shaashank
Shashank Savla
Small proj on NEGOTIABLE INSTRUMENT:
INTRODUCTION
The Negotiable Instruments Act was passed in 1881. Some provisions of the Act have become redundant due to passage of time, change in methods of doing business and technology changes. However, the basic principles of the Act are still valid and the Act has stood test of time. The Act extends to the whole of India. There is no doubt that the Act is to regulate commercial transactions and was drafted to suit requirements of business conditions then prevailing.
The instrument is mainly an instrument of credit readily convertible into money and easily passable from one hand to another hand.
DEFINITION
“A transferable, signed document that promises to pay the bearer a sum of money at a future date or on demand”
Examples include checks, bills of exchange, and promissory notes.
MEANING
ACCORDING TO SEC.13 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881:
“A Negotiable instrument means a promissory note, bills of exchange or cheque payable either to order or to bearer”. ‘Negotiable’ means transferable whereas ‘instrument’ means a document, therefore negotiable instruments means a transferable document. A negotiable instrument is one which entitles the holder to the receipt of money. It gives him the right to transfer the same by mere delivery or endorsement thereon. The negotiability of the instrument continues till its maturity. A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one or two, or one or some of several payees.
1. Substituted by Act 8 of 1919, sec. 3, for sub-
Section
2. Ins. by Act 5 of 1914, sec. 2.
CHARACTERISTIC OF A NEGOTIABLE INSTRUMENT
A negotiable instrument has the following characteristics:
1} PROPERTY: The possessor of the instrument is the holder and owner thereof. A negotiable instrument does not merely give possession of the instrument, but right to property. Whosever gets possession of the instrument becomes its owner and is entitled to the sum mentioned therein as the holder. It passes by mere delivery where instrument is payable to ‘bearer.’
2} DEFECTS IN TITLE: The holder in good faith and for value called the ‘holder in due course’ gets the instrument free from all defects of any previous holder.
3} REMEDY: The holder can sue upon the negotiable instrument in his own name. All prior parties are liable to him. A holder in due course can recover the full amount of the instrument.
4} RIGHT: The holder in due course is not affected by certain defenses which might be available against previous holder, for example, fraud, to which he is not a party.
5} PAYABLE TO ORDER: All three negotiable instruments are payable to order which is expressed to a particular person. An instrument which does not restrict its transferability expressly is negotiable whether the word ‘order’ is mentioned or not. The word ‘order’ or ‘bearer’ is no longer necessary to render an instrument negotiable
It must be noted that all the three negotiable instrument is endorsed and is expressed to be payable to the order of a specified person, it is nevertheless payable to him or his order.
6} PAYABLE TO BEARER: the three negotiable instrument is expressed to be payable or on which the only or last endorsement is an endorsement in blank. It specifies that the person in possession of the bill is a bearer of the instrument which is so expressed payable to bearer.
7} PAYMENT: A negotiable instrument may be made payable to two or more payees, or it may be payable in alternative to one or two payees.
8} CONSIDERATION: Consideration in the case of a negotiable instrument is presumed.
9} PRESUMPTIONS: Certain presumptions apply to all negotiable instruments.
TYPES OF NEGOTIABLE INSTRUMENTS:
A negotiable instrument regulates only three types, viz,
1} PROMISSORY NOTES.
2} BILLS OF EXCHANGE.
3} CHEQUES.
PROMISSORY NOTES, BILLS OF
EXCHANGE, BILLS IN SETS
AND CHEQUES.
PROMISSORY NOTES
DEFINATION
“A PROMISORY NOTE IS AN
INSTRUMENT IN WRITING 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.”
THE PERSON WHO PROMISES TO PAY IS CALLED THE “MAKER”.
THE PERSON WHO IS PROMISSED THE PAYMENT IS CALLED THE “PAYEE”
ELEMENTS OF A PROMISSORY NOTE
WRITING: The promissory note must be in writing. Oral engagement or promise is excluded. No particular form of words is necessary. It may be in any form but the words shall be visible. Intention to make a note must be clear.
UNDERTAKING TO PAY: It is not necessary to use the word “promise” but the intention must clearly show an ‘unconditional undertaking’ to pay the amount. The word ‘promise’ does not mean that a document is not a promissory note, provided it fulfils the requirements of this section and there is clear intention on the part of the parties to treat the document as a promissory note.
ILLUSTRATIONS:
a) “I acknowledge to pay on demand Rs 1000 for value received.” This is a promissory note.
But –“I acknowledge receipt of Rs 1000” is not a
Promissory note.
b) “I promise to pay B Rs 1000 on demand.” It is a
Promissory note.
c) “I owe you Rs1000” this not a promissory note.
UNCONDITIONAL: It must contain definite and an unconditional undertaking to pay. Promise to pay should be unconditional. A conditional instrument is invalid. It must be certain of payment.
ILLUSTRATIONS:
Conditional promissory note:
a) “I promise to pay B Rs1000 7 days after C’s
marriage.”
b) “I promise to pay B Rs1000 after deducting a sum due to him.”
These writing are conditional. Payment is subjected to a certain event happening or not happening. Such writing are not promissory notes.
Unconditional promissory note:
a) A promise given for an executed consideration.
b) Any promise to pay an instrument on lapse of
certain periods, after a specified event which is
certain to happen.
Valid conditional promissory note:
a) “I promise to pay B Rs500, 3 days after the death
of X.
This is a valid promissory note as death is a
certain event to happen; though time of death is
uncertain.
b) “I promise to pay B Rs500 at Bombay.”
SIGNED: The instrument must be signed by the maker thereof. Person must sign with his consent. It should not only be a physical act but also a mental act with an intention to sign.
CERTAIN PERSON: The maker and payee of the instrument must be a definite person. A note may be made by several people to bind themselves jointly. A promissory note cannot be made by two persons. Two different people should fill in the role of a maker and payee. The maker endorses the note. Payee is capable of being ascertained where he is wrongly described, he will be a certain person.
E.g. - a promissory note payable to “my only niece living in England”....is a valid promissory note.
SPECIFIC SUM: The sum promise to be paid must be specific.
ILLUSTRATIONS:
“I promise to pay B Rs 300 and all other sums due to
him.”
However, payment of a note with interest does not
invalidate a promissory note. Interest rate may or may
not be specified.
PROMISE TO PAY MONEY ONLY: The promise to pay must be money only. Promise to pay anything other than legal tender, in full or in part, is not a promissory note.
ILLUSTRATIONS:
a) “I promise to pay B Rs. 100 in cash and Rs. 100
worth of cosmetics.”
b) “I promise to pay B Rs. 500 and to deliver him my
black horse.”
c) “I promise to pay B Rs. 500 in government Bonds.”
These are all invalid promissory notes.
STAMPING: Promissory notes are chargeable with stamp duty. It is advisable to cancel the stamps with maker’s signature or initials. An unstamped or improperly or insufficiently stamped promissory note is not valid as evidence in court of law. No suit can be maintained upon an unstamped or improperly stamped promissory note.
BILLS OF EXCHANGE
DEFINATION:
“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, a certain person or to the
Bearer of the instrument.”
ESSENTIAL ELEMENTS OF A BILL OF EXCHANGE
WRITING: - A bill of exchange must be in writing and may be in any language, and in any form.
PARTIES: - There must be three parties to a bill of exchange, i.e., Drawer, Drawee and Payee.
PAYEE:- Payee as the person named in the instrument, to whom or to whose order the money, by the instrument directed to be paid.
ORDER TO PAY: - The bill of exchange must contain an order by the drawer to the drawee to pay under any circumstances.
UNCONDITIONAL: - The o0rder in the bill must be unconditional, for example, payable under all events and circumstances. Conditional bill is invalid.
SIGNED: - The bill must be signed by the drawer.
MONEY:- The order must be to pay money only
PAYEE MUST BE CERTAIN: - Bill may be made payable to two or more payees jointly or in the alternatives.
CERTAIN SUM: - The sum payable may be ‘certain’ although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange.
STAMPING: - Bill of exchange is chargeable with stamp duty.
HUNDI:-
Bills of exchange drawn in vernacular language called ‘hundis’ are covered by the Act. The word 'hundi', a generic term used to denote instruments of exchange in vernacular is derived from the Sanskrit root 'hundi' meaning 'to collect' and well expresses the purpose to which instruments were utilized in their origin. The Act does not affect any local usage relating to any instrument in an oriental language. In the absence of any custom or usage governing such instruments, provisions of the Act will be extended to such other instruments, for example, hundis, bills of landing, railway receipt, etc. The act does not affect the transfer of instruments under ordinary law otherwise than by negotiation, for e.g. by assignment. A bonafide transferee of a negotiable instrument for value, without notice of any defect acquires the instrument free of any defects. He acquires a better title than that of the transferor irrespective of the transferor’s title being defective.
HOW PROMISSORY NOTE BECOMES A BILL OF EXCHANGE?
An instrument which is a promissory note may become a bill of exchange if acceptance is endorsed thereon by a third party.
BILLS IN SETS
Bills of exchange may be drawn in parts. All the parts together make a set, but the whole set constitutes only one bill. Bills are sometimes drawn in several parts. All the parts so drawn are referred as bill ‘drawn in sets’. The drawer of the ‘bills in sets’ has to sign all the parts and deliver all the parts but the acceptance should be written only on one part. If the drawee accepts more than one part and if such separate accepted parts get into the hands of different holders in due course, he and the subsequent endorsers of each part are liable on every such part as if it were a separate bill.
CHEQUE
A Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise then on demand. A cheque is drawn on a banker only while a bill of exchange can be drawn on any one. A cheque is an unconditional order on the specified banker to pay on demand, a certain sum of money to the bearer of the cheque or to his order. A bill of exchange is wider than a cheque.A cheque is not valid because it is post-dated. A cheque must be dated. Unlike a promissory note and a bill of exchange, cheque may be drawn payable to bearer on demand.
Cheque crossed generally
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
Cheque crossed specially
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.
Crossing after issue
Where a cheque is uncrossed, the holder may cross it generally or specially.
Where a cheque is crossed generally, the holder may cross it specially.
Where a cheque is crossed generally or specially, the holder may add the words "not negotiable".
Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker, his agent, for collection.
Payment of cheque crossed generally
Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to the banker
Payment of cheque crossed specially
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
Payment of cheque crossed specially more than once
Where a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof.
Payment in due course of crossed cheque
Where the banker on whom a crossed cheque is drawn has paid the same in due course, the banker paying the cheque, and (in case such cheque has come to the hands of the payee) the drawer thereof, shall respectively be entitled to the same rights, and be placed in the same position in all respects, as they would respectively be entitled to and placed in if the amount of the cheque had been paid to and received by the true owner thereof.
Payment of crossed cheque out of due course
Any banker paying a cheque crossed generally otherwise than to a banker, or a cheque crossed specially otherwise than to the banker to whom the same is crossed, or his agent for collection, being a banker, shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.
Cheque bearing "not negotiable"
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.
Non-liability of banker receiving payment of cheque A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment
“Maturity” of an instrument.
The maturity of a promissory note or bill of exchange is the date at which it falls due.
Days of grace.-Every promissory note or bill of exchange which is not expressed to be payable on demand, at sight or on presentment is at maturity on the third day after the day on which it is expressed to be payable.
ILLUSTRATION:-
A bill dated 30th November is made payable three months after date.It falls due on 3rd March.
A note dated 1st January is payable one month after sight. It falls due on 4th February.
Calculating maturity of bill or note can be done according to:-
(1) Payable so many months after date or sight.
(2) Payable so many days after date or sight.
ILLUSTRATION of “Maturity" of an instrument:-
A bill dated 30th November is made payable three months after date.It falls due on 3rd March.
A note dated 1st January is payable one month after sight. It falls due on 4th February.
Classification of negotiable instrument
Accommodation bill
This type of bill of exchange most commonly used in Australian financial markets. The accommodation bill grew out of the trade-related bills of exchange which had been widely used since the last century in financing world trade. At present, accommodation bills are a means of providing finance (lending) without necessarily having an underlying trade transaction (whereas trade bills are based on specific transactions). Accommodation parties are defined under the Bills of Exchange Act 1909 - 1973 thus: 'Accommodation party to a bill is a person who has signed a bill as drawer, without receiving value thereof, and for the purpose of lending his name to some other person.' The idea behind the accommodation bill is to lend the weight of the stronger party's name (through accepting/drawing/endorsing the bill) to another party whose name is less marketable.
Illustration:
- A is in need of Rs. 5000, approaches friend B to
borrow money.
- B suggests A to draw bill on him which he accepts.
- A gets bill discounted with the banker.
- Meets his requirements.
- On due date, A pays Rs. 5000 to B.
- B would honor the bill.
- Thus B would honor the bill.
- Thus, B has accommodated A.
FICTITIOUS BILL:
A bill is fictitious when both the drawer and payee are fictitious persons. Where the drawer is also the payee of the bill, without any intention that payment shall be in conformity with the instrument, the instrument is fictitious. Also when payee is non-existing, the instrument is fictitious. A fictitious bill in the hands of a holder in due course becomes a good bill. The acceptor is liable to a holder in due course, if the holder in due course can show that the signature of the supposed drawer and that of the first endorser or payee are under the same hand. The liability of the holder in case of a fictitious bill is only towards the holder in due course.
ESCROW:
A bill delivered conditionally is called an escrow. Where a bill or note is delivered conditionally, the liability of the party delivering does not commence till the happening of the event or the fulfillment of the condition. Such a bill may also be delivered for a special purpose as collateral security. It is to be noticed that though a conditional delivery is valid, the condition attaches exclusively to the delivery and this does not affect the rule that the bill or note must be made conditional.
Illustration of ESCROW:
A makes a note in favour of his servant and hands it to his solicitor telling to retain the note till his death and then to hand it to the servant if he should still continue in service. If this condition are complied with and the solicitor hands over the instrument to the servant, the servant can claim the amount of the note from the administrators of his master’s estate.
INSTRUMENT PAYABLE ON
DEMAND:
A promissory note, a bill of exchange in which no time for payment is specified and Cheque are payable on demand. Therefore, following are the instruments payable on the demand:
1} Bills and promissory notes expressed to be payable ‘on demand’ or ‘at sight’ or ‘on presentment’;
2} Bills and notes where no time for payment is specified; and
3} Cheque is always payable on demand.
BEARER AND ORDER INSTRUMENTS:
An instrument is a bearer instrument when the amount payable thereon is payable to the bearer and he as a holder and in lawful possession thereof is entitled to enforce payment due on it.
AMBIGUOUS INSTRUMENTS:
Where an instrument may be construed either as a Promissory Note or bill of exchange, the holder may at His election treat it as either and the instrument shall be then forward treated accordingly.
INLAND AND FOREIGN INSTRUMENT:
A promissory note, bill of exchange or Cheque drawn or made in India and made payable in, or drawn upon any person resident in India shall be deemed to be an inland instrument. Any such instrument not so drawn, made or made payable shall be deemed to be a foreign instrument.
FOREIGN bills of exchange must be protested for dishonour when such protest is required by the law of the place where they are drawn (sec. 104). However, a foreign bill drawn in India need not be so protested. Protest in case of inland bill is optional. In case of foreign bills, it is absolutely essential.
FORGED INSTRUMENT:
An instrument is a forged when it is drawn, made or alternated in writing to prejudice another man’s rights. The most common form of forgery is signing another person’s signature, signing the name of fictitious or none existing person. Fraudulently writing the name of an existing person is also forgery.
Forgery is a nullity and, therefore, it passes no title. No holder of a forged instruments acquires any right on the instruments. Even a holder in due course gets no title if he comes into the possession of a forged instrument. A person has to pay money on a forged instruments by mistake, can recover it from the person to whom he has paid it.
INTRODUCTION
The Negotiable Instruments Act was passed in 1881. Some provisions of the Act have become redundant due to passage of time, change in methods of doing business and technology changes. However, the basic principles of the Act are still valid and the Act has stood test of time. The Act extends to the whole of India. There is no doubt that the Act is to regulate commercial transactions and was drafted to suit requirements of business conditions then prevailing.
The instrument is mainly an instrument of credit readily convertible into money and easily passable from one hand to another hand.
DEFINITION
“A transferable, signed document that promises to pay the bearer a sum of money at a future date or on demand”
Examples include checks, bills of exchange, and promissory notes.
MEANING
ACCORDING TO SEC.13 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881:
“A Negotiable instrument means a promissory note, bills of exchange or cheque payable either to order or to bearer”. ‘Negotiable’ means transferable whereas ‘instrument’ means a document, therefore negotiable instruments means a transferable document. A negotiable instrument is one which entitles the holder to the receipt of money. It gives him the right to transfer the same by mere delivery or endorsement thereon. The negotiability of the instrument continues till its maturity. A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one or two, or one or some of several payees.
1. Substituted by Act 8 of 1919, sec. 3, for sub-
Section
2. Ins. by Act 5 of 1914, sec. 2.
CHARACTERISTIC OF A NEGOTIABLE INSTRUMENT
A negotiable instrument has the following characteristics:
1} PROPERTY: The possessor of the instrument is the holder and owner thereof. A negotiable instrument does not merely give possession of the instrument, but right to property. Whosever gets possession of the instrument becomes its owner and is entitled to the sum mentioned therein as the holder. It passes by mere delivery where instrument is payable to ‘bearer.’
2} DEFECTS IN TITLE: The holder in good faith and for value called the ‘holder in due course’ gets the instrument free from all defects of any previous holder.
3} REMEDY: The holder can sue upon the negotiable instrument in his own name. All prior parties are liable to him. A holder in due course can recover the full amount of the instrument.
4} RIGHT: The holder in due course is not affected by certain defenses which might be available against previous holder, for example, fraud, to which he is not a party.
5} PAYABLE TO ORDER: All three negotiable instruments are payable to order which is expressed to a particular person. An instrument which does not restrict its transferability expressly is negotiable whether the word ‘order’ is mentioned or not. The word ‘order’ or ‘bearer’ is no longer necessary to render an instrument negotiable
It must be noted that all the three negotiable instrument is endorsed and is expressed to be payable to the order of a specified person, it is nevertheless payable to him or his order.
6} PAYABLE TO BEARER: the three negotiable instrument is expressed to be payable or on which the only or last endorsement is an endorsement in blank. It specifies that the person in possession of the bill is a bearer of the instrument which is so expressed payable to bearer.
7} PAYMENT: A negotiable instrument may be made payable to two or more payees, or it may be payable in alternative to one or two payees.
8} CONSIDERATION: Consideration in the case of a negotiable instrument is presumed.
9} PRESUMPTIONS: Certain presumptions apply to all negotiable instruments.
TYPES OF NEGOTIABLE INSTRUMENTS:
A negotiable instrument regulates only three types, viz,
1} PROMISSORY NOTES.
2} BILLS OF EXCHANGE.
3} CHEQUES.
PROMISSORY NOTES, BILLS OF
EXCHANGE, BILLS IN SETS
AND CHEQUES.
PROMISSORY NOTES
DEFINATION
“A PROMISORY NOTE IS AN
INSTRUMENT IN WRITING 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.”
THE PERSON WHO PROMISES TO PAY IS CALLED THE “MAKER”.
THE PERSON WHO IS PROMISSED THE PAYMENT IS CALLED THE “PAYEE”
ELEMENTS OF A PROMISSORY NOTE
WRITING: The promissory note must be in writing. Oral engagement or promise is excluded. No particular form of words is necessary. It may be in any form but the words shall be visible. Intention to make a note must be clear.
UNDERTAKING TO PAY: It is not necessary to use the word “promise” but the intention must clearly show an ‘unconditional undertaking’ to pay the amount. The word ‘promise’ does not mean that a document is not a promissory note, provided it fulfils the requirements of this section and there is clear intention on the part of the parties to treat the document as a promissory note.
ILLUSTRATIONS:
a) “I acknowledge to pay on demand Rs 1000 for value received.” This is a promissory note.
But –“I acknowledge receipt of Rs 1000” is not a
Promissory note.
b) “I promise to pay B Rs 1000 on demand.” It is a
Promissory note.
c) “I owe you Rs1000” this not a promissory note.
UNCONDITIONAL: It must contain definite and an unconditional undertaking to pay. Promise to pay should be unconditional. A conditional instrument is invalid. It must be certain of payment.
ILLUSTRATIONS:
Conditional promissory note:
a) “I promise to pay B Rs1000 7 days after C’s
marriage.”
b) “I promise to pay B Rs1000 after deducting a sum due to him.”
These writing are conditional. Payment is subjected to a certain event happening or not happening. Such writing are not promissory notes.
Unconditional promissory note:
a) A promise given for an executed consideration.
b) Any promise to pay an instrument on lapse of
certain periods, after a specified event which is
certain to happen.
Valid conditional promissory note:
a) “I promise to pay B Rs500, 3 days after the death
of X.
This is a valid promissory note as death is a
certain event to happen; though time of death is
uncertain.
b) “I promise to pay B Rs500 at Bombay.”
SIGNED: The instrument must be signed by the maker thereof. Person must sign with his consent. It should not only be a physical act but also a mental act with an intention to sign.
CERTAIN PERSON: The maker and payee of the instrument must be a definite person. A note may be made by several people to bind themselves jointly. A promissory note cannot be made by two persons. Two different people should fill in the role of a maker and payee. The maker endorses the note. Payee is capable of being ascertained where he is wrongly described, he will be a certain person.
E.g. - a promissory note payable to “my only niece living in England”....is a valid promissory note.
SPECIFIC SUM: The sum promise to be paid must be specific.
ILLUSTRATIONS:
“I promise to pay B Rs 300 and all other sums due to
him.”
However, payment of a note with interest does not
invalidate a promissory note. Interest rate may or may
not be specified.
PROMISE TO PAY MONEY ONLY: The promise to pay must be money only. Promise to pay anything other than legal tender, in full or in part, is not a promissory note.
ILLUSTRATIONS:
a) “I promise to pay B Rs. 100 in cash and Rs. 100
worth of cosmetics.”
b) “I promise to pay B Rs. 500 and to deliver him my
black horse.”
c) “I promise to pay B Rs. 500 in government Bonds.”
These are all invalid promissory notes.
STAMPING: Promissory notes are chargeable with stamp duty. It is advisable to cancel the stamps with maker’s signature or initials. An unstamped or improperly or insufficiently stamped promissory note is not valid as evidence in court of law. No suit can be maintained upon an unstamped or improperly stamped promissory note.
BILLS OF EXCHANGE
DEFINATION:
“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, a certain person or to the
Bearer of the instrument.”
ESSENTIAL ELEMENTS OF A BILL OF EXCHANGE
WRITING: - A bill of exchange must be in writing and may be in any language, and in any form.
PARTIES: - There must be three parties to a bill of exchange, i.e., Drawer, Drawee and Payee.
PAYEE:- Payee as the person named in the instrument, to whom or to whose order the money, by the instrument directed to be paid.
ORDER TO PAY: - The bill of exchange must contain an order by the drawer to the drawee to pay under any circumstances.
UNCONDITIONAL: - The o0rder in the bill must be unconditional, for example, payable under all events and circumstances. Conditional bill is invalid.
SIGNED: - The bill must be signed by the drawer.
MONEY:- The order must be to pay money only
PAYEE MUST BE CERTAIN: - Bill may be made payable to two or more payees jointly or in the alternatives.
CERTAIN SUM: - The sum payable may be ‘certain’ although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange.
STAMPING: - Bill of exchange is chargeable with stamp duty.
HUNDI:-
Bills of exchange drawn in vernacular language called ‘hundis’ are covered by the Act. The word 'hundi', a generic term used to denote instruments of exchange in vernacular is derived from the Sanskrit root 'hundi' meaning 'to collect' and well expresses the purpose to which instruments were utilized in their origin. The Act does not affect any local usage relating to any instrument in an oriental language. In the absence of any custom or usage governing such instruments, provisions of the Act will be extended to such other instruments, for example, hundis, bills of landing, railway receipt, etc. The act does not affect the transfer of instruments under ordinary law otherwise than by negotiation, for e.g. by assignment. A bonafide transferee of a negotiable instrument for value, without notice of any defect acquires the instrument free of any defects. He acquires a better title than that of the transferor irrespective of the transferor’s title being defective.
HOW PROMISSORY NOTE BECOMES A BILL OF EXCHANGE?
An instrument which is a promissory note may become a bill of exchange if acceptance is endorsed thereon by a third party.
BILLS IN SETS
Bills of exchange may be drawn in parts. All the parts together make a set, but the whole set constitutes only one bill. Bills are sometimes drawn in several parts. All the parts so drawn are referred as bill ‘drawn in sets’. The drawer of the ‘bills in sets’ has to sign all the parts and deliver all the parts but the acceptance should be written only on one part. If the drawee accepts more than one part and if such separate accepted parts get into the hands of different holders in due course, he and the subsequent endorsers of each part are liable on every such part as if it were a separate bill.
CHEQUE
A Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise then on demand. A cheque is drawn on a banker only while a bill of exchange can be drawn on any one. A cheque is an unconditional order on the specified banker to pay on demand, a certain sum of money to the bearer of the cheque or to his order. A bill of exchange is wider than a cheque.A cheque is not valid because it is post-dated. A cheque must be dated. Unlike a promissory note and a bill of exchange, cheque may be drawn payable to bearer on demand.
Cheque crossed generally
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
Cheque crossed specially
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.
Crossing after issue
Where a cheque is uncrossed, the holder may cross it generally or specially.
Where a cheque is crossed generally, the holder may cross it specially.
Where a cheque is crossed generally or specially, the holder may add the words "not negotiable".
Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker, his agent, for collection.
Payment of cheque crossed generally
Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to the banker
Payment of cheque crossed specially
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
Payment of cheque crossed specially more than once
Where a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof.
Payment in due course of crossed cheque
Where the banker on whom a crossed cheque is drawn has paid the same in due course, the banker paying the cheque, and (in case such cheque has come to the hands of the payee) the drawer thereof, shall respectively be entitled to the same rights, and be placed in the same position in all respects, as they would respectively be entitled to and placed in if the amount of the cheque had been paid to and received by the true owner thereof.
Payment of crossed cheque out of due course
Any banker paying a cheque crossed generally otherwise than to a banker, or a cheque crossed specially otherwise than to the banker to whom the same is crossed, or his agent for collection, being a banker, shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.
Cheque bearing "not negotiable"
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.
Non-liability of banker receiving payment of cheque A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment
“Maturity” of an instrument.
The maturity of a promissory note or bill of exchange is the date at which it falls due.
Days of grace.-Every promissory note or bill of exchange which is not expressed to be payable on demand, at sight or on presentment is at maturity on the third day after the day on which it is expressed to be payable.
ILLUSTRATION:-
A bill dated 30th November is made payable three months after date.It falls due on 3rd March.
A note dated 1st January is payable one month after sight. It falls due on 4th February.
Calculating maturity of bill or note can be done according to:-
(1) Payable so many months after date or sight.
(2) Payable so many days after date or sight.
ILLUSTRATION of “Maturity" of an instrument:-
A bill dated 30th November is made payable three months after date.It falls due on 3rd March.
A note dated 1st January is payable one month after sight. It falls due on 4th February.
Classification of negotiable instrument
Accommodation bill
This type of bill of exchange most commonly used in Australian financial markets. The accommodation bill grew out of the trade-related bills of exchange which had been widely used since the last century in financing world trade. At present, accommodation bills are a means of providing finance (lending) without necessarily having an underlying trade transaction (whereas trade bills are based on specific transactions). Accommodation parties are defined under the Bills of Exchange Act 1909 - 1973 thus: 'Accommodation party to a bill is a person who has signed a bill as drawer, without receiving value thereof, and for the purpose of lending his name to some other person.' The idea behind the accommodation bill is to lend the weight of the stronger party's name (through accepting/drawing/endorsing the bill) to another party whose name is less marketable.
Illustration:
- A is in need of Rs. 5000, approaches friend B to
borrow money.
- B suggests A to draw bill on him which he accepts.
- A gets bill discounted with the banker.
- Meets his requirements.
- On due date, A pays Rs. 5000 to B.
- B would honor the bill.
- Thus B would honor the bill.
- Thus, B has accommodated A.
FICTITIOUS BILL:
A bill is fictitious when both the drawer and payee are fictitious persons. Where the drawer is also the payee of the bill, without any intention that payment shall be in conformity with the instrument, the instrument is fictitious. Also when payee is non-existing, the instrument is fictitious. A fictitious bill in the hands of a holder in due course becomes a good bill. The acceptor is liable to a holder in due course, if the holder in due course can show that the signature of the supposed drawer and that of the first endorser or payee are under the same hand. The liability of the holder in case of a fictitious bill is only towards the holder in due course.
ESCROW:
A bill delivered conditionally is called an escrow. Where a bill or note is delivered conditionally, the liability of the party delivering does not commence till the happening of the event or the fulfillment of the condition. Such a bill may also be delivered for a special purpose as collateral security. It is to be noticed that though a conditional delivery is valid, the condition attaches exclusively to the delivery and this does not affect the rule that the bill or note must be made conditional.
Illustration of ESCROW:
A makes a note in favour of his servant and hands it to his solicitor telling to retain the note till his death and then to hand it to the servant if he should still continue in service. If this condition are complied with and the solicitor hands over the instrument to the servant, the servant can claim the amount of the note from the administrators of his master’s estate.
INSTRUMENT PAYABLE ON
DEMAND:
A promissory note, a bill of exchange in which no time for payment is specified and Cheque are payable on demand. Therefore, following are the instruments payable on the demand:
1} Bills and promissory notes expressed to be payable ‘on demand’ or ‘at sight’ or ‘on presentment’;
2} Bills and notes where no time for payment is specified; and
3} Cheque is always payable on demand.
BEARER AND ORDER INSTRUMENTS:
An instrument is a bearer instrument when the amount payable thereon is payable to the bearer and he as a holder and in lawful possession thereof is entitled to enforce payment due on it.
AMBIGUOUS INSTRUMENTS:
Where an instrument may be construed either as a Promissory Note or bill of exchange, the holder may at His election treat it as either and the instrument shall be then forward treated accordingly.
INLAND AND FOREIGN INSTRUMENT:
A promissory note, bill of exchange or Cheque drawn or made in India and made payable in, or drawn upon any person resident in India shall be deemed to be an inland instrument. Any such instrument not so drawn, made or made payable shall be deemed to be a foreign instrument.
FOREIGN bills of exchange must be protested for dishonour when such protest is required by the law of the place where they are drawn (sec. 104). However, a foreign bill drawn in India need not be so protested. Protest in case of inland bill is optional. In case of foreign bills, it is absolutely essential.
FORGED INSTRUMENT:
An instrument is a forged when it is drawn, made or alternated in writing to prejudice another man’s rights. The most common form of forgery is signing another person’s signature, signing the name of fictitious or none existing person. Fraudulently writing the name of an existing person is also forgery.
Forgery is a nullity and, therefore, it passes no title. No holder of a forged instruments acquires any right on the instruments. Even a holder in due course gets no title if he comes into the possession of a forged instrument. A person has to pay money on a forged instruments by mistake, can recover it from the person to whom he has paid it.