UNIT6 NEGOTIABLEINSTRUMENTSANDRELATEDMATTERS

STRUCTURE: 6.1 Objectives 6.2 NegotiableInstruments 6.2.1 FeaturesofNegotiableInstruments 6.2.2 PromissoryNotes 6.2.3 BillsofExchange 6.2.4 Cheques 6.2.5 OtherfeaturesofNegotiableinstruments 6.3 OtherInstruments 6.3.1 BankersDrafts 6.3.2 TravellersCheque 6.3.3 Dividend/InterestWarrants 6.4 CrossingofCheques 6.4.1 GeneralCrossing 6.4.2 SpecialCrossing 6.5 Endorsement 6.5.1 RequirementsforEndorsement 6.5.2 TypesofEndorsement 6.6 OtherProvisions 6.6.1 HolderinDueCourse 6.6.2 PayingBankersduties 6.6.3 PaymentinDueCourse 6.7 Letussumup 6.8 CheckyourProgress 6.9 TerminalQuestions 6.10 AnswerstoCheckyourProgress 74

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6.1OBJECTIVES: Bulkofbankingtransactions,comprisesof,dealingsinnegotiableandother instruments. In India, the Negotiable Instruments Act, 1881, judicial pronouncementsandbankingpracticesgovernthenegotiableinstrumentsand relatedmatters. Inthisregard,thefollowingUnitseekstoacquaintyouwiththebasicconceptsand mainprovisionsrelatingto: NegotiableInstrumentsmeaning,featuresandkinds, OtherInstruments,likebankersdrafts,travellerscheques, CrossingandEndorsements, Holder/Paymentinduecourse. 6.2.NEGOTIABLEINSTRUMENTS: 6.2.1FeaturesofNegotiableInstrumentsTheNegotiableInstrumentsAct, 1881 (hereafter referred as NI Act) does not particularly define the term NegotiableInstrument. TheNIActstatesinitspreamblethatitseekstodefinethelaw relatingto promissorynote,billofexchangeandchequeandthereforeitdealswithonly thesethreekindsofnegotiableinstruments.Thesenegotiableinstrumentshave certaincommonfeaturesandanyinstrumentthatpossessesthesefeatures maybeconsideredtobeanegotiableinstrument(e.g. bankdrafts,government promissorynotes). Thecommonfeaturesofnegotiableinstrumentsareasfollows: (i) Anegotiableinstrumentcanbetransferredbydeliveryorbyendorse mentanddelivery,dependingonwhetheritispayabletothebeareror order. On such a transfer, title in the instrument passes from the transferortothetransferee,withoutanyotherancillarydocumentor noticeofthetransfer.However,transferabilityoftheinstrumentmaybe restrictedbythemakerorholderbycrossingitasAccountPayee. (ii) A negotiable instrument confers an absolute and valid title on the transfereewhotakesitingoodfaith,forvalueandwithoutnoticeofthe defectinthetitleofthetransferor.Thisisanexceptiontothegeneralruleof lawthatsaysthatnoonecangivetoanotherabettertitlethanwhatone has.Thus,intermsofthisgeneralrule,abuyerofstolen goodscannot getavalidtitle,evenifthebuyerisunawarethatthegoodsbeingpurchased were stolen by the seller. However, in case of negotiableinstruments,a bonafide transfereeforvalueacquiresagoodtitleintheinstrument and it would not be vitiated by the defective title of thetransferor.Sucha transfereeisknownasholderinduecourseinlawandhewillgetabetter titlethanthetransferor,asexplainedlaterinthisUnit.

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(iii) Theholderofnegotiableinstrumentcansueinhisownnameandcan recover the amount of the instrument from the party liable to pay thereonasthereisarightofactionattachedtotheinstrumentitself. 6.2.2PromissoryNotesAPromissoryNoteisaninstrumentinwriting(not beingabanknoteoracurrencynote)containinganunconditionalundertaking, signedbythemaker,topayacertainsumofmoneyonlyto,ortotheorderof,a certainperson,ortothebeareroftheinstrument(section4ofNIAct).Thus,an instrumentstatingIpromisetopayBororderRs.1000,orMr.B,IoweyouRs. 1000/canbeconsideredasaPromissoryNote. However,itshouldbenotedthat,whenwordslikeIpromisetopayBRs.1000 afterdeductinganymoneythathemayowemeareincluded,theinstrumentfails toqualifyasaPromissorynotebecausethesumpayabletoBisneithercertain norunconditional. Apromissorynotethatisdependentoncontingencywouldtantamounttobeingan uncertainundertakingandhencecannotbetreatedasapromissorynote. 6.2.3BillofExchangeAbillexchangeisaninstrumentinwritingcontainingan unconditionalorder,signedbythemaker,directingacertainpersontopaya certainsumofmoneyonlyto,ortotheorderof,acertainpersonortothe beareroftheinstrument.(Section5ofNIAct). Mainelementsofabillofexchangeareasfollows: (i) Billofexchangeisusedinbusinessandtradeinvolvingthesellerand buyerofgoods/servicessoldoncreditterms.Ithasthreepartiesdrawer (seller),drawee(buyer)andpayee(beneficiary). (ii) Instead of paying cash, the drawee (buyer) undertakes to pay to the payee,ortohisorder,aspecifiedsumondemand(i.e.demandbillon presentmentofthebill),oronaspecifiedfuturedate(i.e.usancebillafter acceptance). (iii) The drawee of a bill is not liable until he accepts the bill, indicating therebyhisassenttothedrawersordertopay.Demandbillispayable immediately on presentment to the drawee. Usance bill is presented twicetothedraweefirstforacceptance,andthereafterforpaymentonthe duedate. (iv) Thedateofpaymentmustbecertainorascertainable.Demandbillis payable on demand or immediately on presentment. Usance bill is payableafterspecifiedperiodoratafuturedate.Usancebillsattract stampdutyandtheyneedtobeacceptedbythedrawee/stolegallybind him/themforpayment. 6.2.4ChequesAchequeisabillofexchangedrawnonaspecifiedbankerandnot expressedtobepayableotherwisethanondemand.(Section6ofNIAct).Like a bill of exchange, a cheque also has three parties. The drawer is theaccount holdersigningthecheque;draweeisalwaysthebank(branchwheretheaccount holdermaintainshisaccount)andthepayeeisthebeneficiarywho

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willreceivetheamountmentionedinthecheque.Otherfeaturesofacheque maybedescribedasfollows: (i) Inwrittenformat:Achequeshouldbeinwriting(byinkpenorballpoint pen,ortyped,butnotinpencilasthewritingcanbeeasilyerasedor altered).Itcanalsobewrittenbyanotherpersonapartfromthedrawee. (ii) Formofcheque:Bankingpracticerequiresthatthechequeformsshould have been issued by that banker, bearing magnetic ink characters, accountnumberofthedrawer,branchnameetc.Thechequeformsare printedwithsecurityfeaturessoastopreventfraudulentpractices.An accountholdercanuseonlytheseprintedchequesfortransactions. Achequebookistobekeptinsafecustodybytheaccountholder. (iii) Drawerssignature:Thechequehastobesignedininkbytheaccount holderorhisauthorizedagent(throughmandateorpowerofattorney)as perthespecimensignatureavailableonrecordwiththebankbranch.Ifthe signaturediffersmaterially,thechequemaybereturnedbythebanker,to protectthecustomersinterestfrompossibleforgery.Printedsignatures on dividend/interest warrants cheques that are issued bycompaniesinbulk, arealsoacceptable. (iv) Date of cheque: A cheque has to be dated, as the date constitutes a materialelementofacheque.Aholderofanundatedchequemayfillinthe datewhilepresentingitforpayment.Apostdatedchequecannotbepaid before itsduedate.Anantedatedcheque(i.e.date prior to the presentment)ispayablewithinsixmonthsfromthedatespecifiedonthe cheque.AsperIndianbankingpractices,achequepresentedafterthe expiryof6monthsfromitswrittendate(i.e.astalecheque),cannotbe paidunlessitisrevalidatedbythedrawerunderhissignature. (v) Amountoncheque:Intheprintedchequeformsofallbanks,twospaces areprovidedforwritingtheamountinfigureandalsoinwords.While boththeserequirementshavenotbeenlaiddowninlaw,bankspreferit safe,nottopayachequewrittenonlyinfigures,astheamountwritten onlyinfigurescanbeeasilyalteredbytheholderoranyotherperson. However,abankercanpayachequewrittenonlyinwordsorwherethe amount in words and figures mutually differs, after consulting the drawer,whocanlaterremovethedeficiency. 6.2.5OtherFeaturesofNegotiableInstrumentsTherearecertainfeatures whicharecommontopromissorynotes,billsofexchangeandcheques.Someof thesehavebeenexplainedaboveundertheheadingcheques.Letuslistallthe commonfeaturesofnegotiableinstruments,asfollows: (i) Instrumenthastobeinwriting. (ii) Theinstrumentmustcontainanunconditionalpromiseorundertaking. (iii) Thepromisemustrelatetopayingacertainsumofmoney,andnot anythingelse.Intermsoftheprovisionsoflaw,thesumpayableisdeemed

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tobecertainifit(a)includesfutureinterest,(b)ispayableatanindicatedrate ofexchange,orif(c)theinstrumentprovidesthatondefaultof paymentofaninstalment,thebalanceunpaidshallbecomedue. (iv) Thedateofpaymentmustbecertain:Theinstrumentshouldbepayable eitherondemandorpresentment(asinthecaseofchequeorpromissory note,ordemandbillofexchange)oronafixedordeterminablefuture date(incaseofusancebillofexchange). (v) Thepayeemustbeacertainpersoneithersinglyorjointlywithother certainperson(s),aspertheinstrumentitself. (vi) Theinstrumentmustbearthesignatureofthedrawer(incaseofcheques andbillsofexchange)orpromissor(incaseofpromissorynote). (vii) Theinstrumentmustbedeliveredtothepersonforwhomitismeant, afterhavingbeendrawnandsignedbythedrawer/promissor.Deliverymay beactualorconstructive.Thecreation,acceptanceandendorsementof anegotiableinstrumentgetscompletedonlyafterdelivery. (viii) Stampingoftheinstrument(promissorynoteorbillofexchange)asper theStampActoftheconcernedState,isnecessary,asanunstamped instrumentcannotbesubmittedasevidenceinacourtoflaw,ifsome disputearises;i.e.anunstampedorinadequatelystampedpromissory noteandbillofexchangecannotbeenforcedinacourtoflaw(vide section35oftheStampAct,1899). 6.3OTHERINSTRUMENTS: Inbankingtransactions,instrumentslikedemanddrafts(bankersdrafts)and travellerschequesarealsousedfrequentlybycustomersandpublic.Alltheseare issuedbybanksandaresimilartothenegotiableinstruments(i.e.cheque,orbill ofexchange,orpromissorynote)asdefinedbyNIAct.Thefeaturesofthese otherinstrumentsareasfollows: 6.3.1BankersDraftsAbankersdraft(ordemanddraft)isapaymentorder issuedbyonebranchofabankuponotherbranch,instructingthedrawee branchtopaythespecifiedsumofmoneytothespecifiedpersonortohisorder.A demanddraftisalwaysdrawn,payabletoorder.Ademanddraftresemblesabill ofexchange;theonlydifferencebeingthatintheformer,thedrawer(bank) andthedrawee(bank)aresame.ThedefinitionofbillofexchangeinNIActdoes notstatethatthedraweranddraweehavetobedifferent.Itmerelystatesabill ofexchangeshouldbesignedbythemakerandthatthedraweeshouldbea certainperson.Abankdraftcanthereforebetreatedasabillofexchangeand alsoachequesinceitispayableondemandandisdrawnonabanker. 6.3.2TravellersChequesSomebanksissuetravellerscheques,oncommission basis,toenablethepurchasers,asafesubstitutetocashwhiletheyare travelling,thusaremitigatingtheriskofloss.Travellerschequesareintheformof payorderdrawnbytheissuingbank/organisationonitself.Theyaremade

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payabletotheorderofapayee(nameleftblankatthetimeoftheissueandfilledup bytheholderwhileencashingthecheques). InUSA,travellerschequesareconsideredasnegotiableinstrumentsbecause oncetheholdercountersignsthem,theybecomenegotiablebymeredelivery.In Indiahowever,thestatusoftravellerschequesasnegotiableinstruments,has notyetbeenascertained. 6.3.3 Dividend/Interest WarrantsAdividend/interestwarrantisusedfor paymentofadividend/interestbyacompany/organizationtoapersonholding shares/bond,throughabank.Thesewarrantsareissuedonprintedformsandare akintochequesastheyaredrawnonabankandthespecifiedamountispayable tothenamedperson(s).Thewarrantcanalsobecrossedtopreventmisuse. Mostofsuchwarrantshavethevalidityperiodprintedontop(itisusually3 monthsfromthedateofissue).However,thisdoesnotaltertheircharacteras acheque. 6.4CROSSINGOFCHEQUES 6.4.1GeneralCrossingAchequeorbankdraftmaybecrossedbythedrawer/issuer andholderbysimplydrawingonitsface,twoparalleltransverselines,withor withoutthewordsnotnegotiableorandcompanyoraccountpayee.Theseare examplesofgeneralcrossingandinsuchcasesthedraweebankershallnotpayit toanyoneotherthanabanker.Suchcrossingensuresthatthechequeordraftwill bepayablenotincash,butonlythroughthebank,bycredittotheaccountofthe payee. 6.4.2SpecialCrossingAspecialcrossingconsistsofanadditionofthenameofa bankeracrossthefaceofachequewithorwithouttwoparalleltransverselines. Suchcrossingensuresthatthedraweebankshallnotpaythechequetoanyone thanthebanker/hisagent(towhomitiscrossed)forcollection.Thismeansthata speciallycrossedchequehastoberoutedthroughanaccountwiththenamedbank. 6.5ENDORSEMENTS 6.5.1 Requirements for Endorsement A negotiable instrument payable to ordercanbenegotiatedonlybyendorsementanddelivery.Endorsementis madeonthebackoftheinstrument,orbyattachingaslipofpaper(allonge)if thespaceontheinstrumentisnotenough. Followingarethemainrequirementsofendorsement: Signatureoftheendorserwith/withoutaddinganywords. Endorsementtobemadebythepayeeorbyallthepayees jointly.Astranger cannot endorse an instrument, unless he is a holder in duecourse. Endorsementtobemadefortheentireamountandnotforapart oftheamountoftheinstrument.

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6.5.2TypesofEndorsement (a) Blankendorsement:Whentheendorsersignsonlyhisnameonthebackof theinstrument,itistermedasablankendorsement.Suchanendorsed instrumentispayableonlytothebearer,eventhoughitmayhavebeen originallydrawnaspayabletotheorder.Aftersuchendorsement,the instrument can be negotiated by mere delivery without any further endorsementrequired. (b) Special endorsement or endorsement in full : When the endorsers signatureisaccompaniedbyinstructionstopaytheamountto/tothe orderofanamedperson,itistermedasaspecialendorsement.The person to whom the money is payable is known as endorsee. That endorsee can further endorse the instrument in favour of another personspecificallyinstructingtopaytothatcertainperson. (c) Restrictiveendorsement:Whenfurthernegotiationoftheinstrument,is prohibited.(e.g.theinstrumentisendorsedaspayAonly)itistermedas restrictiveendorsement.Suchanendorsementtakesawaythenego tiability of the instrument, as A cannot negotiate it further. A can, however,transferittoanagentforcollection. 6.6OTHERPROVISIONS: Apart from the aforementioned topics, it will be relevant to discuss other provisionsofNIActconcerningHolderinDueCourse,Payingbankersdutiesand Payment in Due course, in this section. A banker, needs to acquire a thoroughknowledgeofthelawandpracticeinthesematters,asmistakesinthis regardcancostdearly. 6.6.1 Holder in Due Course The payee or endorsee of a bill of exchange, promissory note, or cheque, who are entitled to their possession may be holdersofanegotiableinstrumentaspersection8ofNIAct.Inordertobea holderoftheseinstruments,thetitleorclaimofthepersonismoreimportant ratherthantheactualpossessionoftheinstrument.Thus,apersonwhohas stolenorfraudulentlyobtainedpossessionofachequecannotbetheholderof thecheque,despiteactuallypossessingit. Thetermholderinduecourse,denotesabonafideholderforvaluewithout notice.Section9ofNIActdefinesaholderinduecourseasanypersonwhofor considerationbecamethepossessorofapromissorynote,billofexchange,or chequeifpayabletobearer,orthepayeeorendorseethereof,ifpayabletoorder, before the amount mentioned therein became payable, and withouthaving sufficientcausetobelievethatanydefectexistedinthetitleoftheperson fromwhomhederivedhistitle. 6.6.2PayingBankersDutiesThePayingBankers(Drawee)dutiesarelaid downbysection31ofNIActasThedraweeofachequehavingsufficientfundsof thedrawerinhishands,properlyapplicabletothepaymentofsuchchequemust pay the cheque when duly required so to do, and, in default of such

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payment,mustcompensatethedrawerforanylossordamagecausedbysuch default. Obligation of a banker to honour a customers cheques is subject to the followingconditions: Therelationshipofbankerandcustomermustsubsist. Thebankermusthavesufficientfundsofthedrawerintheaccount. Thebankermustbeproperlyinstructedtohonourthecheque. Thefundsshouldbeproperlyapplicabletothepaymentofthecheque. The cheque must be presented at the branch where the customersaccountiskept. Thepresentmentshouldbemadeonlyduringbanking hours. Thebankerwouldbejustifiedinrefusingpaymentofacheque,if: Thechequeiscountermandedbythecustomer. Thereisagarnisheeorderattachedtotheamountofthecheque. Thebankreceivesnoticeregardinginsolvency,deathorinsanityof thecustomer. Thereisadefectinthetitleofthepresenterofthecheque. Apayingbankerwhoproperlypaysachequedrawnbyhiscustomerhasarightto debittheequivalentamountfromthecustomersaccount. 6.6.3PaymentinDueCoursePaymentinduecoursehasbeendefinedin section10ofNIAct.Itsmainfeaturesare: (i) The payment must be in accordance with the apparent tenor of the instrument: Achequeshouldnotbepaidbeforeitsduedate.Thisisprimarily importantforpostdatedcheques. Astalecheque(itsdatebeingmorethan6monthsearlier)should notpaidasperbankingpracticeinIndia,althoughthereisnolawto thiseffect. Amount of the cheque should be written in both, figures and words.Yet,iftheamountisgivenonlyinwords,thebankmaystill pay it but if the amount is written only in figures, the bank generallyreturnsit. Pencilsignatureisvalid,butnotallowedbybankersinpractice.u Paymentshouldbeofthewholeamountofthecheque.Ifthe balanceinthecustomersaccountcoversonlypartamountof thecheque,itshouldbereturned. Allalterationsonthechequehavetobedulyauthenticatedbythe drawerthroughgivingfullsignature.

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NEGOTIABLEINSTRUMENTSANDRELATEDMATTERS Ifthechequeistorn,thebankershouldnormallyreturnitforthe reasonmutilatedcheque,unlessthe drawer confirmsthe mutilationorthecollectingbankattachesacertificatethatitwas accidentallytorn. Thepayingbankerisnotconcernedwithanaccountpayeecrossing. Hisliabilityisdischargedoncehemakespaymentinduecourse.Itis theduty of the collecting banker to collect the proceeds of the cheque for the credit of the payees account, as the account payee/crossing is a direction to the collecting banker and not to thepayingbanker.

(ii) Paymentmustbemadeingoodfaith. (iii) Paymentmustbemadewithoutnegligence. (iv) Paymentmustbemadetoapersoninpossessionoftheinstrumentand thereshouldbenoapparentsuspiciouscircumstances. 6.7LETUSSUMUP: NegotiableInstrumentsAct,1881governsthelawrelatingtopromissorynotes, bills of exchange and cheques in India. The Act defines only these three instrumentsasnegotiableinstruments.However,bankersdrafts,travellers chequesalsohavefeaturesofnegotiableinstrumentsandareconsideredas quasinegotiableinstrumentsinbankingpractice. Thenegotiableinstrumentshavecertaincommonfeaturesasfollows: Ithastobeinwriting. Itmustcontainanunconditionalpromisetopayacertainsumofmoney. Thedateofpaymentmustbecertain. Thepayeemustbeacertainperson. Theinstrumentmustbearthesignatureofthedrawerorpromissor. Theinstrumentmustbedeliveredtothepersonforwhomitis meant,afterhavingbeendrawnandsignedbythe drawer/promissor. Crossingofbills,bankdraftsandchequesisoftwotypesgeneralcrossingand specialcrossing.Bycrossing,aninstrumentpaymentwouldbemadenotincashbut throughanaccountwithabank.Accountpayeecrossingrestrictsfurther transferabilityoftheinstrumentastheamountthereofhastobecreditedtothe payeesaccountonlywiththebank.Specialcrossingmakestheinstrument payablethroughthenamedbankundercrossing. Anegotiableinstrumentpayabletoordercanbenegotiatedonlybyendorse ment and delivery. Endorsement is made on the back of the instrument. Endorsementcanbeblank,orinfullorrestrictive.Eachkindofendorsementhas itsownimplicationandthepayingbankermustseewhethertheendorsements areinorder. TheprovisionsintheNIActregardingholderinduecourse,payingbankersand collectingbankersdutiesandpaymentinduecoursearealsoimportantand

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6.8.CHECKYOURPROGRESS: (A)StatewhetherthefollowingstatementsareTrueorFalse (i) ThisgeneralruleoflawappliestoNegotiableInstrumentsnoonecan givetoanotherabettertitlethanwhatonehas. (ii) ThewordsIpromisetopayBRs.1000afterdeductinganymoneythathe mayowemeisnotaPromissorynote. (iii) Itisabankingpracticetopayachequewrittenonlyinfigures. (iv) Ademanddraftisalwaysdrawnpayabletoorder. (v) Inabankersdraft,thedrawerandthedraweebankaresame. (vi) Apostdatedchequeshouldnotbepaidbeforeitsduedate. (vii) AstalechequeispaidasperbankingpracticeinIndia. (viii) Theobligationofabankertohonourchequesofacustomerissubjectto thecertainconditions. (ix) Payment in due course means that it must be made to a person in possessionoftheinstrumentbuttherearesuspiciouscircumstances. (x) Ifthechequeistorn,thepayingbankershouldnormallypayit,asitcould havebeentornaccidentally. (B)Filluptheblankswithappropriatewords: (i) TheNegotiableInstrumentActdefinesthelawrelatingto..........................., ......................and.............................................. (ii) Abillofexchangehas.............parties,whoarecalled......................(fill thespacesasperthenumberofparties). (iii) A cheque is a .................. ......... ........................... drawn on a specified ..................................... (iv) Itisthedutyofthe......................bankertocreditthepayeesaccount onrealizationofthecheque. (v) Thetermholderinduecourseisusedtodenotea............................... holderforvalue......................notice. (vi) Theamountofachequeshouldbewritten..................infigures............. words. (vii) Apostdatedchequeisonethatispresentedforpayment...........................its duedate. (viii) Astalechequeisonethatispresented..................months......................itsdate. (ix) A negotiable instrument can be transferred by ..........................., or by ......................and...........................,dependingonwhetheritispayableto thebearerororder.

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(x) Promissorynote,billofexchangeandchequehave............., ......................and..................partiesrespectively. 6.9TERMINALQUESTIONS (i) Preciselydescribethecommoncharacteristicfeaturesofnegotiable instruments. (ii) Distinguishbetween: u Chequeandbillofexchange, u Chequeandbankersdraft, u Chequeandtravellerscheque. (iii) Explainthemeaningofholderinduecourse. (iv) Mentiontheingredientsofpaymentinduecourse. (v) Distinguishbetweengeneralandspecialcrossingsandgiveexamplesof both. (vi) ExplainthedutiesofaPayingbanker. 6.10ANSWERSTOCHECKYOURPROGRESS (A) (i) False (ii) True (iii) False (iv) True (v) True (vi) True (vii) False (viii) True (ix) False (x) False (B) (i) Promissorynotebillofexchangecheque. (ii) Threedrawerdraweepayee (iii) Billofexchangebank (iv) Collecting (v) Bonafidewithout (vi) Bothand

NEGOTIABLEINSTRUMENTSANDRELATEDMATTERS (vii) Before (viii) Sixafter (ix) Deliveryendorsementdelivery (x) Twothreethree

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