What is Negotiable Instrument ?
According to Sec. 13 of Negotiable Instruments Act, 1881, A Negotiable Instrument means a promisory note, bill of exchange, payable either to order or bearer.
Features:
It is easily transferable from one person to another ownership / right passes merely by delivery.It passes good title to the transferee even if the transferor had bad title ,provided the person receiving the instrument has accepted the instrument in good faith,and had no reason to believe that the title had any defect.( In case of goods, a person can not get better title than the transferor .However, this is not the case with Negotiable instrument. )
Types of Negotiable Instrument:
By Statute: ie what has been mentioned in Sec. 4,5,6 of Negotiable Instruments Act.
By practice/Custom: Viz., Government Promissory Note, Railway Receipt, Bill of Lading, Air Way Bill etc.
Who is a Holder ?
According to Sec.8 of N I Act ., a holder is a person who in his own name is entitled to the possession of the instrument, and to receive or recover the amount due from the parties to the instrument.
Promissory Note: -
As per Sec.4 of N.I.Act, 1881” Promissory Note is an instrument in writing (not being a bank note or currency note) containing an unconditional undertaking signed by the maker to pay a certain sum of money only or the order of a certain person, or to the bearer of the instrument.”
The promise can be singly or jointly by more than one person.
There are two parties in a Promissory Note
Maker- Is the person who promises to pay
Payee – Is the person to whom promise is made
SPECIMEN
Place
Date
Three months after date I promise to pay to --------------------the sum of Rupees---------------------------value received.
Stamp
Signed
-----------------------------------------------------------------------------------
Place
Date
On demand I promise to pay to------------------------------ the sum of Rupees---------------------------------Value received.
Stamp
Signed
----------------------------------------------------------------------------------
Essential requirements of a Promissory Note:
It must be in writing .It must contain an unconditional undertaking to pay
The maker should sign it
The promise to pay should be unconditional
The promise to pay money and money only
Maker should be certain
It must contain the name of the Payee – it can not be bearer i.e. the person to whom the amount is to be paid has to be mentioned { a bearer promissory note gets the status of a currency note.-prohibited by Sec.31 of Reserve Bank of India Act,1934}
It should bear the date and place of issue
It can be payable on demand i.e. sight or after a certain period
It is not necessary to mention the consideration i.e. “Value Received”
It cannot be tied up with any future event
It attracts stamp duty under Stamp Act.1899.
According to Sec.1 Article 49 Stamping can be done prior to execution or after execution
Note:- The question is why a person undertakes to pay?.He promises to pay because he owes money.The relationship is of Debtor and Creditor.
Banks take Demand Promissory Note ( DP Note) from borrower. In addition to principal amount ,It also contains interest clause ie interest @ ----% per annum with monthly/ quarterly/half yearly rest.
Bill of Exchange: -
As per Sec.5 of N.I.Act, 1881 “ 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 certain person or bearer of the instrument.”
SPECIMEN
Place
Date
Rs.--------------
At sight pay to the order of … …………… the sum of Rs.------------- for value received.
Stamp
Signedbythe Maker
To
Mr./ M/S…………………….
Address
-----------------------------------------------------------------------------------
Place
Date
Rs.---------------------
-------------Months after date pay to the order of……………………..
the sum of Rs……………….value received.
To
Stamp
Mr./M/s. Signed by the maker
Address
Accepted
-----------------------------------------------------------------------------------
The Drawer /maker gives direction to the drawee because he owes money to the drawer or there is some consideration.
Essential Requirements of bill of exchange:
It must be in writing
There are three parties to the Bill of Exchange
– Drawer or Maker
– Drawee – The person on whom the bill is drawn
– Payee – To whom the payment is to be made. Payee is the person whose name is mentioned in the instrument, to whom or to whose order the money is directed to be paid by the instrument.
It should be an unconditional order to pay
It should be signed by the maker/drawer
It must contain direction to a certain person (i.e. drawee) to pay
The sum payable must be certain
Drawee must be certain
It is direction by the drawer / maker to a person (i.e. drawee) to make payment to a definite person or as per his order or to the bearer of the instrument.
Payee must be certain
Bill of Exchange can either be Sight or Usance. Usance bills contain a specified period on which the payment is to be made. Usance bills need acceptance of the payee. Three days of grace is given for payment of usance bills.
Dishonour of Bill of Exchange :
A negotiable instrument can be dishonoured in two ways
· By non payment
· By non acceptance ( Does not allpy to Cheque)
Options available to holder:
With a view to safe guarding his interest, the holder has two options
· To give notice of dishonour to all parties
1- ie maker of promissory note.
2- The acceptor or drawer of bill of exchange
· To get the dishonoured bills noted and protested
Noting :
Notary public makes a demand for payment to the drawee or acceptor for acceptance of the bill. In case the drawee refuses to pay or the acceptor refuses to accept ,he makes noting on the bill and specifies the reasons for dishonour, and the date of dishonour. Once the recording of dishonour has been on the instrument the Notary Public issues a certificate which is called as protest.
A cheque is not noted and protested.
Cheque:
As per Sec. 6 of NI Act, 1881 “ a cheque is a Bill of Exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.”
It is an instrument in writing containing an unconditional order signed by the maker, directing a certain banker to pay a certain sum of money, on demand to, or to the order of, a certain person or to the bearer of the instrument. All cheques are bill of exchange, but all bill of exchange are not cheques.
Difference between a cheque and a bill of exchange: -
A cheque does not require acceptance
It can be crossed
Does not attract stamp duty.
It gets statutory protection under Sec. 85 and Sec. 131 of NIAct.
It is not entitled to days of grace
A cheque is presented for payment, whereas a bill in the first instance is presented for acceptance unless it is a bill on demand.
No notice of dishonour is required
A cheque is not noted or protested
SPECIMEN OF A MICR CHEQUE
-------------------
Pay-------------------------------------------------------------------------------- or Bearer
Rupees------------------------------------------------------------------------
Union Bank of India
B.S.Marg,
Mumbai
A/C No
LF Intl
-----------------------------------------------------------------------------
229859 22 6 026 010 10 Transaction Code
ChequeNo. Citycode Bank code Branch Code
------------------------------------------------------------
MICR Cheques:
Due to introduction of electronic clearing system in all major cities banks are issuing MICR cheques {Magnetic Ink Character Recognition}. This helps in speedy clearing of cheques in the clearinghouses and without much human intervention. A t the bottom of the cheque there is a code line known as “Band”. It contains information in magnetic ink, which is required for mechanical processing of cheque. Cheques are not to be signed and nothing is to be written on the band. It contains
First six digits indicate cheque number.
Next three digits indicate city code number
Next three digits indicate bank code number
Next three digits indicate branch code number
Next digits indicate transaction code i.e. SB/Current/Cash Credit etc.
There are 59 MICR processing centres .These centres account for 83-85% of total chrque volume and amount. Switching over from paper based clearing to truncated cheque clearing system is presently at Delhi.
Essential requirements of a Cheque:
A cheque is always payable on demand.
It is drawn on some specified bank.
It is the only negotiable instrument on which the rules of crossing are applicable.
No acceptance is required on cheque.
A cheque has to be written on the prescribed format of the bank and to be drawn on the chequebook provided by the bank.
It should be dated.
There are three parties to the cheque
1-Drawer or Maker
2-The bank - on whom the cheque is drawn (i.e. the bank with whom the account is maintained by the drawer)
3- Payee – Payee is the person whose name is mentioned on the cheque
towhom or to whose order the money is directed to be paid.
It should be an unconditional order to pay
It should be signed by the maker/drawer
The sum payable must be certain
Payee must be certain
Payment of cheque is subject to drawer having sufficient balance in his account or can be overdrawn under arrangement.
Digital Cheque:
Vide, the Negotiable Instrument (Amendment & Miscellaneous Provisions) Act 2002 important amendments have been made to certain provisions of the Negotiable Instrument Act.
The amendment has brought in two concepts of digital cheques.
1.One is a "mirror image" of a cheque digitally signed.
2.Second is the concept of "truncated cheque" where the physical cheque carrying a physical signature of the drawer is replaced with an image of the signed cheque. Power to create a truncated cheque lies with the clearinghouse or by the paying or collecting banks.
Amendment in the act replaces the original section 6 of the parent Act (NIA) to read as follows.
A "Cheque" is a ‘Bill of Exchange’ drawn on a specified banker and not expressed otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.
Electronic form of Cheque:
"a cheque in the electronic form" means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric cryptosystem.
Truncated Cheque:
"a truncated cheque" means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.
Clearing House:
The expression-clearing clearing house" means the clearinghouse managed by the Reserve Bank of India or a clearinghouse recognized as such by the Reserve Bank of India.
When a cheque is truncated, the paying banker is entitled to demand further information in case of a reasonable suspicion (section 64 of NIA), the Collecting Banker can retain the truncated cheque even after receiving the payment (Section 81 of NIA), the difference if any between the image and the truncated cheque will be considered a "Material Alteration" (Section 89 of NIA), and the Collecting Banker is responsible to verify that the truncated cheque is prima-facie genuine (Sec 131 of NIA).
A cheque can be
1. Ante- dated: Issued on some previous date.
Antedate is a business term to date a document before the date on which it is drawn up. This is not necessarily illegal or improper. A bill is not invalid by reason only that it is ante-dated or post-dated, or that it bears date on a Sunday. A cheque which bears a date before the date of issue is an ante dated cheque. As per Sec. 74 (4) (ii) of NI Act, a cheque presented for payment within a reasonable period of time after its issue ie within six months of its issue will be honoured by bank. A banker is not concerned whether the cheque was ante dated or not.he is only concerned that it is not stale.
2. Post dated: Issued for some future date
3. Stale: Which is out of date more than Six months old
Why post dated cheques are issued?
In those cases where the drawer has not enough funds in his account for meeting his obligations ,he issues post date cheques after taking into account the availablity of funds on some future date in his account.
When under arrangement with the payee ,payment is deferred for some specific future period ie in the event of payment of Loan instalment,under hire purchase arrangements.
Advantages:
Avoids embrassement arising from dishonour and payee taking action under Sec. 138 of NIAct.
Maintaing proper fund flow / management
Saving interest on borrowings or earnings on funds held in account
Meeting immediate fund requirement for other important purposes.
Liability of a paying banker- Payment of Cheque :
· A banker honours the cheques of customers up to the credit balance held in the account or as per arrangements with the bank. The duty of banker is to see that
· The cheque is in the proper form
· Signatures of the person authorised to issue cheque tallies with the specimen signature recorded with the bank
· The cheque is neither stale nor post dated
· Amount mentioned in words and figures are same
· The drawer authenticates material alterations if any.
· Endorsement is proper.
· Cheque is not mutilated
· Crossed cheques are not paid at counter
· Cheques are paid only in banking hours.
Circumstances under which a bank can refuse payment of a cheque:
· If the customer has stopped payment of the cheque
· If bank has notice about the death of customer
· If he has information /notice about the insanity of the customer
· If he has notice of customer’s bankruptcy
· If bank has knowledge of any defect in the title of the person presenting the cheque.
· Notice of garnishee order
· In case of trust account, if the customer contemplates breach of trust.
Dishonour of Cheque.
. A bank can refuse payment of a cheque
1. If it is stale,post dated, mutilated
2. amount in words and figure differ.
3. If there is insufficient balance in the account
4. if the arrangements made with the bank (Over Draft, Cash Credit limit)exceeds
5. If instead of payee’s name word “ Cash “ is mentioned
6. If a crossed cheque is presened at the counter.
7. If signatures are forged.
8. If there is material alteration
Material Alteration:
· Alterations which changes the fundamental character and spirit of the instrument
· Changes the rights and liabilities of the parties to the instrument
· Changes legal character of the document
· Changes made after the cheque has been issued
According to Sec. 87 of NIAct. ,if a cheque is materially altered it can not be regarded as cheque .It includes
· Change in date
· Change in amount
· Alteration in crossing –or cancellation
· Alteration of word order to bearer
· Alteration of place of payment.
· Alteration in the names of the parties or relationship between them.
Unless alterations are authanticated by the drawer, banks do not pay /honour materially altered cheques .However, in following cases alterations do not require authantication by the drawer
· Conversion of blank endorsement to full
· Conversion of general crossing to special crossoing
· Filling of blanks in the cheque
· Crossing of uncrossed cheque
Dishonour of cheque issued for settlement of debt:
Once the cheque has been issued by the drawer to the bank/ payee, merely because the drawer issues a notice to the drawee or to the bank for ‘stop payment’, it will not preclude an action under section 138 of N.I.Act,{ Modi Cement Ltd’ Vs.KuchiKumarNandi(1998) ,28 CLA. 491(SC)/JT1988(2)SC198}
Prerequisite:
1. Cheque to be presented within the validity of the period i.e. within 6 months. It should not be stale.
2. In case of post dated cheques, the period starts from the date of the cheque
3. In case of dishonour, the payee has to give notice to the drawer.
4. The payee or the holder in due course on receipt of intimation from bank about dishonour has to give notice to the drawer within 30 days of the information from bank.
5. if payment is not received within 15 days of the notice, provisions of sec.138 would be applicable.
6. The complaint is to be lodged in writing before a Metropolitan Magistrate or a Judicial Magistrate of the First Class within one month of the expiry of 15 days of receipt of notice to the drawer. (Magistrate is empowered to condone delay in filing complaint)
7. There is no minimum time limit for filing the complaint.
8. if the dishonour is due to the reason “ Account Closed” it would amount that there was no sufficient balance in the account.
As per Section 146, inserted in N.I.Act, by the Amendment Act 2002, banker’s slip or memo having bank’s official mark denoting that the cheque has been dishonored shall be presumed to be the fact of dishonour,and will be treated as prima-facie evidence. The court, on production of bank’s slip or memo having therein the official mark denoting that the cheque has been dishonoured, shall presume the fact of dishonour of such cheque, unless and until such fact is disproved.
The usual practice followed by the court of calling the drawee bank’s person as a witness to prove the fact of dishonour has been dispensed with. Now it is for the accused /drawer to prove that there were sufficient funds in the account or that the cheque was not returned for reason” insufficient funds” or any other reason.
There are two types of crossing
· General
· Special
General crossing:
As per Sec123 of N.I.Act, where a cheque bears across its face an addition of the words "and company " or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words " not negotiable," that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally.
Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker (Sec.126).
Special crossing:
As per Section 124 of N.I.Act, 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 shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker
.
Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent for collection (Sec.126).
A person taking a cheque crossed generally or specially, bearing in either case the words " not negotiable," shall not have, and shall not be capable of giving, a better title to the cheque than that which the person from whom he took it had (Sec.130).
Endorsement:
According to Sec.15 of N.I.Act, when the maker or holder of a negotiable instrument signs the same,( not in the capacity of maker or drawer) on the back of the instrument it is known as indorsement .The purpose is to transfer /give instrument to another person. In case the space on the back of the instrument is insufficient, it can be signed on a paper attaches/pasted on the back of the instrument. The attachment is known as along.
As per Sec 16.1 (1) of NIAct, endorsement can be
· Blank
· Full
Blank: If the endorser signs his name only, the endorsement is said to be " in blank,"
Full: If the endorse adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the indorsement is said to be " in full “.
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