Negotiable Instruments and Indian Law

Negotiable Instrument Act 1881

• The Act governs various types of negotiable instruments, such as cheques, promissory notes, and bills of exchange.
• The Act has 10 marks allocated for this topic

• The term "negotiable" signifies that the instrument can be transferred from one person to another through mere delivery, without any formalities such as endorsement or assignment.

• An "instrument" is comprehensively understood as a written document that establishes a legal right, claim, or obligation, often involving monetary transactions.

• A negotiable instrument serves as a legal promise or order that entitles its holder to receive a predetermined sum of money, acting as an efficient method of facilitating payments and financial transactions in commerce.

• The transfer of a negotiable instrument can take place through various methods, including physical delivery of the instrument itself, or through endorsement, where the current holder signs the back of the instrument, thus allowing the next party to assume rights to the specified amount.

• Negotiable means transferable by delivery

• Instrument means a written document creating a right in someone's favor

• A negotiable instrument is a piece of paper allowing a person to receive a specific sum of money

• The transfer can happen via delivery or endorsement and delivery

Features of Negotiable Instruments

• Easy Transferability: Ownership of negotiable instruments changes through delivery or endorsement. Bearer instruments are payable to whoever possesses them, allowing easy transfer without requiring endorsement, but they carry a risk of loss or theft since ownership is based on physical possession. Examples include bearer bonds and certain checks. In contrast, order instruments require a designated payee and transfer ownership through endorsement, which includes the current holder's signature. This process provides protection against loss or theft, as the instrument can't be claimed by just anyone. Common examples are checks made to a named payee and promissory notes, though the necessity for endorsement may slow down transactions compared to bearer instruments.)

• Title: Absolute and clear title is transferred to the receiver in good faith for value.

• Must be in writing: Handwriting, typing, computer-generated documents, engravings are acceptable

• Unconditional order or promise for payment: Payment must only involve a specific sum of money, and nothing more (e.g., assets, securities, or goods)

• Time of payment: Set to a definite date or action (e.g., death of a person)

• Payee must be a person: Must be named or described clearly. More than one payee is possible

• Signature: The maker must sign the instrument

• Delivery: Must be delivered to the payee

• Stamping: Stamping is the process of affixing a legal stamp to a document to signify authenticity and fulfill regulatory requirements. It is often mandatory for legal agreements, contracts, and financial instruments, ensuring their validity in court. Stamping requirements can vary by jurisdiction, including the type of stamp and transaction amount. It also provides public notice of the document, protecting the involved parties' rights. Under the Indian Stamp Act of 1899, promissory notes and bills of exchange must be stamped, which governs stamp duty on various documents in India. The Act details the rates, instruments requiring stamping, exemption guidelines, and penalties for non-compliance, with each state allowed to amend provisions to meet local needs, causing variations in stamp duties.

• Rule of Evidence: The rules governing the admissibility of evidence in legal proceedings are critical for ensuring the integrity of the judicial process. These rules determine what evidence can be presented in court and how it must be obtained, aiming to ensure fair trials while protecting the rights of parties involved. They often differentiate between various types of evidence, such as testimonial evidence, documentary evidence, and physical evidence, while also addressing issues like hearsay and relevance. Understanding these rules is essential for legal practitioners and individuals involved in litigation.: Documents used as proof of debt. This feature has unique specific regulations for its use.

• Right to File Suit: The instrument's receiver can file a suit to enforce any rights on it

• Notice of Transfer: Generally, not required for transfer of the instrument

• Presumptions: Sections 118 and 119 of the Negotiable Instruments Act (NI Act) outline specific provisions regarding presumptions in legal proceedings. These sections establish certain legal assumptions about the existence of certain facts or the validity of instruments, which facilitates the burden of proof for parties involved in disputes related to negotiable instruments. This enables the courts to operate more efficiently by reducing the need for extensive evidence.

• Procedure for Suits: Special regulations exist for bills of exchange and promissory notes.

• Numbers of Transfers: Transferable repeatedly until maturity

• Popularity: Widely used in business dealings because of ease and quick resolution

• Exchange: Used as a payment substitute instead of currency, enabling the transaction of goods/items

Negotiable instruments can be categorized into several types, each serving different purposes in financial transactions. The main kinds include:

1. Promissory Notes: This is a written promise by one party (the maker) to pay a specified sum of money to another party (the payee) at a designated time or on demand.

2. Bills of Exchange: A bill of exchange is an order from one person to another to pay a specified sum of money to a third party, typically at a future date, involving three parties: The drawer is the person or entity that creates the negotiable instrument and orders payment. The drawee is the individual or institution, typically a bank, upon whom the instrument is drawn. The payee is the party entitled to receive the payment described in the instrument.

3. Checks: A check is a specific type of bill of exchange which is drawn on a bank, instructing the bank to pay a certain amount of money from the drawer's account to the holder of the check (the payee).

4. Certificates of Deposit: These are written acknowledgments from a bank that a certain sum of money has been deposited for a specified term, with the promise to pay back the principal amount plus any accrued interest.

5. Stock Certificates: These represent ownership in a corporation and imply that the holder is entitled to a share of the profits as well as voting rights in corporate matters.

Each type of these instruments is governed by specific regulations and has distinct characteristics that define their use and enforceability in legal contexts.

• Promissory Note: A document where one person promises to pay another a certain sum of money
• Bill of exchange: Orders one person to pay another person a certain sun of money
• Cheque: A document ordering a bank to pay a specified person a sum of money

Types of Negotiable Instruments

• Negotiable by statute (legally recognized): Promissory notes, bills of exchange, cheques
• Negotiable by custom or usage: Treasury bills, bank notes, drafts, railways receipts for goods, dividend warrants, orders of delivery, money orders, postal orders, share certificates, bill of lending, dock warrants (etc)
• Instruments are not considered negotiable (Not negotiable by either usage or statute)

Characteristics of a Promissory Note

• Must be in writing: The document must exist physically
• Express promise: The document must contain a clear promise
• Unconditional: The promise in the document must be clear and unequivocal
• Signed by the maker: The person promising to pay (the maker) must sign it.
• Must be for a certain sum: The amount to be paid must be clearly stated
• Certain Payee: The receiver of payment is named
• Amount should be definite: The sum to be paid is stated clearly

Characteristics of a Bill of Exchange

• In writing: The document is physical
• Express order to pay: The document states an order to pay
• Unconditional: The order to pay must be clear and unambiguous
• Pay certain sum: Clearly defined sum payable
• Pay money only: The document specifies payment of money only
• Certain three parties: The document must mention the payer, payee, and drawee
• Signed by the drawer: The orderer of payment signs the document

Characteristics of a Cheque

• In writing: The document must be physically real
• Express order to pay: The document contains a demand to pay
• Definite and unconditional: The order to pay is clear and unambiguous
• Signed by the drawer: The person writing the cheque signs the document
• Order must be for certain sum: The amount is crystal clear and stated
• Pay money only: Payment for assets, goods or securities not permitted
• Certain three parties: The document contains the drawer, payee and banker
• Drawn upon a specified banker: The cheque is drawn on a certain bank
• Payable on demand: The payment must be made when demanded

Differences Between Cheque and Bill of Exchange

• Drawee: Cheque - always a bank, Bill of Excange - anyone can be drawee
• Demand or Grace period: Cheque- payable on demand, no grace period, Bill of Excange - entitled to a grace period of 3 days
• Acceptance: Cheques require no acceptance, Bill of exchange requires acceptance
• Dishonour Notice: A formal communication indicating non-payment.: Notice of dishonour doesn't need to be given in the case of cheque, notice required in the case of bill of exchange.
• Protest: Cheques do not need to be protested, bills of exchange need to be protested for dishonour
• Crossing: Cheques can be crossed, bills of exchange cannot be crossed.
• Protection: Cheques have statuary protection for the drawee/banker; bills of exchange do not.
• The time period for both cheques and bills of exchange varies based on regulations, but generally, cheques are valid for six months, while bills can be for specific dated terms, often ranging from 30 to 90 days.

Types of Cheques

• Bearer cheque: Payable to whoever presents it
• Crossed cheque: Restricted to particular bank accounts
• Order cheque: Payable to a specific person mentioned on the cheque
• A/C payee cheque: Payable directly into a bank account

Points of difference between Cheque and Bill of Exchange

• Drawee: Banks for cheques, anyone for bills of exchange
• Grace period: No grace period for cheques, grace period (three days) for bills of exchange
• Acceptance: No acceptance for cheques, acceptance is needed for bills
• Notice of dishonour: Not needed for cheques, needed for bills
• Protest: No protest needed for cheques, protest needed for bills
• Crossing: Possible for cheques, not possible for bills

Types of Endorsement

• Blank or general: This type of endorsement involves simply writing the signer's name on the document without any additional specification. It allows the instrument to be negotiated freely, making it payable to anyone who possesses it. This kind of endorsement is commonly used for checks or negotiable instruments as it enhances their liquidity.
• Special or full: In this scenario, the endorsement includes the name of the specific individual or entity to whom the instrument is endorsed, known as the endorsee. This endorsement transfers ownership directly to that person and it restricts further negotiation unless the new endorsee re-endorses the instrument.
• Partial: This endorsement allows the endorser to transfer only a portion of the amount stated on the instrument. This is particularly useful in cases where a payment is being split between multiple parties, allowing for flexibility in financial transactions.
• Restrictive: A restrictive endorsement specifies limitations on the way the instrument can be used or transferred. For example, it may state that the instrument can only be deposited into a particular bank account, preventing further negotiation or transfer to another party.
• Conditional or Qualified: This type of endorsement includes specific conditions that must be met for the instrument to be valid. For example, it might stipulate that payment is contingent upon the performance of a contract, offering protection to the endorser.

Difference Between Holder and Holder in Due Course (HDC)

• Meaning: Holder - has legal rights; HDC - acquires rights with consideration
• Consideration: Not necessary for holder, necessary for HDC
• Rights to sue: Holder can't sue prior parties; HDC can
• Good Faith: Instrument can be acquired with or without good faith, instrument must be acquired in good faith
• Privileges: HDC has more privileges than a holder
• Maturity: Holder can have rights before or after maturity, HDC does not benefit before maturity

Privileges of a holder in due course

• Inchoate Stamped Instrument: Holder in due course is exempt from prior conditions
• Liability of Prior Parties: Liable to the holder in due course until the instrument is paid

Dishonour of Negotiable Instruments

• Dishonour = Failure to honour a negotiable instrument
• Mode of Dishonour: Non-acceptance ( Section 91, only in case of bills of exchange) and Non-payment ( Section 92)

Dishonour by Non-acceptance [Section 91]

• Happens when presented to the drawee but not accepted within 48 hours.
• Drawee is incompetent to contract.
• Presentation waived or refused.
• It is a non-fictitious person with a reasonable search.
• Qualified acceptance
• One of the drawers defaults on acceptance (with requirement)

Dishonour by Non-payment [Section 92]

• The acceptor refuses to make payment in due time
• The maker of a promissory note fails to pay on due date
• Cheque is dishonoured when the banker refuses payment

Notice of Dishonour

• Formal communication of dishonour
• Warns the person who is liable for payment
• Enables the recipient to defend against prior parties

Notice by Whom

• Notice to all prior parties whom the holder wants to make liable

Mode of Notice

• Oral, written, or partially both
• Sent by post (mail)

Duties of the Holder upon Dishonour

• Deliver notice of dishonour to all relevant parties
• Get noting and protesting done for bills or promissory notes

Noting [Section 99]

• The notary specifies dishonour info on the instrument (fact, date, reason, notary's charges, register reference, initials)
• Necessary for foreign bills or when required by local law

Protesting [Section 100]

• Formal certificate by notary public for dishonour by non-acceptance or non-payment.
• Contains instrument details, parties, reason for dishonour, place and time of dishonour.
• Notary's signature

Discharge of Negotiable Instruments

• When an instrument is no longer negotiable
• Results from payment, waiver, or cancellation (etc.)
• Discharge of the primary party discharges the instrument

Mode of Discharge

• Payment in due course
• By a party primarily liable by becoming holder [Section 90].
• By express waiver
• By cancellation
• Discharge as a simple contract