negotiable instruments act Flashcards
negotiable instrument
Negotiable Instruments is an instrument (the word instrument means a document) which is freely transferable (by customs of trade) from one person to another by mere delivery or by indorsement and delivery
Section 13 of the Act provides for only three kinds of negotiable instruments namely bills of exchange, promissory notes and cheques, payable either to order or bearer.
payable to bearer
a.When it is expressed to be so payable e.g. pay bearer
b. When the only or last indorsement (indorsement means signing of the instrument) on the instrument is an indorsement in blank i.e., the person who possesses it can demand payment. For example,. A cheque made payable to specified person and that cheque is endorsed by signing on the back of the cheque by that specified person.
payable to order
a. It is expressed to be so payable b.When it is expressed to be payable to a specified person and does not contain words prohibiting its transfer. (i.e. it is transferrable by indorsement and delivery)
characyeristics of NI
It is necessarily in writing.
It should be signed.
It is freely transferable from one person to another.
Holder’s title is free from defects.
It can be transferred any number of times till its satisfaction.
Every negotiable instrument must contain an unconditional promise or order to pay money.
The promise or order to pay must consist of money only.
The sum payable, the time of payment, the payee, must be certain.
The instrument should be delivered.
Mere drawing of instrument does not create liability.
promissory note
section 4 of the NI Act, 1881, “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,
characteristics of PN
- in writing- oral promise is not sufficient
- There must be an express promise to pay. Mere acknowledgment of debt is insufficient.
- The promise to pay should be definite and unconditional. the promise to pay may be subject to a condition, which according to the ordinary experience of mankind, is bound to happen.
4.A promissory note must be signed by the maker otherwise it is incomplete and ineffective.
5.promise to pay money only - promise to pay a certain sum
- The maker and payee must be certain, definite and different persons. A promissory note cannot be made payable to the bearer [Section 31 of the Bank of India Act, 1934 (RBI Act)]
- Stamping: A promissory note must be properly stamped in accordance with the provisions of the Indian Stamp Act and such stamp must be duly cancelled by maker’s signatures or initials on such stamp or otherwise.
BOE
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
characteistics of BOE
It must be in writing.
Must contain an express order to pay.
The order to pay must be definite and unconditional.
The drawer must sign the instrument.
Drawer, drawee, and payee must be certain. All these three parties may not necessarily be three different persons. One can play the role of two. But there must be two distinct persons in any case
The sum must be certain.
The order must be to pay money only.
It must be stamped
cheque
section 6
a cheque is a BOE 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
Payable on demand means- It should be payable whenever the holder chooses to present it to the drawee (the banker).
Cheque in the electronic form-means a cheque drawn in electronic form by using any computer resource, and signed in a secure system with a digital signature (with/without biometric signature) and asymmetric crypto system or electronic signature, as the case may be;
a truncated cheque” means a cheque which is truncated during 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
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”
characteristics of cheque
According to the definition of cheque under section 6, a cheque is a species of bill of exchange. Thus, it should fulfil:
all the essential characteristics of a bill of exchange
Must be drawn on a specified banker.
It must be payable on demand.
Note: These two additional features distinguish a cheque from bill. Thus, all cheques are bills while all bills are not cheques
bearer instrument
section 13
It is an instrument
where the name of the payee is blank
or where the name of payee is specified with the words “or bearer”
or where the last indorsement is blank.
Such instrument can be negotiated by mere delivery.
order instrument
It is an instrument which is
payable to a person or
Payable to a person or his order or
Payable to order of a person
or where the last indorsement is in full,
such instrument can be negotiated by indorsement and delivery.
inland instrument
section 11
A promissory note,
bill of exchange
or cheque
drawn or made in India
and made payable in,
or drawn upon any person resident in India
shall be deemed to be an inland instrument.
foreign instrument
section 12
A foreign instrument is one which is not an inland instrument.
inchoate instrument
Inchoate Instrument: It means an instrument that is incomplete in certain respects. The drawer/ maker/ acceptor/ indorser of a negotiable instrument may sign and deliver the instrument to another person in his capacity leaving the instrument, either wholly blank or having written on it the word incomplete. Such an instrument is called an inchoate instrument and this gives a power to its holder to make it complete by writing any amount either within limits specified therein or within the limits specified by the stamp’s affixed on it. The principle of this rule of an inchoate instrument is based on the principle of estoppel.
liability on drawing inchoate instrument
The person signing and delivering the inchoate instrument is liable both to a holder and holder in due course. However, there is a difference in their respective rights:
holder
The holder of such an instrument cannot recover the amount in excess of the amount intended to be paid by the signor
holder in due course
The holder in due course can, however, recover any amount on such instrument provided it is covered by the stamp affixed on the instrument.
extra inchoate
Section 20 of the Act reads as “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. 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
ambigous instrument
section 17
Where an instrument may be construed either as a promissory note or bill of exchange, the holder may at his election treat it as either, and the instrument shall be thenceforward treated accordingly
negotition by delivery
section 47
Subject to the provisions of section 58 [Instrument obtained by unlawful means or for unlawful consideration], a promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof.
Exception: A promissory note, bill of exchange or cheque delivered on condition that it is not to take effect except in a certain event is not negotiable (except in the hands of a holder for value without notice of the condition) unless such event happens.
negotiation by inorsement
section 48
Subject to the provisions of section 58 [Instrument obtained by unlawful means or for unlawful consideration],a promissory note, bill of exchange or cheque payable to order, is negotiable by the holder by indorsement and delivery thereof
