NEGOTIABLE INSTRUMENTS ACT,1881

Transcription

1 NEGOTIABLE INSTRUMENTS ACT,1881 Section No. Section Name 4 Promissoy Note 5 Bill of Exchange 6 Cheque 8 Holder 9 Holder in Due course 10 Payment in Due course 11 Inland instruments 12 Foreign Instruments 13 Negotiable instruments 14 Negotiation 15 Indorsement 16 Blank and Full Indorsement 17 Ambigious Instruments 18 Amount different in words and figures 19 Demand Instruments 20 Inchoate Stamped Instruments Maturity and its Calculation Capacity of Parties 31 Liabilty of drawee of cheque 36 Liability of Indorser 40 Discharge of Indorser s Liability 42 Acceptance in Fictitous Name 43 Total Absence of Consideration 44 Partial Absence of Consideration Consisting of money 45 Partial Absence of Consideration not Consisting of money 47 Negotiation by Delivery 48 Negotiation by Indorsement 49,55 Conversion of Blank indorsement into Full 53 Holder from a Holder in Due Course 54 Effects of Blank Indorsement 56 Partial Indorsement 58 Instruments obtained by unlawful means or consideration 61 Presentment for Acceptance 62 Presentment for Sight 63 Drawees time for deliberation Presentment for Payment 82-83,86 Discharge of party 87,88 Material Alteration 89 Alteration not apparent 91 Dishonour by Non Acceptance 92 Dishonour by Non payment Notice for Dishonour A Noting and Protest Acceptance for Honour 113,114 Payment for Honour 115 Drawee in case of need 118 Presumptions as to Negotiable instruments

2 120 Estoppel against denying original validity of instruments 121 Estoppel against denying the capacity of payee to indorse 123 General crossing 124 Special crossing 127 More than one special Crossing 128 Payment in due course of a crossed cheque 129 Payment out of due course of a crossed cheque 130 Not Negotiable Crossing 131 Protection to Collecting Banker 132 Bills in sets 138 Dishonour of cheque for insufficiency of fund 4.1 Concept of Negotiable Instrument Section 13 Meaning The word negotiable means transferable and the word instrument mean a document. Thus, the term negotiable instrument means a document, which is transferable from one person to another. Definition As per section 13, A Negotiable Instruments means a promissory note, bill of exchange, or a cheque payable either to order or to bearer. Other Negotiable Instruments Our Act recognizes and deals with the three Negotiable Instruments as stated above. There are other Negotiable Instruments also recognized by usage or custom of trade such as Hundies, Share warrant, bearer debentures Railway Receipt etc. 4.2 Order And Bearer Instrument order Instrument bearer Instrument A negotiable instrument is said to be payable to order when it is expressed to be so payable when it is expressed to be payable to a specified person and does not contain words prohibiting its transfer A negotiable instrument is payable to bearer: where it is expressed to be so payable e.g. Pay Bearer when the only or last endorsement on the instrument is an endorsement in blank 4.3 Characteristics of a Negotiable Instruments Section 13 Written Document It should be signed Easy Negotiability Transferable Infinitum Promise or order to pay money The term instrument or document necessarily implies that it must be in writing. a instruments to pay money is not binding on a person unless it is signed by him. A negotiable instrument is freely transferable from one person to another. A negotiable instrument can be transferred infinitum i.e. it can be transferred any number of times till its satisfaction. Every negotiable instrument must contain either a promise or order to pay money. Also the promise or order must be unconditional.

3 Payment of money only Presumption The promise or order to pay must consist of money only. Nothing should be payable, whether in addition or in substitution of money. Also, the sum payable must be certain. A negotiable instrument is subject to certain presumptions as specified u/s118. The presumptions specified u/s118 shall prevail unless a contrary evidence is produced. Q1 Which of the following is not applicable to negotiable Instrument? (a) It must be in writing (b) It must be transferable (c) It must be registered (d) It must be signed. [CA PCC MAY 2007] Sol. It must be registered. 4.4 Promissory Note Section 4 1.Definition of a Promissory Note 2.Meaning of a Promissory Note 3.Parties to a Promissory Note As per section 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. A promissory note is a promise in writing by a person to pay a certain sum of money to a specified person. Following are the two main parties in a promissory note 1. Maker -- This is the person who makes the promissory note and promises to pay the money stated therein. 2. Payee -- This is the person to whom the amount of promissory note is payable i.e. to whom the promise to pay is made. 4.Essential Elements (a)in Writing Promissory note must be in writing, an oral promise cannot constitute a promissory note. (b)promise to pay It must contain an undertaking or promise to pay. Thus, a mere acknowledgment of indebtness is not sufficient However, the word promise need not be used, what is necessary is that whatever language is used, it must clearly show that the maker is making himself bound to pay the sum. (c)definite and unconditional promise (d)promise to pay money only (e)the sum payable must be certain (f)certain Parties (g)signed by The promise must be definite and unconditional i.e. it must not be vague or uncertain. In other words, the promise to pay must not depend upon a contingency. A promise to pay is not conditional merely because of the fact that the performance of promise is dependent upon an event which is certain to happen even though the time of its occurrence may be uncertain. E.g. Death.. Similarly, a promise to pay money only at a particular place or at a particular time is not conditional. The instrument must be payable in money and money only. An instrument is not a promissory note if the promisor promises to pay (a) Something other than money,or (b) Something in addition to money For a valid promissory note it is also essential that the sum of money promised to be payable must be certain and definite. The parties to the instrument must be designated with reasonable certainty. There are two parties to a promissory note, namely, the person who makes the note and is known as the maker and the payee with whom promise is made. Both the maker and the payee must be indicated with certainty on the face of instrument The promissory note must be signed by the maker, otherwise, it is of no effect. Even if

4 maker (h)it must be duly stamped under the Indian Stamp Act 5.Some examples 6.Section 31 of RBI act,1934 it is written by the maker himself and his name appears in the body of the instrument, it shall not constitute a valid promissory note, if it is not signed by the maker. It means that the stamps of the required amount and description must have been affixed on the instrument. A signs instruments in the following terms: (a) "I promise to Pay B or order Rs.500". (b) "I acknowledge myself to be indebted to B in Rs.1,000, to be paid on demand, for value received." (c) "Mr B I.O.U Rs.1,000." (d) "I promise to pay B Rs. 500 and all other sums which shall be due to him." (e) "I promise to pay B Rs. 500 first deducting there out any money which he may owe me." (f) I promise to pay B Rs. 500 seven days after my marriage with C. (g) I promise to pay B Rs. 500 on D's death, provided D leaves me enough to pay that sum. (h) I promise to pay B Rs. 500 and to deliver to him my black horse on lst January next. The instruments respectively marked (a) and (b) are promissory notes. The instruments respectively marked (c), (d), (e), (f), (g) and (h) are not promissory notes. No person in India other than the Bank or, as expressly authorized by RBI Act, the Central Government shall make or issue any promissory note expressed to be payable to the bearer of the instrument. Q1 Referring to the provisions of the Negotiable Instruments Act, 1881, examine the validity of the following Promissory Notes: (i) I owe you a sum of Rs. 1,000.`A' tells `B' (ii) `X' promises to pay `Y' a sum of Rs. 10,000, six months after `Y's Marriage with `Z'. [CA PE II NOV. 2002] Sol. Explain the definition of promissory note and explain point 4(b),(c) and then specify that both are not valid because in first there is no promise and in second promise is conditional. Q2 What is a "Promissory Note" and what are its elements? S writes "I promise to pay `B' a sum of Rs. 500, seven days after my marriage with `C'".Is this a promissory note? [CA PE II MAY 2004] Sol. Explain the definition of promissory note and point 4 completely and specify that promissory note is invalid because it contain conditional promise. Q3 What are the essential elements of a "Promissory note" under the Negotiable Instruments Act, 1881? Whether the following notes may be considered as valid Promissory notes: (i) "I promise to pay Rs. 5,000 or 7,000 to Mr. Ram." (ii) I promise to pay to Mohan Rs. 500, if he secures 60% marks in the examination. (iii) I promise to pay Rs. 3,000 to Ravi after 15 days of the death of A. [CA PE II NOV. 2007] Sol. Explain point 4 completely and specify that i. It is not valid because sum of money is not certain. ii. Not valid because conditional promise. iii. Valid because death is not conditional as it is certain to happen. Q4 A signs the instrument in the following manner. State the instrument which cannot be considered as promissory note: (1) I promise to pay B or order Rs. 500

5 (2) I acknowledge myself to be indebted to B Rs. 1,000 to be paid on demand, for value received (3) I promise to pay B Rs. 10,000 after three months (4) I promise to pay B Rs. 500 seven days after my marriage with C. [CA PCC NOV. 2007] Sol. Explain the definition of promissory note and explain point 4(b),(c) and then specify that first three are valid because they contain unconditional promise whereas last is invalid because promise is condtional. 4.5 Concept of Bill of exchange Section 5 Definition of bill of exchange Meaning Parties to a Bill to Exchange As per section 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. A bill of exchange is an order in writing, directing a person to pay a certain sum of money to a specified person. Following are the three main parties in a bill of exchange (1) Drawer This is the person who makes/draws the bill of exchange. (2) Drawee This is the person on whom the bill is drawn. In other words, the person who is ordered to pay the amount of the bill of exchange. When the drawee accepts the bill of exchange (i.e. when he give his consent to make the payment of the bill on its due date), he becomes the acceptor. (3) Payee This is a person to whom the amount of bill of exchange is payable. Essentials o It must be in writing. o It must contain an order to pay. o The order to pay must be definite and unconditional. o The parties must be certain. o It must be signed by the drawer. o The sum payable must be certain or capable of being made certain. o The order must be to pay money and money alone. o It must be duly stamped as per the Indian Stamp Act 4.6 Difference between Promissory Note Bill of Exchange Q1 Examining the provisions of the Negotiable Instruments Act, 1881, distinguish between a Bill of Exchange and a Promissory Note. [CA IPCC MAY 2012] Basis Promissory Note Bill of Exchange 1.Definition 2.Nature of Instrument "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. In a promissory note there is a promise to pay money. 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 In a bill of exchange there is an order for making payment. 3. Parties In a promissory note there are only 2 parties namely: i. the maker and In a bill of exchange, there are 3 parties which are follows i. the drawer

6 4. Acceptance 5.Payable to bearer ii. the payee A promissory note does not require any acceptance, as it is signed by the person who is liable to pay. A promissory note cannot be made payable to bearer. ii. the drawee iii. the payee The word acceptance is relevant for a Bill. There are some bills which must be accepted by drawee. On the other hand a bill of exchange can be drawn payable to bearer. However, it cannot be payable to bearer on demand 4.7 Concept of cheque Section 6 1.Definition 2.Cheque in electronic form 3.Truncated cheque Section 4.Parties to a cheque 5.Essentials 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 cheque in the electronic form. As per RBI w.e.f 1April 2012 the validity period of cheque is 3months from the date of its issue. Cheque in the electronic form" means a cheque drawn in electronic form by using any computer resource and signed in a secure system with digital signature (with or without biometrics signature) and asymmetric crypto system or with electronic signature, as the case may be. Note- For the purposes of this section, the expressions "asymmetric crypto system", "computer resource", "digital signature", "electronic form" and "electronic signature" shall have the same meanings respectively assigned to them in the Information Technology Act, A truncated cheque means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further movement of the cheque in writing. Following are the three main parties in a cheque : 1. Drawer : This is the person who makes/draws the cheque. 2. Drawee : This is the banker who is directed to pay the amount of the cheque. Drawee is the banker on whom the cheque is drawn. 3. Payee : This is the person to whom the amount of cheque is payable. 1. The cheque must be in writing. 2. It must contain an express order to pay. 3. The order to pay must be definite and unconditional. 4. It must contain an order to pay a certain sum of money. 5. It must be signed by the drawer. 6. A cheque is always drawn upon a banker and is always payable on demand. 7. A cheque does not require stamping. 8. A cheque doesn t require acceptance. Q1 Define the term `Cheque' as given in the Negotiable Instruments Act, 1881 and amended by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 [CA PE II NOV. 2004] Sol. Explain point 1,2,3 completely 4.8 Distinction between a bill of exchange and a Cheque Q1 Point out the differences between a "Cheque" and a "Bill of Exchange" under the Negotiable Instruments Act, [CA IPCC MAY 2011]

7 Basis Bill of Exchange Cheque Definition 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. Drawee Payable to Bearer on Demand Liability of Drawer In case of a Bill of exchange, the drawee can be any person including banker. A bill of exchange cannot be drawn payable to bearer on demand. In other words a B/E drawn payable to bearer on demand is absolutely void. In case of bill of exchange the liability of drawer is secondary and conditional. However, until a bill is accepted, the liability of the drawer is primary. Crossing A bill of exchange cannot be crossed. 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. However, in case of a cheque, the drawee is a banker (i.e. it is always drawn on a banker) A cheque can be drawn payable to bearer on demand. In other words a cheque drawn payable to bearer on demand is absolutely valid. In case of a cheque the liability of drawer is always primary. The drawee bank is simply a custodian of money of the customer A cheque can be crossed either generally or specially. Stamping bill requires payment of stamp duty. Cheque doesnot require payment of stamp duty. 4.9 Acceptance Section 7 1.Meaning of Acceptance 2.Essential of a valid Acceptance 3.Types of acceptance 4.Drawee s time for Deliberation 5.Other Provisions When the drawee of the bill signifies his consent in writing to the drawer s order in the bill, by signing across the face of the bill with or without the word accepted and delivers back the bill to the holder or gives notice of acceptance to the holder, the bill is said to have been accepted. The drawee is not liable on a bill until he give his acceptance and thereby becomes the acceptor thereof. Acceptance must be in writing, an oral acceptance is not valid in law. Acceptance must be signed by the drawee. Acceptance must be on bill either on the face or back. Acceptance must be completed by delivery or a notice of acceptance must be given by the drawee to the holder. (a)general Acceptance: - When the drawee accepts the order of the drawer to pay the sum specified in the bill without any condition, the acceptance is said to be general or absolute acceptance. (b)qualified Acceptance: When the drawee accepts the order of the drawer to pay the sum specified in the bill with any condition, the acceptance is said to be qualified acceptance.such acceptance is also valid if consent of prior parties are obtained. The drawee has a right to demand 48 hours to consider whether he will accept the bill or not. This period of 48 hours is called as drawee s time for deliberation. If the drawee does not accept the bill within 48 hours, the bill is dishonoured. However, if the holder allows more than 48 hours to the drawee, he should obtain the consent of all prior parties otherwise such parties are discharge.. There are only bill which require acceptance which are as follows-: A bill payable at a specified period after sight. A bill in which there is an express stipulation that it shall be presented for

8 acceptance before it is presented for payment. Q1 Which are the essential elements of a valid acceptance of a Bill of Exchange? An acceptor accepts a "Bill of Exchange" but write on it "Accepted but payment will be made when goods delivered to me is sold". Decide the validity. [CA PE II MAY 2003] Sol. Explain point 1,2,3(b) and specify such acceptance shall be valid if consent of prior parties is obtained. Q2 What do you mean by an acceptance of a negotiable instrument? Examine validity of the following in the light of the provisions of the Negotiable Instrument Act, 1881: (i) (ii) An oral acceptance An acceptance by mere signature without writing the word "accepted".[ca PE II MAY 2003]. Sol. Explain point 1,2 and specify oral acceptance is not valid but acceptance without writing the word accepted is valid. Q3 A Bill of Exchange originally drawn by M for a sum of Rs. 10,000, but accepted by R only for Rs. 7,000. [CA PE II MAY 2007] Sol. Explain point 1,2,3(b) and specify such acceptance shall be valid if consent of prior parties is obtained. Q4 Referring to the provisions of the Negotiable Instruments Act,1881, examine whether acceptance of a bill of exchange in the following situation shall be treated as qualified acceptance where the acceptor: (i) undertakes to pay only Rs.2,000 for a bill drawn for Rs.5,000; (ii) declares the payment to be independent of any other event; (iii) Writes : "Accepted, payable at ABC Bank".[CA PE II JUNE 2009] Sol. Explain point 1,3(b) and specify - It is qualified since it is accepted partially. - It is not qualified as no condition is imposed. - It is not qualified because payment at particular time or place is not a condition Holder Section 8 Definition Conditions to be satisfied Holder means a dejure holder Lost or stolen As per section 8, holder of a promissory note, bill of exchange, cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. In order to be called a holder a person must satisfy the following conditions: i. He should be entitled in his own name to the possession of the instrument, and ii. He should have the right to receive or recover the amount due thereon from the parties thereto. If a person has possession of the instrument but doesn t have a right to recover the instruments then he is said to be a de-facto holder. However if a person has possession as well as a right to recover then he is said to be de-jure holder. Where a note, bill or cheque is lost or destroyed, its holder is the person so entitled to the instrument at the time of such loss or destruction. Q1 Discuss with reasons, whether the following persons can be called as a holder under the Negotiable Instruments Act, 1881: (i) X who obtains a cheque drawn by Y by way of gift. (ii) A, the payee of the cheque, who is prohibited by a court order from receiving the amount of the cheque. (iii) M, who finds a cheque payable to bearer, on the road and retains it. (iv) B, the agent of C, is entrusted with an instrument without endorsement by C, who is the payee.

9 (v) B, who steals a blank cheque of A and forges A s signature. [CA PE II NOV. 2008] Sol. Explain section completely and then specify X can be holder because obtaining by gift is valid condition for holder. A can t be holder because prohibited by court. M is a bearer but not a holder as he has found the cheque on road. Agent B is not holder as he has possession without C s consent. B is not holder because forgery does not provide any valid title Holder in due course Section 9 1.Definition 2. Condition to be fulfilled for becoming a holder in due course As per section 9, holder in due course means any person who for consideration become the possessor of a promissory note, bill of exchange or cheque, if payable to bearer or the payee or the endorsee thereof, if payable to order, before the amount mentioned in it become payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived the title. A person is a holder in due course, if he fulfills the following conditions: He should have acquired the instruments for some consideration. He should have obtain the instruments before its maturity. If the instrument is taken after its maturity, the person taking it may become a holder but he cannot be called a holder in due course He should have obtain the instruments in good faith i.e. without sufficient cause to believe that defect existed in the title of the person from whom he derived his title. He must have received the negotiable instrument complete and regular on the face of it. In other words, he should not receive an inchoate/incomplete instrument. Q1 Explain the meaning of `Holder' and `Holder in due course' of a negotiable instrument. [CA PE II NOV. 2002] Sol. Explain the definition of holder u/s 8 and Holder in due course u/s 9. Q2 State the privileges of a "Holder in due course" under the Negotiable Instruments Act, [CA PE II NOV. 2004] Sol. State all 9 points Q3 Examine when shall a holder of a negotiable instrument be considered as a holder in due course under the provisions of the Negotiable Instruments Act, [CA PE II NOV. 2005] Sol. Explain point 2 completely. Q4 In legal terms, a person who takes the instrument bona fide for value before it is overdue, in good faith, is known as (a) Holder in due course (b) Holder (c) Holder for value (d) None of the above. [CA PCC JUNE 2009] Sol. Holder in due course Q5 P obtains a cheque drawn by M by way of gift. Here P is a : 1. holder in due course 2. holder for value 3. holder 4. None of the above [CA IPCC MAY 2010] Sol. holder 4.14 Privileges of a holder in due course

10 1.Better title than that of transferor Section 58 2.Privilege in case of an inchoate stamped instruments Section 20 3.Liability of prior parties [Section 36] 4.Privilege in case of fictitious bill [Section 42] 5.Privilege when an Instrument delivered conditionally is negotiated [Section 46] 6.Endorsee from a holder in due course [Section 53] 7.Estoppels against denying capacity of payee to endorse [Section 121] 8.No defence of absence of consideration [Section 43] 9.Estoppels against denying the validity of instruments [Section 120] A holder in due course gets a valid title to the negotiable instrument even though the title of transferor was defective. Thus, a holder in due course acquires a title free from all defects. a b a b In case of an inchoate stamped instrument, if the holder or original payee fills more amount than what he was authorized; he cannot enforce the instrument for the whole amount. If such an instrument is transferred to a holder due course, he can claim the whole of the amount so entered provided that the amount is covered by the stamp affixed thereon. All prior parties to a negotiable instrument continue to remain liable to a holder in due course both jointly & severally until the instrument is duly satisfied However, only preceding party is liable to a succeeding party, if the succeeding party is a holder. The words fictitious payee mean person, who is not in existence or, being in existence, is never intended by the drawer to have the payment. The acceptor of the bill of exchange cannot as against the HDC, say that the other parties to the bill was fictitious. When a negotiable instrument is endorsed or delivered conditionally or for a specific purpose only e.g. for safe custody and not with the idea of transferring the property therein, the property in the instrument does not pass to the endorsee and he is merely a bailee with limited title and power of negotiating it. This, however, doesn t effect the rights of a holder in due course, i.e. if such a instrument is negotiated to a holder in due course, the parties liable on the instrument cannot escape their liability. A holder who receives an instrument from a holder in due course, gets the rights of the holder in due course, even if he had knowledge of the prior defects, provided that he was not a party to the instrument. Where the payee, being a minor or a person of unsound mind, endorses a promissory note or a bill payable to order, the maker of the promissory note or the acceptor of the bill cannot escape his liability on the ground that the payee was incompetent to endorse. When a negotiable instrument is made, drawn, accepted or transferred without consideration, it creates no obligation of payment between the parties to the transaction. An agreement made without consideration is void. However, if the instrument gets into the hands of a holder in due course, he can recover the amount on it from any of the prior parties thereto. The defence of original invalidity of the instrument cannot be put forth against the holder in due course by the drawer of a bill, promissory note or cheque. Q1 B obtains A s acceptance to a bill of exchange by fraud. B endorses it to C who is a holder in due course. C endorses the bill to D who knows of the fraud. Referring to

11 the provisions of the Negotiable Instruments Act, 1882, decide whether D can recover the money from A in the given case.. [CA PE II NOV. 2006] Sol. Explain point 6 (section 53) and then specify that although acceptance is obtained by fraud but since C is a HDC so D who obtained from C will also be an HDC. Q2 X draws a bill on Y but signs it in the fictitious name of Z. The bill is payable to the order of Z. The bill is duly accepted by Y. M obtains the bill from X thus becoming its holder in due course. Can Y avoid payment of the bill? Decide in the light of the provisions of the Negotiable Instruments Act, [CA PE II NOV. 2008] Sol. Explain point 4 (section 42) and then specify that although Z is a Fictitious payee But since M is a HDC so Y shall be liable to M. Q3 Describe in brief the advantages and protections available to a "holder in due course" under the provisions of the Negotiable Instruments Act, [CA PCC NOV. 2008] Sol. Explain all 9 privileges of HDC Q4 J accepted a bill of exchange and gave it to K for the purpose of getting it discounted and handing over the proceeds to J. K having failed to discount it, returned the bill to J. J tore the bill in two pieces with the intention of cancelling it and threw the pieces in the street. K picked up the pieces and pasted the two pieces together, in such manner that the bill seemed to have been folded for safe custody, rather than cancelled. K put it into circulation and it ultimately reached L, who took it in good faith and for value. Is J liable to pay the bill under the provisions of the Negotiable Instruments Act, 1881? [CA IPCC MAY 2010] Sol. Explain point 9 (section 120) and then specify that validity of bill cant be challenged before a HDC and therefore L being an HDC will be able to recover J. Q5 A draws and B accepts the bill payable to C or order, C endorses the bill to D and D to E, who is a holder in due course From whom E can recover the amount? Examining the right of E state the privileges of the holder in due course provided under the Negotiable Instruments Act, [CA IPCC NOV. 2012] Sol. Explain point 3 (section 36) and then specify that E being an HDC will be ablr to recover from all his prior parties i.e. A,B,C,D. Q6 S by inducing T obtains a Bill of Exchange from him fraudulently in his (S) favour. Later, he enters into a commercial deal and endorses the bill to U towards consideration to him (U) for the deal. U take the bill as a Holder in due- course. U subsequently endorses the bill to S for value, as consideration to S for some other deal. On maturity the bill is dishonored. S Sues T for the recovery of the money With reference to the provisions of the Negotiable Instruments Act, 1881 decide whether S will succeed in the case or not. - [CA Inter.(IPC) NOV. 2014] Sol.. Explain point 6 (section 53) and then specify that since S can t recover from T because being a prior party on the bill he can t avail the benefit provided u/s Payment in Due Course Section 10

12 Meaning As per 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 under circumstances which do not afford reasonable ground for believing that he is not entitled to, receive payment of the amount therein mentioned Inland and Foreign Instrument Section 11 & 12 Definition of inland Instrument Definition of Foreign Instrument A promissory note, bill of exchange or cheque drawn or made in India and made payable in or drawn upon any person resident in India shall be deemed to be an inland instrument. Any such instrument not so drawn, made or made payable shall be deemed to be a foreign instrument. In other words any instrument other than inland instrument will be foreign instrument Negotiation Sections 14,47 and 48 Definition of Negotiation Manner of Negotiation Negotiation by whom Time of Negotiation When a promissory note, bill of exchange or cheque is transferred to any person so as to constitute the person the holder thereof, the instrument is said to be negotiated. Bearer Instrument Order Instrument If the instrument is a Bearer instrument It the instrument is an order one, the rights the rights in it can be transferred by mere in it can be transferred by endorsement delivery from one person to another and delivery (Section 48). (Section 47). Every maker, drawer, payee or endorsee all of them can negotiate an instrument, provided the negotiability of such instrument has not been restricted or excluded by any express words used in the instrument. A negotiable instrument may be negotiated until payment or satisfaction thereof Thus, negotiability of an instrument stops only when the party ultimately liable thereon pays it. This clearly means that the negotiation can continue even after the maturity date has arrived. It can be negotiated after maturity if it has not been paid or satisfied. Q1 A negotiable instrument that is payable to order can be transferred by: 1. Simple delivery 2. Endorsement and delivery 3. Endorsement 4. Registered Post. [CA PCC NOV. 2008] Sol. Endorsement and delivery 4.18 Endorsement Section 15 Definition of Endorsement Essentials Kinds of Endorsement Blank or When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereof or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to endorse the same, and is called the endorser. It must be on the instrument itself. If no space is left on the instrument then, it must be on a separate slip of paper attached to the instrument, called alonge. It must be signed by the endorser for the purpose of negotiation. Signature of the endorser on the instrument without any additional word is sufficient. An Endorsement is said to be blank or general if the Endorser signs his name only

13 General Endorsement: Sec 16 & 54 Full or special Endorsement Section 16 Restrictive Endorsement Sec 50 Partial Endorsement Sec 56 Conditional Endorsement Sec 52 Meaning Types of conditional Endorsement on the face or back of the instrument. A Blank Endorsement specifies, no Endorsee and the instrument in consequences becomes payable to bearer even though originally it was payable to order. An Endorsement is called as special Endorsement, if it specifies the name of the Endorsee. In other words, where the Endorser adds a direction to pay the amount to a specified person or to his order, it is called as Special Endorsement. Sec 50, permits restrictive Endorsement also. An Endorsement which, by express words, restricts or excludes the rights of further negotiation to the Endorsee. Where an Endorsement purports to transfer to the Endorsee a part only of the amount of the instrument, the Endorsement is said to be partial. A partial Endorsement doesn t operate as a negotiation of the instrument. An Endorsement is conditional or qualified if it contains any condition imposed by the Endorser. An Endorsement may be conditional or qualified in one of the following ways Sans recourse Endorsement: When the Endorser expressly excludes his own liability on the negotiable instrument while making Endorsement, to the Endorsee or any subsequent holder in case of dishonour of the instrument, the Endorsement is known as sans recourse or without recourse Endorsement such an Endorsement is indicated by adding the words sans recourse or without recourse. Sans Frias endorsement: WHER ENDORSER LIMIT HIS LIABILITY DURING NEGOTION IT IS CALLED SANS FRIAS ENDORSEMENT Facultative Endorsement: Where an Endorser by express words abandons some right or increases his liability under an instrument, the Endorsement is called the facultative Endorsement. An Endorsement pay A or order, notice of dishonour waived is a facultative Endorsement. Contingent Endorsement: An Endorser may Endorse an instrument in such a way that his liability depends upon the happening of a specified event which may or may not happen. Pay A on his marriage Negotiation Back Negotiation Back 1. In the course of Negotiation, if a negotiable instrument is circulated/negotiated back by an Endorser to any of the prior party on the negotiable instruments it is termed as negotiation back. 2. The person who becomes the holder in due course under this negotiation back cannot make any of the intermediate Endorsers liable on the instruments. 3. But where an Endorser had excluded his liability, by the use of the words sans recourse or without recourse to me and after that becomes the holder of the instrument in his own right under the negotiation back all intermediate Endorsers are liable to him and in case of dishonour, he can recover the amount from all or any one of them. Q1 M, the holder of a bill, endorses it without recourse to N. N endorses to P, P to Q,Q to R and R endorses it to M. Can M recover the amount of the bill from N, P, Q and R, or any of them? Discuss with reference to the provisions of the Negotiable Instruments Act, [CA PE II NOV. 2009] Sol. Explain all 3 points as specified above and then specify that M can recover from al his prior parties i.e. N,P,Q,R because no party can sue him as he has made sans recourse endorsement but he can all his prior parties.

14 4.20 Kinds of Instrument Sec 17, 20, 46 Ambiguous Instruments Section 17 Inchoate stamped Instruments Section 20 Escrow Section 46 Para 3 a. When an instrument owing to its faulty drafting may be interpreted either as a promissory note or a bill of exchange, it is called an ambiguous instrument. b. Its holder has to elect once for all whether he wants to treat it as a promissory note or a bill of exchange (sec 17) The term inchoate instrument means an instrument incompletes in some respects, e.g. an instrument which doesn t mention the amount payable, or the name of the payee. When a negotiable instrument is delivered conditionally or for a special purpose as a collateral security or for safe custody only, and not for the purpose of transferring property therein, it is called an Escrow Kinds of Bill of Exchange 1.Accommodation Bill Accommodati a. It is a bill of exchange made only to provide financial help to some person; or on Bill b. It is drawn by person with a view to lend the credit of his name on the bill so that the person taking the bill can get the money for the same. Example A was in need of Rs. 50,000. He went to his friend B for a loan. But B was not in a position to lend money. However B suggested that A may draw a bill of exchange on B which he would accept. Accordingly, A draw a bill of exchange on B and B accepted it. This would be an Accommodation bill. If A enjoys good reputation in market, he can get the bill discounted with his banker and can get the amount. And thus, A will be in a position to acquire the needed money. In this case, A will indemnify B for any payment Documentary Bill and clean Bill Meaning of Fictitious Bill Meaning of Bill in sets which B might make in respect of the bill. o When a seller of goods has drawn a bill of exchange on the buyer for the price of the goods and the documents of title to the goods such as railway receipt,warehouse receipt and some other documents such as invoice, shipping papers, marine insurance policy etc are attached to the bill, such a bill of exchange is called a documentary bill. o On the other hand, when no documents of title etc, are attached to a bill of exchange it is called a clean bill. a. It is a bill of exchange in which the names of the drawer or the payees or both are fictitious. b. Fictitious person means a person who is not in existence or a pretended person i.e. a person who exist but was never intended by the parties to be the drawee or payee of the bill of exchange. A bill of exchange may be drawn in sets of three. It would be called as bill in sets. Such a thing may become necessary when the parties to the bill of exchange are at distant places or in different countries. In such cases, the bill of exchange, which is sent from one place to another may be lost or miscarried in transit. In such a case, the different sets of the same bill are sent by separate post to ensure the safe transmission of at least one part of the bill. These parts together constitute one set. And if one or two parts are lost in transit, the payee can present that part which he has received Demand and Time Instrument Section 19 & 21

15 Demand Instrument Time Instrument a. A demand instrument may be described as the instrument in which the holder need not wait for payment and can demand payment when he chooses to do that. b. A promissory note or a bill of exchange in which no time for payment is specified, and a cheque, are payable on demand. (Sec 19) c. In a promissory note or a bill of exchange the expression at sight and on presentment means on demand (sec 21) a. A time instrument means the instrument which is payable some time in future. b. An instrument payable after a fixed time (say, after six months) or on a specified date (say, on 5 Aug 2006) is termed as a time instrument c. An instrument payable after happening of an even which is certain to happen, e.g., death, though the time of its happening may be uncertain, is also called a time instrument Maturity of a Promissory Note or Bill of Exchange Sec 22 1.Meaning a. The maturity of a promissory note or bill of exchange is the date on which it falls due. b. Every instrument payable otherwise than on demand is entitled to three days of grace Manner of calculating maturity date Sec 22,23,25 2.Manner of calculating maturity date Sec lays down the following rules for calculating the maturity of a time bill or note. If it is made payable to a stated number of months after date or after sight, or after a certain event, it matures or become payable three days after the corresponding date of month after the stated number of months. If the month in which the period would terminate has no corresponding date, the period shall be held to terminate on the last day of such month. If it is made payable a certain number of days after date or after sight,or after a certain event, the maturity is calculated by excluding the day on which the instrument is drawn or presented for acceptance or sight or on which the events happens. If the date of maturity of the instrument is a public holiday, it shall mature on preceding business day. If the maturity date of a negotiable instrument is an emergency or unforeseen public holiday the negotiable instrument shall expire on the succeeding business day. Q1 In what way does the Negotiable Instruments Act, 1881 regulate the determination of the `Date of Maturity' of a Bill of Exchange. Ascertain the `Date of maturity' of a bill payable 120 after the date. The Bill of exchange was drawn on 1st June, 2005[CA PE II NOV. 2005] Sol. Explain point 2 manner of determining completely and then specify maturity date will be 1june =29 September days of grace=2oct 2015 but since 2 oct is a public holiday so preceding business day i.e. 1 October Q2 What is meant by maturity of a Bill of Exchange or Promissory Note? Calculate the date of maturity of the following bills of exchange explaining the relevant rules relating to determination of the date of maturity as provided in the Negotiable Instruments Act, 1881: (i) A Bill of Exchange dated 31st August, 2007 is made payable three months after date. (ii) A Bill of Exchange drawn on 15th October, 2007 is payable twenty days after sight and the bill is presented for acceptance on 31st October, [CA PCC

16 NOV. 2007] Sol. Explain point 1 and 2 completely and then specify maturity dates as follows (i) 31August months=30 November days of grace=3 December (ii) maturity date will be calculated from date of sight/ acceptance i.e. 31october =20November, days of grace = 23 November 2007 Q3 Bharat executed a promissory note in favour of Bhushan for Rs. 5 crores. The said amount was payable three days after sight. Bhushan, on maturity, presented the promissory note on 1st January, 2008 to Bharat. Bharat made the payments on 4th January, Bhushan wants to recover interest for one day from Bharat. Advise Bharat, in the light of provisions of the Negotiable Instruments Act, 1881, whether he is liable to pay the interest for one day? [CA PE II MAY 2008] Sol. Explain point 1 and 2 completely and then specify date of sight is 1january +3 days of grace= 4January is the date of maturity. Since Bharat made the payment on maturity date so he is not liable to pay any interest Capacity of A Person To Be A Party To A Negotiable Instrument Sec 26,29 1.Position of Minor 2.Position of Insolvent 3.Position of a company 4.Position of an Agent 5.Position of legal representative A minor may draw, Endorse, deliver and negotiate any negotiable instrument [i.e. an instrument drawn, accepted, endorsed, or negotiated by minor is not void]. All the parties, except the minor shall be bound on such negotiable instrument. Thus, a minor is not liable on a negotiable instrument even though he may be the maker, acceptor or Endorser. An insolvent is not allowed to draw, make accept or Endorse a negotiable instrument because it will bind his estate which now stands vested in Official Receiver. a. A company, as an artificial person governed by its object clause in the memorandum of association, is capable of doing only such acts as are expressly allowed by its memorandum of association. b. Hence, if the company executes (i.e. draws, accepts or negotiates) a negotiable instrument without being authorized to do so by its memorandum of association, the instrument would be void and even a holder in due course would not be able to enforce it against the company. The doctrine of agency works in the field of negotiable instrument also. So, a person who has the capacity to become a party to a negotiable instrument, may appoint an agent to draw, make, accept or negotiate a negotiable instrument on his behalf. This however, will require a specific authority to be granted to the agent. A legal representative of a deceased person who signs his name on a negotiable instrument is liable personally thereon unless he expressly limits his liability to the extent of the assets received by him as such (Sec 29). Q1 A, a major, and B, a minor, executed a Promissory Note in favour of C. Examine with reference to the provisions of the Negotiable Instruments Act, 1881 the validity of the Promissory Note and state whether it is binding on A and B. [CA PE II NOV. 2005] Sol. Explain point 1 and specify that promissory note is valid but it is binding on A (major) Q2 A Promissory note drawn jointly by X, a minor and Y, a major is:

17 (1) void (2) valid but not negotiable (3) valid but can be enforced only against Y (4) illegal. [CA PCC MAY 2008] Sol. valid but can be enforced only against Y Q3 A negotiable instrument drawn in favour of a minor is : (1) void (2) void but not enforceable (3) valid (4) None of the above. [CA IPCC NOV. 2009] Sol. valid Q4 State with reasons whether the following statements are correct or incorrect. A promissory note duly executed in favour of minor is void. [CA IPCC NOV. 2010] Sol.Incorrect and explain point 1. Q5 P a major and Q a minor executed a promissory note in favour of R Examine with reference to provisions of the negotiable Instrument Act, 1881 the validity of promissory note and whether it is binding on P and Q[CA Inter.(IPC) MAY 2015] Sol. Explain point 1 and specify that promissory note is valid but it is binding on P (major) 4.26 Total Or Partial Absence Of Consideration Section 43 To 45 1.Total absence or failure of consideration Section 43 2.Partial absence or failure of consideration consisting of money Section 44 3.Partial absence or failure of consideration not consisting of money Section 45 a) No obligation between the parties is created, if a negotiable instrument is made, drawn, accepted, Endorsed or transferred: o without consideration. o for consideration which fails subsequently. b) However, if such negotiable instrument is transferred to a holder for consideration, such holder (and every subsequent holder) is entitled to recover the amount due on such negotiable instrument from the transferor or any prior party. a) In case of partial absence or failure of consideration consisting of money, the holder standing in immediate relation with the signer cannot recover more than the full amount of the negotiable instrument as reduced by that part of consideration which has failed. b) However, if such negotiable instrument is transfer to a holder for consideration, such holder (and every subsequent holder) is entitled to recover the full amount due on such negotiable instrument from the transferor or any prior party. a. In case of partial failure of consideration not consisting of money, the holder standing in immediate relation with the signer cannot recover more than full amount of the negotiable instrument as reduced by that part of consideration which has failed provided the partial failure of consideration can be ascertained in terms of money without any collateral inquiring. b. However, if the partial failure of consideration cannot be ascertained in terms of money without any collateral inquiry, even the holder standing in immediate relation with the signer shall be entitled to recover the full amount of the negotiable instrument. Q1 A draws a bill on B. B accepts the bill without any consideration. The bill is transferred to C without consideration. C transferred it to D for value. Decide (i) Whether D can sue the prior parties of the bill, and (ii) Whether the prior parties other than D have any right of action intense? Give your answer in reference to the Provisions of Negotiable Instruments Act, [CA PE II NOV. 2004]

18 Sol. Explain point 1 (Section 43) completely and then specify that (i) D can sue all his prior parties since he has obtained the instrument for value. (ii) No prior party other then D will have any right of action intense. Q2 A owes a certain in sum of money to B. A does not know the exact amount and hence he makes out a blank cheque in favour of B, signs and delivers it to B with a request to fill up the amount due payable by him. B fills up fraudulently the amount larger than the amount due payable by A and endorses the cheque to C in full payment of dues of B. Cheque of A is dishonoured. Referring to the provisions of the Negotiable Instruments Act, 1881, discuss the rights of B and C. [CA PE II MAY 2007] Sol. Explain point 2 (Section 44) completely and then specify that C will be able to recover the entire amount on instruments whereas B will recover only the original amount due from A and not the entire amount. Q3 A draws a bill of exchange payable to himself on X. Who accepts the bill without consideration just to accommodate A. A transfers the bill to P for good consideration. State the rights of A and P. Would your answer be different if A transferred the bill to P after maturity? [CA PCC MAY 2008] Sol. Explain point 1 (Section 43) completely and then specify that A will not be able to recover because of absence of consideration but P being Holder for consideration will be able to recover. Our answer remains the same even if P obtains the instrument after maturity Presentment of a Bill For Acceptance Sec 61,63 Meaning When is Presentment for Acceptance Required Presentment to whom? Presentment by whom? Time for presentment Place of presentment: Holders duty on Presentment for acceptance means exhibiting/showing the bill of exchange to the drawee to procure/obtains the acceptance thereof. a. A bill payable at a specified period after sight. Such a bill must be presented to the drawee for his acceptance in order to fix the maturity of the bill. i. A bill in which there is an express stipulation that it shall be presented for acceptance before it is presented for payment. The bill must be presented to: o the drawee or his agent; or drawee in case of need or his agent, where the name of drawee is mentioned in the bill, and the original drawee refuses to accept the bill; or legal representative of the deceased drawee, where the drawee is dead or official receiver or official assignee of the drawee, where drawee is insolvent. The presentment is to be made by the holder of a bill of exchange. A bill of exchange may be negotiated even before the acceptance has been obtained. The holder who takes the bill impliedly undertakes to procure the acceptance thereof by properly presenting the same as required in section 61. The rules with regard to time of presentment for acceptance are as follows: The presentation for acceptance must be made on a business day within business hours, whether the parties are traders or non-traders (sec 61). a. If a particular place has been specified in the bill for presentment for acceptance, it must be presented at that place. If at such a place the drawee cannot be found on the due date for presentment after reasonable search, the bill is dishonoured. (Section 61) b. If no place is mentioned in the bill, it may be presented at the usual place of business of the drawee or his residence. It is holder duty to provide 48 hours to the drawee so that can decide whether to accept the bill or not.