the person before the indorser’s signature and thus convert the indorsement into full. The holder doesn’t thereby incur any liability as an indorsee. For instance, A holds a bill indorsed by B in blank. A writes over B’s signature of the words ‘pay to C or order’. The instrument will operate as full indorsement from B to C. However, A will not be liable as an indorser. The effect of such conversion is hat the instrument ceases to be payable and it becomes payable to the indorsee only. |
| Blank Indorsement followed by full Indorsement: If an instrument indorsed in blank(which is payable to bearer) is subsequently indorsed in full, it retains it bearer character and is negotiated by delivery as against all the parties prior to the indorser in full. The ‘indorser in full’ cannot be held liable on the instrument except by his immediate indorsee and the parties deriving title from him, but not others. | |
| Restrictive Indorsement: An indorsement is said to be restrictive, when a) it prohibits further negotiation ex:’pay to ram only’ or b) it restricts the indorsee to deal with the instrument as directed by the indorser, ex: ‘pay to Ram or order for collection”.For example: A the holder of a note, indorsee it in blank and delivers it to B. B also delivers it to C. C indorses the note in full to D or order. D without indorsement delivers the note E. E can recover from the drawer of the note A or B. However E cannot recover from C or D, because E doesn’t not derive title from C. C is liable to D. If however D has indorsed the instrument in full and delivered to E, E could have recovered from all the parties including C & D. The effect of a restrictive Indorsement is that the indorsee gets the right to receive the payment when due and sue the parties to the instrument, but he cannot further negotiate the instrument except as authorised by the indorser. | |
| Partial Indorsement: An indorsement is said to be partial when it purports to transfer only a part of the amount payable on the instrument. In fact, it doesn’t amount to negotiation; indorsemnt of na instrument in part only being prohibited. But where an amount is partly paid, a note to that effect may be indorsed on the instrument which may then be negotiated(for the unpaid amount). a) Indorsement Sans Recourse: When the indorser doesn’t want to incur any liability to the indorsee or subsequent holders, he makes a sans recourse Indorsement such as ‘Pay A or order sans recourse” or Pya A or order at his own risk. When an indorser sans recourse, again becomes the holder of the instrument in his own right, all the intermediate indorsers shall be liable to him. b) Facultaive Indorsement: When an indorser abandons some right or extends his own liability by stipulating expressly in the indorsemnt, it is said to be facultive indorsemnt. For example: ‘Pay A or order, notice of dishonour waived’. In such a case, the indorser remains liable even though no notice of dishonour is given to him. c) Sans Frais Indorsement: When an indorser doesn’t want the indorsee or any other holder to incur any expenses on his account on the instrument, the indorsement is called sans frais(withotu expense) indorsement. | |
| Cancellation of Indorsement | Cancellation of Indorsement: Where the holder of a negotiable instrument, without consent of the indorser, destroys or impairs an indorser’s remedy against the prior parties, such indorser shall be discharged from liability to the holder tot eh same extent as if the instrument had been paid at maturity. Thus where the holder cancels the Indorsement made by an intermediate party to the instrument, it will give a discharge to all the subsequent parties but not the prior parties. For example: A is the holder of a bill of exchange made payable to the order of B. B Indorses it to C, C to D, D to E and E to A. A cancels indorsements by C and D, without consent of E. A shall not be entitled to recover anything from E. |
Steps to Constitute offence under Section 138 Negotiable Instrument Act, 1881:
- The cheque is drawn on a bank for the discharge of any legally enforceable debt or other liability.
- The cheque should have been presented within the period of six months or within the period of its validity whichever is earlier.
- The cheque is returned by the bank unpaid due to insufficient funds
- The payee has given a notice to the drawer claiming the amount within 30 days of the receipt of the information by the bank.
- The drawer has failed to pay within 15 days from the date of the receipt of notice.
The complaint should have been failed within one month from the date of expiry for the payment of amount before a Metropolitan Magistrate or a Judicial Magistrate not below the rank of a 1st class Judicial Magistrate.
Miscellaneous:
MATERIAL ALTERNATIONS: According to S.87: It is not any unsubstantial alteration that becomes material alteration but only such alterations as would adversely affect the interests of the other side can be called material alterations. Filling up the interest column initially left blank in the printed promissory note form was held to be material alteration rendering it void.