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THE NI ACT, 1881

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THE NI ACT, 1881

negotiable means transferable by delivery andinstrumentmeans awritten document by which a right

is created in favor of some person

Thus, the term negotiable instrument literally means a

written document which creates a right in favor of someperson and is freely transferable

A negotiable instrument is a piece of paper whichentitles a person to a certain sum of money and which is

transferable from one person to another person by

delivery or by endorsement and delivery.

Eg. - Bill of Exchange, Promissory Note, Cheque,documents of title such as Railway or Lorry Receipts,

Dividend Warrant, etc.

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Types of Negotiable Instruments

Negotiable instruments are of two types whichare as follows:

Negotiable Instruments recognized bystatutes:

e.g.-Bill of Exchange, Promissory Note &Cheque.

Negotiable Instruments recognized by usageor customs of trade:

e.g.-Bank Note, Share Certificate, DividendWarrant, etc.

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BILL OF EXCHANGE

A bill of exchange is an instrument inwriting, signed by the maker, containing an

unconditional order, 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 theinstrument.

eg - Mr. X purchases goods from Mr. Y for Rs.1000/-; Mr. Y purchases goods from Mr. Z for

Rs. 1000/-. Then, Mr. Y may order Mr. X topay Rs. 1000/- to Mr. Z, which will be nothing

but a bill of exchange.

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Parties to a Bill of Exchange

Drawer, Drawee

Acceptor

Payee Holder

Endorser, Endorsee

Drawee In Case Of Need

Acceptor For Honour

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Essential Characteristics of a Bill of Exchange

A Negotiable Instrument

It must be in writing

It must be signed by the maker

It must contain an order to pay money only It must be unconditional

It must be definite

Parties must be certain

Amount must be certain

Presumptions

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Promissory Note

A promissory note is an instrument in

writing (not being a bank note or a currency

note), signed by the maker, containing an

unconditional undertaking, to pay a certain

sum of money, only to or to the order of acertain person or the bearer of the instrument.

SPECIMEN:-

Abad, April 1, 2010

Rs.5,000/-

Three moths after the date, I promise to pay Mr. X of Mumbai or order a sum

of Rupees Fifty Thousand for value received.

To, Mr. X, Abad

Stamp

Signature of Mr. Y

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Parties to a Promissory Note

Maker

Payee Holder

Endorser, Endorsee

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Essential Characteristics of a Promissory Note

A Negotiable Instrument

It must be in writing

It must be signed by the maker

It must contain a promise to pay money only

It must be unconditional

It must be definite

Parties must be certain

Amount must be certain

Presumptions It must be properly stamped according to the

provisions of the Indian Stamp Act, 1899

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Promissory NoteCurrency Note

The RBI Act, 1934

No Person can draw, accept, make and/orissue any bill of exchange;

No Person can make or issue any

promissory note;

PAYABLE TO THE BEARER OF THE

INSTRUMENT

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CHEQUE

A cheque is a bill of exchange drawn on aspecified banker and expressed to be

payable on demand.

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Parties to a Cheque

Maker

Drawee Payee

Holder

Endorser, Endorsee

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Essential Characteristics of a Cheque

A Negotiable Instrument

It is a Bill of Exchange

It is always drawn on a specified banker It is always payable on demand

A cheque can be a bearer cheque or a

crossed cheque

A cheque requires no acceptance in theordinary course of business as it is

intended for immediate payment

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Crossing of Cheques

Open Cheque - payable in cash across the counter

Crossed Cheque - payment can be obtained only through

a specified banker

Types of Crossing :-

1. General Crossing - drawee banker shall not

pay it unless it is presented by a banker2. Special Crossing - drawee banker shall pay it

only to the banker on whom it is crossed

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Crossing of Cheques

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DIFFERENCE

PROMISSORY NOTE BILL OF EXCHANGE

two parties, maker & payee three parties, drawer-drawee-payee

contains unconditional promise to pay unconditional order to pay

maker of a note is debtor drawer of the note creditor

liability of maker is primary & absolute liability is secondary & conditional

can not be made payable to maker

himself

the drawer & the payee may be one

and the same person

requires no acceptance must be accepted by the drawee

can not be drawn payable to bearer can be so drawn

maker of note stands in immediate

relation with payee

drawer of the bill stands in immediate

relation with the acceptor & not the

payee

in case of disowner no notice is

required

notice is required to all the person who

are to be made liable to pay

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DIFFERENCE

BILL OF EXCHANGE CHEQUE

drawn on any person including banker always drawn on a banker

must be accepted before payment requires no acceptance

entitled for 3 daysgrace not entitled to any grace periodmay be payable on demand always payable on demand

must be duly presented for payment to

the acceptor or else drawer will be

discharged from liability

drawer of cheque is not

necessarily discharged from

liability by delay of the holder in

presenting for paymentmay not be crossed may be crossed

must be stamped does not require any stamp

payment can not be countermanded payment may be countermanded

may be noted and protested for

disowner

is not required to be

noted/protested

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Types of NI

Inland Instrument

(An instrument both drawn/made and payable in India or drawn

upon any person resident in India is an inland instrument)

Foreign Instrument

Payable on demand

Payable at sight

A Genuine Trade Bill/Accommodation Bill-a bill without any consideration is called an accommodation bill

-eg.:- A is in need of Rs.10,000/-. He approaches B, but, B is not isposition to lend. B suggests that A might draw a bill on him which he

would accept. A can get the bill discounted with his banker. On the

due date, A would pay Rs.10,000/- to B who would meet the bill.

This is an accommodation bill.

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Types of NI

Fictitious Bill

Escrow

(conditional, as a collateral security or forsafe custody)

Ambiguous Instrument

Inchoate Instrument

(an incomplete instrument) Bills In Sets

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PRESUMPTIONS

As to consideration

As to date

As to time of acceptance As to time and number of endorsements

As to stamps

As to a holder in due course

As to time and place of transfer

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HOLDER s.8

Holder of a negotiable instrument means any person-

(a) who is entitled in his own name to the possession of

the negotiable instrument;

(b) who has also the right to receive or recover the

amount due thereon from the parties thereto

POSSESSION OF INSTRUMENT

-A thief, though in possession of the negotiable

instrument, is not a holder in the absence of a legal title

to it.

-An agent holding a negotiable instrument for his

principal is also not a holder though he has a right toreceive the payment.

ENTITLED TO RECEIVE THE AMOUNT

The person must be entitled to receive the amount of the

instrument and give a valid discharge to the buyer.

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HOLDER IN DUE COURSE s.9

A person who takes a negotiable instrument bona-

fide and for valuable consideration gets the

instrument free from all defects. Such holderin due

course is not affected by defective title of the

transferor or of any other party

HolderIn Due Coursemeans any person, who, for

consideration, becomes the possessor of a bill of

exchange, a promissory note or a cheque withouthaving sufficient cause to believe that any defect

existed in the title of the person from whom he

derived his title

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NEGOTIATION

Whena promissory note, a bill of exchange or a cheque

is transferred to any person, so as to constitute that

person the holder thereof, the instrument is said to be

negotiated.

Itis a process of transferring the ow nership, r ight, t i t le

and interest of a person in a negotiable instrument toanother person so as to give a good title to the transferee

and make a transferee a holder of such instrument.

A negotiable instrument can be transferred in the

following two ways:

(i) Negotiation by delivery;

(ii) Negotiation by endorsement and delivery.

Instruments payable to bearer can be transferred by

mere delivery, while instruments payable to order can be

transferred by endorsement and delivery.

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Negotiation By Delivery

Negotiation by delivery involves a

voluntary transfer of possession of the

negotiable instrument.

When an instrument is negotiated by

delivery, it is not necessary for a transferor

to put his or her signature on the

instrument and therefore, there is no privity

of contract between the transferor and anysubsequent transferee.

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Negotiation By Endorsement And Delivery

Types of Endorsement

1. GENERAL OR BLANK ENDORSEMENT

When an endorser signs his name either on

the back or face of the instrument, theendorsement is said to be blank or general. In a

blank endorsement, endorsee is not specified and

therefore the instrument becomes payable to

bearer.

2. FULL OR SPECIAL ENDORSEMENT When an endorser signs the instrument and

adds a direction to pay the amount mentioned

therein to or to the order of a specified person, the

endorsement is said to be in full.

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Negotiation By Endorsement And Delivery

Types of Endorsement

3. PARTIAL ENDORSEMENT

Nowriting on a negotiable instrument is valid

for the purpose of negotiation if such writingpurports to transfer only a part thereof, but, where

such amount has been partly paid, a note to that

effect may be endorsed on the instrument, which

may then be negotiable for the balance amount.

4. RESTRICTIVE ENDORSEMENT Restrictive endorsement restricts the further

negotiability of the negotiable instrument.

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Negotiation By Endorsement And Delivery

Types of Endorsement

5. CONDITIONAL ENDORSEMENT

In a conditional endorsement, the liability of

the endorser is limited or negative. A conditional endorsement is different from a

restrictive endorsement inasmuch as a conditional

endorsement limits or negatives the liability of the

endorser while a restrictive endorsement places

certain restriction on the negotiability of theinstrument.

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DISHONOUR OF NEGOTIABLE INSTRUMENT

A Promissory Note and a Cheque may be

dishonoured by non-payment only, while,

a Bill of Exchange may be dishonoured by

non-acceptance or by non-payment.

The holder / holder in due course must

give notice that the instrument has been

so dishonoured, to all other parties whom

the holder seeks to make severally orjointly liable thereon.

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NOTING AND PROTEST

NOTING

The holder / holder in due course must give notice of

dishonor to all other parties whom the holder seeks to

make severally or jointly liable thereon.

Prior to giving such notice, the holder / holder in due

course can get the fact of dishonour of the instrumentauthenticated through notingby a notary public.

Noting is the authentic and official proof of presentment

and dishonour of the negotiable instrument.

Noting means nothing but the recording of the fact of

dishonor of the instrument by a notary public, within areasonable time, after dishonour.

Of course, noting is not compulsory, neither does it affect

the rights of the holder thereon.

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NOTING AND PROTEST

PROTEST

When a Promissory Note or a Bill of

Exchange has been dishonoured by non-

acceptance or by non-payment, the holder

/ holder in due course may, within a

reasonable time, cause such dishonour to

be noted and certified by a notary public.

Such a certificate is called a protest.

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dishonour of cheque due to

insufficiency of funds-s.138

the payee or holder in due course is requiredto give notice to drawer of cheque within 30days from receiving information from bank;

the drawer should make payment within 15days of receipt of notice;

if he does not pay within 15 days, the payeehas to lodge a complaint with MetropolitanMagistrate or JMFC, against the drawer withinone month from the last day on which drawershould have paid the amount;

the penalty can be upto two yearsimprisonment or fine upto twice the amount ofcheque or both

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Offences by Companies

If the person committing an offence is a company,

every person, whether a director, a manager,

secretary or any other officer of the company who

was in charge of and was responsible for the

conduct of companys business, shall be deemed

to be guilty of the offence and shall be liable to be

proceeded against and punished accordingly.

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DISCHARGE OF A NI

BY PAYMENT IN DUE COURSE

BY PARTY PRIMARILY LIABLE

BECOMING HOLDER OF THE NI

BY EXPRESS WAIVER

BY CANCELLATION

BY DISCHARGE AS A SIMPLE

CONTRACT

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Material Alteration

An alteration to a negotiable instrument issaid to be materialif,

1.Character or identity of the instrument ischanged,

2.Rights and liabilities of the parties arechanged,

3.Operation of the instrument is altered.

Instances of Material Alteration includechanges in Date/Sum payable/Time orPlace of Payment/Rate ofInterest/Mutilation, etc.

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HUNDIS

A hundi is an indigenous negotiable instrument written in a

vernacular language subject to local usages and customs.

There are two main kinds of hundis:-

1.Darshni Hundi i.e a hundi payable at sight;

2.Muddati or Miadi hundi i.e. a hundi payable after a specificperiod

Other kinds of Hundis:-

shah jog hundi, payable to a shah, a respectable person;

nam jog hundi, payable to or to the order of a specified

person named in the hundi;

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HUNDIS

Other kinds of Hundis:-

dhani jog hundi, payable to the bearer/holder;

firman jog hundi, payable to order;

jawabee hundi, a hundi which is used for remitting money

from one place to another; i.e. the person who is to receivethe money, on receipt of the money, has to send an

answer, i.e jawab, to the remitter;

jokhami hundi, a combination of Bill of exchange and an

insurance policy.

Khoka :-

a hundi when paid up and cancelled is called a khoka.

Peth :-

a duplicate of a hundi if original is lost is called a peth.