B.Com 1st Year Negotiable Instrument Act 1881 Short Notes
B.Com 1st Year Negotiable Instrument Act 1881 Short Notes :- In this post is very useful for BCOM Students you will get full information related to Definition of negotiable instruments; Features; Promissory note; Bill of exchange and cheque; Holder and holder in the due course; Crossing of a cheque, types of crossing; Negotiation; Dishonour and Discharge of negotiable instrument. Study Material Notes available.
Short Answer Questions
Q.1. What do you mean by negotiable instrument?
Or Define the term ‘Negotiable instrument’. Explain the characteristics of a negotiable instrument.
Or Define a negotiable instrument. Can a promissory note be made payable to bearer?
Ans. Negotiable Instrument: The word ‘negotiable’ means ‘transferable from one person to another in return for consideration’ and ‘instrument means ‘a written document by which a right is created in favour of some person. Thus, a negotiable instrument is a document which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or by endorsement and delivery.
The term ‘negotiable instrument’ as such is not defined in the Negotiable Instrument Act, 1881. Section 13, however provides that a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.
Characteristics of a Negotiable Instrument
Following are the characteristics of a negotiable instrument:
1. Freely Transferable: The property in a negotiable instrument passes from one person to another by delivery, if the instrument is payable to bearer, and by endorsement and delivery if it is payable to order.
2. Title of Holder Free from All Defects: A person taking an instrument bonafide and for value gets the instrument free from all defects in the title of the transferer. He is not in any way affected by any defect in the title of the transferer or of any prior party.
3. Presumptions: It is presumed by law that every negotiable instrument is made or drawn for a consideration. But it is not an irrebuttable presumption. It must be reputed by proof that the instrument had been obtained from its lawful owner by means of fraud, undue influence or for an unlawful consideration. The onus of proof is on the person who challenges the existence of consideration.
4. Recovery: A person taking an instrument bonafide and for value can sue upon a negotiable instrument in his own name for the recovery of the amount.
Condition of Payment of Promissory Note
A promissory note, bill of exchange or cheque is payable to bearer if either of the following two conditions are fulfilled:
1. It must expressed to be so payable, or
2. The only or last endorsement must be an endorsement in blank.
1. A promissory note cannot be made payable to the bearer.
2. A bill of exchange cannot be made payable to bearer on demand. [Section 31 of the Reserve Bank of India Act, 1934.
3. A bearer instrument can be transferred by mere delivery. (2015)
Q.2. Write a note on ‘Bill of exchange’.
Ans. Bill of exchange is an instrument in writing containing an unconditional order that is 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. Bill of exchange is also called a draft.
It may be made payable to bearer on demand and cannot be made payable to bearer on demand as Section 31 of RBI prohibits the issue of such bills of exchange.
Characteristics: The characteristics of bill of exchange are as follows:
1. It must be in writing.
2. There must be an order to pay.
3. A bill must indicate a drawee who should be called upon to accept or pay it.
4. The drawee must sign the instrument.
5. The sum must be certain and the medium of payment must be money and money only.
6. For validity, it must be duly stamped as per the Indian Stamp Act. Important Points for Writing a Bill of Exchange: The following points should be kept in mind:
1. The place of drawing is written at the top in the right hand corner of the bill.
2. The date is written right below the place of drawing in the right hand corner of the bill.
3. Amount is mentioned both in figures as well as in words.
4. The stamp is affixed in the left hand corner of the bill right below the place where the amount is mentioned in figures.
5. Period of the bill means the duration after the expiry of which the bill becomes payable to the drawer and is mentioned in the main part of bill.
6. For value received means goods or services that have already been received for the value of the bill and is included at the end of main part of bill.
7. The drawer signs his name on the bottom right hand corner of the bill.
Q.3. Differentiate between bill of exchange and promissory note.(2014)
Ans. Difference between Bill of Exchange and Promissory Note
1. A bill of exchange is drawn by the creditor while a promissory note is made by the debtor.
2. A bill of exchange is an order to pay while a promissory note is a promise to pay.
3. Acceptance by the drawer is necessary in case of a bill of exchange but a promissory note does
not need to be accepted.
4. The drawer, acceptor and the payee are the three parties to a bill of exchange but there are two parties to a promissory note–the maker and the payee.
5. The drawer and the payee of a bill of exchange may be the same person but in case of a promissory note, they are not the same person.
6. Three copies are made in case of a foreign bill of exchange but only one copy is made in case of a foreign promissory note.
7. The acceptors of a bill of exchange have a joint liability but in case of a promissory note, the makers are jointly and severally liable.
8. A bill payable at sight need not be stamped but a promissory note payable at sight needs to be stamped.
9. The drawer is liable in case of non-payment of a bill whereas the maker of a promissory note is always liable for the same.
10. Any other person may make the payment in case same is not possible in case of a promissory note.
11. A noting is necessary in case a bill of exchange is dishonoured while as such is not necessary in case a promissory note is dishonoured.
Q.4. What are the different kinds of bills of exchange?
Ans. Bills of exchange are mainly of the following types:
1. Inland Bill: It is one which is drawn by a businessman for acceptance by another businessman of the same country.
2. Foreign Bill: Bill of exchange in which the drawer and the acceptor live in different countries is foreign bill and is used mainly in the course of foreign trade.
3. Accommodation Bill: These are the bills drawn without any actual consideration to help friends and relatives.
4. Inchoate Bill: It is a bill in which, when any person signs, stamps and delivers a totally blank bill to another person that is only partly filled up and authorises such person to fill up the remaining part of the bill.
5. Undated Bill: The bill in which the holder of an undated instrument bonafide enters a wrong date or the date will be considered as correct as long as all other legal formalities have been complied with.
6. Ambiguous Bill: If an instrument is written in such a manner that it can be classified as both a promissory note as well as a bill of exchange, then such an instrument is known as an obiguous instrument and the bill is called as ambiguous bill.
7. Fictitious Bill: A bill is payable to the bearer in case the drawer or the drawee or the payee of a bill is a fictitious person or is a person who is no longer alive.
8. Documentary Bill: Such a bill of exchange is one which is accompanied by documents like shipping documents, bill of lading, insurance policy, etc. and such documents are released by the bank only on the acceptance or payment of the bill.
9. Banker’s Draft: It is a bill of exchange in which a bank orders its branch or another bank to pay a specified amount to a specified person.
Q.5. What do you mean by cheque and crossing a cheque?
Or What is crossed cheque?(2016)
Ans. Cheque: According to Negotiable Instruments Act, 1881, a cheque is a bill of exchange which is drawn on a specified banker and is not expressed to be payable otherwise than on demand. It is an unconditional order in writing drawn by a customer on his bank requesting the specifying bank to pay on demanda particular amount of money to a person whose name is on the cheque or to the bearer or to the order of a stated person.
A cheque must possess the following requirements:
1. It must be drawn upon a specified banker.
2. It must be payable on demand.
3. It must be dated and signed by the drawer.
4. It must be an unconditional order to pay a certain amount of money.
Crossing a Chegue: The cheque is said to have been crossed when two angular parallel lines are drawn on the upper left hand corner of the cheque. drawn on the face of the cheque. Such lines are drawn on the upper left hand corner of the cheque. Some words are also mentioned in between these lines sometimes otherwise they are left blank. So, a crossed cheque is one on which two parallel lines are drawn across its face with or without any words between these lines.
Q.6. Who may cross a cheque?
Ans. Crossing of an uncrossed cheque does not amount to a material alteration so as to affect the validity of the instrument. Obviously the drawer of a cheque may cross it generally or specially at the time of issue. Section 125 permits the crossing being made even after issue of a cheque in the following ways:
1. Where a cheque is uncrossed, the holder may cross it generally or specially.
2. Where a cheque is crossed generally, the holder may cross it specially.
3. Where a cheque is crossed generally or specially, the holder may add the words ‘not negotiable’.
4. Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker as his agent for collection.
Crossing once made becomes a material part of the cheque and only the Writing the words ‘Pay cash’ and cancelling the crossing along with his full signature.
If the words ‘not negotiable’ are written on the face of the cheque, it does not mean that the cheque is no longer transferable but the transferee gets the same title to the cheque, as that of the transferor. The word ‘A/c payee’ means amount should only be deposited into the account of the payee!
Q.7. Who are the parties to negotiable instruments?
Ans. Following are the various parties to different kinds of negotiable instruments
1. Parties to Promissory Note: It includes:
(a) Maker or Drawer: Person who makes promissory note.
(b) Payee: Person who has to receive the payment for the promissory note.
(c) Holder: Person having right to possess promissory note in its own name and to receive the amount due thereon.
(d) Endorser: Holder of a promissory note.
(e) Endorsee: Person in whose name the promissory note has been endorsed.
2. Parties to a Bill of Exchange: It includes:
(a) Drawer: Person who draws a bill of exchange.
(b) Drawee: Person on whom the negotiable instrument has been drawn.
(c) Acceptor: Person who accepts bill of exchange and is liable for the amount thereon.
(d) Payee: Person who has to receive the payment.
(e) Holder: Person who is entitled to the bill of exchange.
(f) Endorser: When the holder of a bill of exchange endorses it in favour of another person.
(g) Endorsee: Person in whose name the bill of exchange is endorsed.
(h) Drawee in Case of Need: Person to make payment in case the bill is not accepted by principal drawee.
(i) Acceptor for Honour: Other person to accept the bill to save the honour and reputation of drawee.
3. Parties to a Cheque: It includes:
(a) Drawer: Person who writes the cheque.
(b) Drawee: Bank on which the cheque is drawn.
(c) Payee: Person who is to receive payment for the cheque.
(d) Holder: Person who is legally entitled to the possession of the cheque.
(e) Endorser: Person who endorses cheque in favour of another person,
(f)Endorsee: Same as in a promissory note or a bill of exchange.
Q.8. What are the liabilities of parties to negotiable instruments?
Ans. The liabilities of parties to negotiable instruments are as
1. Liability of the Drawer of a Bill of Exchange: The drawer of a bill of exchange is not liable to the holder thereof. He takes the responsibility that when the bill of exchange is presented for acceptance the drawee will accept it and when on maturity, the bill is presented for payment, the acceptor pays the amount due thereon.
2. Liability of the Maker of a Promissory Note: The maker of a promiss the amount due thereon on the date of maturity to the bearer if the promissory note is bound to payable to the bearer.
3. Liability of the Drawer of a Cheque: if the bank dishonours a cheque or refuses to make the payment thereof, the drawer of the cheque is bound to pay the holder of the cheque the amount due thereon.
4. Liability of the Acceptor of a Bill: The drawee of a bill of exchange is not bound to accept the bill, and in case, he refuses to accept the bill, no liability arises to him and if he accepts the bill, he is bound to make the payment thereon on the expiry of duration of the bill.
5. Liability of the Drawee of a Cheque: The drawee of the cheque should pay the amount of cheque at the time it is presented for payment provided there are sufficient funds in the account of the drawer of the cheque.
6. Liability of the Endorser: The endorser of a negotiable instrument is liable on a negotiable instrument in the same way as is the drawer. The endorser can relieve himself of his liability on the instrument by specifically mentioning it on the instrument at the time of endorsement.
7. Liability of the Prior Parties: Every party to a negotiable instrument is liable to all subsequent parties and the holder in due course till the instrument is actually paid.
Q.9. What do you mean by negotiation? What are its different modes?
Ans. Negotiation: It means keeping a negotiable instrument in circulation. It is the transfer of the right, title and interest of the holder of a negotiable instrument in such a way that the transferee gets a good title to the instrument and he becomes a holder in due course even when there is some defect in the title of the transferor. According to Section 14, the instri when a promissory note, bill of exchange or cheque is transferred to any person so as to constitute the transferee as the holder thereof. So, negotiation occurs only when the transferee becomes entitled to hold the instrument in his own name and to recover the amount due thereon from the concerned parties.
A negotiable instrument can be negotiated by the following modes:
1. Negotiation by Mere Delivery: When a promissory note, bill of exchange or cheque is payable to bearer it may be negotiated by mere delivery. A negotiable instrument shall not be considered as negotiated if it has been delivered on the condition that it shall be effective only on the occurrence of a specified event.
2. Negotiation of Endorsement and Delivery: When the negotiable instrument is not payable to bearer but instead is payable to a specified person or to his order, such instrument is payable to order and can be negotiated only by endorsement and delivery.
Q.10. Write a note on endorsement. (2015)
Or What is meant by ‘Endorsement of cheques’?(2014)
Ans. Endarcement: When the holder of a negotiable instrument who is entitled to get payment on the instrument puts his signature on the back of it or on face thereof on a slip of paper annexed thereto. with the obiect of transferring his right to get the money, it is termed as endorsement.
When a negotiable instrument is signed and transferred by one person to another in such a wav that the right to receive the payment on the basis of negotiable instrument is transferred to the other person, it is called as endorsement. It is normally made on the backside of the negotiable instrument and if there is no space on the backside of the instrument for the endorsement, a separate sheet known as ‘allonge’ is attached to the negotiable instrument to make endorsements thereon.
Endorsement of cheques are valid if:
(a) it is made by the drawer or the holder or the endorsee of the negotiable instrument.
(b) it is made with the aim of transferring the rights contained in the negotiable instrument and is made on the backside of the instrument.
(C) it is made in ink. The delivery of cheques is important while making endorsement.
Q.11 What is acceptance? What are its essentials?
Ans. Acceptance: It means that the person on whom the negotiable instrument is drawn agrees to pay the amount due thereon. This permission is known as acceptance and the person giving the acceptance is known as acceptor.
The essential characteristics of a valid acceptance are as follows:
1. Acceptance must be on the instrument. It can be on the backside of the instrument but it has to be on the instrument and not on its copy.
2. Instrument must bear the drawee’s signature. The signature of the drawee on the instrument with or without the word ‘accepted constitutes a valid acceptance.
3. Accepted instrument must be delivered back to the drawer. The acceptance will not be complete unless the accepted instrument is delivered back to the drawer..
Acceptance can be general or qualified. When the debtor accepts the negotiable instrument without any condition, the acceptance is known as a general acceptance but when the debtor wants to accept the instrument subject to certain conditions and gives his acceptance only after specifying those conditions on the instrument, the acceptance is known as a qualified acceptance.
The drawer of a bill of exchange can refuse to accept a qualified acceptance as he has a right to an absolute and unqualified acceptance. The persons who can accept a negotiable instrument are the drawee, drawee in case of need, agent of the above mentioned parties, the acceptor for honour and the agent of the acceptor for honour.
Q.12. Write a note on “Presentment’ or ‘Presentation’.
Ans. Presentment or Presentation: It means showing it to the party liable thereon. The process of showing the negotiable instrument when it is shown to its drawer, maker or acceptor for acceptance thereof or for the payment of the amount due thereon. Presentment may be made for the reasons of:
1. Acceptance: This can be done if the instrument is payable on a specified date, it is payable on demand or it is payable after the expiry of a specified number of days from the date of the negotiable instrument. An instrument can be presented for acceptance to the drawee or to his authorised agent, to the legal representative of the drawee in case the drawee is deceased, to the official receiver in case the drawee has been declared insolvent.
2. Bight: In case of a promissory note, the maker himself makes the promise to pay and hence the question for presentment for acceptance does not arise. The presentment of such a promissory note can be made to the maker or to his agent, to the legal representative of the maker in case the maker is deceased and to the official receiver in case maker has been declared insolvent.
3. Payment: In the case of a promissory note, the presentment for payment must be made to the maker in case of bill of exchange to the acceptor thereof and in case of a cheque, to the bank on which it has been drawn.
Q.13. When is negotiable instrument said to be dishonoured?
Ans. A negotiable instrument is said to be dishonoured whe or make payment thereon. An instrument may be dishonoured by the following modes:
1. Dishonour by Non-acceptance: This is made:
(a) When the drawee commits a default in accepting the bill of exchange.
(b) when the drawee is incapable to contract.
(c) when presentment for acceptance is not required and the bill is not accepted.
(d) when the acceptance is qualified.
(e) When the drawee is a fictitious person and can’t be found even after due search.
So, such a dishonour occurs when the bill is presented by the drawer to the debtor for acceptance and acceptance is not granted by him. Here, a suit can’t be filed against the debtor since he is not a party to that instrument before he accepts the same. A creditor can file a suit only for the recovery of the amount of loan.
2. Dishonour by Non-payment: A promissory note, bill of exchange or cheque is said to be asmonou cu because of non-payment when the maker of the promissory note, acceptor of the bill of exchange or the drawee of the cheque commits a default in payment over the instrument that is being presented for the payment.
Q.14. Explain the term ‘Noting’.
Ans. Noting: Noting is the authentic and official proof of presentment and dishonour of a negotiable instrument. The question of noting does not arise in the case of dishonour of a cheque because in such a case the bank, while refusing payment, returns back the cheque giving reasons in writing for the dishonour of the same, and that itself acts as an authentic evidence of the fact of dishonour.
Even in the case of inland bills or notes, noting is not compulsory.
According to Section 99, when a promissory note or a bill of exchange has been dishonoured by non-acceptance or non-payment, the holder may cause such dishonour to be noted by a Notary Public upon the instrument, or upon a paper attached thereto, or partly upon each. For this the holder takes the bill or note to the notary public who makes a demand for acceptance or payment upon the drawee or acceptor or maker formally and his refusal to do so notes the same on the bill or note. Thus noting means recording the fact of dishonour on the dishonoured instrument or on a paper attached thereto for the purpose.
Noting must be made within a reasonable time after dishonour and must specify:
1. the date of dishonour.
2. the reason assigned for such dishonour.
3. the notary’s charges.
Q.15. Elaborate the term ‘Protest’.
Ans. Protest: Protest is a formal certificate of dishonour issued by the notary public to the holder of the bill or note, on his demand (noting is merely a record of dishonour on the instrument itself)
Protest for Better Security: Such protest can be made in the case of bills only when the acceptor of a bill of exchange has become insolvent, on his credit has been public impeached before the maturity of the bill, the holder may, within a reasonable time, cause a notary public to demand better security of the trand on its being refused, may within a reasonable time caused such facts to be noted and Certified as aforesaid. Such certificate is called a protest for better security.
Contents of Protest: The protest must contain the following particulars:
1. The instrument itself or a literal transcript of the instrument and of everything written or printed thereupon.
2. The name of the person for whom and against whom the instrument has been protested.
3. The fact and the reasons for dishonour, ie.’ a statement that payment or acceptance or better security, as the case may be, was demanded by the notary public from the person concerned and he refused to give it or did not answer, or that he could not be found.
4. The place and time of dishonour.
5. The signature of the notary public.
6. In the case of acceptance for honour or payment for honour, the names of the persons by whom and for whom it is accepted or paid.
Q.16. What do you mean by dishonour of cheque or bouncing of cheque?
Ans. Dishonour of Cheque or Bouncing of Cheque: A cheque is said to be bounced or dishonoured by non-payment when drawee of the cheque makes default in payment upon being duly required to pay the same. With a view to enhancing the acceptability of cheques in settlement of liabilities, it is necessary that the cheques drawn are honoured and not bounced.
Liability of Drawee on Dishonour of a Cheque: The drawee of a cheque must compensate the drawee for any loss or damage caused by non-payment if the following three conditions are fulfilled:
1. If the drawee has sufficient funds of the drawer in his hands.
2. If the funds are properly applicable to such payment.
3. If the drawee is duly required to pay the cheque.
Liability of Drawer on Dishonour of a Cheque: On dishonour of a cheque, the drawer is punishable with imprisonment for a term not exceeding 2 years or with fine not exceeding twice the amount of a cheque or with both if the following conditions are fulfilled:
1. If the cheque was drawn to discharge a legally enforceable debt or other liability.
2. If the cheque is returned by the bank unpaid due to insufficiency of funds in the account of drawer.
3. If the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.
4. If the payee or the holder in due course of the cheque has made a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque within * 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid.
5. If the drawer of such cheque has failed to make payment of the said amount of money to the payee or to the holder in the course of the cheque, within fifteen days of the receipt of the said notice.
Q.17. Discuss the provisions of Negotiable Instrument Act with regard to the dishonour of cheque for insufficiency of funds in the accounts of a drawer.
Ans. Dishonour of a Cheque on Ground of Insufficiency of Funds: Sections 138 to 142 incorporated by the Amendment Act in 1988 provide for criminal penalties in the event of dishonour of cheques for insufficiency of funds.
Dishonour of Cheque for Insufficiency, etc. of Funds in the Account: The drawer, under Section 138, may be punished with imprisonment upto 2 years or with a fine upto twice the amount of cheque or with both.
However, in order to attract the aforesaid penalties following conditions must be satisfied:
1. The cheque has been dishonoured due to insufficiency of funds only-either the amount of money standing to the credit of the account is insufficient or that the amount of cheque exceeds the amount arranged to be paid from that account by an agreement with the bank.
2. The payment for which the cheque was issued should have been in discharge of a legally enforceable debt or liability in whole or part of it. It implies that to cheque given as gift will not attract such punishment.
3. The cheque should have been presented to the paying banker within six months from the date or which it is drawn or within the periodof validity, whichever is earlier.
4. The drawer is liable only if he fails to make the payment within 15 days of such notice period. In other words, the drawer can make payment within 15 days of the receipt of the notice.
5. The payee or the holder in due course of the cheque should have given notice in writing to the drawer demanding payment, within 30 days ofthe receipt of information of dishonour of the cheque from the bank. The court shall take cognizanceof the offence under Section 138 only if the complaint is made by the payee or the holder in due course of the cheque.
Q.18. What is ‘Hundi’ ? Discuss its types.
Ans. Hundi: Hundi is an instrument same as a negotiable instrument. It is drawn in the form of a letter and helps to transfer money from one place to another. It is unconditional but sometimes a condition is added to the hundi as in the case ofa jokhami hundi. If a hundi is dishonoured nothing of such dishonour is not required. It is a local bill of exchange whose time of payment is specified on it.
Types of Hundi: The various types of hundi are:
1. Darshani Hundi: It is payable immediately on demand and need not be stamped.
2. Mitti Hundi or Muddati Hundi: A hundi which is payable after the expiry of a specific duration is known as a mitti hundi. It is necessary to properly stamp a mitti hundi.
3. Nam-jog Hundi: Such a hundi is payable only to the person whose name is mentioned on the hundi.
4. Furman-jog Hundi: Such a hundi can be paid either to the person whose name is mentioned in the hundi or to any person so ordered by him.
5. Dhani-jog Hundi: When the hundi is payable to the holder or bearer, it is dhani jog hundi.
6. Shah-jog Hundi: The hundi in which the name of the shah is mentioned thereby the hundi
shall be payable only through the shah to the person for whom it is tendered .
7. Jokhim Hundi: It is conditional in which the drawer promises to pay the amount of the hundi only on the satisfaction of a certain condition.
8. Jawabi Hundi: It is a hundi in which money is transferred from one place to another through a hundi and the person received the payment on is to give an acknowledgement.
9. Khaka Hundi: It is a hundi which has already been paid.
10. Khoti Hundi: In case, there is any defect in the hundi or in case the hundi has been forget then, such a hundi is known as a khoti hundi.