Business laws-Negotiable instruments act 1881-MBA Study Material

The Negotiable Instruments act 1881
Ex     -- promissory note
        Bill of exchange
NEGOTIABLE:- Freely transferable/exchangeable with consideration
INSTRUMENT:- Document in a written form
          Transferor                                        Transferee
                                      Good faith
                There are certain documents which can be freely used in commercial transactions and monetary dealings. These documents are known as negotiable means freely transferable (or)easily exchangeable from one person to another person in relation for consideration . Instruments means a written document by which a right is created in favor of some persons. Thus negotiable instrument means a document which can be transferable from one person to another which entitles the person to some of money by mere delivery.
                This act 1881 recognises only the 3 instruments those are
1.       Promissory note
2.       Bills of exchange
3.       Cheque
Postal orders, fixed deposit certificates, shares certificate are not at all negotiable instrument.
Character of N.I’s:
The NI’s possess the following characters. Those
1.       Easy transferability/Exchangeability
2.       Title
3.       Right to file a suit
4.       Consideration
5.       Date
6.       Contract
7.       Rule of evidence
8.       Exchange
1.Easy transfer ability:
          Transferor                                                 Transferee
                                      --good faith
                                      --Promissory note
                                      --Bill of exchange
                      “Holder in due course”
The property in a N.I’s passes to one party to another by delivery. The property can be transferred without any formalities.
            In the above diagram the transferor is transfer his right to the transferee in good faith and for consideration. The right may be in the form of property. The concept is known as “holder in due course”
            Title means the legal right to ownership of the property the transferee gets the legal right to ownership of property. This is known as title of the instrument.
3.Right to file or suit:
             The transferee i.e the holder in due course is entitled to sue on the instrument in his own name.
4. Consideration:                                                                                                                     Every N.I has been made, accepted, endorsed, transferred, for consideration.
5. Date:
            Every N.I shall have a date assuming that it has been made (or)drawn on such date.
6. Contract:
            A  N.I passes all the characteristics of a contract.
7.Rule of evidence:
            These instruments are in writing and signed by the party. There are used as evidence of the fact.
8. Exchange:
            These instruments relate to payment of certain money. There are considered as substitution for many.
Kinds of negotiable instruments:
            The N.I act mentions only three kinds of instruments those are viz.
promissory note
Bill of exchange
These instruments are also known are “negotiable by statute”
Promissory note:
            Promissory note is a promise made by one person in writing to pay a certain some of money. A particular, specified person who is the bearer of the instrument.
It is a well known an familiar instrument covered the N.I act.
Parties to a promissory note:
There are two parties in a promissory note those a
1.       Maker
2.       Payee
The person who makes the promissory note, who the promise to pay is called maker the person to whom the payment has to be made is called the payee.

Essential elements of a promissory note:
1.       Instrument in writing
2.       Promise to pay
3.       Definite and unconditional promise
4.       Signed by the maker
5.       Certain parties
6.       Certain sum of money
7.       Promise to pay money only
8.       Legal formalities
9.       Necessary stamp duty
Instrument in writing:
            The instrument must be in writing. Mere verbal agreement is not a promissory note. Writing includes print type writing and also writing by hand in ink.
Promise to pay:
          The instrument must contain an express promise to pay
Ex : 
 I , Vamsinath promise to pay  Y. Srinivas a sum of  Rs10000/-
ok     (ten thousand rupees only) after three months

Not       i) I Vamseenath liable to pay.
ok        ii) I Vamseenath bound to pay.

Definite and unconditional promise:
            The promise to pay must be definite and unconditional. Indefinite and conditional promises in makes the instruments invalid.
Ex :                                                                             date______
I  Vamseenath promise to pay
Condition  - when convent
                        - when my grandfather had over the property
                        -when i have enough money
                        -when my sister’s marriage done

Signed by the maker:
            The instrument must be signed by the maker even if it is written by the maker himself and his name appear in the body of the instrument, his signature there. With out the signature of maker is the Promissory note is invalid.

Certain parties:
     The instrument must point out with certainty who is the maker ?  
Who is the payee?
            Maker and payee shall be clearly identify with certainty.
Bill of exchange:
            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 of money only to a certain person.

Parties to a bill of exchange:
            There are three parties in a bill of exchange these are
1.       DRAWER
2.       DRAWEE
3.       PAYEE
The person who makes the bill and who gives the order is called the DRAWER.
The person who is direct to pay is called DRAWEE
The person to whom the payment is to be made is called the PAYEE.
The payee who is in possession of the bill is called HIDE(Holder In Due Course)
Ex : Durga Prasad of Delhi buys goods on credit from Mahesh  of Mumbai for Rs 500000/- which is to be paid 3months after the date. Mahesh buys goods from Murali of Delhi Rs 500000/- on similar terms. Now Mahesh may order Durga prasd to pay some of Rs 5lakhs to Murali. This order will be a bill of exchange.
            Drawer --  Mahesh
            Drawee -- Durga Prasad
            Payee    -- Murali
Essential elements of Bill of exchange:
1.       It must be in writing
2.       It must contain an order to pay. No promises, no request will be identified in bills of exchange.
3.       The order must be unconditional
4.       It requires three parties. Those are Drawer, Drawee, payee
5.       The parties must be certain
6.       It must be signed by the DRAWER
7.       The some payable must be certain
8.       It must contain an order to pay money only
9.       The legal formalities relating to number, date, place consideration are necessary in bill of exchange
10.A bill must be affixed with the necessary stamp under the Indian stamps act 1889.
A cheque is an order by the customer of a bank, directly his banker to pay the specified amount an demand to the person whose name their in or to the barer of the cheque.
            A cheque is also bill of exchange is also bill of exchange. It must have all the essential features of a bill of exchange.
Parties to a cheque:
            There are three parties to a cheque those are
1.       Drawer (Maker)
2.       Drawee
3.       Payee
The customer who makes the cheque, who signs on the cheque is called maker or drawer.
The bank on whom the cheque is drawn is called drawee
 The person to whom the cheque is payable is called the payee.

Characteristics of a cheque:
1.       Instrument in writing
2.       Unconditional order
3.       Drawn on a specified banker
4.       Order for payment of certain sum
5.       Payee to be certain
6.       Payable on demand
7.       Date
8.       Stamp duty

Instrument in writing:
            A cheque must be in writing. Oral order not treated as cheque. A cheque may be with a pen, pencil, type writer, printed characters.

Unconditional order:
            A cheque must contain an unconditional order. It is not necessary to use the word order.

Drawn on a specified banker:
            A cheque should be drawn on a specified banker. Usually bank supply cheque books to their customer the cheque contain the name of the bank place of the branch also.

Order for payment of certain sum:
            The order must be only for the payment of money. The money is to be specified. A banker should not be asked to do some thing else be sides payment of money on the cheque.

Payee to be certain:
            The person to whom the amount is to be paid must be certain. The payee need not be human beings but also legal persons like corporate bodies, local authorities, clubs, institutions, associations.

Payable on demand:
            The amount mention in the cheque must be payable on demand only when the drawer(customer) asks the banker(drawee) to pay the instrument is said to be payable on demand.

            A cheque shall bear the date. A cheque without a date is an invalid instrument.

Stamp duty :
            No stamp is required to be affixed on cheques.

Practise to a negotiable instrument
Capacity of parties:
            According to section (11) of the Indian contract act 1972, every person is competent to contract who is the age of majority
      Who has the sound mind
      Who is competent
      Who shall not be insolvent
      Who shall not be convicted
      Who shall not be fraudulent
      Who shall not be lunatic

A person competent to participant to a contract can be a parity to a negotiable instrument. Since a negotiable instrument is also a contract. The sec(11) will be applicable to negotiable instruments also
            The following also can become parties to a contract those are
1.       Corporations
2.       Agents
3.       Partners
4.       Hindu joint family  “KARTA” (HUF- Hindu Under did family)
5.       Legal representatives

Parties to a negotiable instrument:
1.       Parties to a promissory not     Maker, payee
2.       Parties to a Bill of exchange   Drawer, Drawee, Payee
3.       Parties to a cheque                   Drawer(maker),drawee, payee
4.       Parties to a N.I (or)endorsement endorser, endorse
Endorsement (endorsement):
            Endorsement means declaring his or her approval. In ite literal sense. The term endorsement means writing on an instrument.
            In its technical sense. According to negotiable instrument act. It means te writing  of a purpose name (other than the maker) on the face of a negotiable instrument, on the back side of a negotiable instrument, slip of paper, annexed for the purpose of negotiation.
                       Right                                        Right
Transferor                              Transferee                           Third party
                   -Back side
                   -separate paper
When a promissory note bill of exchange cheque is transferred any person, the third person becomes holder in due course(HIDC). The instrument is said to be negotiated by negotiation, the third party is put  in the possession of the instrument and is also made holder in due course.
If the person wants to transfer his right to another, he must sign the instrument on the face of the instrument (or) on the back side of the instrument (or) on the separate slip of paper (alonge). The person who signs the instrument is known as endorser. The person to whom the instrument is endorsed is called endorse.
Essential of a void endorsement:
1.       The endorsement must be on the instrument itself (face, back side, alonge)
2.       It must be signed by the endorser (transferee) for the purpose of negotiation without any additional words is sufficient.
3.       It may be made by the endorser
4.       It must be completed by the delivery of the instrument.

Effect of Endorsement:
 The instrument is endorsed and delivered with an intention to transfer the property in the instrument from endorser to endorse.
Transfer of further negotiation will be acquired by the endorse
Right of action will be given to the endorse

          Hence there are four steps in any instrument.
Those are
Making of the instrument
Acceptance of the instrument
Endorsement of the instrument
Delivery of the instrument