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Notes on Negotiable Instrument Act

Negotiable Instrument Act, 1881

  • Enacted on - 9th December 1881
  • Came into force on - 1st march 1882
  • Extends to whole of India
  • Law relating to - Not relating to - promissory notes treasury bills Bills of exchange post office money order Cheques (includes Demand Draft) currency notes Meaning of Negotialble instrument:
    Negotiable - transferable / transferability
    Instrument - piece of paper/ written document

Sec 4 - Promissory note
A "Promissory note" is an instrument in writing (not being a bank-note or a currency-note) 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.

Promissiory note:

An instrument: in writing
Not a: bank not or currency note
Must contain : unconditional undertaking Signed : By maker

To pay a certain sum of money:
to order of a certain person or to the bearer of the instrument

Stamping of Promissory Note is essential under The Indian Stamp Act, 1899. It must contain date.

The limitation period for a promissory note to file a suit is 3 years from the date of execution or from the date of acknowledgement

Sec 5 - Bill of Exchange
Bill of exchange.- 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 of, a certain person or to the bearer of the instrument. Unconditional. Certain sum. Certain person.

Bill of exchange:
An instrument - in writing
Must contain - unconditional order
Signed by - the maker

Directing a certain person
To pay a certain sum of money - to the order of a certain person or to the bearer of the instrument
3 parties in a bill of exchange

Drawer - The person who makes and he is entitled to receive
Drawee - the person who has to pay
Payee - the person who receives if drawer doesn't receive (the person who gets benefit or beneficiary)
Sec 6 - Cheque

A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

3 parties in a cheque - Drawer - maker. Drawee - the person who pay , bank .Payee -beneficiary

When a bill of exchange drawn by one bank on another bank, or by itself on its own branch, and is a negotiable instrument then it is called as bank draft. Not payable to bearer. Not easily counter-manded(cancelled).

Sec 6 A - "a cheque in the electronic form" means a cheque drawn in electronic form by using any computer resource and signed in a secure system with digital signature or with electronic signature.

Sec 6 B - "a truncated cheque" means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.

All cheques are bill of exchange but all bill of exchange are not cheque.

Sec 7 - Drawer, Drawee, Payee

Drawer - The maker of a bill of exchange or cheque is called the "drawer";

Drawee - the person thereby directed to pay is called the "drawee".

Drawee in case of need- When in the Bill or in any indorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need, such person is called a "drawee in case of need."

Acceptor-After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the "acceptor".

Acceptor for honour-When a bill of exchange has been noted or protested for non-acceptance acceptance or for better security, and any person accepts it supra protest for honour of the drawer or of any one of the indorsers, such person is called an "acceptor for honour"

Payee-The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the "Payee".

Sec 8 - Holder
The "holder" of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.

Sec 9 - Holder in due course-
"Holder in due course" means any person who for **consideration** became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee thereof, if payable to order,before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

Sec 10 - Payment in due course
"Payment in due course" means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.

Sec 11 - Inland instrument
A promissory note, bill of exchange or cheque drawn or made in India & made payable in, or drawn upon any person resident, in India

Sec 12 - Foreign instrument
Any such instrument not so drawn, made or made payable shall be deemed to be a foreign instrument.

Sec 13 - Negotiable instrument
A "negotiable instrument" means a promissory note, bill of exchange or cheque payable either to order or to bearer.

Sec 14. Negotiation.-
When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder.

Sec 15 - Indorsement.-
When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same, and is called the "indorser".

Sec 16 - Indorsement "in blank" and "in full".-
If the indorser signs his name only, the indorsement is said to be "in blank," and if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the indorsement is said to be "in full"; and the person so specified "Indorsee".-is called the "indorsee" of the instrument.

Special or full endorsement - endorser specifies another person's name and signs

Conditional endorsement- endorser puts some condition along with endorsement

Restrictive endorsement - endorser restricts further endorsement of instrument.

Partial endorsement - in case part payment has been made and endorsement made for balance unpaid amount. Sec 56

Sans recourse endorsement - endorser excludes his liability and in case of dishonour, endorser will not be liable.

Facultative endorsement - when the endorser gives up some of his rights under the neg. ins.

Forged endorsement - in case of forged endorsement the paying bank gets protection under section 85(1).

Sec 17 - ambiguous instrument:
If either considered bill of exchange or promissory note then considered that only.

Sec 18- Where amount is stated differently in figures and words.-
If the amount undertaken or ordered to be paid is stated differently in figures and in words, the amount stated in words shall be the amount undertaken or ordered to be paid.

Sec 19 - Instruments payable on demand.-
A promissory note or bill of exchange, in which no time for payment is specified, and a cheque, are payable on demand.

Sec 20 - Inchoate stamped instruments.
Where one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments then in force in 1 [India], and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as the case may be, upon it a negotiable instrument, for any amount specified therein and not exceeding the amount covered by the stamp.

The person so signing shall be liable upon such instrument, in the capacity in which he signed the same, to any holder in due course for such amount: provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid thereunder.

Sec 21 - "At sight".-"On presentment".
In a promissory note or bill of exchange the expressions "at sight" and "on presentment" mean on demand. The expression "After sight"-"after sight" means, in a promissory note, after presentment for sight, and, in a bill of exchange, after acceptance, or nothing for non-acceptance, or protest for non-acceptance.

Sec 22. - "Maturity".-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.

Sec 31 - Liability of drawee of cheque. bank is drawee in cheque

The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and , in default of such payment, must compensate the drawer for any loss or damage caused by such default.

Sec 45 A - Holder's right to duplicate of lost bill.
Where a bill of exchange has been lost before it is over-due, the person who was the holder of it may apply to the drawer to give him another bill of the same tenor, giving security to the drawer, if required, to indemnify him against all persons whatever in case the bill alleged to have been lost shall be found again. If the drawer on request as aforesaid refuses to give such duplicate bill, he may be compelled to do so.

Sec 47 - negotiation by delivery

Sec 49 - Conversion of indorsement in blank into indorsement in full
The holder of a negotiable instrument indorsed in blank may, without signing his own name, by writing above the indorser's signature a direction to pay to any other person as indorsee, convert the indorsement in blank into an indorsement in full; and the holder does not thereby incur the responsibility of an indorser.

Sec 50 - Effect of indorsement.- right of further endorsement
The indorsement of a negotiable instrument followed by delivery transfers to the indorsee the property therein with the right of further negotiation; but the indorsement may, by express words, restrict or exclude such right, or may merely constitute the indorsee an agent to indorse the instrument, or to receive its contents for the indorser, or for some other specified person.

Sec 52 - Indorser who excludes his own liability or makes it conditional.- conditional endorsement
The indorser of a negotiable instrument may, by express words in the indorsement, exclude his own liability thereon, or make such liability or the right of the indorsee to receive the amount due thereon depend upon the happening of a specified event, although such event may never happen. Where an indorser so excludes his liability and afterwards becomes the holder of the instrument, all intermediate indorsers are liable to him.

Sec 54 - Instrument indorsed in blank.
Subject to the provisions hereinafter contained as to crossed cheques, a negotiable instrument indorsed in blank is payable to the bearer thereof even although originally payable to order.

Sec 55 - Conversion of indorsement in blank into indorsement in full.
If a negotiable instrument, after having been indorsed in blank, is indorsed in full, the amount of it cannot be claimed from the indorser in full, except by the person to whom it has been indorsed in full, or by one who derives title through such person.

Sec 57 - . Legal representative cannot by delivery only negotiate instrument indorsed by deceased.- The legal representative of a deceased person cannot negotiate by delivery only a promissory note, bill of exchange or cheque payable to order and indorsed by the deceased but not delivered.

Sec 60 - Instrument negotiable till payment or satisfaction transferable unlimited number of times

A negotiable instrument may be negotiated (except by the maker, drawee or acceptor after maturity) until payment or satisfaction thereof by the maker, drawee or acceptor at or after maturity, but not after such payment or satisfaction.

Negotiation back in favour of endorser- prior endorser becomes the holder again.yes possible

Negotiation back in favour of drawer - drwer again becomes holder

Endorsement on bearer cheque - bearer becomes entitled to payment

Sec 63 - Drawee's time for deliberation. Time period for drawee for acceptance - 48 hrs

The holder must, if so required by the drawee of a bill of exchange presented to him for acceptance, allow the drawee forty-eight hours exclusive of public holidays) to consider whether he will accept it.

Sec 65 - Hours for presentment . usual business hours or bankimg hours

Presentment for payment must be made during the usual hours of business, and, if at a banker's within banking hours.

Sec 80 - Interest when no rate specified. 18%

When no rate of interest is specified in the instrument, interest on the amount due thereon shall be calculated at the rate of eighteen per centum per annum. From the date of notice of dishonour.

Sec 82 - Discharge from liability
The maker, acceptor or indorser respectively of a negotiable instrument is discharged from liability thereon:
  1. by cancellation.-to a holder thereof who cancels such acceptor's or indorser's name with intent to discharge him, and to all parties claiming under such holder
  2. by release.-to a holder thereof who otherwise discharges such maker, acceptor or indorser, and to all parties deriving title under such holder after notice of such discharge
  3. by payment.-to all parites thereto, if the instrument is payable to bearer, or has been indorsed in blank, and such maker, acceptor or indorser makes payment in due course of the amount due thereon.

Sec 85 (1) - Cheque payable to order.
protection in case of order cheque
  1. Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course.
    Protection to paying bank in case of bearer cheque
  2. Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing, thereon, and notwithstanding that any such endorsement purports to restrict or exclude further negotiation.

Sec 89 - Payment of instrument on which alteration is not apparent. Bank not liable

Where a promissory note, bill of exchange or cheque has been materially altered but does not appear to have been so altered.

Sec 91 - . Dishonour by non-acceptance. Imp
A bill of exchange is said to be dishonoured by non-acceptance when the drawee, or one of several drawees not being partners, makes default in acceptance upon being duly required to accept the bill, or where presentment is excused and the bill is not accepted. Where the drawee is incompetent to contract, or the acceptance is qualified, the bill may be treated as dishonoured.

Sec 123 - 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.

Sec 124 - 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.

Not negotiable - defective title bearer is not entitled
Sec 131 - 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.

When bank should not make payment of cheque
Death of drawer, Company in liquidation, Insolvent drawer, Insane customers, Countermanding - valid stop payment

Others - post date , insufficient funds, material altered, stale, etc.

Sec 99 - Noting
When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment, the holder may cause such dishonour to be noted by a notary public upon the instrument, or upon a paper attached thereto, or partly upon each. Such note must be made within a reasonable time after dishonour, and must specify the date of dishonour, the reason, if any, assigned for such dishonour, or, if the instrument has not been expressly dishonoured, the reason why the holder treats it as dishonoured, and the notary's charges.

Sec 100 - Protest
When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment, the holder may, within a reasonable time, cause such dishonour to be noted and certified by a notary public. Such certificate is called a protest.

Protest for better security.- notary public to demand better security of the acceptor, and on its being refused may, within a reasonable time, cause such facts to be noted and certified as aforesaid. Such certificate is called a protest for better security.

Sec 138 - 142- Bouncing of cheque
Liable to be prosecuted:

Drawer of cheque . Return unpaid . Insufficiency of funds . Stop payment . Closure account . Different signature.

Sec 138 - Dishonour of cheque for insufficiency, etc., of funds in the account - max 2 yrs imprisonment + twice fine

Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may be extended to two years or with fine which may extend to twice the amount of the cheque, or with both

Provided that nothing contained in this section shall apply unless:
  1. the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;
  2. the payee or the holder in due course of the cheque, makes a demand for the payment of the said amount of money by giving a notice; in writing, to the drawer , within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid. "cheque return memo"
  3. the drawer of such cheque fails to make the payment of the said amount of money to the payee or to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

The payee / holder has the right to file a criminal complaint u/s 138 of NI ACT within 30 days of notice.

"debt of other liability" means a legally enforceable debt or other liability.

Sec 143 A - Power to direct interim compensation
Court trying an offence u/s138 order the drawer to pay interim compensation to the complainant-

In a summary trial or a summons case, where he pleads not guilty and in any upon framing charge.

The interim compensation shall not exceed twenty percent of the amount of the cheque.

The interim compensation shall be paid within sixty days from the date of the order or within such further period not exceeding thirty days as may be directed by the Court on sufficient cause being shown by the drawer of the cheque.

If the drawer is acquitted, the Court shall direct the complainant to repay to the drawer with interest at the bank rate as published by the Reserve Bank of India, prevalent at the beginning of the relevant financial year, within sixty days from the date of the order, or within such further period not exceeding thirty days

Norms for return of dishonoured cheque:
Goiporia committee - such cheques to be returned to the customer within 24 hrs.

Cheques dishonoured for insufficient funds should be attached with memo reading "insufficient fund"

Cheques dishonoured of amount 1 crore and above should be made part of MIS.

If from an account 4 or more times cheques of 1 crore and above were returned for insufficiency of funds in a financial year then cheque book facility to be withdrawn.

Cheque returning memo should be signed even if it is a computer generated.

Stale cheque - cheque not presented within 3 months to bank, it can be revalidated any number of times.

If order & bearer both written on cheque - treated as bearer. If none written - order cheque.

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