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 Nowadays in Bank recruitment tests Banking knowledge is tested.  Hence I am giving below a few points on Negotiable Instruments Act. 


Sections 4,5 and 6 define a promissory note, a bill of exchange and a cheque in that order.  Sections 7 defines drawer, drawee and acceptor.
Section 13 of the Act states that a pronote, a bill and a cheque are negotiable instruments.
Sec 8 – holder is a person who has a legal title on the instrument.
Sec. 9 – A holder in due course is one who becomes a holder for consideration and ithout any notice of the defect (if any) to the title in the instrument, in good faith.
Sec 10 – Payment in due course is one, which is not only as specified on the instrument; the payment should also take the established practices into consideration and it should be a payment in good faith, without negligence.  Section 11 and Section 12 defines and Inland and Foreign Instrument respectively.
Sec 13 – A bearer instrument is one, which is expressly payable to the bearer or where the latest endorsement in the instrument is in blank.
Sec 14 – Negotiation is transferring of the title in a negotiable instrument.  Section 15 defines Endorsement.  Section 16 defines  Endorsements in  blank and full.
Sec. 47,48 – A bearer cheque is negotiated by delivery and an order cheque is negotiated by endorsement and delivery.
Sec.54 – A blank endorsement renders the NI bearer instrument.  Since a DD cannot be issued payable otherwise than on demand, it can only be an order instrument.  i.e. a DD endorsed in blank is still an order instrument.
Sec. 18 – If amount in words is different from amount in figures, cheque should be passed for amount in words.   However, in practice such cheques are returned.  Section 19 defines instruments payable on demand.
Sec.69 – If an instrument is payable at a specified place, it should be presented there.
Sec.22 – Usance instruments attract grace period, ie. if a bill is drawn payable after 3 months, from date, in effect it is payable 3 months and 3 days after date.
If a bill is drawn payable on say 14.07.2001, it is actually payable only on 17.07.2001. 
Sec.25 – If the maturity date of a bill/PN is a holiday, it is payable on the previous working day.
Sec.31 – If the bank wrongfully dishonours a cheque (i.e. returning the cheque for funds reason, when actually funds are available in the account) it should compensate the customer for any loss or damages suffered by him.
A bearer cheque is payable to the presentor without insisting on his identification.  It is said “one a bearer, always a bearer” which means that so long as the cheque is bearer, the basic characteristics of a bearer cheque will remain.  For ex. Endorsement on the back of a bearer cheque will not make it order.  The paying bank need not consider the endorsement (even a restrictive endorsement) on a bearer cheque.
If a bearer cheque is crossed, it cannot be paid to an unidentified person, since payment is to be routed through a bank account and no back account will be opened in the name of a person who is not introduced.
Sec.89 – If a material alteration in a negotiable instrument is not apparent, then payment against the same in good faith and without negligence will be payment in due course. 
Sec.104 -  A foreign bill must be protested for dishonour, if the law of the country where it is drawn, requires it. 
Post dated cheques are not purchased by banks, since such a cheque will not give any title to the bank, in case the drawer dies before the date of the cheque or countermands payment of cheque.(Sec. 118b)
Section 123 – General Crossing.
Sec. 124 – Special Crossing  - A cheque bearing the name of a bank across its face.
Sec.130 – A cheque crossed “not negotiable” cannot confer a better title on the transferee.  However, such a cheque can be transferred.
Account Payee crossing does not find a mention in the NI Act.  It has come to stay in practice.  The purpose of crossing “a/c. payee” is to restrict the payment to the payee only.    Account payee crossing is an instruction to the collecting bank.  Not negotiable crossing is a caution to the bank collecting the cheque for the transferee. 
Sec.131 – If a bank collects a crossed cheque for properly introduced customer in good faith and without negligence, the bank will not be liable, even if the title to the cheque is defective.  The protection available is called protection against conversion.  Conversion is defined as interference with title.
Sec. 138 to 143  - Provides penal provisions for dishonour of a cheque for want of funds.  Punishable with an imprisonment unto one year and/or a find unto twice the cheque amount, if
the cheque was not stale at the time of presentation.
the affected holder notified the drawer within 15 days from the date of receipt of dishonour notice from the bank.
drawer fails to pay or reply within 15 days from the date of his receiving the notice from the holder or drawer’s reply is not acceptable to the holder.
No court inferior to that of Metropolitan Magistrate or Judicial Magistrate  of Ist class will try the offence.
27.        Cheque Bouncing – Punishment becomes harsher
            Union Cabinet approved a fresh bill to amend the Negotiable Instrument Act, 1981, proposing doubling of punishment from the present one year to two years.  The Bill would also provide that cases of dishonoured cheques should be deposed within six months, with hearing being held daily if required.  The new bill would also make the information technology act 2000, applicable to electronic clearance of the cheques of truncated cheques(i.e. cheques issued in physical form where the transaction has been done electronically).

            The Bill seeks to draw a distinction between executive directors and non-executive directors of companies for the purpose of pinning responsibility for dishonour of cheques.  Thus, a non executive director holding the post by virtue of his holding  an employment in the Union Government, State Government or a financial corporation owned or controlled by the Union or state Government would not be liable for prosecution under this Act.

            Stopping payment of post-dated cheques-- an offence

The Supreme Court has held that if a person issuing a post-dated cheque stops its payment by giving instructions to the drawee or the bank before the due date of payment, he would be liable for penal consequences under Section 138 of the Negotiable Instruments Act.

The object of the Act was to ensure credibility in business transactions and by countermanding payment of post-dated cheque, a party should not be allowed to get away from the penal provision.

“If we hold otherwise, by giving instructions to banks to stop payment of a cheque after issuing the same against a debt or liability,  a drawer would easily avoid penal consequences.”

If stoppage of payment of a post-dated cheque is permitted to take the  case out of the purview of section 138 of the N.I. Act, it will amount to allowing the party to take advantage of his own wrong”.       

(a)        Criminal liability cannot be fastened on the heirs or legal representatives.
(b)        An offence is committed even if cheque is returned on the ground of closure of account.
©          A cheque can be presented any number of times during the period of its validity.
(d)        A post-dated cheque is deemed to have been drawn on the date it bears and the 6 months periods for purpose are to be reckoned from that date

Section 141 – Offences by Companies.(refer point 27)

Section 146  - Banks slip prima-facie evidence of certain facts.

            Section 147  -- Offences to be compoundable – Every offence punishable under the Act shall be compoundable.  Payee of a cheque  cannot initiate prosecution for an offence under Section 138 for its dishonour for the second time, if he had not initiated  such prosecution on the earlier cause of action.

            NI Act does not say anything about dating a negotiable instrument.  But practice has established that an undated instrument is not valid.

            A cheque in different inks/handwritings etc. is not invalid just because of that.


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