unit 3 negotiable instruments

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Unit- 3 Negotiable instruments Negotiable instruments It means a written document which creates a right in favour of some person and which is freely transferable. Def of Justice Willis: a negotiable instrument is “one in which the property is acquired by any one who takes it bonafide and for value notwithstanding any defects of title in the person from whom he took it.” Free negotiability is an important characteristic of a negotiable instrument. Section 13 of the negotiable act: a negotiable instrument means “promissory note, bill of exchange or cheque, payable either to order or to bearer, whether the words “order” or “bearer” appear on the instrument or not.” 1

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Essential characteristics of negotiable instrument Negotiability Title Recovery Presumptions Presumptions of negotiable instrument That every negotiable instrument was drawn, accepted and endorsed, made or transferred for consideration. That the date it bears is the date on which it was made. That it was accepted with in a reasonable time after being made and before maturity. That every transaction was made before maturity. That the endorsements were made in the same order in which they appear. That the lost instrument was duly signed and stamped. 2

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Essential characteristics it must be in writing it must be singed by the drawer the drawer, drawer and payee must be certain the sum payable must also be certain it should be properly stamped it must contain an express order to pay money and money alone the order must be unconditional Bills of exchange Def: a bill of exchange is an instrument in writing containing an unconditional order, signed by the marker, directing a certain person to pay a certain sum of money only to, or the order of, a certain person or to the bearer of the instrument. 3

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4 Specimens of bill of exchange Mumbai, Date : 1st march, 2007. Rs. 5,000.00 Sixty days after date pay to ABC or order the sum of five thousand rupees only for value received. To PQR, Lentin Road, Mumbai. Signed XYZ Here XYZ is the “drawer” PQR is the “drawee” and ABC is the “payee.”

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Def : A bill of exchange drawn on a specified banker and not expressed to be payable. Cheque Cheques have the three additional qualifications It is always drawn on a specified banker It is always payable on demand It includes the electronic image of a truncated cheque and also a cheque in the electronic form 5

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6 Specimens of a cheque Date: 1st march, 2007. PAY A B C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . .. . . . . . . . . . . .. . .. . . . . OR BEARER RUPEES Five Thousand Only A/C No. THE BANK OF INDIA MUMBAI Rs. 5000.00 Sd./- XYZ “340218” 400013020 11

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Promissory note Essential characteristics of promissory note It is an instrument in writing It is a promise to pay The undertaking to pay is unconditional It should be signed by 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 Def: A promissory note is an instrument in writing containing an unconditional undertaking signed by the marker, to pay a certain sum of money only to, or to the order of a certain person, or to the bearer of the instrument. 7

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8 Rs. 5,000.00 On demand I promise to pay ABC, the sum of Rs.5,000(Rupees five thousand) only with interest at 9 percent per annum for the value received. Place: Bombay. Date: 1st march, 2007 XYZ Specimens of promissory note

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Difference between a bill of exchange and promissory note number of parties “promise” and “order” Acceptance Nature of liability Maker’s position Formalities in case of dishonor Notice to prior parties protest Copies 9

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Difference between bill of exchange and a cheque A bill of exchange is usually on some person or firm, while a cheque is always drawn from on bank. Drawer cannot hold the drawer liable on bill of exchange unless the latte has accepted it. It is essential that a bill of exchange must be accepted before its payment can be claimed. A cheque does not require any such acceptance. A cheque is always payable on demand. A bill of exchange may be payable on demand or on the expiry of a fixed period. A cheque is payable immediately on demand without any days of grace but in the case of a time bill of exchange, three days of grace are allowed from the date within which the payment can be made. A bill of exchange must be property stamped. A cheque does not require any stamp. A cheque drawn to the bearer payable on demand shall be valid, but a bill payable on demand can never be drawn to the bearer. Unlike bill of exchange, cheques usually are not intended for circulation but for immediate payment. Unlike cheques, the payment of bill cannot be countermanded by the drawer. 10

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Bank draft or demand draft It is drawn by a banker upon another banker It cannot be made payable to bearer Its payment cannot ordinarily be stopped or countermanded It is always payable on demand 11

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Payment in due course These conditions may briefly be explained as follows: Payment must be in accordance with the apparent tenor of the instrument Payment in order to be payment in due course must be in all good faith The drawer must not be guilty of any negligence in making the payment Payment in due course must be made to a person who has the actual position of the instrument Payment should not be made under circumstances which afford a reasonable ground for believing that the person was entitled to received the amount mentioned in the instrument. 12

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Types of Endorsements There are seven kinds of endorsement Indorsement in blank Indorsement in full Partial Indorsement Conditional or qualified Indorsement Restrictive Indorsement Facultative Indorsement Forged Indorsement 13

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1. Indorsement in blank If the indorser signs his name only, the Indorsement is said to be ‘in bank’. A blank Indorsement is also called ‘general endorsement’. The name of indorser is left blank. Specimens of Indorsement in blank Henry Brown. Thomson Robinson. Jonathan George. 14

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2.Indorsement in full If the indorser signs his name and adds a direction to pay the amount mentioned in the instrument to, or to the order of a specified person, the Indorsement is said to be ‘in full’. The specified person is called the ‘indorsee’ of the instrument. Specimens of Indorsement in full Pay to Thomson Robinson or order James Richardson. Pay to George French James Phillips. Pay to Jonathan George George French 15

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3.Partial Indorsement No writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to transfer only a part of the amount to be due on the instrument. 4.Conditional or qualified Indorsement The indorser of a negotiable instrument may, by express words in the Indorsement, exclude his own liability thereon, or make such liability or the right of indorsee to receive the amount due thereon dependent upon the happening of a specified event, although such event may never happen. 16

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5.Restrictive Indorsement Restrictive Indorsement prohibits or restricts further negotiation of an instrument. The effects of restrictive Indorsement can be summarized as under : It prohibits further negotiation, It may constitute indorse agent to: Receive its contents for the indorser; Receive its contents for some other specified person. 17

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6.Facultative Indorsement When the indorser abandons some right or increase his liability under an instrument, the indorser is called “facultative”. For example the indorser may by an Indorsement waive notice of dishonor as given in the illustration below: illustration: pay A or order. Notice of dishonor waived. 7.Forged Indorsement Forgery is nullity. Where an instrument is negotiable by a forged Indorsement, no person can acquire the rights of a holder in due course, even if he has obtained instrument for value and in good faith. 18

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Holder – Holder in due course Holder in due course Holder in due course means any person who for consideration became the possessor of a promissory note, bill of exchange, or cheque, if payable, to bearer, or the payee or indorsee thereof, if payable to order, before the amount mentioned In it became payable, and without having sufficient cause to believe that any defect existed in the of the person from whom he derived his title. A person is a holder in due course when he proves that Consideration Before maturity Good faith 19

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Rights or privileges of a holder in due course Holder in due course acquiring the instrument for consideration and in good faith gets the following rights under the Act: Holder in due course can file a suit in his own name against the parties liable to pay. He is deemed prima facie to be a holder in due course. Every prior party to the instrument is liable to a holder in due course until the instrument is duly satisfied. The other parties liable to pay cannot plead that the delivery of the instrument was conditional or for a specific purpose only. Even if the negotiable instrument is made without consideration, if it gets into the hands of the holder in due course, he can recover the means of a forged Indorsement. The person liable cannot plead against the holder in due course that the instrument had been lost or was obtained by means of an offence or fraud or for an unlawful considerations. 20

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Holder driving title from holder in due course A holder of a negotiable instrument who derives title from a holder in due course has the rights thereon of that holder in due course. The law presumes that every holder in due course until the contrary is provided. Liability of prior parties to holder in due course Every priority party to a negotiable instrument is liable thereon to holder in due course until the instrument is duly satisfied. 21

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Discharge of parties Discharge of instrument and discharge of parties from liability is not same. Parties may be discharged from liability on a negotiable instrument in any of the following ways: By payment By cancellation By release By default of the holder By material alteration By holder destroying indorser remedy Draft indorsed by payee Discharge of drawee of cheque By operation of law 22

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1.By payment When the maker, acceptor or indorser makes payment on an instrument in due course to the person entitled to receive payment in advance with the apparent tenor of instrument in good faith and without negligence, discharges the parties to the instrument. 2.By cancellation When the holder or his agent cancels or strikes out the name of the acceptor or indorser with intention to discharge him, such party is discharged from liability to the holder and to all subsequent parties. Cancellation by mistake does not discharge the party. It must be intentional. Cancellation must be legible and apparent on the face of the instrument. 23

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3.By release Where the holder discharges or releases the maker, acceptor or indorser, such party receiving notice of discharged to the holder and to all subsequent parties. Holder may, there fore discharge any one of the parties by agreement, renunciation or by accord and satisfaction. 4.By default of the holder The parties to the instrument are discharged when the following defaults are committed by the holder. Allowing drawee more than 48 hours Parties not consenting to qualified or limited acceptance Delay in presentment of cheque and drawer damaged thereby Delay in presentment for payment Failure to give notice of dishonor 24

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5.By material alteration Material alteration without consent of the other parties thereto renders the alteration void and discharges the parties to the instrument because by alternation the identity of the instrument is destroyed. Accidental alteration does not render a document invalid. Instances of material alteration The following alterations are material are material alterations which will make the instrument void: Altering the date of the instrument Altering the amount payable on the instrument Altering the time or place of payment Addition of place of payment without acceptors assent. 25

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6.By holder destroying indorser remedy: Where the holder of a negotiable instrument, without consent of the indorser, destroys or impairs the endorser's remedy against a prior party, the indorser is discharged from liability to the holder, to the same extent as if the instrument had been paid at maturity. 7.Draft indorsed by payee Drafts are drawn by one branch of a bank upon its another branch. The account of the customer is debited and the amount is transferred to another branch of bank on which the draft is drawn. When payment is made by the branch office of the bank upon which it is drawn, to the person endorsed by the payee, the bank is discharged. 26

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8.Discharge of drawee of a cheque Where a cheque is a payable to order, the drawee is discharged by payment in due course. Where cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof. 9.By operation of law Parties to the instrument are also discharged by operation of law under the following circumstances: By an order of the insolvency court discharging the insolvent. When debt under the bill is merged into the judgment debt. By remedy becoming time-barred. 27

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