Third-year Law Notes & Flashcards

INTRODUCTION

Negotiable instruments play a vital role in modern commercial transactions by facilitating the smooth transfer of money and credit in business dealings. They provide a secure and reliable method of payment and help in reducing the risks associated with carrying cash. These instruments are widely used in trade and finance because they can be easily transferred from one person to another and the holder has the right to claim the amount mentioned in the instrument.

In India, negotiable instruments are governed by the Negotiable Instruments Act, 1881, which lays down the legal framework relating to their creation, transfer, and enforcement. The Act defines various types of negotiable instruments such as promissory notes, bills of exchange, and cheques, and prescribes the rights and liabilities of the parties involved. It also establishes certain legal presumptions that ensure certainty and reliability in commercial transactions.

The Negotiable Instruments Act was enacted, in India, in 1881. Prior to its enactment, the provision of the English Negotiable Instrument Act were applicable in India, and the present Act is also based on the English Act with certain modifications. It extends to the whole of India except the State of Jammu and Kashmir. The Act operates subject to the provisions of Sections 31 and 32 of the Reserve Bank of India Act, 1934. Section 31 of the Reserve Bank of India Act provides that no person in India other than the Bank or as expressly authorised by this Act, the Central Government shall draw, accept, make or issue any bill of exchange, hundi, promissory note or engagement for the payment of money payable to bearer on demand. This Section further provides that no one except the RBI or the Central Government can make or issue a promissory note expressed to be payable or demand or after a certain time. Section 32 of the Reserve Bank of India Act makes issue of such bills or notes punishable with fine which may extend to the amount of the instrument. The effect or the consequences of these provisions are:

• A promissory note cannot be made payable to the bearer, no matter whether it is payable on demand or after a certain time.
• A bill of exchange cannot be made payable to the bearer on demand though it can be made payable to the bearer after a certain time.
• But a cheque {though a bill of exchange} payable to bearer or demand can be drawn on a person's account with a banker.

MEANING OF NEGOTIABLE INSTRUMENTS

According to Section 13 (a) of the Act, “Negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer, whether the word “order” or “ bearer” appear on the instrument or not."

In the words of Justice, Willis, “A negotiable instrument is one, the property in which is acquired by anyone who takes it bonafide and for value notwithstanding any defects of the title in the person from whom he took it".

Thus, the term, negotiable instrument means a written document which creates a right in favour of some person and which is freely transferable. Although the Act mentions only these three instruments (such as a promissory note, a bill of exchange and cheque), it does not exclude the possibility of adding any other instrument which satisfies the following two conditions of negotiability:

• the instrument should be freely transferable (by delivery or by endorsement. and delivery) by the custom of the trade; and
• the person who obtains it in good faith and for value should get it free from all defects, and be entitled to recover the money of the instrument in his own name.

As such, documents like share warrants payable to bearer, debentures payable to bearer and dividend warrants are negotiable instruments. But the money orders and postal orders, deposit receipts, share certificates, bill of lading, dock warrant, etc. are not negotiable instruments. Although they are transferable by delivery and endorsements, yet they are not able to give better title to the bonafide transferee for value than what the transferor has.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

A negotiable instrument has the following characteristics:

Property: The possessor of the negotiable instrument is presumed to be the owner of the property contained therein. A negotiable instrument does not merely give possession of the instrument but right to property also. The property in a negotiable instrument can be transferred without any formality. In the case of bearer instrument, the property passes by mere delivery to the transferee. In the case of an order instrument, endorsement and delivery are required for the transfer of property.

Title: The transferee of a negotiable instrument is known as 'holder in due course.' A bona fide transferee for value is not affected by any defect of title on the part of the transferor or of any of the previous holders of the instrument.

Rights: The transferee of the negotiable instrument can sue in his own name, in case of dishonour. A negotiable instrument can be transferred any number of times till it is at maturity. The holder of the instrument need not give notice of transfer to the party liable on the instrument to pay.

Presumptions: Certain presumptions apply to all negotiable instruments e.g., a presumption that consideration has been paid under it. It is not necessary to write in a promissory note the words 'for value received' or similar expressions because the payment of consideration is presumed. The words are usually included to create additional evidence of consideration.

Prompt payment: A negotiable instrument enables the holder to expect prompt payment because a dishonour means the ruin of the credit of all persons who are parties to the instrument.

PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENT

Sections 118 and 119 of the Negotiable Instrument Act lay down certain presumptions which the court presumes in regard to negotiable instruments. In other words these presumptions need not be proved as they are presumed to exist in every negotiable instrument. Until the contrary is proved the following presumptions shall be made in case of all negotiable instruments:

• Consideration: It shall be presumed that every negotiable instrument was made drawn, accepted or endorsed for consideration.
• Date: Where a negotiable instrument is dated, the presumption is that it has been made or drawn on such date, unless the contrary is proved.
• Time of acceptance: Every accepted bill of exchange is presumed to have been accepted within a reasonable time after its issue and before its maturity.
• Time of transfer: It shall be presumed that every transfer of a negotiable instrument was made before its maturity.
• Order of endorsement: It shall be presumed that the endorsements appearing upon a negotiable instrument were made in the order in which they appear thereon.
• Stamp: It shall be presumed that a lost promissory note, bill of exchange or cheque was duly stamped.
• Holder in due course: It shall be presumed that the holder of a negotiable instrument is the holder in due course.
• Proof of protest: Section 119 provides that the court shall presume the fact of dishonour upon proof of protest.

TYPES OF NEGOTIABLE INSTRUMENT

Section 13 of the Negotiable Instruments Act states that a negotiable instrument is a promissory note, bill of exchange or a cheque payable either to order or to bearer.

Negotiable instruments recognised by statute are:

• (i) Promissory notes
• (ii) Bills of exchange
• (iii) Cheques

Negotiable instruments recognised by usage or custom are:

• (i) Hundis
• (ii) Share warrants
• (iii) Dividend warrants
• (iv) Bankers draft
• (v) Circular notes
• (vi) Bearer debentures
• (vii) Debentures of Bombay Port Trust
• (viii) Railway receipts
• (ix) Delivery orders

PROMISSORY NOTES

Section 4 of the Act defines, “A promissory note is an instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to or to the order of a certain person, or to the bearer of the instrument.”

Essential Elements

• It must be in writing
• It must contain an express promise to pay
• The promise must be unconditional
• It should be signed by the maker
• The maker must be certain
• The payee must be certain
• The promise should be to pay money and money only
• The amount should be certain
• Other formalities such as date or place are not essential

BILL OF EXCHANGE

Section 5 of the Act defines, “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”.

There are usually three parties to a bill of exchange:

• Drawer
• Drawee / Acceptor
• Payee

Essential Conditions

• It must be in writing
• It must be signed by the drawer
• The parties must be certain
• The amount must be certain
• It should be properly stamped
• It must contain an order to pay money
• The order must be unconditional

DISTINCTION BETWEEN BILL OF EXCHANGE AND PROMISSORY NOTE

• A promissory note has two parties; a bill of exchange has three parties.
• A promissory note cannot be payable to the maker himself; a bill may be payable to the drawer.
• A promissory note contains a promise; a bill contains an order to pay.
• A bill requires acceptance in some cases; a promissory note does not.
• Liability in a promissory note is primary; in a bill it is secondary.
• Relationship of parties differs.
• Foreign bills require protest for dishonour; promissory notes do not.
• Notice of dishonour is required in bills but not necessary in promissory notes.

CHEQUES

Section 6 of the Act defines, “A cheque is a bill of exchange drawn on a specified banker, and not expressed to be payable otherwise than on demand".

A cheque is therefore a special type of bill of exchange which is always drawn on a banker and payable on demand.

DISTINCTION BETWEEN BILL OF EXCHANGE AND CHEQUE

• A bill may be drawn on any person; a cheque is always drawn on a bank.
• A bill requires acceptance; a cheque does not.
• A bill may be payable after a certain period; a cheque is always payable on demand.
• Three days grace applies to bills but not to cheques.
• Delay in presentment affects liability differently.
• Notice of dishonour is necessary for bills but not for cheques.
• Cheques may be crossed.
• Bills require stamping; cheques do not.
• Bills cannot be payable to bearer on demand but cheques can be.
• Payment of a cheque can be countermanded by the drawer.

CONCLUSION

Negotiable instruments are an essential component of commercial and financial transactions as they facilitate the easy transfer of money and credit. The Negotiable Instruments Act, 1881 provides a comprehensive legal framework governing these instruments and ensures certainty, reliability, and security in business dealings. Promissory notes, bills of exchange, and cheques serve as important tools for trade and banking operations. Their negotiability, legal presumptions, and clear rules regarding rights and liabilities of parties help promote trust and efficiency in financial transactions. As commerce continues to evolve, negotiable instruments will remain a significant mechanism for ensuring smooth and reliable monetary exchanges in both domestic and international trade.

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