Description
Highlights different kinds of negotiable instruments and their properties.
NEGOTIABLE INSTRUMENT ACT
Negotiable Instrument
• General Definition:
– Documents commonly used in monetary dealings and commercial transactions.
• A special kind of contract • Indian act: Negotiable instrument act, 1881 • Definition by act:
• A bill of exchange, promissory note or cheque either to order or bearer.
• Negotiable- “transferable by delivery” • Instrument- “written document by which a right is created in favor of some one”
Negotiable Instrument- Evolution
City A
Trader X
Chance of theft and discomfort of taking money
X sells goods to Y for 1000 Rs. At a common place
City B
Trader Y
Trader X
Negotiable instrument
X sells goods to Y and Z buys goods from Y for 1000 Rs. At a common place
Trader Y
Trader Z
Properties
• Freely transferable – Payable to bearer – Payable to order • Property • Defects in title • Payment
Presumptions
• Consideration – Is presumed – Instrument drawn or transferred without consideration (e.g.) – Consideration that fails in part (e.g.) • Date • Time of acceptance • Order of endorsement • Holder in due course
Kinds of Negotiable Instrument
• Instruments payable to order or payable to bearer
– Payable to order:
• when expressed to be so payable or payable to a particular person • Prohibiting transfer
– Payable to order of a specified person
• Payable to him/ his order at his option
– Payable to bearer
• When expressed to be so payable or on which the only or last indorsement is in blank • It is transferable by mere delivery
Kinds of Negotiable Instrument
• Inland and foreign instruments
– A promissory note, bill of exchange or cheque which is
• Both drawn or made in India and payable in India, or • Drawn upon any person resident in India
– An instrument, which is not inland instrument is deemed to be a foreign instrument. – Example:
• A bill drawn in Delhi on a merchant in Kolkata and payable at Mumbai or London- Inland Bill • A bill drawn in Delhi on a merchant in New York and payable at London is a foreign bill
Kinds of Negotiable Instrument
• Time and Demand Instrument:
– Time Instrument:
• A bill or note which payable a) after a certain period or b) on a specified day or c) after sight or d) on the happening of an event which is certain to happen.
– Demand Instrument:
• The following instruments are payable to demand:
– A cheque is always payable on demand – A bill or note is payable on demand when» No time for its payment is specified or » It is expressed to be payable „on demand?, „at sight? or „on presentment?.
Kinds of Negotiable Instrument
• Documentary bill and clean bill:
– Documentary bill is one to which documents of tiltle to the goods and other documents such as invoice etc are annexed, such documents are delivered to the buyer only on acceptance on payment. – When no such documents are attached, it is clean bill.
• Trade and accommodation bill:
– A bill drawn accepted, drawn or indorsed for
• consideration is called a genuine trade bill
Kinds of Negotiable Instrument
• Incomplete Instrument:
– An instrument which is incomplete in some respect – Example:
• A draws a bill „ payable to…….or order?. Any holder in due course may fill in his name as payee in the blank and recover the money.
• Ambiguous Instrument:
– When an instrument owing to its faulty drafting may be treated either as a promissory note or bill of exchange.
Kinds of Negotiable Instrument
• Hundis:
– A regional version of negotiable instrument in a vernacular language. Can be a promissory note or bill of exchange.
• Escrow:
– Negotiable instrument delivered conditionally or for a special purpose as a collateral security or for safe custody and not for the purpose of transferring. – The liability to pay on escrow does not arise until the purpose for which the instrument was delivered is not satisfied.
Promissory Notes
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. Parties to a Promissory Note Primarily two parties – The Maker or Drawer - makes the note and promises to pay the amount stated therein. – The Payee - whom the amount is payable. Other Parties involved may be – The Endorser - The person who endorses the note in favour of another person. – The Endorsee - The person in whose favour the note is negotiated by endorsement.
Features of Promissory Note
• Writing: in writing, duly signed by its maker and properly stamped • Undertaking to Pay: an undertaking or promise to pay. Mere acknowledgement of indebtedness is not enough.
• Unconditional promise to pay
• Promise to pay money and money alone. • The parties to a promissory note, i.e. the maker and the payee must be certain . • A promissory note may be payable on demand or after a certain date.
• Specific Sum: Sum to be paid must be certain and Specific
Specimen
Bill of Exchange
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 a certain person, or to the bearer of the instrument.
Parties to a Bill of Exchange
• The Drawer - The person who makes the order for making payment. • The Drawee – The person to whom the order to pay is made.
• The Payee – The person to whom the payment is to be made.
Features of Bill of Exchange
• Writing : in writing, duly signed by its drawer, accepted by its drawee and properly stamped • 3 parties to be there: Drawer, Drawee and Payee • It must contain an order to pay. Words like „please pay Rs 5,000/on demand and oblige? are not used. “Order by the drawer to the drawee to pay” • Unconditional: payable under all events and circumstances • Only money • The sum payable mentioned must be certain or capable of being made certain. • Certain parties (Drawer, Drawee and Payee) to a bill.
Specimen
Promissory Note
• 2 Parties-Maker and Payee • Unconditional promise to pay • No acceptance is required • Note cannot be made payable to the maker.
Bill of Exchange
• 3 Parties-Drawer, Drawee and Payee • Unconditional order to pay • Payable by other person directed. So Acceptance is necessary • Drawer and the payee may be one and the same person
Cheque
• The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Actually, a cheque is an order by the account holder of the bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer.
• Most commonly used Negotiable Instrument
• A cheque may be regarded as a bill of exchange; the only difference is that the bank is always the drawee in case of a cheque
Parties Involved
There are three parties involved in a bill of exchange. They are as follows: • The Drawer – The person who makes the order for making payment. • The Drawee – The person to whom the order to pay is made. He is generally a debtor of the drawer. Always Bank in case of Cheque • The Payee – The person to whom the payment is to be made.
Features Of Cheque
• A cheque must be in writing and duly signed by the drawer.
• It contains an unconditional order.
• It is issued on a specified banker only.
• The amount specified is always certain and must be clearly mentioned both in figures and words.
• The payee is always certain. • It is always payable on demand. • The cheque must bear a date otherwise it is invalid and shall not be honoured by the bank.
Types of Cheque
• • • • • • • • Open cheque Crossed cheque Bearer cheque Order cheque Ante – dated cheque Stale cheque Mutilated cheque Post – dated cheque
Types of Cheque
• Open cheque: A cheque is called „Open? when it is possible to get cash over the counter at the bank. The holder of an open cheque can do the following:• Receive its payment over the counter at the bank. • Deposit the cheque in his own account. • Pass it to someone else by signing on the back of a cheque. • Crossed cheque: Since open cheque is subject to risk of theft, it is dangerous to issue such cheques. This risk can be avoided by issuing other types of cheque called „Crossed cheque?. The payment of such cheque is not made over the counter at the bank. It is only credited to the bank account of the payee. A cheque can be crossed by drawing two transverse parallel lines across the cheque, with or without the writing „Account payee? or „Not Negotiable?.
Types Of Cheque
• Bearer cheque: – A cheque which is payable to any person who presents it for payment at the bank counter is called „Bearer cheque?. A bearer cheque can be transferred by mere delivery and requires no endorsement. • Order cheque: – An order cheque is one which is payable to a particular person. In such a cheque the word „bearer? may be cut out or cancelled and the word „order? may be written. The payee can transfer an order cheque to someone else by signing his or her name on the back of it.
Other Types of Cheques
• Ante-dated cheques: Cheque in which the drawer mentions the date earlier to the date of presenting if for payment. For example, a cheque issued on 20th May 2003 may bear a date 5th May 2003. • Stale Cheque: – A cheque which is issued today must be presented before at bank for payment within a stipulated period. After expiry of that period, no payment will be made and it is then called „stale cheque?. Find out from your nearest bank about the validity period of a cheque. • Mutilated Cheque: – In case a cheque is torn into two or more pieces and presented for payment, such a cheque is called a mutilated cheque. The bank will not make payment against such a cheque without getting confirmation of the drawer. But if a cheque is torn at the corners and no material fact is erased or cancelled, the bank may make payment against such a cheque.
Other Types of Cheques
• Post-dated Cheque:
– Cheque, on which drawer mentions a date, that is subsequent to the date on which it is presented, is called post-dated cheque. For example, if a cheque presented on 8th May 2003 bears a date of 25th May 2003, it is a post-dated cheque. The bank will make payment only on or after 25th May 2003
Differences between a Cheque and a Bill of exchange
Cheque 1. It is drawn only on a banker. Bill of Exchange 1. It can be drawn on anybody including a banker. 2. The amount is always 2. The amount is payable on
payable on demand.
demand or after a specified
period.
3. It can be crossed to end its negotiability. 4. Acceptance is not required.
3. It cannot be crossed.
4. Acceptance is a must.
Crossed Cheque
A crossed cheque is one on which two parallel transverse lines with or without the word „& co.? „not negotiable?…etc. are drawn. A crossed cheque is not payable across the counter of the bank. It must be collected through a bank. It is paid into the bank account of a person and cannot be encashed at the counter of the bank. By crossing cheques safety is ensured and the person to whom payment is eventually made can be traced because such a cheque is always paid into a bank account. A crossed cheque provides protection not only to the holder of the cheque but also to the receiving and collecting bankers.
Specimen
Kinds of Crossing
• • • • General Crossing Special Crossing Restrictive Crossing Non negotiable Crossing
Definition of General Crossing
Sec 123 of the Negotiable Instruments Act 1881 defines general crossing as follows: “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 to be a „crossing, and the cheque shall be deemed to be crossed generally.”
Significance of General Crossing
• The effect of general crossing is that it gives a direction to the paying banker. • The direction is that the paying banker should not pay the cheque at the counter. • If a crossed cheque is paid at the counter in contravention of the crossing:
a. b. c. He has no right to debit his customers account, since , it will constitute a breach of his customer?s mandate, He will be liable to the drawer for any loss, which he may suffer, He will be liable to the true owner of the cheque who may be the third party.
• The main intention of crossing a cheque is to give protection to it.
Special Crossing
Sec 124 of the Negotiable Instruments Act of 1881 defines “where a cheque bears across its face, an addition of the name of a banker, 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”
Essentials of Special Crossing
• Two parallel transverse lines are not at all essential for a special crossing. • The name of a banker must be necessarily specified across the face of the cheque. The name of the banker itself constitutes special crossing. • It must appear on the left hand side, preferably on the corner. • The two parallel transverse lines and the words „not negotiable be adedd to a special crossing.
Significance of Special Crossing
• It is a direction to the paying banker. • A special crossing gives more protection the cheque than a general crossing.
Restrictive Crossing
• It constitute a direction to the collecting banker to collect the cheque and credit the proceeds to the account of the payee only. Such a crossing is known as RESTRICTIVE CROSSING. The collecting bank has to credit the account of the payee in whose favour the cheque is drawn.
Non Negotiable Crossing
• It makes the cheque non transferable but the effect of such a crossing is that when the holder to a cheque transfers it to any other person the transferee does not get a better title than the transferor had even though the transferee is a bonafide person who takes the instrument for a valid consideration and before the maturity of the instrument.
Dishonour Of Cheques
• Dishonour of cheque for insuffiency of funds in the account (Sec.138 the Negotiable Instruments Act,1881) • The Provisions of Section 138 of the act would be attracted when: a)Insufficiency of funds b)Issue of Cheque for reasons other than discharge of a debt or liability
When Dishonour OF Cheque Is An Offence?
• Existence of a live account • Presentation of the cheque within 6 months or within the period of its validity. • Return of the cheque unpaid for reason of insufficiency of funds • Issue of the notice of dishonour demanding payment within 30 days of receipt of information as to dishonour the cheque • Failure of the drawer to make the payment within 15 days of the receipt of notice
Time Line During Dishonour Of Cheque
CONDITION Presentation of Cheque to banks for encashment TIME DURATION 6 Months from the date mentioned on the cheque(includes post dated cheques) a)Any number of times till NO legal notice of dishonour and demand of cheque amount is made b)Once a Legal notice about dishonour of cheque and demand of cheque amount is made,the cheque cannot be presented again
Number of times a cheque can be presented for encashment in a bank(in case of dishonour)
Issuance of Legal notice for dishonour of cheque and demand Payment of Dishonoured cheque amount by Drawer Filing criminal complaint before court
30 days from date of intimation of dishonour of cheque by bank to customer 15 days from date of receipt of legal notice of demand After 15 days but within 45 days from date of receipt of legal notice of demand by drawer if no payment of cheque amount is made
Some Commonly faced Issues
• When a cheque is dishonoured,what is the legal action that can be taken? • Ans: Firstly a statuatory notice is liable to be given to the other party. Then one can file a suit for recovery of cheque amount along with cost and interest under order XXXVII of code of civil procedure 1908.A criminal complaint can also be filed u/s 138 of NIA act. • I have been given blank cheques by a partnership firm,since they owe me some money .Now the partnership firm has been closed Can I deposit the cheques now and raise a claim on them? • Ans: Yes,you can fill the cheques and present for encashment.The partnership firm and partners are liable even after the firm is dissolved.First a notice must be given within 15 days of dishonouring and still if no payment is made a complaint must be made within 30 days thereafter.
Contd……
• When drawer of a dishonoured cheque is a company or firm or group: Ans: Every Director,secretary,manager,partner etc shall be deemed to guilty and punished unless the person proves that offence was committed without his knowledge or he had excercised due diligence to prevent commission of such offence • A large number of cases fail in court because of defects and mistakes in legal notice • Mode of making demand for payment is by giving notice in writing to drawer of cheque which can be of any form • Stopping payment of post dated cheques issued by a person to discharge is debt or liability would amount to penal offence
Penalty
• The drawer may be punished with imprisonment for a term which may extend to two years ,or • Fine which may extend to twice the amount of the cheque,or • With Both • However a Magistrate can award any sum as compensation to alleviate the grievance of complainant using section 357(3) of the code
Where can the complaint be filed?
• Where the Cheque was drawn • Where the Cheque was presented for encashment • Where the Cheque was returned unpaid by the drawee bank • Where notice in writing was given to drawer of Cheque demanding payment • Where drawer of Cheque failed to make payment within 15 days of receipt of notice
Discharge of an Instrument
• By Payment [Section 82 (a)] • By Release [Section 82(b)] • By Cancellation [Section 82(c)] • By default of holder: • Allowing drawee more than 48 hours [Section 83] • Delay in cheque presentment & drawer damage [Section 84] • Parties not consenting to qualified/limited acceptance [Section 86] • Delay in presentment of payment • Failure to give notice of dishonor
Discharge of an Instrument
• By material alteration [Section 87-89] • There are both permissible alterations and impermissible alterations. • Alterations that make instruments void: • Date of the instrument • Amount on the instrument • Time or place of the payment • Addition of place of payment without acceptor?s assent
Discharge of an Instrument
• When cheque is an electronic image [Section 89 (2) & (3)] • By holder destroying indorser?s remedy [Sector 40] • Draft indorsed by payee [Section (85A)] • Discharge of drawee of a cheque [Section 85] • By operation of law • By an order of insolvency • When debt merged into judgment debt • By remedy becoming time barred
References
•Business Law
•K.R.Bulchandani
•Legal aspects of business
•akhileshwar pathak
•Nabhi?s business laws one should know •www.Indiacourt.nic.in •www.vakilno1.com
doc_864073280.pptx
Highlights different kinds of negotiable instruments and their properties.
NEGOTIABLE INSTRUMENT ACT
Negotiable Instrument
• General Definition:
– Documents commonly used in monetary dealings and commercial transactions.
• A special kind of contract • Indian act: Negotiable instrument act, 1881 • Definition by act:
• A bill of exchange, promissory note or cheque either to order or bearer.
• Negotiable- “transferable by delivery” • Instrument- “written document by which a right is created in favor of some one”
Negotiable Instrument- Evolution
City A
Trader X
Chance of theft and discomfort of taking money
X sells goods to Y for 1000 Rs. At a common place
City B
Trader Y
Trader X
Negotiable instrument
X sells goods to Y and Z buys goods from Y for 1000 Rs. At a common place
Trader Y
Trader Z
Properties
• Freely transferable – Payable to bearer – Payable to order • Property • Defects in title • Payment
Presumptions
• Consideration – Is presumed – Instrument drawn or transferred without consideration (e.g.) – Consideration that fails in part (e.g.) • Date • Time of acceptance • Order of endorsement • Holder in due course
Kinds of Negotiable Instrument
• Instruments payable to order or payable to bearer
– Payable to order:
• when expressed to be so payable or payable to a particular person • Prohibiting transfer
– Payable to order of a specified person
• Payable to him/ his order at his option
– Payable to bearer
• When expressed to be so payable or on which the only or last indorsement is in blank • It is transferable by mere delivery
Kinds of Negotiable Instrument
• Inland and foreign instruments
– A promissory note, bill of exchange or cheque which is
• Both drawn or made in India and payable in India, or • Drawn upon any person resident in India
– An instrument, which is not inland instrument is deemed to be a foreign instrument. – Example:
• A bill drawn in Delhi on a merchant in Kolkata and payable at Mumbai or London- Inland Bill • A bill drawn in Delhi on a merchant in New York and payable at London is a foreign bill
Kinds of Negotiable Instrument
• Time and Demand Instrument:
– Time Instrument:
• A bill or note which payable a) after a certain period or b) on a specified day or c) after sight or d) on the happening of an event which is certain to happen.
– Demand Instrument:
• The following instruments are payable to demand:
– A cheque is always payable on demand – A bill or note is payable on demand when» No time for its payment is specified or » It is expressed to be payable „on demand?, „at sight? or „on presentment?.
Kinds of Negotiable Instrument
• Documentary bill and clean bill:
– Documentary bill is one to which documents of tiltle to the goods and other documents such as invoice etc are annexed, such documents are delivered to the buyer only on acceptance on payment. – When no such documents are attached, it is clean bill.
• Trade and accommodation bill:
– A bill drawn accepted, drawn or indorsed for
• consideration is called a genuine trade bill
Kinds of Negotiable Instrument
• Incomplete Instrument:
– An instrument which is incomplete in some respect – Example:
• A draws a bill „ payable to…….or order?. Any holder in due course may fill in his name as payee in the blank and recover the money.
• Ambiguous Instrument:
– When an instrument owing to its faulty drafting may be treated either as a promissory note or bill of exchange.
Kinds of Negotiable Instrument
• Hundis:
– A regional version of negotiable instrument in a vernacular language. Can be a promissory note or bill of exchange.
• Escrow:
– Negotiable instrument delivered conditionally or for a special purpose as a collateral security or for safe custody and not for the purpose of transferring. – The liability to pay on escrow does not arise until the purpose for which the instrument was delivered is not satisfied.
Promissory Notes
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. Parties to a Promissory Note Primarily two parties – The Maker or Drawer - makes the note and promises to pay the amount stated therein. – The Payee - whom the amount is payable. Other Parties involved may be – The Endorser - The person who endorses the note in favour of another person. – The Endorsee - The person in whose favour the note is negotiated by endorsement.
Features of Promissory Note
• Writing: in writing, duly signed by its maker and properly stamped • Undertaking to Pay: an undertaking or promise to pay. Mere acknowledgement of indebtedness is not enough.
• Unconditional promise to pay
• Promise to pay money and money alone. • The parties to a promissory note, i.e. the maker and the payee must be certain . • A promissory note may be payable on demand or after a certain date.
• Specific Sum: Sum to be paid must be certain and Specific
Specimen
Bill of Exchange
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 a certain person, or to the bearer of the instrument.
Parties to a Bill of Exchange
• The Drawer - The person who makes the order for making payment. • The Drawee – The person to whom the order to pay is made.
• The Payee – The person to whom the payment is to be made.
Features of Bill of Exchange
• Writing : in writing, duly signed by its drawer, accepted by its drawee and properly stamped • 3 parties to be there: Drawer, Drawee and Payee • It must contain an order to pay. Words like „please pay Rs 5,000/on demand and oblige? are not used. “Order by the drawer to the drawee to pay” • Unconditional: payable under all events and circumstances • Only money • The sum payable mentioned must be certain or capable of being made certain. • Certain parties (Drawer, Drawee and Payee) to a bill.
Specimen
Promissory Note
• 2 Parties-Maker and Payee • Unconditional promise to pay • No acceptance is required • Note cannot be made payable to the maker.
Bill of Exchange
• 3 Parties-Drawer, Drawee and Payee • Unconditional order to pay • Payable by other person directed. So Acceptance is necessary • Drawer and the payee may be one and the same person
Cheque
• The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Actually, a cheque is an order by the account holder of the bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer.
• Most commonly used Negotiable Instrument
• A cheque may be regarded as a bill of exchange; the only difference is that the bank is always the drawee in case of a cheque
Parties Involved
There are three parties involved in a bill of exchange. They are as follows: • The Drawer – The person who makes the order for making payment. • The Drawee – The person to whom the order to pay is made. He is generally a debtor of the drawer. Always Bank in case of Cheque • The Payee – The person to whom the payment is to be made.
Features Of Cheque
• A cheque must be in writing and duly signed by the drawer.
• It contains an unconditional order.
• It is issued on a specified banker only.
• The amount specified is always certain and must be clearly mentioned both in figures and words.
• The payee is always certain. • It is always payable on demand. • The cheque must bear a date otherwise it is invalid and shall not be honoured by the bank.
Types of Cheque
• • • • • • • • Open cheque Crossed cheque Bearer cheque Order cheque Ante – dated cheque Stale cheque Mutilated cheque Post – dated cheque
Types of Cheque
• Open cheque: A cheque is called „Open? when it is possible to get cash over the counter at the bank. The holder of an open cheque can do the following:• Receive its payment over the counter at the bank. • Deposit the cheque in his own account. • Pass it to someone else by signing on the back of a cheque. • Crossed cheque: Since open cheque is subject to risk of theft, it is dangerous to issue such cheques. This risk can be avoided by issuing other types of cheque called „Crossed cheque?. The payment of such cheque is not made over the counter at the bank. It is only credited to the bank account of the payee. A cheque can be crossed by drawing two transverse parallel lines across the cheque, with or without the writing „Account payee? or „Not Negotiable?.
Types Of Cheque
• Bearer cheque: – A cheque which is payable to any person who presents it for payment at the bank counter is called „Bearer cheque?. A bearer cheque can be transferred by mere delivery and requires no endorsement. • Order cheque: – An order cheque is one which is payable to a particular person. In such a cheque the word „bearer? may be cut out or cancelled and the word „order? may be written. The payee can transfer an order cheque to someone else by signing his or her name on the back of it.
Other Types of Cheques
• Ante-dated cheques: Cheque in which the drawer mentions the date earlier to the date of presenting if for payment. For example, a cheque issued on 20th May 2003 may bear a date 5th May 2003. • Stale Cheque: – A cheque which is issued today must be presented before at bank for payment within a stipulated period. After expiry of that period, no payment will be made and it is then called „stale cheque?. Find out from your nearest bank about the validity period of a cheque. • Mutilated Cheque: – In case a cheque is torn into two or more pieces and presented for payment, such a cheque is called a mutilated cheque. The bank will not make payment against such a cheque without getting confirmation of the drawer. But if a cheque is torn at the corners and no material fact is erased or cancelled, the bank may make payment against such a cheque.
Other Types of Cheques
• Post-dated Cheque:
– Cheque, on which drawer mentions a date, that is subsequent to the date on which it is presented, is called post-dated cheque. For example, if a cheque presented on 8th May 2003 bears a date of 25th May 2003, it is a post-dated cheque. The bank will make payment only on or after 25th May 2003
Differences between a Cheque and a Bill of exchange
Cheque 1. It is drawn only on a banker. Bill of Exchange 1. It can be drawn on anybody including a banker. 2. The amount is always 2. The amount is payable on
payable on demand.
demand or after a specified
period.
3. It can be crossed to end its negotiability. 4. Acceptance is not required.
3. It cannot be crossed.
4. Acceptance is a must.
Crossed Cheque
A crossed cheque is one on which two parallel transverse lines with or without the word „& co.? „not negotiable?…etc. are drawn. A crossed cheque is not payable across the counter of the bank. It must be collected through a bank. It is paid into the bank account of a person and cannot be encashed at the counter of the bank. By crossing cheques safety is ensured and the person to whom payment is eventually made can be traced because such a cheque is always paid into a bank account. A crossed cheque provides protection not only to the holder of the cheque but also to the receiving and collecting bankers.
Specimen
Kinds of Crossing
• • • • General Crossing Special Crossing Restrictive Crossing Non negotiable Crossing
Definition of General Crossing
Sec 123 of the Negotiable Instruments Act 1881 defines general crossing as follows: “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 to be a „crossing, and the cheque shall be deemed to be crossed generally.”
Significance of General Crossing
• The effect of general crossing is that it gives a direction to the paying banker. • The direction is that the paying banker should not pay the cheque at the counter. • If a crossed cheque is paid at the counter in contravention of the crossing:
a. b. c. He has no right to debit his customers account, since , it will constitute a breach of his customer?s mandate, He will be liable to the drawer for any loss, which he may suffer, He will be liable to the true owner of the cheque who may be the third party.
• The main intention of crossing a cheque is to give protection to it.
Special Crossing
Sec 124 of the Negotiable Instruments Act of 1881 defines “where a cheque bears across its face, an addition of the name of a banker, 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”
Essentials of Special Crossing
• Two parallel transverse lines are not at all essential for a special crossing. • The name of a banker must be necessarily specified across the face of the cheque. The name of the banker itself constitutes special crossing. • It must appear on the left hand side, preferably on the corner. • The two parallel transverse lines and the words „not negotiable be adedd to a special crossing.
Significance of Special Crossing
• It is a direction to the paying banker. • A special crossing gives more protection the cheque than a general crossing.
Restrictive Crossing
• It constitute a direction to the collecting banker to collect the cheque and credit the proceeds to the account of the payee only. Such a crossing is known as RESTRICTIVE CROSSING. The collecting bank has to credit the account of the payee in whose favour the cheque is drawn.
Non Negotiable Crossing
• It makes the cheque non transferable but the effect of such a crossing is that when the holder to a cheque transfers it to any other person the transferee does not get a better title than the transferor had even though the transferee is a bonafide person who takes the instrument for a valid consideration and before the maturity of the instrument.
Dishonour Of Cheques
• Dishonour of cheque for insuffiency of funds in the account (Sec.138 the Negotiable Instruments Act,1881) • The Provisions of Section 138 of the act would be attracted when: a)Insufficiency of funds b)Issue of Cheque for reasons other than discharge of a debt or liability
When Dishonour OF Cheque Is An Offence?
• Existence of a live account • Presentation of the cheque within 6 months or within the period of its validity. • Return of the cheque unpaid for reason of insufficiency of funds • Issue of the notice of dishonour demanding payment within 30 days of receipt of information as to dishonour the cheque • Failure of the drawer to make the payment within 15 days of the receipt of notice
Time Line During Dishonour Of Cheque
CONDITION Presentation of Cheque to banks for encashment TIME DURATION 6 Months from the date mentioned on the cheque(includes post dated cheques) a)Any number of times till NO legal notice of dishonour and demand of cheque amount is made b)Once a Legal notice about dishonour of cheque and demand of cheque amount is made,the cheque cannot be presented again
Number of times a cheque can be presented for encashment in a bank(in case of dishonour)
Issuance of Legal notice for dishonour of cheque and demand Payment of Dishonoured cheque amount by Drawer Filing criminal complaint before court
30 days from date of intimation of dishonour of cheque by bank to customer 15 days from date of receipt of legal notice of demand After 15 days but within 45 days from date of receipt of legal notice of demand by drawer if no payment of cheque amount is made
Some Commonly faced Issues
• When a cheque is dishonoured,what is the legal action that can be taken? • Ans: Firstly a statuatory notice is liable to be given to the other party. Then one can file a suit for recovery of cheque amount along with cost and interest under order XXXVII of code of civil procedure 1908.A criminal complaint can also be filed u/s 138 of NIA act. • I have been given blank cheques by a partnership firm,since they owe me some money .Now the partnership firm has been closed Can I deposit the cheques now and raise a claim on them? • Ans: Yes,you can fill the cheques and present for encashment.The partnership firm and partners are liable even after the firm is dissolved.First a notice must be given within 15 days of dishonouring and still if no payment is made a complaint must be made within 30 days thereafter.
Contd……
• When drawer of a dishonoured cheque is a company or firm or group: Ans: Every Director,secretary,manager,partner etc shall be deemed to guilty and punished unless the person proves that offence was committed without his knowledge or he had excercised due diligence to prevent commission of such offence • A large number of cases fail in court because of defects and mistakes in legal notice • Mode of making demand for payment is by giving notice in writing to drawer of cheque which can be of any form • Stopping payment of post dated cheques issued by a person to discharge is debt or liability would amount to penal offence
Penalty
• The drawer may be punished with imprisonment for a term which may extend to two years ,or • Fine which may extend to twice the amount of the cheque,or • With Both • However a Magistrate can award any sum as compensation to alleviate the grievance of complainant using section 357(3) of the code
Where can the complaint be filed?
• Where the Cheque was drawn • Where the Cheque was presented for encashment • Where the Cheque was returned unpaid by the drawee bank • Where notice in writing was given to drawer of Cheque demanding payment • Where drawer of Cheque failed to make payment within 15 days of receipt of notice
Discharge of an Instrument
• By Payment [Section 82 (a)] • By Release [Section 82(b)] • By Cancellation [Section 82(c)] • By default of holder: • Allowing drawee more than 48 hours [Section 83] • Delay in cheque presentment & drawer damage [Section 84] • Parties not consenting to qualified/limited acceptance [Section 86] • Delay in presentment of payment • Failure to give notice of dishonor
Discharge of an Instrument
• By material alteration [Section 87-89] • There are both permissible alterations and impermissible alterations. • Alterations that make instruments void: • Date of the instrument • Amount on the instrument • Time or place of the payment • Addition of place of payment without acceptor?s assent
Discharge of an Instrument
• When cheque is an electronic image [Section 89 (2) & (3)] • By holder destroying indorser?s remedy [Sector 40] • Draft indorsed by payee [Section (85A)] • Discharge of drawee of a cheque [Section 85] • By operation of law • By an order of insolvency • When debt merged into judgment debt • By remedy becoming time barred
References
•Business Law
•K.R.Bulchandani
•Legal aspects of business
•akhileshwar pathak
•Nabhi?s business laws one should know •www.Indiacourt.nic.in •www.vakilno1.com
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