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NEGOTIABLE INSTRUMENGT, Schemes and Mind Maps of Social Contract Theory

Dibrugarh UniversitySocial Contract Theory

ABOUT NI ACT IS WRITTEN HERE FROM SEPECIFIC CONTRACT

Typology: Schemes and Mind Maps

2024/2025

Uploaded on 05/31/2025

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UNIT-2
THE NEGOTIABLE INSTRUMENTS ACT, 1881
INTRODUCTION
Money can very easily and safely be transferred from one place to another with the help of
negotiable instruments. The law relating to Negotiable Instruments is laid down in Negotiable
Instruments Act, 1881. It extends to the whole of India except the State of Jammu and Kashmir.
DEFINITION
According to Section 13 of the Act, "Negotiable instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer, whether the word "order" or " bearer"
appear on the instrument or not."
In the words of Justice, Willis, "A negotiable instrument is one, the property in which is acquired by
anyone who takes it bona fide and for value notwithstanding any defects of the title in the person
from whom he took it".
Thus, the term, negotiable instrument means a written document which creates a right in favour of
some person and which is freely transferable. Although the Act mentions only these three
instruments (such as a promissory note, a bill of exchange and cheque), it does not exclude the
possibility of adding any other instrument which satisfies the following two conditions of
negotiability:
(1) the instrument should be freely transferable (by delivery or by endorsement. and delivery) by
the custom of the trade; and
(2) the person who obtains it in good faith and for value should get it free from all defects, and be
entitled to recover the money of the instrument in his own name.
CHARACTERISTICS OF A NEGOTIABLE INSTRUMENTS
1. Easy transferability
The property (ownership) in a negotiable instrument is transferred by mere delivery, if the
instrument is payable to bearer, by delivery and indorsement if payable to order.
2. Transferee’s title free from all defects
The transferee who takes it bona fide and for value and before maturity ( called holder in due
course) gets a good even if the title of transferor was defective.
3. Transferee can sue in his own name: The transferee of the negotiable instrument can sue in his
own name, in case of dishonor.
4. Prompt payment
A negotiable instrument enables the holder to expect prompt payment because a dishonour means
the ruin of the credit of all persons who are parties to the instrument.
5. Notice of transfer not necessary: The transferee is not required to give a notice of transfer to the
person liable to pay the instrument.
6. Presumptions
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UNIT- 2

THE NEGOTIABLE INSTRUMENTS ACT, 1881

INTRODUCTION

Money can very easily and safely be transferred from one place to another with the help of negotiable instruments. The law relating to Negotiable Instruments is laid down in Negotiable Instruments Act, 1881. It extends to the whole of India except the State of Jammu and Kashmir. DEFINITION According to Section 13 of the Act, "Negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer, whether the word "order" or " bearer" appear on the instrument or not." In the words of Justice, Willis, "A negotiable instrument is one, the property in which is acquired by anyone who takes it bona fide and for value notwithstanding any defects of the title in the person from whom he took it". Thus, the term, negotiable instrument means a written document which creates a right in favour of some person and which is freely transferable. Although the Act mentions only these three instruments (such as a promissory note, a bill of exchange and cheque), it does not exclude the possibility of adding any other instrument which satisfies the following two conditions of negotiability: (1) the instrument should be freely transferable (by delivery or by endorsement. and delivery) by the custom of the trade; and (2) the person who obtains it in good faith and for value should get it free from all defects, and be entitled to recover the money of the instrument in his own name. CHARACTERISTICS OF A NEGOTIABLE INSTRUMENTS

1. Easy transferability The property (ownership) in a negotiable instrument is transferred by mere delivery, if the instrument is payable to bearer, by delivery and indorsement if payable to order. 2. Transferee’s title free from all defects The transferee who takes it bona fide and for value and before maturity ( called holder in due course) gets a good even if the title of transferor was defective. 3. Transferee can sue in his own name: The transferee of the negotiable instrument can sue in his own name, in case of dishonor. 4. Prompt payment A negotiable instrument enables the holder to expect prompt payment because a dishonour means the ruin of the credit of all persons who are parties to the instrument. 5. Notice of transfer not necessary: The transferee is not required to give a notice of transfer to the person liable to pay the instrument. 6. Presumptions

Sections 118 and 119 of the Negotiable Instrument Act lay down certain presumptions which the court presumes in regard to negotiable instruments:

1. Consideration: It is presumed that every negotiable instrument was made drawn, accepted or endorsed for consideration. 2. Date: Every negotiable instrument is presumed to have been made or drawn on the date which it bears. 3. Time of acceptance: It is presumed that every accepted bill was accepted within a reasonable time after its issue and before its maturity. 4. Time of transfer: It is presumed that every transfer was made before its maturity. 5. Order of endorsement: The endorsements are presumed to have been made in the order in which they appear thereon. 6. Stamp: In case an instrument is lost, it is presumed that it was duly stamped. 7. Every holder is a holder in due course: Every holder is presumed to be a holder in due course. 8. Proof of protest: In case a suit is filed for dishonor of instrument, the court shall on proof of the protest, presume the fact of dishonour, unless and until such fact is disproved. TYPES OF NEGOTIABLE INSTRUMENT (a) Negotiable instruments recognised by statute (By the Negotiable Instruments Act): (i) Promissory notes (ii) Bills of exchange (iii) Cheques (b) Negotiable instruments recognised by usage or custom are: (i) Hundis (ii) Share warrants (iii) Dividend warrants (iv) Bankers draft (v) Circular notes (vi) Bearer debentures (vii) Debentures of Bombay Port Trust (viii) Railway receipts (ix) Delivery orders. PROMISSORY NOTE Section 4 of the Act defines, "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 to or to the order of a certain person, or to the bearer of the instruments." Parties to a Promissory Note: 1. Maker – The person who makes the note and promises to pay. 2. Payee- The person to whom the amount is payable. Essential elements An instrument to be a promissory note must possess the following elements: (1) It must be in writing: A mere verbal promise to pay is not a promissory note. (2) It must contain an express promise to pay: There must be an express undertaking to pay. A mere acknowledgment of debt is not enough. (3) Promise to pay must be unconditional: A conditional undertaking destroys the negotiable character of an otherwise negotiable instrument.

CHEQUE

Section 6 of the Act defines "A cheque is a bill of exchange drawn on a specified banker, and not expressed to be payable otherwise than on demand". A cheque is bill of exchange with two more qualifications, namely, (i) it is always drawn on a specified banker, and (ii) it is always payable on demand. Consequently, all cheque are bill of exchange, but all bills are not cheque. Parties to a Cheque

  1. Drawer. the person who draws the cheque.
  2. Drawee. It is the drawer's banker on whom the cheque has been drawn.
  3. Payee. He is the person who is entitled to receive the payment of the cheque.

Types of Cheques (a) Open Cheque – When the cheque is payable at the counter of the bank on whom it is drawn, it is called an open cheque. It may be of two types. o Bearer Cheque - When a cheque is payable to the bearer i.e. to the person who presents the cheque to the bank for encashment, is called bearer cheque. It can be transferred by mere delivery. Hence there is a great risk. Eg. Pay ‘A’ or bearer. o Order Cheque - When a cheque is payable to person named in the cheque or to his order, is called Order Cheque. It can be transferred only by endorsement and delivery. Eg. Pay ‘A’ or order. (b) Crossed Cheque – To reduce the risk involved in open cheque, a cheque may be crossed. It is the cheque on which two parallel transverse lines are drawn across the top left , with or without the word : (i) ' & Co.' (ii) Not Negotiable (iii) A/c Payee It can not be encashed at the counter of the bank , can be received through a collecting banker. MODES OF CROSSING (1) General Crossing – In general crossing, simply two parallel transverse lines at the left hand side of its top corner with or without words such as 'and company' or 'not negotiable' may be drawn. Effect - Payment can be made through bank account only, and not at the counter. (2) Special Crossing - When a cheque bears the name of the bank in between the two parallel lines, with or without the words 'not negotiable' is called Special Crossing.

Comparison between Cheque and Bill of Exchange Comparison between Bill of Exchange and Promissory Note S.N. BASIS BILL OF EXCHANGE PROMISSORY NOTE

  1. Meaning Bill of Exchange is an instrument in writing showing the indebtedness of a buyer towards the seller of goods. It is an instrument in writing containing an unconditional undertaking signed by maker to pay a certain sum of money to a certain person or to the bearer.
  2. Defined in Section 5 of Negotiable Instrument Act, 1881. Section 4 of Negotiable Instrument Act, 1881.
  3. Nature of Payment There is an unconditional order to pay There is an unconditional promise to pay
  4. Number of Parties Three parties, i.e. drawer, drawee and payee. Two parties, i.e. drawer and payee.
  5. Drawn by Creditor Debtor
  6. Liability of Maker Secondary and conditional Primary and absolute
  7. Notice of dishonour Notice must be given to all persons liable to pay Notice of dishonor to maker is not necessary
  8. Noting and protesting Required in case of dishonor of a bill. Not required in case of dishonor of a note.
  9. Payable to maker The drawer and payee may be one person Maker cannot pay to himself
  10. Copies Bill can be drawn in copies. Promissory Note cannot be drawn in copies. S.N. BASIS CHEQUE BILL OF EXCHANGE
  11. Meaning A document used to make easy payments on demand and can be transferred through hand delivery A written document that shows the indebtness of the debtor towards the creditor
  12. Defined in Section 6 of Negotiable Instrument Act, 1881. Section 5 of Negotiable Instrument Act, 1881.
  13. Drawee Always a specific bank May be any person or bank
  14. Payable to bearer on demand Always Cannot be made payable to bearer on demand.
  15. Acceptance Does not require acceptance A bill needs to be accepted.
  16. Validity period 3 months Not applicable
  17. Days of grace No grace period is allowed 3 days of grace allowed
  18. Can it be crossed Yes No
  19. Stamping No such requirement Must be stamped

NEGOTIATION

According to section 14 of the Act, ‘when a promissory note, bill of exchange or cheque is transferred to any person so as to constitute that person the holder thereof, the instrument is said to be negotiated.’ Negotiation thus requires two conditions to be fulfilled, namely:

  1. There must be a transfer of the instrument to another person; and
  2. The transfer must be made in such a manner as to constitute the transferee the holder of the instrument. Modes of Negotiation Negotiation may be effected in the following two ways : 1. Negotiation by delivery (Sec. 47) : Where a promissory note or a bill of exchange or a cheque is payable to a bearer, it may be negotiated by delivery thereof. Example : A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep it for B. The instrument has been negotiated. 2. Negotiation by endorsement and delivery (Sec. 48) : A promissory note, a cheque or a bill of exchange payable to order can be negotiated only be endorsement and delivery. Unless the holder signs his endorsement on the instrument and delivers it, the transferee does not become a holder. If there are more payees than one, all must endorse it. ENDORSEMENT As per the Negotiable Instruments Act endorsement means, the writing of one’s name on the back of the instrument or any paper attached to it with the intention of transferring the rights therein. Thus, endorsement is signing a negotiable instrument for the purpose of negotiation. The person who effects an endorsement is called an ‘endorser’, and the person to whom negotiable instrument is transferred by endorsement is called the ‘endorsee’. Classes of endorsement: An endorsement may be : (1) Blank or general. (2) Special or full. (3) Partial. (4) Restrictive. (5) Conditional. (1) Blank or general endorsement (Sections 16 and 54). It is an endorsement when the endorser merely signs on the instrument without mentioning the name of the person in whose favour the endorsement is made. Example : A bill is payable to X. X endorses the bill by simply affixing his signature. This is an endorsement in blank by X. In this case the bill becomes payable to bearer. . ( 2 ) Special or full endorsement (Section 16)

A holder in due course must satisfy the following conditions:

  1. He must be a holder for valuable consideration.
  2. He must have become a holder (possessor) before the date of maturity of the negotiable instrument.
  3. He must have become holder bona fide.
  4. He should not have notice of defects whether actual or constructive.
  5. A holder in due course must take the negotiable instrument complete and regular on the face of it. Example (i) A bill made out by pasting together pieces of a tom bill taken without enquiry will not make the holder, a holder in due course. It was sufficient to show the intention to cancel the bill. Privileges of a Holder In Due Course:
  6. Instrument purged of all defects: A holder in due course who gets the instrument in good faith in the course of its currency is not only himself protected against all defects of title of the person from whom he has received it, but also serves, as a channel to protect all subsequent holders. Example: A obtains Bs acceptance to a bill by fraud. A indorses it to C who takes it as a holder in due course. The instrument is purged of its defects and C gets a good title to it. In case C indorses it to some other person he will also get a good title to it except when he is also a party to the fraud played by A.
  7. Rights not affected in case of an inchoate instrument : Right of a holder in due course to recover money is not at all affected even though the instrument was originally an inchoate stamped instrument and the transferor completed the instrument for a sum greater than what was intended by the maker. (Sec. 20)
  8. All prior parties liable: All prior parties to the instrument (the maker or drawer, acceptor and intervening indorers) continue to remain liable to the holder in due course until the instrument is duty satisfied. The holder in due course can file a suit against the parties liable to pay, in his own name (Sec. 36)
  9. Can enforce payment of a fictitious bill : Where both drawer and payee of a bill are fictitious persons, the acceptor is liable on the bill to a holder in due course. If the latter can show that the signature of the supposed drawer and the first indorser are in the same hand, for the bill being payable to the drawer's order the fictitious drawer must indorse the bill before he can negotiate it. (Sec. 42).
  10. No effect of conditional delivery: Where negotiable instrument is delivered conditionally or for a special purpose and is negotiated to a holder in due course, a valid delivery of it is conclusively presumed and he acquired good title to it. (Sec.46). Example: A, the holder of a bill indorses it "B or order" for the express purpose that B may get it discounted. B does not do so and negotiates it to C, a holder in due course. D acquires a good title to the bill and can sue all the parties on it.
  1. No effect of absence of consideration or presence of an unlawful consideration: The plea of absence of or unlawful consideration is not available against the holder in due course. The party responsible will have to make payment (Sec. 58).
  2. Estoppel against denying original validity of instrument: The plea of original invalidity of the instrument cannot be put forth, against the holder in due course by the drawer of a bill of exchange or cheque or by an acceptor for the honour of the drawer. But where the instrument is void on the face of it e.g. promissory note made payable to "bearer", even the holder in due course cannot recover the money. Similarly, a minor cannot be prevented from taking the defence of minority. Also, there is no liability if the signatures are forged. (Sec. 120).
  3. Estoppel against denying capacity of the payee to indorsee: No maker of promissory note and no acceptor of a bill of exchange payable to order shall, in a suit therein by a holder in due course, be permitted to resist the claim of the holder in due course on the plea that the payee had not the capacity to indorse the instrument on the date of the note as he was a minor or insane or that he had no legal existence (Sec 121)
  4. Estoppel against indorser to deny capacity of parties: An indorser of the bill by his endorsement guarantees that all previous endorsements are genuine and that all prior parties had capacity to enter into valid contracts. Therefore, he on a suit thereon by the subsequent holder, cannot deny the signature or capacity to contract of any prior party to the instrument. DISHONOUR OF NEGOTIABLE INSTRUMENTS A negotiable instrument is dishohoured by non-payment. While a bill of exchange can be dishohoured, in addition, by non-acceptance also. When a negotiable instrument is dishonoured, the holder must give a notice of dishonour to all the previous parties in order to make them liable. (a) Dishonour by non-acceptance (Section 91) A bill of exchange can be dishonoured by non-acceptance in the following ways :
    1. When the bill is duly presented and the drawee does not accept the bill within 48 hours of presentment.
    2. When there are several drawees who are not partners, and any of them doesnot accept the bill within 48 hours of presentment.
    3. When the drawee is a fictitious person.
    4. When the drawee after reasonable search, cannot be found.
    5. When the drawee is incompetent to contract.
    6. When the acceptance is qualified.
    7. When presentment for acceptance is excused and the bill is not accepted. (b) Dishonour by non-payment (Section 92) A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill, drawee of the cheque or drawee in case of need, if there is any, does not pay the amount upon being duly required to pay the same. An instrument is also dishonoured by non-payment when presentment for payment