Parties to the Negotiable Instruments

Parties to the Negotiable InstrumentsPresented by Vaghela NayanSDJ International College

Various common parties to the negotiable instrumentsMaker: the person who signs the promissory notes.Drawer: the maker of the Bill of Exchange or a Cheque is called Drawer.Drawee: the person who is directed to pay.Payee: the person who will receive the money.Acceptor: when the drawee signs on the bill for the consent, he becomes acceptor.

Acceptor for honour: in case when the bill is protested, with the consent of the holder in writing the party thereto may accept the same and he will be known as Acceptor for honour.Endorser: the maker or the holder, for the purpose of negotiation, signs on the back side of the instrument and transfers the property with in the instrument, then he is Endorser.Endorsee: the person in whose favour instrument is transferred is called the endorsee.

Drawee in case of need:When the drawer has a doubt about the non acceptance of the bill by the drawee, then he may write the name of another drawee in the bill.When the first drawee does not accept the bill then the holder of a bill has to present it to the second drawee.The second drawee is called the drawee in case of need.As and when there is drawee in case of need, the bill is not likelt to be dishonoured.In England it is known as Reference in case if need

Holder:The holder of a negotiable instrument means any person whoIs entitled in hisOwn name to the possession thereof and to receive or remove the amount, due thereon from the parties thereto.Necessities to be Holder of a Negotiable Instrument:He should be entitled in his own name to the possession of the instrument, andHe should have a right to recover the amount due thereon from the parties.

Every instrument initially belongs to the payee.He can transfer it to any person in payment of his own debt. (Negotiation)Negotiation is possible in the following cases:In case of bearer instrument. (by mere delivery)In case of an order instrument. (by endorsement and delivery)It means the person who is legally entitled to receive the money due on the instrument is called Holder.

Holder in Due CourseSection 9 of the negotiable instrument act defines Holder in Due Course as:Any person who for consideration became the possessor of a negotiable instrument, if payable to bearer, or the payee, or endorsee thereof, if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that defect existed in the title of the person from whom he derived his title.

Conditions to become a HDCHe must be a Holder of Valuable Consideration.He must became a holder of the instrument before the date of maturity.He must became the holder of the instrument in good faith.He must not have any reason to believe the title of the instrument to be defective.

When the Holder is not a HDC?If the instrument is obtained in the form of gift.If it is obtained by illegal method.When the instrument is acquired after the date of maturity.If the torn instrument is pasted together.If the instrument contains several erasures.If the instrument is not bonafied.

Rights of a HDC:Liability of prior parties.Defects of the instruments are eliminated.Unauthorized act of the agent may be valid.Good title in an inchoate stamped instrument.Acceptance of bill drawn in fictitious name.Unlawful instrument.Conditional delivery.Estoppel against denying original validity of instrument.

Difference between Holder and HDCAspectsHolderHolder in Due Course1. Time to obtain:Instrument may be obtained at any time.Instrument may be obtained before the date of maturity.2. Consideration:The holder may become the possessor or payee of the instrument even without the consideration.The HDC is one who obtains possession for consideration.3. Maturity:The holder may become the possessor before or after the maturity.HDC must become the possessor or payee before the amount thereon becomes payable.4. Knowledge of defects:The holder may have the knowledge of the defects in the title of the person from whom he derived his title.He must have become the holder of the instrument in good faith and after exercising due care and caution.5. To be a holderEach holder is not a Holder in Due Course.Each Holder in Due Course is also a Holder.

Liability of the Parties:According to sec. 30 to 32 and 35 to 42, of the Negotiable instrument, Act, followings are the points of the liability of the parties to the negotiable instrument:Drawer: The drawer is bound to compensate the holder in case of dishonor of the bill when he receives the notice of dishonor. (sec. 30)The liability of a drawer in BOE and Cheque is different as the drawer in case of cheque is drawee himself.

Drawee of a cheque:When the payee presents the cheque for encashment, he must receive the payment.In case of dishonor of the cheque, the damages to the payee must be compensated by the drawee. (sec. 31)Maker and Acceptor: The maker of the Promissory note and the acceptor of the bill of exchange are the primarily liable for the payment due. ( Sec. 32)Even after the maturity in case of BOE, the acceptor is liable to pay the amount on demand.In case of dishonor, the either party has to compensate the damage occurred to the payee.

Endorser:The endorser will be liable to all the subsequent parties in case of dishonor of the cheque.He will not be liable if:There is a contract to the contrary,The endorser has made his liability limited by expressed words.Due notice of dishonor is receive or given to the endorser.(Sec. 35)If the holder of the instrument, without the consent of the endorser destroys the instrument or impairs the endorsers remedy form the prior party, the endorsers liability is discharged as if the instrument has been paid at maturity. (sec. 40)

General rules regarding liability:Principle of Suretyship: every prior party to the negotiable instrument is liable thereon to HDC until the instrument is duly satisfied. (Sec. 36) the endorser stands as surety for the prior party.Maker, Drawer and Acceptor as Principals: Incase of cheque and promissory notes, the maker or drawer will be the principal debtors and in case of BOE the acceptor is the principal debtor, other parties are surety as the case may be. (sec. 37)

Prior party is principal for the subsequent party: (Sec. 38)Suretyship: when the acceptor enters into any contract with the holder under sec. 134/135 of Indian Contract Act, 1872 and the holder stands in the position to expressly reserve the right to charge, the acceptor is not discharged.Acceptors liability on a forged instrument: the Acceptor of the BOE already endorsed is not relieved from the liability by reason that such endorsement is forged. (Sec. 41)

Stolen Instrument:The person who steals or finds an instrument can not enforce the payment on any party thereto.He cannot retain it against the party from whom he so obtained it.If he obtains the payment, then the true owner can recover the payment thereon.If the bearer stolen instrument is negotiated by mere delivery, then the later person obtains the good title and becomes the rightful person to compel the payment.The instrument payable to order, if negotiated by forged endorsement, the holder do not have the good title to the instrument.