NEGOTIABLE INSTRUMENT ACT (NI Act) 1881
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)
And Cheque.
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).
PARTIES:
In PN there are 2 parties maker (debtor)
& payee (creditor)
CURRENCY NOTES:
Currency/bank notes are not promissory notes
as these are excluded from the definition of promissory notes.
CHEQUE:
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.
TRUNCATED CHEQUE:
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.
ANTE-DATED CHEQUE:
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).
INCOMPLETE DATE:
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.
FORGED CHEQUE:
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.
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HOLDER ( Sec. 8 )
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HOLDER IN DUE COURSE
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(Sec.9 )
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Consideration
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Not
essential
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Essential
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Actual
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Not
essential
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Essential
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Possession
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Defective Title
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Will affect
the instrument
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Will not
affect the Instrument
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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)
INCHOATE INSTRUMENT:
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.
NEGOTIATION
It means transfer of an instrument from one
person to another to make the transferee the holder thereof.
METHOD OF NEGOTIATION :
BEARER-
Negotiation is completed by delivery only in
case of bearer instruments (Sec 47).
ORDER:
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.
ENDORSEMENT
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.
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TYPES OF ENDORSEMENT
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BLANK 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.
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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.
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RESTRICTED
ENDORSEMENT (Sec 50):
Where endorser restricts further
negotiation (pay to ….. only). In this case, the endorsee can obtain payment
but cannot endorse further.
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FACULTAT1VE: Where an endorser waives the condition of notice of dishonour
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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.
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FORGED
:
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.
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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.
CONVERSION:
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/c closed, 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 uptoRs, 5000 or imprisonment
upto1 year or both.
g) Regular Proceedings: Punishment is fine upto
double the amount of cheque or imprisonment upto2 years or both.
MATERIAL ALTERATION
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.
PROTECTION:
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).
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