Negotiable Instruments

Negotiable Instruments Negotiable instrument act 1881 which governs the operations does so without a strict definition of Negotiable instruments but states in section 13 that promissory notes, bills of exchange and cheques payable either to order or to bearer are negotiable instruments. Main characteristics of Negotiable Instruments:- Negotiable instruments are easily transferable i.e Transferability does not make an instrument negotiable e.g. share certificate of a company

Negotiable instruments 2. The property in the negotiable instrument can be transferred by mere delivery of the instrument if it is a bearer or by endorsement and delivery if it is an order one. 3. The title of the negotiable instrument can be transferred from the transferor to the transferee. The transferee of a negotiable instrument gets a title which is free from the defects of the title of the transferor. For example if a bearer cheque is transferred by some person after it is stolen by him the transferee of such a stolen cheque becomes a holder-in-due course, even though the cheque is stolen, on certain conditions given by the act.

Negotiable Instruments 4. Liability of the negotiable instrument in Law is extensive:- In the case of cheque which is dishonoured wrongfully by a drawee bank, the holder of the cheque can file a suit against any endorser of the cheque or against the drawer of the cheque directly. When such a suit is filed against the endorser, the endorser can also file a suit against the drawer and the drawer in tun can file a suit against the drawee bank 5. They are payable either to order or bearer

Negotiation Where a bill of exchange, promissory note or cheque is transferred to any person as to constitute that person the holder thereof, the instrument is said to be negotiated. Negotiation implies transfer by endorsement and delivery if payable to order or by delivery if payable to bearer. When a cheque is delivered to the payee the payee becomes holder of the instrument

Cheque and its characteristics Section 6 of N.I. Act defines a cheque as “A bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand” Section 5 of N.I. act defines Bill of Exchange:- “ An instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money to a certain person or the order of that certain person or to the bearer of the instrument

Main characteristics of the cheque Negotiability:-bill of exchange and negotiable instrument Payability: payable on demand and always drawn on bank Three parties:-Drawer, drawee and the payee Unconditionality- It cannot be subject to the satisfaction of some performance or condition Monetary nature:- Payment of only money Certainty:-Amount certain and specific Payee should be certain The cheques can be payable either to order or to bearer

Crossing of cheques Drawing of two parallel transverse lines on the face of the cheque with or without the words “& Co” constitute the crossing. The reason for crossing is to prevent the proceeds of the cheque gpomg into the hands of persons having no title to them. Crossing also ensures safety in case of theft/robbery/misplacement etc. When a cheque is crossed, the banker on whom it is draw, shall pay the amount thereof only to a banker. Thus banker shall pay the amount of a crossed cheque to a party over the counter

Types of crossing General crossing:- Sec 123 of the N.I. act defines general crossing as follows:- “Where a cheque bears across its face an addition of the words “& company” or any abbreviation thereof, between two parallel transverse line, or of two parallel transverse lines simply, either with or without the words “not negotiable”, that addition shall be deemed a crossing, and cheque shal be deemed to crossed general

Types of crossing Special crossing:- Section 124 of the N.I. Act defines special crossing as “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 the banker

Not Negotiable crossing The effect of these words is stated in section 130 of the N.I. Act “ A person taking a cheque crossed generally or specially bearing in either case the words ‘ Not Negotiable” shall not have and shall not be cpable or giving a better title to the cheque than which the from he took it had. It does not make the cheque non-transferable but it deprives the cheque of the special feature of negotiability. It is a warning to the transfree that when he takes the cheque, he will get only that title which the transferor had.

Who can cross a cheque -The holder may cross it generally or specially -Where a cheque is crossed generally, the holder may cross it specially -Where a cheque is crossed generally or specially, the holder may add the words “Not Negotiable”

Who and how a crossing on a cheque can be cancelled If a cheque is crossed the drawer has the right to cancel the crossing by writing the words “Crossing cancelled pay cash” across the cheque and authenticating the same with his full signature on the cheque

Holder and Holder in due course Section 8 of N.I. Act defines holder as:- “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 destroyed, its holder is the person so entitled at the time of such loss or destruction A person is not Holder within the meaning of this section if he does not have the right to

Holder and holder in due course Recover the amount from the parties. A finder of a lost cheque is not a holder. A person does not get the right to get unless he is named in the cheque as a payee, endorsee or bearer A person has to acquire the title as Holder of the cheque in legal manner. A person who takes a cheque either under a forged or invalid endorsement such as that of a thief, cannot be regarded as a Holder

Holder in due course Section 9 of N.I. Act --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 endorsee 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

Endorsement of cheques Section 15 of N.I. Act:- 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 (allonge) annexed thereto..he is said to endorse the same and is called the endorser.

Kinds of endorsements Endorsement in Blank:- Mere signature of the endorser on the back of an instrument without mentioning the name of the specified person in whose favour the endorsement is made is called blank endorsement. This has the effect of making the cheque payable to bearer and thereafter the cheque can be negotiated by mere delivery, since a bearer cheque is transferred by mere delivery

Endorsement in full Endorsement in full:- When the endorser makes a direction to pay the amount specified in the cheque to a certain person or his order than the endorsement is in full. By specifying the name, the endorser guarantees that at the time the cheque left his hands he had a good title and that the instument was genuine in all respects. Further he attests that all the endorsement made prior to this are genuine. The next endorsee/payee in turn may endorse in blank or in full

Conditional endorsement In the normal circumstances, the effect of endorsement is that the endorser binds himself to pay upon no other condition than the dishonour of the instrument on due notice of dishonour to him. However, at his option, he may make his own liability on the instrument subject to a condition, in which case the endorsement is termed as a conditional endorsement. The condition can be the happening of a contingent event or

Conditional endorsement Make the right of the right of the endorsee to receive the payment in respect of the instrument dependent upon the happening of such an event. The condition may either be condition precedent or condition subsequent. Until the conditions are fulfilled no right accrues to the endorsee.

Restrictive endorsement When the right of negotiation is restricted or excluded by the endorsement, it is restrictive endorsement. This is on the lines of the account payees cheques. If the endorsement is pay to Mr MM Lal only, then Mr Lal’s right to negotiate the instrument is restricted Endorsement sans recourse- The effect of adding the words sans recourse-”Without recourse to me” would be that the endorser is excluded from all liability on the instrument

Negotiable Instruments