Chapter 10: Miscellaneous Laws & Acts

Miscellaneous Laws & Acts

Negotiable Instruments Act, 1881

–     The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881. It is an Act to define and amend the law relating to promissory notes, bills of exchange and Cheques.

–     The term “negotiable instrument” means a document transferable from one person to another.

–     According to this definition the following are the conditions of negotiability:

•     The instrument should be freely transferable. An instrument cannot be negotiable unless it is such and in such state that the true owner could transfer by simple delivery or endorsement and delivery.

•     The person who takes it for value and in good faith is not affected by the defect in the title of the transferor.

•     Such a person can sue upon the instrument in his own name.

–     The Act recognizes only three kinds of negotiable instruments under Section 13 but it does not exclude any other negotiable instrument provided the instrument entitles a person to a sum of money and is transferable by delivery.

•     Promissory Notes

•     Bills of Exchange

•     Cheques

–     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 only to bearer of the instrument.

–     To be a promissory note, an instrument must possess the following essentials:

•     be in writing

•     contain an express promise

•     undertaking to pay must be unconditional

•     maker must sign the promissory note

•     maker

•     payee must be certain

•     sum payable must be certain

•     be properly stamped in accordance with the provisions of the Indian Stamp Act.

–     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.

–     Bills of exchange were originally used for payment of debts by traders residing in one country to another country with a view to avoid transmission of coin. Now-a-days they are used more as trade bills both in connection with domestic trade and foreign trade and are called inland bills and foreign bills respectively.

–     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

GLOSSARY

Negotiable Instrument - “Negotiable instrument” means a document transferable from one person to another. However the Act has not defined the term. It merely says that “A negotiable instrument” means a promissory note, bill of exchange or Cheque payable either to order or to bearer.

Inland Instruments- A promissory note, bill of exchange or cheque drawn or made in India, and made payable, or drawn upon any person, resident in India shall be deemed to be an inland instrument

Foreign Instruments- An instrument which is not an inland instrument, is deemed to be a foreign instrument. it must be drawn outside India

Inchoate or Incomplete Instrument - When one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments, and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as the case may be, upon it a negotiable instrument, for any amount specified therein, and not exceeding the amount, covered by the stamp.

Trade Bill- A bill drawn and accepted for a genuine trade transaction is termed as a trade bill.

Accommodation Bill- All bills are not genuine trade bills, as they are often drawn for accommodating a party. Accommodation bill is a bill in which a person lends or gives his name to oblige a friend or some person whom he knows or otherwise.

Collecting Banker- Collecting Banker is one who collects the proceeds of a cheque for a customer.

Endorser- Person who, by signing a negotiable instrument, transfers the title of the instrument (or the property named therein) to another.

Holder- A person is a holder of a negotiable instrument who is entitled in his own name (i) to the possession of the instrument, and (ii) to recover or receive its amount from the parties thereto.

Holder in Due Course- A holder in due course is-

(i) a person who for consideration, obtains possession of a negotiable instrument if payable to bearer, or

(ii) the payee or endorsee thereof, if payable to order, before its maturity and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

Hundis- Hundis are negotiable instruments written in an oriental language. They are sometimes bills of exchange and sometimes promissory notes, and are not covered under the Negotiable Instruments Act, 1881.