After reading this chapter, you will be able to understand:
In India, there is a reason to believe that instruments to exchange were in use from early times and we find that papers representing money were introduced into the country, by one of the Mohammedan sovereigns of Delhi in the early part of the fourteenth century.
The word ‘hundi’, a generic term used to denote instruments of exchange in vernacular is derived from the Sanskrit root ‘hund’, meaning ‘to collect’ and well expresses the purpose to which instruments were utilized in their origin. With the advent of British rule in India, commercial activities increased to a great extent. The growing demands for money could not be met by mere supply of coins; and the instrument of credit took the function of money which they represented.
Before the enactment of the Negotiable Instrument Act, 1881 the law of negotiable instruments as prevalent in England was applied by the courts in India when any question relating to such instruments arose between the Europeans. When the parties were Hindu or Mohammedans their personal law was held to apply. Though, neither the law books of the Hindus nor those of the Mohammedans, contain any reference to negotiable instruments such as, the customs prevailing among the merchants of the respective community were recognized by the courts and applied to the transactions among them. During the course of time, there had developed in the country a strong body of usage relating to hundis which even the Legislature could not, without hardship to Indian bankers and merchants, ignore. In fact the Legislature felt the strength of such local usages and though fit to exempt them from the operation of the Act, with a provision that such usage may be excluded altogether by appropriate words. In the absence of any such customary law, the principles derived from the English law were applied to the Indians, as rules of equity justice and good conscience.
The history of the present act is a long one. The act was originally drafted in 1866 by the India Law Commission and introduced in December 1867 in the Council and it was referred to a Select Committee. Objections were raised by the mercantile community to the numerous deviations from the English Law which it contained. The Bill had to be redrafted in 1877. After the lapse of a sufficient period for criticism by the Local Governments, the High Courts and the Chambers of Commerce, the Bill was revised by a Select Committee. In spite of this Bill could not reach the final stage. In 1880 by the Order of the Secretary of State, the Bill had to be referred to a new Law Commission. On the recommendation of the new Law Commission, the Bill was re-drafted and again it was sent to a Select Committee which adopted most of the additions recommended by the new Law Commission. The draft thus prepared for the fourth time was introduced in the Council and was passed into law in 1881, being the Negotiable Instruments Act, 1881.
Negotiable instrument means a promissory note or bill of exchange or cheque payable either to order or to the bearer.
An instrument, the property in which is acquired by anyone, who takes it bonafide and for value notwithstanding any defect in the title of any prior party is known as a negotiable instrument.
The important characteristics of the negotiable instrument are the following:
A negotiable instrument is subject to certain presumptions. These have been recognized by the Negotiable Instrument Act under Sections 118 and 119, with a view to facilitate the business transactions. These are detailed below:
However, these legal presumptions are rebuttable by evidence to the contrary.
A ‘promissory note’ is an instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of money only to—
To be a promissory note, an instrument must possess the following essentials.
The promissory note should be in writing. It could be in hand writing or printing. An oral promise to pay is not sufficient.
The promissory note must contain express promise to pay. Mere acknowledgement of indebtedness is not sufficient.
Example
‘Mr. B I.O.U ₹ 10,000’. There is no promise to pay and therefore this is not a valid promissory note.
If a promise to pay is dependent upon an event which is certain to happen although the unconditional time of its happening is uncertain, the promise to pay is unconditional.
Example
‘I promise to pay Bina ₹ 5,00,000 on D’s death’. The promise is not conditional but definite since death of D is certain. Therefore, the promissory note is valid.
The promissory note must be signed by the maker. The signatures may be made on any part of the instrument. An agent of a trading firm can sign a promissory note on behalf of the firm.
The promissory note should contain the promise to pay a certain sum of money. It should contain the promise to pay only money and nothing else.
Examples
The name of the payee must be specified in the promissory note otherwise it will be invalid.
The promissory note must be stamped. The stamp duty is paid as per the Stamp Act.
The person who makes the promissory note is called as maker. His liability is primary and unconditional. The person to whom money is to be paid, is called as payee.
‘I promise to pay Blawan ₹ 1200 after deducting there from any money which he owes me’. Is it valid promissory note? Why?
‘I promise to pay Balwant ₹ 100, 10 days after my marriage with C’. Is it valid promissory note? Why?
‘I promise to pay B ₹ 2000 on D’s death, provided D leaves me enough to pay that sum’. Is it valid promissory note? Why?
‘I acknowledge myself to be indebted to B in ₹ 5000 to be paid on demand for value received’. Is it valid promissory note? Why?
Referring to the provisions of the Negotiable Instruments Act, 1881 examine the validity of the following promissory notes:
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—
Examples
The characteristics of bill of exchange are almost similar to the promissory note. The essentials characteristics of a bill of exchange are following:
The person who draws or makes the bill is known as the drawer. His liability is secondary and conditional. The person on whom the bill is drawn is called as the drawee. On the acceptance of the bill, the drawee is called as the acceptor. He becomes liable for the payment of the bill and his liability is primary and unconditional. The person to whom the money is to be paid is known as the payee.
An acceptor accepts a ‘Bill of Exchange’ but write on it ‘Accepted but payment will be made when goods delivered to me is sold’. Decide the validity.
Following points highlight the main difference between a promissory note and a bill of exchange.
A cheque is a bill of exchange, drawn on a specified banker and it includes ‘the electronic image of truncated cheque’ and ‘a cheque in electronic form’. The cheque is always payable on demand.
A cheque must contain all the characteristics of a bill of exchange. The essentials characteristics of a cheque can be summarized as under—
A cheque does not require stamping or acceptance.
The person, who draws or makes the cheque is called as drawer. His liability is primary and conditional. The bank on whom, the cheque is drawn is called as drawee. The bank makes the payment of the cheque. The person to whom money is to be paid is called as payee. The payee may be the drawer himself or a third party. A cheque is usually valid for 6 months. However, it is not invalid if it is post dated or antedated.
A truncated cheque means a cheque which is truncated during the course of a clearing cycle either by the clearing house or 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.
A cheque in electronic form means a cheque which contains the exact mirror image of a paper cheque and is generated, written and signed in a secure system, ensuring the minimum safety standards with the use of digital signature (with or without biometric signature) and asymmetric crypto system.
In case of and reasonable suspicion about the genuineness of the electronic image of a truncated cheque (e.g., suspicion as to fraud, forgery, tampering or destruction of the instrument), the paying banker is entitled to demand any further information regarding the truncated cheque. The paying banker can also demand the presentment of truncated cheque itself for verification.
Bill of Exchange | Cheque |
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Bill of exchange can be drawn on any person. | Cheque is always drawn on the bank. |
Bill of exchange need not always be payable on demand. | It is always payable on demand. |
It cannot be payable to bearer on demand. | It can be drawn, payable on bearer on demand. |
It require an acceptance of drawee. | It does not require an acceptance. |
It requires stamp as per Stamp Act. | It does not require stamp. |
It cannot be crossed. | It can be crossed. |
Notice of dishonour is usually required. | Notice of dishonour is not required. |
A person, capable to enter into contract is capable to make or draw negotiable instrument. A person shall be liable on a negotiable instrument (by reason of making, drawing, accepting, endorsing, delivering or negotiating a negotiable instrument), only if he is capable of contracting, according to the law to which he is subject.
A minor may draw, endorse, deliver and negotiate any negotiable instrument. All the parties shall be bound on such negotiable instrument. However, the minor shall not be bound on such negotiable instrument.
An agent who signs in his name on a promissory note, bill of exchange or cheque without indicating thereon that he signs as an agent will be personally liable on instrument.
X, a major and M, a minor, executed a promissory note in favour of P. Examine with reference to the provisions of the Negotiable Instruments Act, the validity of the promissory note and whether it is binding on X and M.
A negotiable instruments may be classified as under:
The negotiable instrument is payable to order—
The negotiable instrument is payable to bearer when—
A promissory note cannot be made payable to bearer. The bill of exchange cannot be made payable to bearer on demand.
The negotiable instrument on which time for payment is not specified, is an instrument payable on demand. The negotiable instrument which is expressed to be payable on demand is also demand instrument.
A cheque is always payable on demand. A demand instrument may be presented for payment at anytime. The demand instrument is not entitled to any days of grace.
An instrument in which the time for payment is specified is known as time instrument. The time instrument may be payable—
A negotiable instrument is an inland instrument if it is—
Example
A bill drawn in India payable in Japan, upon a person in India is an inland instrument.
The negotiable instrument which is not an inland instrument is called as foreign instrument. The foreign instrument must be drawn outside India and made payable outside or inside India.
An ambitious instrument means an instrument which can be constructed either as a promissory note or bill of exchange. Once the option is exercised, the instrument shall be treated accordingly.
An accommodation bill means a bill which is drawn accepted without consideration. The person who becomes the holder of such a bill in good faith and for consideration after maturity may recover the amount from any party.
A fictitious bill is a bill in which the name of the drawer or the payee or both is fictitious.
A documentary bill means a bill to which the documents of title of the goods are attached.
A clean bill means a bill to which no document relating to the goods, is attached.
An inland bills are drawn in India on a person residing in India, payable any where or drawn in India on a person residing outside India, payable in India, while a foreign bill is a bill which is not inland bill.
A foreign bills are drawn and are payable outside India, or drawn in India and payable outside India or drawn in India upon the persons resident outside India and made payable outside India.
The foreign bills may be of five kinds:
The inland bills are drawn in a single copy but foreign bills are drawn in triplicate.
In the inland bills, dishonour requires noting. The protest is optional but in foreign bills, dishonour requires protesting.
Where one person signs and delivers to another, a paper stamped in accordance with the law relating to negotiable instruments then in force in 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. Such instrument is called as inchoate instrument.
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 there under.
Cheques are always payable on demand but other instruments like bills and notes, may be made payable on specified date or after specified time. Maturity of a negotiable instrument means the date on which the negotiable instrument falls due for payment. The negotiable instrument which is payable otherwise than on demand is entitled to three days of grace.
Type of Instrument | Date of Maturity |
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Negotiable instrument payable on a specified day. | Specified day + third day. |
Negotiable instrument payable on a stated number of days after date. | Date on which negotiable instrument is drawn + stated number of days + third day. |
Negotiable instrument payable on stated number of days after sight. | Date on which negotiable instrument is presented for sight + stated number of days + third day. |
Negotiable instrument payable on stated number of days after happening of a certain event. | Date on which such event happens + stated number of days + third day. |
Negotiable instrument payable on stated number of months after date. | Corresponding day of the relevant month* (i.e., Date on which negotiable instrument is drawn + stated number of months) + third day. |
Negotiable instrument payable in installment. | Each installment is entitled to three days of grace. |
If the day of maturity of the negotiable instrument is a public holiday instrument is payable immediately preceding business day. But if the day of maturity of the negotiable instrument is an emergency or unforeseen public holiday, the instrument is payable immediately on the succeeding business day.
Examples
Promissory note dated 1 February 2001 payable two months after dale was presented to the maker for payment 10 days after maturity. What is the date of maturity?
A negotiable instrument made, drawn, accepted, endorsed or transferred without consideration creates no obligation of payment between the parties to the transaction.
But if any such party has transferred the instrument to a holder for a consideration, such holder and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.
No party, for whose accommodation a negotiable instrument has been made, drawn, accepted or endorsed can, if he has paid the amount there of recover thereon such amount from any person who became a party to such instrument for his accommodation.
A negotiation means transfer of a negotiable instrument to any other person so as to constitute that person the holder of such negotiable instrument. When a negotiable instrument is transferred by negotiation, the rights of the transfree may rise higher than those of the transferor, depending upon the circumstances. When the transfer is made by assignment, the assignee has only those rights which the assignor possessed.
Two methods of the negotiation of instrument are follows:
A bearer instrument may be negotiated by delivery. The delivery must be voluntary.
An order instrument can be negotiated only by way of endorsement and delivery.
An endorsement means, signing on the face or back of a negotiable instrument or on a slip of paper annexed to the negotiable instrument by the holder of the negotiable instrument. The endorsement is made for the purpose of negotiating such negotiable instrument.
The endorsement must be in writing. The endorsement shall not be valid unless it is signed. The endorsement shall be valid only if the negotiable instrument is signed by the holder. The person to whom the instrument is endorsed is called the endoresee. In other words, ‘endorsement’ means and involves the writing of something on the back of an instrument for the purpose of transferring the right, title and interest therein to some other person.
Different kinds of possible endorsements are following:
A general endorsement means an endorsement, made by the endorser without writing the name of the endorsee. It is also known as endorsement in blank. The general endorsements only contain a sign on the back of instrument. With the general endorsement, the order instrument is converted into a bearer instrument.
Example
Where bill is payable to ‘Mohan or order’ and he writes on its back ‘Mohan,’ it is an endorsement in black by Mohan and property in the bill can pass by mere delivery.
A special endorsement means an endorsement made by a holder by signing his name and adding a direction to pay the amount to a specified person. It is also known as endorsement in full. A blank endorsement can be turned into special one by addition or an order making the bill payable to the transferee.
Example
A bill made payable to Mohan or order and endorsed ‘pay to the order of Sohan’ would be specially endorsed and Sohan endorses it further.
An endorsement which restricts the right of further negotiation is called as restrictive endorsement.
Examples
An endorsement which purports to transfer only a part of the amount of the instrument is called as partial endorsement. The partial endorsement is not valid at law.
A holds a bill for ₹ 10,000 and endorses it as ‘pay B or order ₹ 500’. The endorsement is partial and invalid.
An endorsement is conditional which limits the liability of the endorser. An endorser may limit his liability in any of following ways:
Sans Recourse—The endorser relieves himself from the liability to all subsequent endorsees. It is a type of endorsement on a negotiable instrument by which the endorser absolves himself or declines to accept any liability on the instrument of any subsequent party. The endorser signs the endorsement, putting his-signature along with the words, SANS RECOURSE.
Facultative—The endorser waives any of his rights.
Contingent—The endorser makes his liability dependent upon happening of some event.
Example
The holder of bill endorse it—‘pay A or order on his marrying B’. In such case, the endorser will not be liable until A marry to B.
If a negotiable instrument is negotiated by the holder; but the endorser again becomes the holder of such negotiable instrument then it is called as negotiation back.
Example
A, holder of bill endorses it to B, B endorses it to C and C to D and D endorses it again to A.
The effects of negotiation back are following:
A bill of exchange is drawn payable to X or order. X indorses it to Y, Y to Z, Z to A. A to B and B to X. State with reasons whether X can recover the amount of the bill from Y. Z, A and B if he has originally indorsed the bill to Y by adding the words ‘Sans Recourse’.
A cheque is either ‘open’ or ‘crossed’. An open cheque can be presented by the payee to the paying banker and is paid over the counter. A crossed cheque cannot be paid across the counter. Crossing means a direction given by the drawer of the cheque to the drawee bank, not to pay the cheque at the counter of the bank but to pay it to a person who presents it through a banker.
The crossing makes it possible to trace the person to whom the payment has been made. Thus, it makes the cheque safe and protects the holder of the cheque:
14.23.1.1 General Crossing The cheque must contain two parallel transverse lines. The cheque must be paid only to a banker. In the case of general crossing, the holder cannot get payment over the counter of bank.
Example
14.23.1.2 Special Crossing The cheque must contain the name of a banker. The cheque must be paid only to the banker to whom it is crossed. A special crossing may be made only once. The special crossing cannot be converted into general crossing. The paying banker will pay only to the banker whose name appears across the cheque or to his collecting agent.
14.23.1.3 Not Negotiable Crossing The cheque must contain the words ‘not negotiable’. The cheque must be crossed generally or specially. The title of the transferee shall not be better than the title of the transferor. Not negotiable crossing does not restrict transferability but restrict negotiability only.
Example
14.23.1.4 A/c Payee Crossing i.e., Restrictive Crossing The cheque must contain the words ‘A/c Payee’ or ‘A/c Payee only’. It is also known as restrictive crossing. The cheque does not remain negotiable anymore.
The cheque must be crossed generally or specially. It warns the collective banker that the proceeds are to be credited only to the account of the payee.
Example
A cheque is said to be bounced or dishonoured by non-payment when the drawee of cheque makes a default in payment in when cheque is presented to him for payment.
In case of default by the drawee (i.e., Banker), the drawee shall compensate the drawer for loss caused to him. The liability of a drawee arises by non-payment, if the following three conditions are fulfilled on the dishonour of cheque:
On the dishonour of the cheque, the drawer is punishable with imprisonment upto two years or fine not exceeding twice the amount of cheque or both if the following conditions are satisfied:
A person is a holder of a negotiable instrument who is entitled in his own name:
It is not every person in possession of the instrument who is called a holder. To be a holder, the person must be naked in the instrument as the payee or the endorsee or he must be the bearer thereof. A person who has obtained the possession of instrument by theft or under forged instrument is not a holder.
A holder in due course, is in a privileged position. He enjoys the following privileges:
A found a negotiable instrument lying on the road and transferred it to B who received it in good faith and for consideration. Can B recover the amount due on the instrument?
Holder | Holder in Due Course |
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A person becomes a holder even if he obtains the negotiable instrument without any consideration. | A person becomes a holder in due course, only if he obtains the negotiable instrument for consideration. |
A person becomes a holder, even if he does not the negotiable instrument in good faith. | For being a holder in due course, a person must obtain the negotiable instrument in good faith. |
A person becomes a holder even if he obtains the negotiable instrument after the maturity of the negotiable instrument. | A person becomes a holder in due course only if he obtains the negotiable instrument before its maturity. |
A holder is not entitled to the privileges which are available for HDC. | A holder in due course is entitled to various privileges as specified under the Negotiable Instruments Act, 1881. |
A holder cannot sue all the prior parties. | A holder in due course can sue all the prior parties. |
Any person liable to make payment under negotiable instrument must make the payment of amount due, there under in due course in order to obtain valid discharge against the holder. A payment in due course means payment in accordance with the apparent tenor of instrument in good faith to any person in possession thereof. The payment will be a payment in due course if—
A paying banker is one who makes the payment of cheque on behalf of customer.
Nature of cheque | Conditions subject to which protection is available to paying banker. |
Cheque payable to order | Payment is made in due course. The protection shall be available notwithstanding, that any endorsement subsequently turns out to be a forgery. |
Cheque originally payable to bearer | Payment is made in due course. Payment is made to the bearer of the cheque. |
The protection shall be available notwithstanding that any endorsement appears on the cheque. | |
Cheques crossed generally | Payment is made in due course. Payment is made to any banker. |
Cheques crossed specially | Payment is made in due course. Payment is made to the banker to whom the cheque is crossed. |
The paying banker shall be liable to the true owner of the cheque for any loss sustained by him in the following two cases:
The collecting banker shall verify with due diligence and ordinary care:
The authority of the banker to honour the customer’s cheque comes to an end he must refuse to honour issued by the customer is in the following cases:
The banker may refuse to pay customer’s cheque in the following cases:
No liability of the drawer, if the bank fails conditions:
An alteration is called as material alteration if it alters the character or operation (i.e., the legal effect) of a negotiable instrument or the rights and liabilities of any of the parties to a negotiable instrument. The material alteration renders the instrument void but it alters only those persons who have already become parties at the date of alteration.
Examples
However, following are not considered as material alteration as it is authorized under act:
The effect of a material alteration of a negotiable instrument is only to discharge those who become parties, thereto prior to the alteration; But if an alteration is made in order to carry out the common intention of the original parties, it does not render the instrument void. Any material alteration if made by an indorsee, discharges his indorser from all liability to him in respect of the consideration thereof.
The alteration must be so material that it alters the character of the instrument to a great extent. In Hongkong and Shanghai Bank versus Lee Shi (1928), it has been held that an accidental alteration will not render the instrument void. It is necessary to show that the alteration has been made improperly and intentionally. The effect of making the material alteration without the consent of the party bound is exactly the same as that of cancelling the deed.
In short, we can conclude that all the parties to the negotiable instrument not consenting to the material alteration are discharged.
An acceptance means the drawee signs the bill and delivers it to the holder of the bill or gives a notice of acceptance to the holder of the bill. On the acceptance of a bill, the drawee becomes the acceptor.
The acceptance on the bill should be in written. Writing may be either on the face or back of the bill. Valid acceptance is said when the drwaee sign the instrument. Writing the word ‘Acceptance’ is not necessary. It means, if the bill is signed with or without the word ‘accepted’ it is valid. After the signature delivery or intimation to the holder is given that the bill has been accepted.
The acceptance may be either general or qualified. A general acceptance is absolute. It is an acceptance of bill without any qualification. A qualified acceptance of bill means acceptance of a bill subject with some qualification (e.g., accepting the bill subject to the condition that the payment of bill shall be made only on happening of an event specified therein).
The holder may object to the qualified acceptance. In such a case, it shall be treated that the bill is dishonoured due to non-acceptance.
He may give his consent to the qualified acceptance. In such a case, all the prior parties not consenting to it are discharged.
Example
Accepted payable on giving up bill of landing.
A bill is dishonoured by non-acceptance, if it is duly presented for acceptance but the bill is not accepted.
Following are cases where the bill is dishonoured by non-acceptance:
The holder gets an immediate right to sue all the prior parties without waiting for the maturity of the bill. A promissory note or a cheque cannot be dishonoured by non-acceptance since a promissory note or a cheque does not require any acceptance.
The person who accepts the bill for the honour of any other person is called as an ‘acceptor for honour’.
The bill must have been noted for non-acceptance. The acceptance is given:
The acceptance must be made in writing on the bill.
He is liable to pay the amount of the bill if the drawee does not pay on maturity. He is liable only to the parties, subsequent to the party for whose honour the bill is accepted.
He is entitled to recover the amount paid by him from the party for whose honour the bill was accepted and from all the parties prior to such party.
A person who pays a bill for honour of any other person is called as ‘payer for honour’.
The bill must have been noted for non-payment. The payment for honour is made—
The payment must be recorded by Notary Public.
The payer for honour is entitled to all the rights of a holder. He can recover all the sums paid by him from the party for whose honour he pays and all the parties prior to such party.
A negotiable instrument shall he dishonoured by non-payment if default in payment is made by the maker of a promissory note or acceptor of bill.
A bill which does not require acceptance shall be dishonoured by non-payment if default in payment is made by the drawer. A cheque shall be dishonoured by non-payment by the drawee.
A notice of dishonour may be given by the holder or any party liable on the negotiable instrument. The notice of dishonour must be given to all the parties to whom the holder seeks to make liable. The notice of dishonour must disclose the fact of dishonour of negotiable instrument. A party (other than the party primarily liable on the negotiable instrument) to whom the notice of dishonour is not given is discharged from liability on the negotiable instrument. The notice may be oral or in writing. It must be given within reasonable time of dishonour.
In the following circumstances or situation, the notice of dishonour is not necessary:
Recording the fact of dishonour of a negotiable instrument on the negotiable instrument is known as noting. The notice or minute must be recorded by notary public within a reasonable time after dishonour and must contain the fact of dishonour, the date of dishonour, reason if any.
The dishonoured bill is handed over to a Notary Public. The Notary Public presents it again for acceptance/payment. If the drawee or acceptor refuses to accept or pay the bill, the Notary Public records the fact of dishonour on the bill. Noting is optional. It is not mandatory to get the feet of dishonour noted.
When the instrument is dishonoured and noting is carried out a certificate issued by the Notary Public, stating the fact of dishonour. This process is known as protesting.
The name of any person may be given in a bill as ‘drawee in case of need’. His liability arises on the bill, only when the bill is not accepted by the drawee named in the bill. The bill is not dishonoured until it has been dishonoured by the drawee in case of need.
The discharge in relation to a negotiable instrument may be either (i) discharge of instrument or (ii) discharge of one or more parties.
The negotiable instrument is discharged:
The negotiable instrument is discharged if the party is primarily liable to the payment in due course. When the payment is made, the negotiable instrument must be cancelled or the fact of payment must be recorded on the negotiable instrument.
Where the holder cancels the name of the party primarily liable on the negotiable instrument with intent to discharge him, the negotiable instrument is discharged.
Where the holder releases or renounces his rights against the party primarily liable on the negotiable instrument, the negotiable instrument is discharged.
Where a party primarily liable on a negotiable instrument becomes the holder of the negotiable instrument, the negotiable instrument is discharged.
When any particular party is discharged, the instrument continues to be negotiable and the undischarged parties remain liable on it.
Non-presentment of bill on due date discharge the endorsers from their liability but the acceptor remain liable on it.
The party may be discharge in following ways:
A payment by a party who is secondarily liable on a negotiable instrument discharges the holder and all the parties, subsequent to the party, making payment of the negotiable instrument.
Where the holder cancels the name of any party, liable on the negotiable instrument (other than the party primarily liable on the negotiable instrument), such a party and all parties subsequent to him are discharged.
Where the holder releases any party, liable on the negotiable instrument (other than the party primarily liable on the negotiable instrument) such a party and all parties subsequent to him are discharged.
All prior parties not consenting to the same are discharged from liability to such holder.
Where a holder of the bill consents to qualified acceptance, all the prior parties who did not consent to qualified acceptance are discharged.
Every party not consenting to a material alteration of a negotiable instrument is discharged.
Where a party already liable on the negotiable instrument becomes the holder of negotiable instrument, such a party and all intermediate parties to whom such a party was previously liable shall be discharged.
A party is discharged if the negotiable instrument becomes time barred. A party is discharged if he is declared as an insolvent by the court.
A hundi means a bill of exchange drawn in local language. The Negotiable Instruments Act, 1881 applies to hundies if there is no local usage of trade or custom prevailing in the area in which hundi is drawn. However, if there is any custom or usage prevailing in such an area, the same will apply to the hundies and therefore Negotiable Instruments Act, 1881 shall not apply to hundies.
The different types of the hundies are following:
It means the hundi payable to a party, named in the hundi or to his order.
It means the hundi payable to the dhani or the owner i.e., the bearer.
It means the hundi payable at sight.
The hundi that is payable after a specified period of time.
The hundi that is payable to a Shah.
The hundi drawn in respect of goods shipped on the vessel and is payable only when the goods reach their destination safely.
Duplicate copy of the hundi.
Triplicate copy of the hundi.
The hundi which has already been paid or discharged.
The negotiability involves two elements, namely transferability free from equities and transferability by delivery or endorsement.
Past dated cheque remains bills of exchange. It becomes a cheque on the date of cheque. Therefore period of 6 months should be calculated from the date of cheque and not from the date when the installment was handed over to drawee.
Everyone who takes a cheque marked ‘not negotiable’, takes it at his own risk.
Writing word ‘A/c Payee’ does not make the chequenegotiable. An A/c payee cheque remains transferable.
In the case of cheque, liability is only of drawer. The holder of a cheque has no remedy against the banker.
The bank is liable if amount of cheque is increased by forgery.
The bank is liable if it honours a forged cheque. But if such forgery was due to negligence of customers bank will not be liable.
The cheque must be presented within six months to drawee bank.
If a cheque is returned with remark ‘A/c closed’, it would be offence u/s 138.
No prosecution if a cheque returned for signature difference.
Stop payment instructions to the banker in the case of cheque cannot stop prosecution of drawer.
The managing director of a company, deemed to be in charge and responsible to conduct of business of company. Therefore, if the offence is committed by company, its director in charge of affairs will be personally liable.
Notice of dishonour of cheque to the drawer of cheque can be sent by fax.
Notice of dihonour of cheque to M.D., who has signed the cheque on behalf of company is sufficient. It is not necessary to send notice to company.
The drawee can deposit cheque any number of times but he can send notice only once he sends notice of dishonour of cheque he forfeits his right of presenting cheque again.
Specified place means full address of exact location. Mere mentioning name of city is not specified place.
The person who is holder of Negotiable instrument after paying valuable consideration and become possessor/payee/endoresee before date whom amount is payable and without knowledge and defect in the title of person, transferring the instrument in good faith is only holder in due course.
Material alteration means it should change the character or identity of instrument.
Change in name of party, dates sum payable, time of payment, place of payment, the signature of drawer, without the consent of drawer would be material alteration.
Explain the various characteristic of a Negotiable Instrument.
(Ref. Para-14.2)
What are the presumptions applicable to all the negotiable instruments, as provided under the Negotiable Instrument Act, 1881?
(Ref. Para-14.3)
What is a promissory note and what are its elements?
(Ref. Para-14.4,14.5)
Define the bill of exchange and explain its salient features.
(Ref. Para-14.6)
In what ways does a ‘promissory note’ differ from a ‘bill of exchange’.
(Ref. Para-14.7)
Define the cheque. Mention its character.
(Ref. Para-14.8)
In what respect bill of exchange differ from a cheque?
(Ref. Para-14.9)
Write down the difference between electronic cheque and truncated cheque.
(Ref. Para-14.10)
Who can be party to negotiable instrument?
(Ref. Para-14.11)
How can negotiable instrument be classified?
(Ref. Para-14.12)
What is demand instrument?
(Ref. Para-14.12)
What do you understand by time instrument?
(Ref. Para-14.12)
What do you understand by ambiguous instrument?
(Ref. Para-14.12)
Distinguish between ‘inland bill’ and ‘foreign bill’.
Ref. Para-14.13)
What is inchoate instrument? Explain the provisions relating to inchoate instrument.
(Ref. Para-14.14)
What are the differences between an ambiguous instrument and inchoate instrument?
(Ref. Para-14.15)
State briefly the rules laid down under Negotiable Instrument Act, 1881 for determining the date of maturity of bills of exchange.
(Ref. Para-14.16)
Can a negotiable instrument be drawn without consideration?
(Ref. Para-14.17)
Write a short note negotiation.
(Ref. Para-14.18)
What do you understand by endorsement? Explain different kind of endorsement.
(Ref. Para-14.19,14.20)
When the term ‘negotiation back’ used in Negotiable Instrument Act? What are the effects of negotiation back?
(Ref. Para-14.21)
What are the difference between ‘negotiability’ and ‘assignability’?
(Ref. Para-14.22)
What do you understand by the crossing of cheque? What is object of crossing?
(Ref. Para-14.23)
Explain clearly the meaning of ‘general’ and ‘special crossing’ of cheque.
(Ref. Para-14.23)
Write short note on restrictive crossing.
(Ref. Para-14.23)
Write short note on not-negotiable crossing.
(Ref. Para-14.23)
A cheque marked ‘not negotiable’ is not tranferable. Comment.
(Ref. Para-14.23)
Write a short note on crossing of cheque.
(Ref. Para-14.23)
Explain the meaning of ‘holder’ and ‘holder in due course’.
(Ref. Para-14.25)
State the privileges of a ‘holder in due course’ under the Negotiable Instrument Act.
(Ref. Para-14.26)
What are the main differences between a holder and a holder in due course?
(Ref. Para-14.27)
When payment will be a payment in due course?
(Ref. Para-14.28)
A paying banker is always protected. Comment.
(Ref. Para-14.29)
State the cases in which a banker is justified or bound to dishonour cheque.
(Ref. Para-14.31)
State the grounds on the basis of which a cheque may be dishonour by bank?
(Ref. Para-14.32)
What will be effect of non-presentment of cheque within reasonable time?
(Ref. Para-14.33)
When is an alteration of an instrument as material alteration under act?
(Ref. Para-14.34)
Which kind of alteration to an instrument is allowed under the act and not regarded as material alteration?
(Ref. Para-14.34)
Which are the essentials elements of a valid acceptance of bill of exchange?
(Ref. Para-14.35)
When can a bill of exchange be dishonoured by ‘non-acceptance’ and ‘non-payment’ under the provisions of Negotiable Instrument Act, 1881?
(Ref. Para-14.36)
Explain the meaning of ‘acceptance for honour’ under the Negotiable Instrument Act, 1881.
(Ref. Para-14.37)
Explain the meaning of ‘payment for honour’ under the Negotiable Instrument Act, 1881.
(Ref. Para-14.38)
When notice of dishonour is unnecessary?
(Ref. Para-14.40)
Explain the provisions of negotiable Instrument Act, 1881 relating to ‘notify’ and ‘protesting’ of bill of exchange which has been dishonoured by the acceptor.
(Ref. Para-14.41)
When the negotiable instrument is discharged?
(Ref. Para-14.43)
When party to negotiable instrument is discharged?
(Ref. Para-14.44)
Write a short note on ‘hundi’.
(Ref. Para-14.45)