Negotiable
Instruments
By
Asok Nadhani
1.1
Negotiable Instruments (Sec.13)
Certain
documents commonly used in commercial transactions and monetary dealings, that
are freely transferable from one person to another in return for consideration,
are collectively referred as Negotiable Instruments.
In
brief, a negotiable instrument is a written document which entitles a person to
a sum of money and which is transferable from one person to another by mere
delivery or by indorsement and delivery.
According
to Thomas, a negotiable instrument is one which is, by a legally recognised
custom of trade or by law,
a. transferable
by delivery or by indorsement and delivery.
b.
without
notice to the party liable, in such a way that the holder of it for the time
being may sue upon It in his own name, and
c.
the property in it passes to a bona
fide transferee for value free from equities and free from any defect in
the title of the person from whom he obtained it.
This
means that a person taking an instrument (1) bona fide, and (2) for
value, known as a holder in due course, gets a good title even though
the title of the transferor may be defective.
This
property makes Negotiable instruments a different class of contracts.
1.2 Characteristics of a negotiable instrument
i.
Freely transferable. An instrument is freely transferable from one
person to another. The right of ownership contained in the instrument can be
transferred from one person to another by –
a. mere
delivery, if it is payable to bearer; or
b. endorsement
and delivery, if it is payable to order.
ii.
Holder’s title free from all
defects. A holder in
the due course gets a good title to the instrument even though the title of the
transferor is defective. Thus a holder in due course is not affected by
any such fact. But immediate parties are affected due to such defect in the
title of the transferor. Ex.1.1
iii.
Recovery. The
holder in due course can sue upon a negotiable instrument in his own name for
the recovery of the amount. He need not give notice of transfer to the party
liable on the instrument to pay.
iv.
Must be in writing. ‘Instrument’ or
‘document’ must be in writing. An oral promise or order to pay money cannot be
regarded as a negotiable instrument.
v.
Must be signed. Under the
Negotiable instruments Act, 1881, a written promise to pay money makes the
debtor bound only when it is signed by him.
vi.
Transferable Infinitum. A negotiable
instrument may be transferred any number of times and any time. It may even be
transferred after maturity (i.e., due date) although the holder does not become
a holder in due course.
vii. Joint or alternate payees. A negotiable instrument may name more than one payee jointly or
alternatively.
1.3
Presumptions applicable in Negotiable Instruments (Sec.118)
The
following presumptions apply to all negotiable instruments, unless contrary is
proved. But such presumptions are rebuttable by evidence.
a.
Consideration. It shall be presumed that every negotiable
instrument was made, drawn, accepted, indorsed, negotiated or
transferred, for consideration, facilitating the holder to get a decree
from a Court.
b.
Date. Every
negotiable instrument bearing a date is presumed to have been made or
drawn on such date.
c.
Time
of acceptance. It shall be assumed that every accepted bill was
accepted within a reasonable time after its date and before its
maturity.
d.
Time of transfer. Every
transfer of a negotiable instrument is presumed to have been made before its
maturity.
e.
Order of endorsements. The
endorsements appearing upon a negotiable instrument are presumed to have been
made in the order in which they appear thereon.
f.
Stamp. When
an instrument has been lost, it is presumed that it was duly stamped.
g.
Holder presumed to be a holder
in due course. Every holder of
a negotiable instrument is presumed to be a holder in due course (Sec. 118).
h.
Proof of protest. Where a suit is filed claiming that a instrument
has been dishonoured, the court shall presume the fact dishonour, if proof of protest is produced.
(Sec.119)
i.
Where the Negotiable Instrument has been obtained
from its lawful owner/custodian by means of an offence/fraud or for unlawful
consideration, the burden of proving that a Holder is a Holder in due course,
lies upon him.
j.
The NI Act will not affect Sec. 21 of the Indian
Paper Currency Act, 1871, or any local usage relating to any instrument in a
local language. [Sec.1]
1.4
Types of Negotiable Instruments
Negotiable by Statute
Negotiable by custom or usage.
1.4.1
Instruments negotiable by Statute
As
per sec.13 of Negotiable Instruments Act, Promissory Notes, Bill of exchange
and Cheques are recognized as negotiable instruments.
1.4.2
Instruments negotiable by custom or
usage
There
are certain other instruments with character of negotiability by the usage or
custom of trade. Thus Government promissory notes, banker's drafts and pay
orders, hundis, delivery orders and Carrier’s receipts for goods, have
been held to be negotiable by usage or custom.
The
law relating to negotiable instruments is contained in the Negotiable
Instruments Act, 1881, which deals with promissory notes, bill of exchange and
cheques, and hundis (bills of exchange in vernacular language).
1.5
Promissory Note
Promissory
Note (not being a bank note or a currency note) is an instrument
in writing containing an unconditional undertaking, signed by the maker,
to pay a certain sum of money only to, or to order of a certain person, or to
the bearer of the instrument (Sec. 4). [Mysore State
Road Transport Corporation v. Somashshankar], [Sreenivasam v. Subbarama
Sastrikal], [Khirodnath Gountia
v. Arjun Panda]
The person who makes the promissory
note and promises to pay is called the maker.
The
person to whom the payment is to be made is called the payee.
1.5.1
Essential elements of a Promissory Note
(i)
In
Writing. The instrument must be in writing. Verbal promise is not
recognized. Writing includes print, typewriting, or handwriting in pencil or
ink.
(ii)
Promise to pay. The
instrument must contain an express promise to pay. A mere acknowledgment of
indebtedness does not constitute a promissory note.
So,
the following expressions do not constitute a promissory notes:
"Mr.
A, I owe you Rs. 1000".
"I
am indebted to A, for a sum of Rs. 700 to be paid by instalments."
A receipt for
money, if coupled with a promise to pay, it is a promissory note. [Bal Mukund VS.
Munnald, Ramji Lal], [Ctladon
vs. Bradley], [B Krishnayya vs. Chaparala], Ex.1.2
(iii)
Definite and unconditional. The
promise to pay must be definite arid unconditional, or else the instrument is
invalid.
Thus the
following instruments signed by A are not promissory notes :
"I
promise to pay X Rs. 5000 when X delivers me the goods."
"I
promise to pay X Rs. 50000 on Y's death, provided Y leaves me enough to pay
that sum."
If the promise
to pay depends on an event certain to happen (though the time of its happening
may be uncertain), it is not treated as 'conditional'. Ex. 1.3, 1.4
The promise to
pay at a particular place or after a specified time is also not treated as
conditional. [R Kannusamy vs. VVK Swamy &
Co ]
(iv) Signed
by the maker. The instrument
must be signed by the maker, otherwise it is not valid. even if it is written
by the maker himself and his name appears in the body of the instrument.
An agent of a
trading firm can sign a promissory note on its behalf of the firm. [George vs. Surrey ]
(v) Maker
& Payee. The instrument
must clearly identify the maker and the payee, otherwise it is invalid.
The payee may
sometimes be misnamed or designated by description only. In such a case, the
note is valid if the payee can be ascertained (so a promissory note payable
'to the manager of a certain bank' is valid). '
A promissory
note cannot be made payable to the maker (promisor) himself. But it may be endorsed
by the maker to some other person or endorsed in blank. [Wills v. Barret], [Gay v.
Landal]
(vi) Specified
Amount of money. The money payable
must be certain and must not be capable of contingent additions or
subtractions.
The sum payable
is considered to be certain when:
- it
is payable with interest at a specified rate.
- it
is payable at an indicated rate of exchange.
- it
is payable by instalments, with a provision that on default being made in
payment, the balance unpaid shall become due.(sec.5). [In Official
Liquidator vs. Bishan Singh]
(vii) Promise
to pay money only. The payment to
be made under the instrument must be in the legal tender money of India
(viii) Bank
note or currency note is not a promissory note. This
is because a bank note or a currency note is money itself.
(ix) Other
information . Other information like date, place, consideration,
etc are usually found but their omission does not invalidate the instrument. The
date of a promissory note is not mandatory unless the amount is payable at a
certain time after date. But it must bear the necessary stamp under the Indian
Stamp Act, 1899.
(x)
Payable on demand or after a
definite period of time. The expression
'on demand' means payable immediately or forthwith.
(xi) It
cannot be made payable to bearer on demand. The
Reserve Bank of India Act, 1934 prohibits issue of such promissory notes to
bearer on demand, except by the Reserve Bank of India
1.6
Bill of Exchange
A
Bill of Exchange is an Instrument in writing containing an unconditional
order, signed by the maker, directing a certain person to pay
a certain sum of money only to, or to the order of, a certain person or
to the bearer of the Instrument (Sec. 5).
1.6.1
Parties to a Bill of Exchange
There
are three parties to a bill of exchange, the drawer, the drawee and the payee.
a.
Drawer : The person
who gives the order to pay or who makes the bill is the drawer.
b.
Drawee :
The person who is directed to pay is called the drawee. When the drawee accepts the bill,
he is called the Acceptor.
c.
Payee :
The person to whom the payment is to be made is the Payee.
Where
the payee named in a bill is a fictitious or non-existing person, the bill is
treated as payable to bearer. In some cases, the drawer and the payee, or when
a principal draws on his agent, the drawer and the drawee may be one and the
same person. [Clutton v. Attenborough]
Apart
from the above, the following persons may also become a party to a bill of
exchange:
a. Holder : The drawer or
the payee who is in possession of the bill is called the holder. The
holder must present the bill to the drawee for his acceptance,
b. Indorser : When
the holder indorses the bill, he is called the indorser.
c. Indorsee : The
person to whom the bill, note or cheque is indorsed Is called the indorsee.
d. Drawee in case of need : When
apart from the drawee, an additional name is entered in the bill or in any
indorsement thereon, to be referred to in case of need, such person is called a
drawee in case of need (Sec. 7). When the bill is dishonoured by
non-acceptance or non-payment, it must be presented to the 'drawee in case of
need'.
1.6.2
Essential elements of a Bill of Exchange
a.
It must be in writing.
b. It
must contain an order to pay. [Ruff vs. Webb],
Ex.1.5
c.
It requires three parties, i.e.,
the drawer, the drawee and the payee.
d.
The order must be unconditional.
e.
The sum payable must be certain.
f.
It must contain an order to pay money.
g.
The parties must be certain.
h.
It must be signed by the drawer.
i.
It must be properly stamped.
The
formalities relating to number, date, place and consideration, though usually
found in bills, are not essential in law. But a bill must be affixed with the
necessary stamp.
A
bill as originally drawn cannot be made payable to bearer on demand. [Sinha v. Bidhu Bhasan]
1.6.3
Distinction between Bill of Exchange &Promissory Note
|
Promissory Note
|
Bill of
Exchange
|
|
In a
Promissory Note there are two parties, the maker and the payee.
|
In Bills of
Exchange there are three parties, the drawer, the drawee and the
payee.
|
|
A
Promissory Note contains an unconditional promise to pay.
|
A Bill of
Exchange contains an unconditional order to pay.
|
|
The
maker of a note is the debtor and he himself undertakes to pay.
|
The
drawer of a bill is the creditor who directs the drawee (his debtor)
to pay.
|
|
Maker of
Promissory Note cannot undertake to pay conditionally.
|
Acceptor of
Bills of Exchange may accept Bills of Exchange conditionally because he is
not the originator of the instrument.
|
|
The
liability of the maker of a Promissory Note is primary and absolute,
|
Liability of
the drawer of a Bills of Exchange is secondary and conditional.
|
|
A
Promissory Note cannot be made payable to the maker himself
|
whereas in
Bills of Exchange, the drawer and the payee may be one and the same person
|
|
A Promissory
Note requires no acceptance as it is signed by the person who is
liable to pay.
|
A Bills of
Exchange payable after sight or after a certain period must be accepted by
the drawee before it is presented for payment.
|
|
A
Promissory Note cannot be drawn payable to bearer.
|
A Bills of
Exchange can be so drawn. But neither Promissory Note nor Bills of Exchange
can be drawn payable to bearer on demand.
|
|
The maker of a
Promissory Note stands in immediate relation with the payee.
|
The drawer of
a Bills of Exchange stands in immediate relation with the acceptor and not
the payee.
|
|
Certain
provisions like (a) presentment for acceptance (Sec. 61), (b) acceptance
(Sec. 75), (c) acceptance for honour (Sec. 108), and (d) bill in sets (Sec.
132) do not apply to notes.
|
These
provisions apply to Bills of Exchange.
|
|
But in the
case of dishonour of a Promissory no notice is required to be given to the
maker.
|
In case of
dishonour of a Bills of Exchange either by non-acceptance or by nonpayment,
due notice of dishonour must be given to all the persons who are to be made
liable to pay. This includes the drawer and the prior indorsers. (Sec. 93).
|
|
No protest is
mandatory in the case of dishonor of a Promissory Note.
|
Foreign Bills
of Exchange must be protested for dishonour when such protest is required by
the law of the place where they are drawn (Sec. 104).
|
|
Only one copy promissory
note is drawn.
|
A bill of exchange can be
drawn in sets.
|
1.7
Cheque (Sec.6)
a. A
cheque is a bill of exchange drawn upon a specified banker and not expressed to
be payable otherwise than on demand. The term Cheque includes the electronic
image of a truncated cheque and a cheque in the electronic form.
Cheque
in Electronic Form : A Cheque in Electronic Form
is a mirror image of a paper cheque and is
generated, written or signed in a secured system with the use of digital
signature and asymmetric crypto system.
Truncated
Cheque : A cheque which is truncated during the course of clearing
cycle by clearing house or by bank immediately on generation of an electronic
image or transmission, to substitute further physical movement of written
cheque.
b. A
cheque has the following additional qualifications, viz.,
It is always drawn on a specified
banker (sec.3), and
It is always payable on demand.
c.
All cheques are bills of exchange, but
all bills of exchange are not cheques. A cheque does not require acceptance as
it is intended for immediate payment.
d.
Bank Draft : Bank Draft is also a type
of cheque. It is an order drawn by one branch of a bank to another branch of
the same bank (s.85A). All rules as regards to crossing of cheques are also
applicable to drafts (s.131A). Like cheque, draft may be payable to drawer on
demand.
e.
Types of Cheques :
There are three types of
cheque:
1.
Bearer cheque:
The owner of the cheque is the holder.
2.
Order cheque:
In this type of cheque, the name is mentioned in whose order the cheque is
issued.
3.
Cross cheque:
It is a cheque which bears two parallel transverse lines on its face.
1.7.1
Distinction between a Bill of Exchange and a cheque
|
Bill
of Exchange
|
cheque
|
|
A bill of
exchange may be drawn on any person, including a banker,
|
A cheque is
always drawn on a banker. Thus all bills are not cheques whereas all cheques
are necessarily bills.
|
|
A bill must be
accepted before the drawee can be called upon to make payment upon it.
|
A cheque
requires no acceptance.
|
|
A bill which
is not expressed to be payable on demand is entitled to three days of grace.
|
A cheque is
not entitled to any days of grace.
|
|
A bill may be
payable on demand or after the expiry of a certain period after date or
sight.
|
A cheque is
always payable on demand.
|
|
A bill must be
duly presented for payment to the acceptor or else the drawer of the bill
will be discharged from liability.
|
The drawer of
a cheque is not necessarily discharged from his liability by delay of the
holder in presenting it for payment. He is discharged only to the extent of
the damage, if any, suffered by him.
|
|
There is
nothing like crossing a bill.
|
A cheque may
be crossed.
|
|
A bill, except
in certain cases, must be stamped.
|
A cheque does
not require any stamp.
|
|
The payment of
a bill can not be countermanded by the drawer.
|
The payment of
a cheque may be countermanded by the drawer.
|
|
A bill may be
noted or protested for dishonour.
|
A cheque is
not required to be noted or protested for dishonour.
|
|
Notice of dishonour is
mandatory to hold the parties liable thereon.
|
Notice of dishonour is not
needed.
|
1.7.2
Marking of cheques
A
cheque does not require acceptance in ordinary course of business as it is
intended for immediate payment. Marking of a cheque is to make sure that it
would be honoured on presentation for payment. But marking cheques as 'good for
payment' by the banker does not amount to an acceptance.
In
view of stringent provisions regarding dishonour of cheque due to insufficient
funds (s. 138 to s. 142), marking of cheques are not considered necessary.
The
following rules apply to marking of cheque:
a. Marking at drawer's instance
The drawer cannot afterwards
countermand payment of such cheque.
The banker may dishonour other cheques to
hold sufficient funds for the marked cheques.
b. Marking at holder's request
The banker may
refuse to honour the cheque when it is subsequently presented for payment if in
due course the drawer has withdrawn funds or stopped payment of the cheque.
c. Marking at collecting banker's instance
Where a cheque
is received by a collecting banker too late for inclusion in the clearing, he
may, to safeguard the interest of the customer, present such cheque for marking
by the drawee banker. Such cheque shall be honoured when it is presented
through the next clearing, as per custom of the bank.
1.7.3
Crossing of cheques
There
are two types of cheques:
a.
Open Cheques : A cheque
which is payable in cash across the counter of a bank is called an open cheque.
If its holder loses it, the finder may go to the bank and get payment unless
its payment has already been stopped.
b.
Crossed
Cheque : Two 'parallel transverse lines with or
without the words '& Co. ' are drawn and it
becomes payable only through a bank. So, the person who obtains the payment of crossed cheque can be traced through the drawee banker and
it offers security and protection to the owner of the cheque.
1.7.3.1
Types of crossing
1. General
crossing (sec. 123): A
General Crossing is done by adding on the cheque :
i.
the words 'and company' or any
abbreviation thereof, between two parallel transverse lines, either with or
without the words 'not negotiable'.
ii.
two
parallel transverse lines simply, either with or without the words 'not
negotiable' (Sec.123).
The drawee
banker of a crossed cheque will make payment only when it is presented by a
bank (Sec. 126).
2.
Special crossing: A
Special Crossing is done by adding on the cheque :
The name of a
banker, either with or without the words 'not negotiable' (Sec. 124). The
payment of a specially crossed cheque can be obtained only through the
particular banker whose name appears across the face of the cheque or between
the transverse lines, if any. The drawee bank will make payment of a specially
crossed cheque only to the banker on whom it is crossed, or his agent for
collection (Sec. 126).
3.
Restrictive crossing: The
words ‘A/c Payee' are added. The collecting banker must credit the amount
collected on cheque to the account of the payee. However, 'A/c Payee'
cheques are negotiable.
1.7.3.2
Not Negotiable crossing (Sec.
130)
The
words 'not negotiable' on a crossed cheque indicates that the title of the transferee of such a cheque
cannot be better than that of its transferor (but otherwise does not
affect further transferability of the cheque). Normally, a holder in due course
with a defective title can give a good title to a subsequent holder in due
course. By 'Not Negotiable' crossing, the holder or the drawer gets protection
against miscarriage or dishonesty in
the course of transit. Ex.1.6
1.7.3.3
Who may cross a cheque
A
cheque may be crossed by (Sec. 125):
1.
The drawer. He
may cross the cheque generally or specially.
2.
The holder. Where
the cheque is uncrossed, the holder may cross it generally or specially. Where
it is crossed generally, he may cross it specially. Where it is crossed
generally or specially, he may add the words 'Not Negotiable'.
3.
The banker. Where
a cheque is crossed specially, the banker to whom it is crossed may again cross
it specially to another banker (his agent) for collection.
1.7.3.4 Opening of Crossing
A crossed cheque
don’t remain so forever. The drawer has a right to cancel the crossing by
writing the words ‘pay cash’ and putting his full signatures. This is termed as
opening of crossing.
1.8
Classification of Negotiable Instruments
The
negotiable instruments may be classified in various ways :
1.8.1
Bearer and Order Instruments
a.
Bearer instruments. Any
person who is in lawful possession of an instrument payable to bearer, as a
holder, is entitled to enforce payment due on it.
A negotiable
instrument is payable to bearer—
1. when
it is expressed to be so payable, or
2. when
the only or last indorsement on the instrument is an indorsement in blank.
A promissory
note and a bill of exchange cannot be made payable to bearer on demand.
b. Order
instruments. A negotiable
instrument is payable to order—
1.
when it is expressed to be payable to
order, (e.g., 'Pay to A or order' or 'Pay to the order of A’), the
instrument is payable to A or his order at his option.
2.
when it is expressed to be payable to a
particular person, and does not contain words prohibiting or restricting its
transfer, e.g ., 'Pay A one hundred rupees.'
1.8.2
Inland and Foreign Instruments
i. Inland instruments. A promissory
note, bill of exchange or cheque which is (1) both drawn or made in India and
made payable in India, or (2) drawn upon any person resident in India, is
deemed to be an inland instrument (Sec. 11). A bill of exchange drawn
upon a resident in India
ii.
Foreign instruments. An instrument, which is not an
inland instrument, is deemed to be a foreign instrument (Sec. 12).
Foreign bills
must be protested for dishonour if such protest is required by the law of the
place where they are drawn. But protest in case of inland bills is optional
(Sec. 104).
iii. Usance: Usance is the
time fixed for the payment of bills drawn in one country and payable in
another. It is fixed by the custom of the countries and the length of the
usance varies in different countries.
1.8.3
Instruments payable on demand
A
cheque is always payable on demand and it cannot be expressed to be payable
otherwise than on demand (Sec. 6). A promissory note or bill of exchange is
payable on demand—
-
when no time for payment is specified
in it (Sec. 19)
-
when it is expressed to be payable 'on
demand', or 'at sight' or 'on presentment'.
The
words 'on demand' are usually in a promissory note, the words 'at sight' are in
a bill of exchange.
In a
promissory note or bill of exchange, the expressions 'at sight ' and 'on
presentation' mean 'on demand' (Sec. 21).
1.8.4
Time instruments
1. A
bill or note is known as a time instrument, when it is payable: [Williamson
v. Rider, (1963) 1 Q.B. 89]
a. after
a fixed period
b. after
sight
c. on a
specified day
d. on
the happening of an event which is certain to happen, when the event is bound
to happen (even though the actual time of its happening is uncertain - like death of a certain person).
But if the
event is probable but not certain to happen, the instrument does not become
valid if the event happens. Likewise an order to pay on or before a specified
date is not a bill.
2.
In an instrument with the word ‘After
Sight’ :
a. In
case of a promissory note, payment can be demanded only after it has been shown
to the maker.
b. In case
of a bill of exchange, it means after acceptance, or noting for non-acceptance,
or protest for non-acceptance (Sec. 21).
1.8.5
Accommodation bill
a.
A bill is normally drawn, accepted, or
indorsed for consideration, it is a 'genuine trade bill'. But, when a
bill is drawn, accepted or indorsed without any consideration but just
allow a person to get money for some period, it is called an 'accommodation
bill'. Ex.1.8
b.
The accommodating party signs the bill
as drawer, acceptor, or endorser without receiving value.
c.
In case of failure for consideration
the bill creates no obligation of payment between the parties to the
transaction.
Where
any party has transferred the bill with or without indorsement to a holder for
consideration, the Holder in due course and every subsequent holder deriving
title from him, may recover the amount due to such instrument from the
transferor for consideration or any party thereto.
1.8.5.1
Rules regarding accommodation bills
1. The
accommodated party cannot, after he has paid the amount of the bill, recover
the amount from any person who became a party to the bill for his accommodation
(Sec. 43). Ex.1.9
2. An
accommodation bill can even be negotiated after maturity provided the
person to whom it is negotiated takes it in good faith and for consideration
(Sec. 59).
3. Non-presentment
of an accommodation bill to the acceptor for payment does not discharge the
drawer.
4. When
an accommodation bill is dishonoured, failure to give notice of dishonour does
not discharge the prior parties from the liability.
1.8.6
Fictitious bill
A
bill is said to be fictitious if all the following conditions are satisfied:
The drawer of the bill is a fictitious
person.
The bill is payable to order, and the
drawer s himself the payee and the bill has been accepted by the drawee.
Acceptor’s liability
a.
Where both the drawer and the payee of
a bill are fictitious persons, the acceptor is liable to that of the first endorser
(payee) are in the same handwriting (Sec. 42). holder in due course, if the
holder in due course can show that the signature of the supposed drawer.
b.
Where holder knows or has reason to
believe that the drawer or the payee is a fictitious person, he is not a holder
in due course (as he is not getting the bill in good faith) and so cannot claim
the money.
1.8.7
Documentary bill and clean bill
When
documents of title to the goods and other documents, e.g., invoice,
marine insurance policy, etc. are annexed to a bill, the bill is called a documentary
bill. Such documents are delivered to the buyer only on acceptance or
payment of the bill. When no documents relating to the goods represented by the
bill are attached to it, it is called a clean bill.
1.8.8
Escrow
Escrow
is conditional delivery of negotiable instrument for a purpose other than transferring
absolutely property therein (viz, as a collateral security or for safe
custody).
When
such an instrument is delivered conditionally, the liability to pay does not
arise if the conditions agreed upon or the purpose for which it is delivered are
not fulfilled, This, however, does not affect the rights of a holder in due
course. Ex.1.10
1.8.9
Ambiguous instrument
When
an instrument is so drafted that it be interpreted either as a promissory note
or a bill of exchange, it is called an ambiguous instrument. Its holder has to decisively
elect whether he wants to treat it as a promissory note or a bill of exchange and
the instrument will be accordingly treated (Sec. 17). Ex.1.11, Ex.1.12, Ex.1.13
If
the amount undertaken or ordered to be paid is stated differently in figures
and in words, the amount stated in words is the amount undertaken or ordered to
be paid (Sec. 18).
1.8.10
Inchoate instrument (Sec.
20)
An
inchoate instrument is an incomplete instrument in some respect. When a person
signs and delivers such instrument (incomplete, blank or inadequately stamped
paper), he authorises the other person to complete the instrument (upto the amount
covered by the stamp) and becomes liable to any holder in due course for such instrument.
[Mohanlal
Kanailal vs. Keshrimul Chordiya], Ex.1.14, Ex.1.15
The
following rules apply for inchoate instruments:
a.
The liability of the person who signs
and delivers an inchoate stamped instrument arises only when the blanks are filled
in and the instrument is completed.
b.
To make the signer liable on an
inchoate instrument, the instrument should be delivered to the transferee.
c.
If an inchoate instrument is completed
and negotiated to a holder in due course, he can claim payment of the full
amount covered by the stamp.
1.8.11
Undated Bills and Notes
An
undated negotiable instrument does not become invalid if the date of its
execution can be proved by oral or other evidence. A holder in due course may insert
the true date of issue or acceptance, and the instrument shall be payable
accordingly.
1.8.12
Bills in Sets (Sec.132)
Foreign
Bill of Exchange are normally drawn in sets (multiple copies) to avoid undue
delay, loss or miscarriage in transit so that at least one part of the bill reaches
the drawee safely at the earliest, for acceptance.
Each
part of the bill is known as a 'via' and as soon as any of the parts is
accepted or paid the other parts become ineffective.
1.8.12.1
Rules regarding bills in sets
1. A
bill of exchange may be drawn in parts (two, three or four) and all the
parts together make a set which constitutes only one bill.
2. Each
part of the bill in a set must be numbered and must contain reference to
other parts and a provision that it shall continue to be payable only when other
parts remaining unpaid. Each part must contain a reference to the other parts.
If any part of a set does not contain a reference to the other parts, that part
becomes a separate bill if a holder in due course gets it.
3. The
entire bill is discharged when payment is made on any of the parts.
4. The
drawer must sign each part of the bill and deliver all the parts. Only one part
requires to be stamped and only one part needs to be accepted.
5. When
a person accepts or indorses different parts of the bill in favour of different
persons, he and the subsequent endorsers of each part are liable on such parts
as separate bills.
6. Where
two or more parts of a set are negotiated to different holders in due course,
he who first acquires title to his part is deemed to be the true owner of the
bill. He is entitled to the possession of all other parts, and can claim the
money in respect of the bill.
1.8.13
Difference
between Inland Bills and Foreign Bills
|
Basis
|
Inland Bills
|
Foreign Bills
|
|
1. Bills drawn
|
Inland bills
are drawn in
|
Foreign bills
are drawn in
|
|
2. Copy
of the bill
|
Inland bills
are drawn in a single copy
|
Foreign bills
are drawn in triplicate
|
|
3. Protesting
|
Protest is
optional in case of dishonour of Inland bills.
|
Foreign bills
dishonour must require mandatory protesting.
|
1.9 Maturity and days of grace (sec.22)
In a
promissory note or a bill of exchange (payable otherwise than on demand), the date
of maturity (the date by which the payment must be made) is computed by
adding 3 Days of Grace (extra days allowed for payment).
1. Instruments are not entitled to 'days
of grace' :
a. a
cheque
b. a
bill or note payable 'at sight' or 'on presentment' or 'on demand', and
c. bill
or note in which no time is mentioned.
2. Bill or notes entitled to 'days of
grace' :
a.
payable on a specified day, Ex. 1.17
b.
payable 'after sight',
c.
payable at a certain period after date
Ex. 1.16
d.
payable at a certain period after the
happening of a certain event.
In case of
bills or notes entitled to days of grace, the instrument must be presented for
payment on the last day of grace. Where an instrument is payable by
instalments, each instalment is payable three days after the day fixed for
payment of each instalment.
3. Calculation
of date of maturity (Sees.
23 to 25)
i. If a
promissory note or bill of exchange is made payable a stated number of months, it
becomes payable three days after the corresponding date of month after the
stated number of months (Sec, 23). Ex.1.18
ii. If
the months in which the period would terminate has no corresponding day, the
period is held to terminate on the last day of such month (Sec. 23). Ex.1.19
iii. The
day on which the instrument is drawn, or presented for acceptance or sight, or
the day on which the event happens, is to be excluded (Sec. 24) Ex.1.20
iv. When
the day on which a promissory note or bill of exchange is at maturity is a
public holiday, the instrument is deemed to be due on the preceding business
day (Sec. 25). Ex.1.21
The expression
'public holiday' includes Sunday, and any other day declared by the Central
Government, by notification in the Official Gazette, to be a public
holiday.
1.10 Payment (Sec. 78)
Payment of
amount due on a Bill of Exchange, Promissory Note or Cheque, must, in order to
discharge the Maker or Acceptor, be made to the Holder of the Instrument.
1.11 Rights of Person liable to pay (Sec. 81)
a.
Any person liable to pay, or called upon by the
Holder to pay the amount on a Note, Bill or Cheque has the right-
§ Before Payment-
To have the instrument shown to him
§ On Payment- To
have the instrument delivered upto him
§ On loss of
instrument or Not produced – To be indemnified against any further claim
thereon.
b.
In respect of electronic images of truncated
cheques, even after payment, the Banker who received payment is entitled to
retain truncated cheque.
c.
A Certificate issued on the foot of the printout of
the electronic image of a truncated cheque by the Paying Banker is prima facie
proof of such payment.
1.12
Payment in Due Course (Sec. 10)
Payment
in due course means payment in accordance with the apparent tenor of the
instrument in good faith and without negligence to any person in possession
thereof.
Payment
in due course resulting in discharge of a negotiable instrument should satisfy
the following conditions :
1. The
payment must be in accordance with the apparent tenor of the instrument.
"Apparent tenor" means payment according to what appears on the face
of the instrument to be the intention of the parties. A payment before maturity
is not a payment according to the apparent tenor of the instrument.
2. The
payment must be made by or on behalf of the drawee or acceptor. It must be made
in money (including cheques and currency notes) and in no other mode without
the consent of the holder.
3. The
person to whom payment is made should be in possession of the instrument and
should also be entitled to receive payment on it.
4. The
payment should be made in good faith, without negligence and under bona fide
circumstances.
5. There
should not exist any ground for believing that the possessor is not entitled to
receive payment.
1.13
Interest on Bills and Notes
1. When
the rate of interest is specified in a promissory note or bill of exchange, it
will be calculated at such rate on the principal money due thereon from the
date of the instrument to the date of realisation or tender of such amount. If
a suit is filed on the instrument, interest is payable up to such date as the
Court directs (Sec. 79).
2. When
no rate of interest is specified in the instrument, interest is calculated (in
spite of any collateral agreement which is not embodied in the instrument) at
the rate of 18 per cent per annum (Sec. 80). [Seth Tulsidass Lalchand vs.
Rajagopal], [syndicate Bank v. N.C.Kalyani Raghavan]
3. When
the party charged is the indorser of an instrument dishonoured by non-payment,
he is liable to pay interest only from the time that he receives notice of
dishonour (Sec. 80).
In the
following cases, the rate of interest specified in the instrument may not be
allowed by the Court: [syndicate Bank v. N.C.Kalyani Raghavan]
a. Where
the rate specified is excessive and the transaction is substantially unfair.
b. Where
the instrument has been obtained by coercion, undue influence, fraud or misrepresentation
c. Where
the stipulation in the contract for payment of interest is in the nature of a
penalty
Ex: 1 Examples
Holders title free from all defects
Ex.1.1 Ram sells certain goods to Rahim and receives a promissory note from
Rahim. Later Rahim refuse to pay by claiming that the goods are not
according to order. If Ram sues Rahim on the note, Rahim has a point in defence.
But if Ram negotiates the note to Rehaman,
a holder in due course, then Rahim’s defence will not be valid. [Ref 1.2 (2)]
Promise to
Pay Promisery Note
Ex.1.2 "We
have received the sum of Rs. 10,000 from Shri Ram Nayak in cash. This amount
will be repaid by us on demand. Held, this is a promissory note [Ref. 1.5.1(ii)]
Definite and
Unconditional Payment of Promisery Note
Ex,1.3 A promises to pay B a sum of Rs.500 after the
death of C –. This is not a conditional promise for it is certain that C shall
die and is treated as a valid promissory note. [Ref. 1.5.1(iii)]
Ex,1.4
"I promise to pay Rs.1,000 to B, 30 days after his marriage with C." Signed
by A. This is not a promissory note as it is probable that B may not marry C
[Ref. 1.5.1(iii)]
Order to Pay
a Bills of Exchange
Ex.1.5. "Mr.
A, Please let the bearer have Rs7000 and oblige." Signed by A . This
is not a bill of exchange as it contains a request and not an order. [Ref.
1.6.2.(b)]
Not
Negotiable Crossing
Ex.1.6 V drew a cheque crossed 'not
negotiable' in blank and handed it to his clerk to fill in the amount and the
name of the payee. The clerk inserted a sum in excess of her authority and
delivered the cheque to P in payment of a debt of her own. As the clerk
had no title to the cheque and as such P had no better title, and therefore V
was not liable [Ref.1.7.3.2]
Inland
Instruments
Ex.1.7 (a) A bill is drawn
in Delhi Bombay Calcutta London
(b) A bill is drawn in Delhi London Calcutta
(c)
The above bills are indorsed in New
York
Accommodation Bill
Ex.1.8 A is
in need of Rs. 1,000 and approaches B to lend him. B suggests that A might
draw a bill on him which he would accept. As the credit of A is good, he would
get the bill discounted with the banker. On the due date, A would pay Rs. 1,000
to B who would meet the bill. This is an example of Accommodation Bill. Here B
is the Accommodating ( or accommodation) party and A is the Accommodated party. [Ref.1.8.5]
Rules Regarding Accommodation bills
Ex.1.9 A
bill is drawn and accepted for the accommodation of B, the payee. B endorses
the bill to C. The bill is dishonoured and B pays the amount of the bill. B cannot
sue the drawer or the acceptor to recover the amount. [Ref: 1.8.5.1(1)]
Escrow
Ex.1.10 A, the
holder of a bill, indorses it to B or order for the express purpose that
B may get it discounted. B negotiates the bill to C who takes it bona
fide and for value. C is a holder in due course and he acquires a good
title to the bill. [Ref.1.8.8]
Ambiguous Instrument
Ex.1.11 A
bill is drawn by A, an agent, acting within the scope of his authority
upon his principal, P. The holder may, at his option, treat it as a note
or bill because the drawer (A) and the
drawee
(P) are the same person. [Ref. 1.8.9]
Ex.1.12 A draws a bill on B and
negotiates it himself. B is a fictitious drawee. The holder may treat
the bill as a note made by A. [Ref.
1.8.9]
Ex.1.13 A bill is drawn "Pay A or
order the sum of one thousand rupees", but the amount in figure is written
as Rs.100. This will be treated as a bill for Rs.1,000. [Ref. 1.8.9]
Inchoate Instrument
Ex.1.14 A bill is
drawn "payable to... or order". Any holder in due course may write
his own name as payee in the blank and sue upon the instrument. [Ref. 1.8.10]
Ex.1.15 A owes B Rs.1,000. He gives
B a blank acceptance on a bill which is sufficiently stamped to cover
any amount upto Rs.2,000. B indorses the bill to H, a holder in
due course. H who fills up the amount as Rs.2,000 can recover the
amount. [Ref. 1.8.10]
Bill or notes entitled to ‘days of
grace’
Ex. 1.16 A
bill dated 1st January, 2000
is made payable four months after date. It falls due on 4th May, 2000 . [Ref: 1.9 (2 (c))]
Ex. 1.17 A
bill is payable on 1st Feb. It falls due on 4th Feb, 2000 . [Ref: 1.9 (2 (a))]
Maturity and
days of grace
Ex.1.18 A
bill, dated 30th January,
2000 , is made payable one month after date. The date of maturity
falls on 3rd March, 2000 .
[Ref. 1.9(3 (i))]
Ex.1.19 A
bill, dated 31st January,
2000 , is made payable two months after date. The bill is at
maturity on 3rd March, 2000 .
[Ref. 1.9(3 (ii))]
Ex.1.20 A bill
payable thirty days after sight is presented for sight on 1st March, 2000 . It falls due on 3rd April, 2000 . [Ref. 1.9(3 (iii))]
Ex.1.21 A bill,
dated 13 January, 2000 ,
is payable three months after date. It falls due on 16th April, 2000 . which happens to be a
Sunday. As such it will fall due on 15th April, 2000 , i.e., the preceding business day.
[Ref. 1.9(3 (iv))]
For more details, refer
to Business & Corporate Laws by Asok Nadhani, BPB Publications, www.bpbonline.com,
bpbpublications@gmail.com
