NEGOTIABLE INSTRUMENT ACT (NI Act) 1881 --A few important points for SBI Associate Bank/IBPS/SBI --Interviews--VERY USEFUL
NEGOTIABLE INSTRUMENT ACT (NI Act) 1881 came into force wef Mar 01, 1882.
NEGOTIABLE INSTRUMENT ACT (NI Act) 1881 came into force wef Mar 01, 1882.
Latest amendment Dec 2002. Total sections 147 Applicable throughout India including J & K
STATUTE: Section 13 gives the meaning of Negotiable Instruments and states Negotiable Instruments means a Promissory Note, Bill of Exchange or Cheque payable either to order or to bearer.
DEFINITION OF NI:
No direct definition of an NI is available.
But as per Sec 13, NI means and include
promissory note (PN),
Bill of exchange (BoE)
TYPE OF NEGOTIABLE INSTRUMENTS:
(a) As per NI Act - 1:Promissory note, 2:bill of exchange, 3:cheque and 4:Demand draft
(b) As per Transfer of property Act (Sec 137) - Documents of title to goods such as Bill of Lading, Rail Reciept, GR issued by transport operators approved by IBA, Warehouse receipt , AirWay Bill Dock Warrant, Delivery Order etc. also called Quasi Negotiable instrument.
(c) As per usage or practice - such as Certificate of Deposit , Commercial Paper , Treasury Bills, Hundi, Govt. Promissary Notes.
RESTRICTION ON ISSUE OF BEARER PN & BOE:
As per NI Act, BoE and PN can be made payable to bearer.
But only Central Govt. and RBI, are permitted to draw PN & BoE payable to Bearer u/s 31 of RBI Act 1934. Other persons in India can draw only payable to order.
DD is issued payable to ORDER due to this restriction.
Cheques can be issued as bearer or order, as this restruction is not applicable to cheques.
PRESUMPTIONS OF NIs:
U/s 118, NIs are presumed to be:
(a) made for consideration,
(b) bear date on which they are made.
(c) every holder is a holder in due course.
PROMISSORY NOTE (Section 4 NI Act):
PN is in an unconditional undertaking or promise, in writing signed by the maker (the debtor), to pay a certain sum of money to or to the order of a certain person or to the bearer thereof.
Promise is a compulsory condition, in a promissory note.
Acknowledgement is not a promissory note (example I owe you Rs.500 is an acknowledgement and not a promissory note).
In PN there are 2 parties maker (debtor) & payee (creditor)
Currency/bank notes are not promissory notes as these are excluded from the definition of promissory notes.
Cheque is a demand bill of exchange drawn on a specified bank. It also includes truncated cheque (in case of CTS in NCR and Chennai) and electronic cheque. (Sec 6).
Cheque can be made payable to bearer or order (restriction of Section 31 of RBI Act on issuing bearer is not applicable on cheque).
BEARER AND ORDER:
If a cheque bears, the words bearer / order both, it is payable to bearer. If does not bear such words it is payable to order.
It is a paper cheque, which is retained by the collecting bank. To collect the payment, the collecting bank sends scanned image of the paper cheque to the drawee bank + digital signatures of collecting bank.
ELECTRONIC CHEQUE :
It is a scanned image of the paper cheque + digital signatures of the drawer.
(Digital signature has two keys, public key (which is disclosed) and private key (which is kept secret). Public key is used to verify the digital signatures and private key is used to sign.
FORMAT OF CHEQUE:
Format is a practice. It is not prescribed in any Act.
POST DATED CHEQUE:
Cheque bearing date subsequent to date of its presentment. It cannot be paid before its date. Example - Cheque dated Jan 22, is presented on Jan 16. It will be returned.
A cheque bearing date prior to the date, when it was actually drawn.
Example - Cheque issued on Jan 22 but it is dated Jan 05, while the account was opened on Jan 10. Such cheque can be paid.
IMPOSSIBLE DATE :
If an impossible date is written (say Feb 29 in case of leap year, 31 Apr, 31 Jun, 31 Sep,Nov 31), the cheque would be paid on last day of month (Nov 30).
If date is not complete (say Jun 2010). It cannot be paid.
AMOUNT IN WORDS AND FIGURES DIFFERS (Sec 18):
Such cheque can be paid for amount written in words. Amount written in figures shall be ignored.
If amount in words is written and in figures not given, it is incomplete cheque and cannot be paid.
DIFFERENT HANDWRITINGS / INKS / SCRIPTS
A cheque drawn in different handwritings or in different inks or different script would be paid.
A forged cheque (where signatures of the drawer are forged) is not a mandate of the drawer and in no circumstances it can be paid. If paid bank would be liable.
HOLDER (Sec 8):
Holder is a person who is
(a) entitled to possession of the instrument
(b) entitled to receive or recover the due amount thereon.
Actual possession and consideration is not compulsory for a holder.
HOLDER IN DUE COURSE (Sec 9):
It is a person who is
(a) entitled to possession of the instrument
(b) entitled to receive or recover the due amount thereon
(c) obtained the possession for consideration
(d) obtained the possession in good faith.
Payee or endorsee of a cheque is a holder in due course. But if the cheque is lost, he becomes only a holder. Similarly, the payee of a gift cheque is only a holder and not a holder in due course, as there is no consideration.
Holder or Holder in due course can
(a) complete an inchoate (incomplete) instrument,
(b) cross an uncrossed cheque,
(c) obtain a duplicate if original is lest and
(d) convert a bearer into order.
HOLDER ( Sec. 8 )
HOLDER IN DUE COURSE
Will affect the instrument
Will not affect the Instrument
RIGHTS OF HOLDER
a) Holder can obtain a duplicate of the lost Instrument (Section 45-A)
b) Holder can cross the cheque if not already crossed, convert a general crossing to a
special crossing, endorse and can negotiate If !tie negotiation is not restricted
c} Holder can sue in his own name In relation to the instrument
d} Holder can complete an Inchoate Instrument
e} Holder can give proper discharge to the person making the payment
RIGHTS OF HOLDER IN DUE COURSE
· Every prior party to a negotiable Instrument is liable thereon to a holder in due course until the Instrument IS duly satisfied (Sec. 36).
· If a bill is drawn payable to the drawer's order In a fictitious name, the acceptor IS not relieved from liability to any holder in due course, provided endorsement and the drawer's signatures are in the same handwriting (Sec. 42).
· If a bill of exchange or promissory note IS negotiated to a holder in due course, the other parties to the Instrument cannot escape liability on the ground that the delivery of the instrument was conditional or for a special purpose only (Sec. 46)
As per Section 20, it is incomplete instrument in which one or the other particulars are not given (but it bears signatures of the drawer). It can be completed by the Holder. These are, otherwise, valid instruments, but cannot be paid till completed.
A cheque date June 2012, is incomplete. It can be paid only when date is completed.
It means transfer of an instrument from one person to another to make the transferee the holder thereof.
METHOD OF NEGOTIATION :
Negotiation is completed by delivery only in case of bearer instruments (Sec 47).
It is completed by endorsement followed by delivery by the same person (Sec 48) in case of order instrument.
If endorser dies after endorsement but before delivery, the negotiation can be completed by legal heirs, with fresh endorsement and then delivery.
As per Sec 15, endorsement means signing on the face or backside of an instrument (or on a separate paper, called allonge) for the purpose of negotiation i.e. transfer of cheque to next person. Person transferring the instrument is called endorser. He can be drawer, payee or an existing endorsee. The person to whom it is transferred is called an endorsee.
BEARER CHEQUES :
On a bearer cheque endorsement is not required. If made, it will be ignored, as a bearer is always a bearer (Sec 85-2).
U/s 35, liability of an endorser is similar to drawer of the cheque. If cheque is dishonoured, the endorsee can recover the amount from the endorser or drawer.
TYPES OF ENDORSEMENT
(Sec 16-1) : Signed without writing any instruction above the signature (as to whom to pay).Such cheque becomes payable to bearer u/s 54.
Blank endorsement can be converted into full by writing name of a person, to whom to pay, above the signatures.
ENDORSEMENT IN FULL : Where endorser writes the name of person to whom to pay above signatures. Instruments becomes payable to endorsee. Such endorsement followed by an endorsement in blank, makes the instrument payable to bearer.
RESTRICTED ENDORSEMENT (Sec 50):
Where endorser restricts further negotiation (pay to ….. only). In this case, the endorsee can obtain payment but cannot endorse further.
FACULTAT1VE: Where an endorser waives the condition of notice of dishonour
SANS RECOURSE :
Where the endorser withdraws his liability by specifically writing so. (pay to X without my liability). In this case, in case of dishonour, the endorsee cannot recover from the endorser.
When endorser's signatures are forged. Title does not pass to any person on the basis of such endorsement and it remains with the payee or last endorsee. A person getting a cheque after such endorsement, does not become holder as he gets no title to the cheque.
Paying bank is protected (u/s 85-1) on payment on the basis of forged endorsement if it is regular.
PROTECTION TO PAYING BANK: Paying bank gets protection on payment of crossed cheques u/s 128 by ensuring that the payment is made in due course.
COLLECTION OF CHEQUE
Banks collect cheques as agents for their customers.
In the process of collection, if they collect a cheque for a customer, of which the customer is not true owner, it is called conversion. Conversion is an offence and punishable.
PROTECTION AGAINST CONVERSION: U/s 131 for cheque and u/s 131A for demand draft, banks gets protection against conversion, when they collect cheques subject to fulfilment of the conditions that :
(a) cheques are collected for customers (as agents) in properly introduced accounts,
(b) cheques are crossed (generally or specially) before presentation to the paying bank and
(c) cheques are collected in good faith and without negligence.
PAYMENT OF CHEQUE
OBLIGATION OF BANKS: U/s 31 of NI Act, the banks are under statutory obligation to honour cheques issued by the customer where:
(a) there are sufficient funds (in the same account on which cheque is drawn). If bank makes payment by creating overdraft without customer consent, it is recoverable from the customer, if customer has not objected to payment of cheque.
(b) funds are meant for payment of the cheque and
(c) there is proper demand to make the payment i.e. within business hours.
(d) signatures are as per record (if cheque is paid for signatures different from record, but otherwise genuine, customer cannot ask for refund).
On payment in due course, bank will be discharged from obligation.
WHEN PAYMENT NOT TO BE MADE:
Payment should not be made in case of:
(a) death, insolvency, insanity of customer OR insolvency of partner or firm OR liquidation of company
(b) stop payment of cheque
(c) receipt of garnishee/attachment order
(d) post dated or mutilated or stale cheque.
(e) Insufficient balance
(f) Different signatures
(g) Material alteration
(h) Payment demanded by payee after business hours (payment to drawer after business hours, can be made)
PAYMENT OF CHEQUES ISSUED BY AGENTS: Payment can be made in case of death of agent (such as authorized signatory of a Company or Trust or Club or Society etc., agent appointed by individual customers etc.) where cheque is not dated prior to date of authority given to the agent and subsequent to date of death. (Example - Agent got authority on Jan 20. Cheque signed and dated Jan 18, cannot be paid).
PAYMENT IN DUE COURSE
Banks get protection, if a payment is in due course. As per Sec 10, a payment would be considered in due course if:
(a) Payment is as per apparent tenor of instrument.
(b) Payment is in good faith and without negligence
(c) Payment is to person in possession of instrument
(d) Payment under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount mentioned therein
(e) Payment must be made in money only.
PROTECTIONS TO BANKERS
85-1 : Paying banker is protected for payment of an endorsed cheque if endorsement is regular endorsement (whether genuine or forged). Paying bank is protected against forged endorsement but it should be regular.
85-2 :Payment to be made of a bearer cheque which is endorsed, by ignoring the endorsement, as a bearer is always a bearer.
85-A: Protection to paying banker in case of Bank drafts, similar to a cheque u/s 85-1 above.
89 : Protection to paying bank for materially altered cheques, provided the alteration is not visible even after careful examination of the cheque.
128: Protection for payment in due course of crossed cheques
131: Protection to collecting bank against conversion for crossed cheques subject to compliance of certain conditions
131-A : Protection to collecting bank against conversion for crossed bank drafts.
DISHONOUR OF CHEQUE
If a cheque is dishonoured, the drawer is liable for legal action by holder, u/s 138-147 of NI Act (wef 01.04.89) where:
1. Cheque is issued to discharge a liability (for gift cheque not liable).
2. Cheque presented within validity period (max restricted to 6 months/ 3 months from 1st April 2012)
3. Dishonour is due to insufficiency of funds or even for stop payment or closure of account.
a) The cheque should have been issued for discharge of lawful liability
a) Cheque should be returned with the reason 'insufficient balance' but due to different judgments of Supreme Court reasons like Refer to drawer, A/cclosed, Exceeds arrangement, Payment stopped by drawer and effects not clear are treated equal to insufficient balance.
b)The payee or holder in due course should give notice to drawer within 30 days of return of , cheque with the reason 'insufficient balance' and demanding payment within 15 days of his receiving information of dishonour.
d) The drawer can make payment within 15 days of the receipt of notice and only if he fails to do so prosecution could take place.
d) The complaint is to be made within one month of the cause of action arising i.e, expiry of notice period.
d) Summary Proceedings: Fine upto Rs, 5000 or imprisonment upto 1 year or both.
g) Regular Proceedings: Punishment is fine upto double the amount of cheque or imprisonment upto 2 years or both.
An alteration that changes the basic direction of the drawer and is not authenticated by him, is called material alteration which include:
1. Change in amount, name of payee or date
2. Mutilation of cheque
3. Cancellation of crossing or converting special crossing into general crossing.
4. Converting order into bearer.
WHAT IS NOT MATERIAL ALTERATION:
1. Completion of amount, name of payee or date by the holder.
2. Crossing of an uncrossed cheque
3. Cancellation of bearer or writing of order
PAYMENT OF MATERIALLY ALTERED CHEQUE:
Such payment cannot be made as per Section 87 of NI Act.
Bank gets protection u/s 89 where materially altered cheque is paid, if the alteration is not visible even after careful examination of the cheque. (it is not compulsory to see the cheque through ultra violet lamp).
NEGOTIABLE INSTRUMENT ACT (NI Act) 1881 --A few important points for SBI Associate Bank/IBPS/SBI --Interviews--VERY USEFUL Reviewed by sambasivan srinivasan on 10:49:00 AM Rating: