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NEGOTIABLE INSTRUMENTS ACT,1881

Business Law Term I : PGP 2009-11 Date: 9th September 2009

Prof Chowdari Prasad

11/3/2012

THE FLOW OF PRESENTATION


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THE ACT KEY TERMS CHARACTERSTICS KINDS OF NEGOTIABLE INSTRUMENTS ENDORSEMENT CROSSING OF CHEQUES DISHONOUR COLLECTING BANKER PAYING BANKER PROTECTION TO COLLECTING BANKER

BOUNCING OF CHEQUE

Prof Chowdari Prasad

11/3/2012

Negotiable Instruments
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Negotiable Instruments
Parties to Negotiable Instruments Negotiation of Negotiable Instruments

Banker and Customer

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NI Act.
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The Act deals with N.I.s; extends to whole of India Has been amended more than a dozen times

Deals with three kinds of negotiable instruments, ie., 1. Promissory Notes (Section 4) 2. Bills of Exchange (Section 5) and 3. Cheques (Section 6)

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NEGOTIABLE INSTRUMENTS ACT, 1881


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The NI Act Provides A Legal Framework For Non-

cash Paper Payment Instruments In India


An Act To Define And Amend The Law Relating To

Promissory Notes, Bills Of Exchange And Cheques


Law Relating To Negotiable Instruments

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11/3/2012

Objectives
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Understand the essential characteristicsof NIs Note the instruments recognised as NIs Understand essential requirements of a PN Understand the essential requirements of BEs Know the distinction between PN and BE

Be familiar with the definition of a Cheque and


Learn the distinction between Cheque and BE
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Objectives
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Understand the concept of crossing of cheques Be aware of the various types of crossing Know the cases in which a banker must refuse and

may refuse payment of his customers cheques Understand the law relating to bouncing.. Understand the liabilities of a banker

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Definition and Characteristics


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Negotiation means transferable by delivery and the

word instrument means a written document by which a right is created in favour of some person. Thus the term, negotiable instrument literally means a written document transferable by delivery.
13 A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.

Sec

May be payable to two or more jointly.


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Parties to Negotiable Instruments


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Introduction: Eg of NI are: Bills of Exchange,

Promissory Note, Cheque, Treasury Bill, Dividend Warrant, Share Warrant, Bearer Debenture, Hundi and Railway Bond, etc.
These instruments involve number of parties like

Payer, Payee, Drawer, Drawee, Endorser, Endorsee, Beneficiary, Holder, Holder in Due Course

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Negotiation of NIs
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Easy transferability being one of the essential

features of negotiable instruments, they are frequently transferred from one person to another for making payment and discharging business obligations
The ownership of a negotiable instrument continues

to be transferred from one to another. This process is called negotiation

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Negotiable Instrument.
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Payable to order. To a particular person Payable to bearer To any person whoever

bears it Is one which is, by legally recognised custom of trade or by law, transferable by delivery or by endorsement and delivery in such circumstances that (a) the holder of it for the time being may sue transferor

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CHARACTERSTICS
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NEGOTIABILITY WRITING & SIGNATURE MONEY CONSIDERATION NOTICE


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Promissory Note
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Sec 4 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 only to, or to the order of, a certain person, or to the bearer of the instrument
Essentials of a Promissory Note.. Instrument in Writing An unconditional undertaking Signature by the maker To pay a Certain Sum of Momey To a Certain Person, or to the Bearer of the Instrument
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Bill of Exchange
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Sec 5 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
Essentials of BE, Special Benefits of BE

Distinction between a PN and a Bill


Documentary / Accommodation Bill
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Distinction between PN and BOE


In a PN there are only two parties In a BOE, there are three parties-

maker and the payee It contains an unconditional promise by the maker to the payee No acceptance is necessary The liability of the maker or drawer is primary and absolute The maker stands in immediate relationship with the payee No notice of dishonor need to be given.

drawer, the drawee and the payee It contains an unconditional order to the drawee or his agent to pay according to the drawers directions. A bill has to be accepted if it is a bill payable after sight The liability of the drawer secondary i.e. when there is non payment by the drawee. Notice of dishonor to be given by the holder to the drawer The maker and the drawee do not stand in immediate relationship.

Cheque
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Sec 6 A cheque is a bill of exchange drawn on a

specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form
Distinction between a Cheque and BE Bank Draft (Section 85 a)

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Differences between BOE and Cheque


BOE The drawee liable only after it is accepted Days of grace (three) are allowed in case of a bill except for payment on demand Drawee may be any one including the banker It should be presented for payment, otherwise it may dischare the liability of the drawer BOE cannot be crossed A notice of dishonor has to be given to the drawer Cheque A cheque does not require acceptance and it is intended for immediate payment No days of grace The drawee is always a banker Delay in presenting does not discharge the drawwer from his liability It may be crossed

ENDORSEMENT
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An instruction from the person holding the instrument, to

pay the money to the person directed by him, given on the note.
Way of endorsement It can be either:
o Specific endorsement o Blank endorsement

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CROSSING OF CHEQUES
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Payable only through a collecting banker (or into a

bank account) and not directly at the counter..


Two Parallel Lines
& Co A/c payee

Not negotiable
XYZ Bank only .
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DISHONOURING
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Refusal of payment

non-acceptance Dishonour by non-acceptance.

non-payment Dishonour by non-payment.


Noting by banker Formal notice
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Collecting Banker & Paying Banker


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Collecting Banker:

A Banker who collects cheque amount / payment on behalf of his customers from the Drawer of a Cheque by presenting the same

Paying Banker: A banker who holds the account of

the Drawer of the cheque and is obliged to make payment to the presenter (Payee) or his banker

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Protection to Collecting Banker


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Sec 131 of NI Act Should act in good faith and without negligence Any suspicion in the mind of banker must be

inquired Not liable if Customers title turns out to be defective Customer deposits third party cheque, and banker credits the account with the proceeds immediatly, cheque gets dishonored, rightfully debit the account

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Bouncing of Cheques
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A cheque is said to bounce or to be dishonored by

non-payment, when the banker defaults in its payment, even when he is required to pay
Can become an offence if given towards settlement

of some liability

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Miscellaneous Provisions
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Time and Demand Instruments. Ambiguous Instruments. Incohate Instruments..

Maturity of Negotiable Instruments..


Payment in Due Course. Payment of Interest.. Noting Protest ..
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Banker and Customer


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A banker is one who is involved in banking business.

Banking Regulation Act, 1949 defines a banking company


Banking is defined as accepting, for the purpose of

lending or investment, of deposits of money from the public, repayable on demand or, otherwise, and withdrawable by cheque, draft, order or otherwise.
Customer of a bank is not defined by any law!
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