NEGOTIABLE INSTRUMENTS ACT, 1881
Negotiable Instrument Act 1881 came into force w.e.f. Mar 01, 1882.
Latest amendment was carried out in December 2002. The Act has total 147 sections which are applicable throughout India including Jammu & Kashmir state.
STATUTE: Section 13 gives the meaning of Negotiable Instruments and states Negotiable Instruments means a Promissory Note, Bill of Exchange or Cheque payable either to order or to bearer.
Definition of Negotiable Instruments:
No direct definition of an NI is available. But as per Sec 13, NI means and include Promissory note (PN), Bill of exchange (BoE) and Cheque.
TYPE OF NEGOTIABLE INSTRUMENTS:
(a) As per NI Act - 1: Promissory note, 2: bill of exchange, 3: cheque and 4: Demand draft
(b) As per Transfer of property Act (Sec 137) - Documents of title to goods such as Bill of Lading, Rail Reciept, GR issued by transport operators approved by IBA, Warehouse receipt , AirWay Bill Dock Warrant, Delivery Order etc. also called Quasi Negotiable instrument.
(c) As per usage or practice - such as Certificate of Deposit , Commercial Paper , Treasury Bills, Hundi, Govt. Promissary Notes.
RESTRICTION ON ISSUE OF BEARER PN & BOE:
As per NI Act, BoE and PN can be made payable to bearer.
But only Central Govt. and RBI, are permitted to draw PN & BoE payable to Bearer u/s 31 of RBI Act 1934. Other persons in India can draw only payable to order.
DD is issued payable to ORDER due to this restriction.
Cheques can be issued as bearer or order, as this restriction is not applicable to cheques. PRESUMPTIONS OF NIs:
U/s 118, NIs are presumed to be:
(a) made for consideration,
(b) bear date on which they are made.
(c) every holder is a holder in due course.
PROMISSORY NOTE (Section 4 NI Act):
PN is in an unconditional undertaking or promise, in writing signed by the maker (the debtor), to pay a certain sum of money to or to the order of a certain person or to the bearer thereof.
Promise is a compulsory condition, in a promissory note.
Acknowledgement is not a promissory note (example I owe you Rs.500 is an acknowledgement and not a promissory note).
PARTIES:
In PN there are 2 parties maker (debtor) & payee (creditor)
CURRENCY NOTES:
Currency/bank notes are not promissory notes as these are excluded from the definition of promissory notes.
CHEQUE:
Cheque is a demand bill of exchange drawn on a specified bank. It also includes truncated cheque (in case of CTS in NCR and Chennai) and electronic cheque. (Sec 6).
Cheque can be made payable to bearer or order (restriction of Section 31 of RBI Act on issuing bearer is not applicable on cheque).
BEARER AND ORDER:
If a cheque bears, the words bearer / order both, it is payable to bearer. If does not bear such words it is payable to order.
TRUNCATED CHEQUE:
It is a paper cheque, which is retained by the collecting bank. To collect the payment, the collecting bank sends scanned image of the paper cheque to the drawee bank + digital signatures of collecting bank.
ELECTRONIC CHEQUE :
It is a scanned image of the paper cheque + digital signatures of the drawer.
(Digital signature has two keys, public key (which is disclosed) and private key (which is kept secret). Public key is used to verify the digital signatures and private key is used to sign.
FORMAT OF CHEQUE:
Format is a practice. It is not prescribed in any Act.
POST DATED CHEQUE:
Cheque bearing date subsequent to date of its presentment. It cannot be paid before its date. Example - Cheque dated Jan 22, is presented on Jan 16. It will be returned.
ANTE-DATED CHEQUE:
A cheque bearing date prior to the date, when it was actually drawn.
Example - Cheque issued on Jan 22 but it is dated Jan 05, while the account was opened on Jan
10. Such cheque can be paid.
IMPOSSIBLE DATE :
If an impossible date is written (say Feb 29 in case of leap year, 31 Apr, 31 Jun, 31 Sep,Nov 31), the cheque would be paid on last day of month (Nov 30).
INCOMPLETE DATE:
If date is not complete (say Jun 2010). It cannot be paid.
AMOUNT IN WORDS AND FIGURES DIFFERS (Sec 18):
Such cheque can be paid for amount written in words. Amount written in figures shall be ignored. If amount in words is written and in figures not given, it is incomplete cheque and cannot be paid.
DIFFERENT HANDWRITINGS / INKS / SCRIPTS
A cheque drawn in different handwritings or in different inks or different script would be paid.
FORGED CHEQUE:
A forged cheque (where signatures of the drawer are forged) is not a mandate of the drawer and in no circumstances it can be paid. If paid bank would be liable.
HOLDER (Sec 8):
Holder is a person who is
(a) entitled to possession of the instrument
(b) entitled to receive or recover the due amount thereon.Actual possession and consideration is not compulsory for a holder.
HOLDER IN DUE COURSE (Sec 9):
It is a person who is
(a) entitled to possession of the instrument
(b) entitled to receive or recover the due amount thereon
(c) obtained the possession for consideration
(d) obtained the possession in good faith.
Payee or endorsee of a cheque is a holder in due course. But if the cheque is lost, he becomes only a holder. Similarly, the payee of a gift cheque is only a holder and not a holder in due course, as there is no consideration.
Holder or Holder in due course can
(a) complete an inchoate (incomplete) instrument,
(b) cross an uncrossed cheque,
(c) obtain a duplicate if original is lest and
(d) convert a bearer into order.
HOLDER ( Sec. 8 ) HOLDER IN DUE COURSE (Sec.9 )
Consideration Not essential Essential
Actual Possession Not essential Essential
Defective Title Will affect the instrument Will not affect the Instrument
RIGHTS OF HOLDER
a) Holder can obtain a duplicate of the lost Instrument (Section 45-A).
b) Holder can cross the cheque if not already crossed, convert a general crossing to a special crossing, endorse and can negotiate If !tie negotiation is not restricted
c) Holder can sue in his own name In relation to the instrument
d) Holder can complete an Inchoate Instrument.
e) Holder can give proper discharge to the person making the payment
RIGHTS OF HOLDER IN DUE COURSE
Every prior party to a negotiable Instrument is liable thereon to a holder in due course until the Instrument IS duly satisfied (Sec. 36).
If a bill is drawn payable to the drawer's order In a fictitious name, the acceptor IS not relieved from liability to any holder in due course, provided endorsement and the drawer's signatures are in the same handwriting (Sec. 42).
If a bill of exchange or promissory note IS negotiated to a holder in due course, the other parties to the Instrument cannot escape liability on the ground that the delivery of the instrument was conditional or for a special purpose only (Sec. 46)
INCHOATE INSTRUMENT:
As per Section 20, it is incomplete instrument in which one or the other particulars are not given (but it bears signatures of the drawer). It can be completed by the Holder. These are, otherwise, valid instruments, but cannot be paid till completed.
A cheque date June 2012, is incomplete. It can be paid only when date is completed.
NEGOTIATION
It means transfer of an instrument from one person to another to make the transferee the holder thereof.
METHOD OF NEGOTIATION :
BEARER-
Negotiation is completed by delivery only in case of bearer instruments (Sec 47).
ORDER:
It is completed by endorsement followed by delivery by the same person (Sec 48) in case of order instrument.
If endorser dies after endorsement but before delivery, the negotiation can be completed by legal heirs, with fresh endorsement and then delivery.
ENDORSEMENT
As per Sec 15, endorsement means signing on the face or backside of an instrument (or on a separate paper, called allonge) for the purpose of negotiation i.e. transfer of cheque to next person. Person transferring the instrument is called endorser. He can be drawer, payee or an existing endorsee. The person to whom it is transferred is called an endorsee.
BEARER CHEQUES :
On a bearer cheque endorsement is not required. If made, it will be ignored, as a bearer is always a bearer (Sec 85-2).
U/s 35, liability of an endorser is similar to drawer of the cheque. If cheque is dishonoured, the endorsee can recover the amount from the endorser or drawer.
ENDORSEMENT BY MINOR:
Minor can endorse u/s 26. But he is not liable.
CROSSING OF CHEQUES
Crossing means putting two parallel lines across the face of a cheque or demand draft, with or without words.
Parallel lines can be on any part or in any manner on the face, not necessarily transverse lines.
BoE & PN : Crossing is applicable for cheques and demand drafts only. Promissory notes or bill of exchange cannot be crossed.
PAYMENT OF CHEQUE
OBLIGATION OF BANKS: U/s 31 of NI Act, the banks are under statutory obligation to honour cheques issued by the customer where:
(a) there are sufficient funds (in the same account on which cheque is drawn). If bank makes payment by creating overdraft without customer consent, it is recoverable from the customer, if customer has not objected to payment of cheque.
(b) funds are meant for payment of the cheque and
(c) there is proper demand to make the payment i.e. within business hours.
(d) signatures are as per record (if cheque is paid for signatures different from record, but otherwise genuine, customer cannot ask for refund).
On payment in due course, bank will be discharged from obligation.
WHEN PAYMENT NOT TO BE MADE:
Payment should not be made in case of:
(a) death, insolvency, insanity of customer OR insolvency of partner or firm OR liquidation of company
(b) stop payment of cheque
(c) receipt of garnishee/attachment order
(d) post dated or mutilated or stale cheque.
(e) Insufficient balance
(f) Different signatures
(g) Material alteration
(h) Payment demanded by payee after business hours (payment to drawer after business hours, can be made)
Negotiable Instrument Act 1881 came into force w.e.f. Mar 01, 1882.
Latest amendment was carried out in December 2002. The Act has total 147 sections which are applicable throughout India including Jammu & Kashmir state.
STATUTE: Section 13 gives the meaning of Negotiable Instruments and states Negotiable Instruments means a Promissory Note, Bill of Exchange or Cheque payable either to order or to bearer.
Definition of Negotiable Instruments:
No direct definition of an NI is available. But as per Sec 13, NI means and include Promissory note (PN), Bill of exchange (BoE) and Cheque.
TYPE OF NEGOTIABLE INSTRUMENTS:
(a) As per NI Act - 1: Promissory note, 2: bill of exchange, 3: cheque and 4: Demand draft
(b) As per Transfer of property Act (Sec 137) - Documents of title to goods such as Bill of Lading, Rail Reciept, GR issued by transport operators approved by IBA, Warehouse receipt , AirWay Bill Dock Warrant, Delivery Order etc. also called Quasi Negotiable instrument.
(c) As per usage or practice - such as Certificate of Deposit , Commercial Paper , Treasury Bills, Hundi, Govt. Promissary Notes.
RESTRICTION ON ISSUE OF BEARER PN & BOE:
As per NI Act, BoE and PN can be made payable to bearer.
But only Central Govt. and RBI, are permitted to draw PN & BoE payable to Bearer u/s 31 of RBI Act 1934. Other persons in India can draw only payable to order.
DD is issued payable to ORDER due to this restriction.
Cheques can be issued as bearer or order, as this restriction is not applicable to cheques. PRESUMPTIONS OF NIs:
U/s 118, NIs are presumed to be:
(a) made for consideration,
(b) bear date on which they are made.
(c) every holder is a holder in due course.
PROMISSORY NOTE (Section 4 NI Act):
PN is in an unconditional undertaking or promise, in writing signed by the maker (the debtor), to pay a certain sum of money to or to the order of a certain person or to the bearer thereof.
Promise is a compulsory condition, in a promissory note.
Acknowledgement is not a promissory note (example I owe you Rs.500 is an acknowledgement and not a promissory note).
PARTIES:
In PN there are 2 parties maker (debtor) & payee (creditor)
CURRENCY NOTES:
Currency/bank notes are not promissory notes as these are excluded from the definition of promissory notes.
CHEQUE:
Cheque is a demand bill of exchange drawn on a specified bank. It also includes truncated cheque (in case of CTS in NCR and Chennai) and electronic cheque. (Sec 6).
Cheque can be made payable to bearer or order (restriction of Section 31 of RBI Act on issuing bearer is not applicable on cheque).
BEARER AND ORDER:
If a cheque bears, the words bearer / order both, it is payable to bearer. If does not bear such words it is payable to order.
TRUNCATED CHEQUE:
It is a paper cheque, which is retained by the collecting bank. To collect the payment, the collecting bank sends scanned image of the paper cheque to the drawee bank + digital signatures of collecting bank.
ELECTRONIC CHEQUE :
It is a scanned image of the paper cheque + digital signatures of the drawer.
(Digital signature has two keys, public key (which is disclosed) and private key (which is kept secret). Public key is used to verify the digital signatures and private key is used to sign.
FORMAT OF CHEQUE:
Format is a practice. It is not prescribed in any Act.
POST DATED CHEQUE:
Cheque bearing date subsequent to date of its presentment. It cannot be paid before its date. Example - Cheque dated Jan 22, is presented on Jan 16. It will be returned.
ANTE-DATED CHEQUE:
A cheque bearing date prior to the date, when it was actually drawn.
Example - Cheque issued on Jan 22 but it is dated Jan 05, while the account was opened on Jan
10. Such cheque can be paid.
IMPOSSIBLE DATE :
If an impossible date is written (say Feb 29 in case of leap year, 31 Apr, 31 Jun, 31 Sep,Nov 31), the cheque would be paid on last day of month (Nov 30).
INCOMPLETE DATE:
If date is not complete (say Jun 2010). It cannot be paid.
AMOUNT IN WORDS AND FIGURES DIFFERS (Sec 18):
Such cheque can be paid for amount written in words. Amount written in figures shall be ignored. If amount in words is written and in figures not given, it is incomplete cheque and cannot be paid.
DIFFERENT HANDWRITINGS / INKS / SCRIPTS
A cheque drawn in different handwritings or in different inks or different script would be paid.
FORGED CHEQUE:
A forged cheque (where signatures of the drawer are forged) is not a mandate of the drawer and in no circumstances it can be paid. If paid bank would be liable.
HOLDER (Sec 8):
Holder is a person who is
(a) entitled to possession of the instrument
(b) entitled to receive or recover the due amount thereon.Actual possession and consideration is not compulsory for a holder.
HOLDER IN DUE COURSE (Sec 9):
It is a person who is
(a) entitled to possession of the instrument
(b) entitled to receive or recover the due amount thereon
(c) obtained the possession for consideration
(d) obtained the possession in good faith.
Payee or endorsee of a cheque is a holder in due course. But if the cheque is lost, he becomes only a holder. Similarly, the payee of a gift cheque is only a holder and not a holder in due course, as there is no consideration.
Holder or Holder in due course can
(a) complete an inchoate (incomplete) instrument,
(b) cross an uncrossed cheque,
(c) obtain a duplicate if original is lest and
(d) convert a bearer into order.
HOLDER ( Sec. 8 ) HOLDER IN DUE COURSE (Sec.9 )
Consideration Not essential Essential
Actual Possession Not essential Essential
Defective Title Will affect the instrument Will not affect the Instrument
RIGHTS OF HOLDER
a) Holder can obtain a duplicate of the lost Instrument (Section 45-A).
b) Holder can cross the cheque if not already crossed, convert a general crossing to a special crossing, endorse and can negotiate If !tie negotiation is not restricted
c) Holder can sue in his own name In relation to the instrument
d) Holder can complete an Inchoate Instrument.
e) Holder can give proper discharge to the person making the payment
RIGHTS OF HOLDER IN DUE COURSE
Every prior party to a negotiable Instrument is liable thereon to a holder in due course until the Instrument IS duly satisfied (Sec. 36).
If a bill is drawn payable to the drawer's order In a fictitious name, the acceptor IS not relieved from liability to any holder in due course, provided endorsement and the drawer's signatures are in the same handwriting (Sec. 42).
If a bill of exchange or promissory note IS negotiated to a holder in due course, the other parties to the Instrument cannot escape liability on the ground that the delivery of the instrument was conditional or for a special purpose only (Sec. 46)
INCHOATE INSTRUMENT:
As per Section 20, it is incomplete instrument in which one or the other particulars are not given (but it bears signatures of the drawer). It can be completed by the Holder. These are, otherwise, valid instruments, but cannot be paid till completed.
A cheque date June 2012, is incomplete. It can be paid only when date is completed.
NEGOTIATION
It means transfer of an instrument from one person to another to make the transferee the holder thereof.
METHOD OF NEGOTIATION :
BEARER-
Negotiation is completed by delivery only in case of bearer instruments (Sec 47).
ORDER:
It is completed by endorsement followed by delivery by the same person (Sec 48) in case of order instrument.
If endorser dies after endorsement but before delivery, the negotiation can be completed by legal heirs, with fresh endorsement and then delivery.
ENDORSEMENT
As per Sec 15, endorsement means signing on the face or backside of an instrument (or on a separate paper, called allonge) for the purpose of negotiation i.e. transfer of cheque to next person. Person transferring the instrument is called endorser. He can be drawer, payee or an existing endorsee. The person to whom it is transferred is called an endorsee.
BEARER CHEQUES :
On a bearer cheque endorsement is not required. If made, it will be ignored, as a bearer is always a bearer (Sec 85-2).
U/s 35, liability of an endorser is similar to drawer of the cheque. If cheque is dishonoured, the endorsee can recover the amount from the endorser or drawer.
ENDORSEMENT BY MINOR:
Minor can endorse u/s 26. But he is not liable.
CROSSING OF CHEQUES
Crossing means putting two parallel lines across the face of a cheque or demand draft, with or without words.
Parallel lines can be on any part or in any manner on the face, not necessarily transverse lines.
BoE & PN : Crossing is applicable for cheques and demand drafts only. Promissory notes or bill of exchange cannot be crossed.
PAYMENT OF CHEQUE
OBLIGATION OF BANKS: U/s 31 of NI Act, the banks are under statutory obligation to honour cheques issued by the customer where:
(a) there are sufficient funds (in the same account on which cheque is drawn). If bank makes payment by creating overdraft without customer consent, it is recoverable from the customer, if customer has not objected to payment of cheque.
(b) funds are meant for payment of the cheque and
(c) there is proper demand to make the payment i.e. within business hours.
(d) signatures are as per record (if cheque is paid for signatures different from record, but otherwise genuine, customer cannot ask for refund).
On payment in due course, bank will be discharged from obligation.
WHEN PAYMENT NOT TO BE MADE:
Payment should not be made in case of:
(a) death, insolvency, insanity of customer OR insolvency of partner or firm OR liquidation of company
(b) stop payment of cheque
(c) receipt of garnishee/attachment order
(d) post dated or mutilated or stale cheque.
(e) Insufficient balance
(f) Different signatures
(g) Material alteration
(h) Payment demanded by payee after business hours (payment to drawer after business hours, can be made)
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