Banking Law MBL March2010

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Transcript of Banking Law MBL March2010

Negotiable Instruments Law & Procedure

Module contents Justification for study of negotiable instruments Understanding negotiable instruments Parties to negotiable instruments Presentment Special provisions relating to cheques Discharge from liability Noting and protest Presumptions and estoppels Offences under the act Foreign instruments

Understanding the context (at macro level) Growing concept of securitization as a mode of finance What is securitization? securitization is a process in which pools of individual loans or receivables or actionable claims are packaged, under written and distributed to investors in the form of securities -- Kenneth Cox

POOLS OF ASSETS 1. LOANS & ADVANCES 2. BILLS 3. OTHER RECEIVABLES 4. DEBTORS

BELONGS TO THE ORIGINATOR (SUPPOSE A BANK OR A FINANCIAL INSTITUION)

RECEIVE THE LOAN AMOUNT

CREATION OF SPV POLLED ASSETS ARE BEING TRANSFERRED TO THE SPV FOR CONSIDERATION

THE SPV MAY BE A BANK OR A FINANCIAL INSTUTIONS GENERALLY

POOLED ASSETS ARE PASSED ON TO THE SPECIAL PURPOSE VEHICLE (SPV)

ASSET VALUE IN THE POOL IS DIVIDED NOTINALLY INTO SMALL SHARE OR SECURITY

SHARES / SECURITIES ARE SOLD FURTHER TO VARIOUS INVESTORS

SHARES / SECURITIES PAID BY THE SPECIAL PURPOSE VEHICLE

Justification for study Negotiable instruments form the backbone of todays complex commercial world Tradesmen prefer to use cheques, drafts, promissory notes etc., in their day to day transactions, rather than ready cash These instruments are used as mode of payment for almost all human activities (payment of salary, application cost, payment of fees etc.,)

Necessity of such instruments make the wheels of economy turn and transact-ability increases

Negotiable instruments an introduction Might have originated from negoce (French word) meaning business, trade or management of affairs negotiable is something which is legally capable of being transferred by endorsement or delivery, and negotiability is the legal character of being negotiable Blacks Law Dictionary A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer S. 13 of NIAct, 1882

Special indicators It gives certain rights to the person in lawful possession of such an instrument which no other instruments can ever give It represents money to a great extent; and Does not get tainted by any defect in title at the source so long as its acquisition is lawful Ex: if the maker of the instrument commits fraud or forgery the bona fide payee of the instrument is not affected It passes by delivery like cash Person in lawful possession of it can sue in his own name

Kinds of negotiable instruments The Act deals in three kinds of instruments1. Promissory Note; 2. Bill of Exchange; and 3. Cheque.

Application Indian Paper Currency Act, 1871; Any local usage relating any instrument in an oriental language Hundis; Rukka

Hundi The saving clause does not render the act altogether inapplicable to hundis local custom overrides the statute provided It is established by the party relying on it; and Such local usage is not specifically nullified by the instrument specifically (indicating the intent of the parties)

By excluding the applicability of the Act to instruments in oriental languages, necessary confusion in the state of law has been established. The law of negotiable instruments being closely related to the commercial world should be, by and large, uniform in its application Khergamvala on Negotiable Instruments Act Eleventh Report of the Law Commission of India (1958)

Punjab National Bank v Britannia India Ltd., [(2001) 106 Comp Cas 293 DB] the Negotiable Instruments Act, 1881 has been framed in order to assimilate and record the mercantile trade practices, prevailing as the law merchant in England and therefore any usage contrary to the provisions of the said Act may not be upheld by a court. It is presumed that the Act has taken into account, all the prevailing mercantile usages and any usage, contrary to the provisions of the Act cannot be given effect to

Promissory notesan instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument Sec. 4

two partiesDRAWER

DRAWEE

PERSON WHO DRAWS THE PROMISSORY NOTE

THE PERSON TO WHOSE FAVOUR THE PROMISSORY NOTE IS DRAWN

Pro Note for a loan

Bangalore , March 24, 2007 In consideration of loan of Rupees Five Thousands (Rs.5,000) advanced by Mr. Avtar Singh to me, I promise to repay the said loan of Rupees Five Thousand with interest at 6.5% per annum to Mr. Avtar Singh or order

Pratap Singh s/o Biswas Singh, Resident of 222, 72 cross, 4th Main, Rajajinagar, 6th Block, Bangalore-560 012

Pro Note payable on fixed dateDharwad, March 24, 2008 I, Ashok Ramappa Patil, S/o Ramappa Chendrashekhar Patil, promise to pay, Shri. Chandrakant P Bellad, or order the sum of Rs.50,000(Rupees Fifty Thousand only) on the Seventh day of November two thousand eight.

Ashok R. Patil, s/o Ramappa Chendrashekhar Patil, Resident of No. 227 Pratap Chendra Nilaya College Road, Dharwad-580 001.

Pro Note payable on instalmentsDharwad, March 24, 2008 I, Ashok Ramappa Patil, S/o Ramappa Chendrashekhar Patil, promise to pay, Shri. Chandrakant P Bellad, or order in ten equal instalments of Rs.30,000 (Rupees Thirty Thousand) each payable on the first day of every month commencing from the first day of every month of May 2008.

Ashok R. Patil, s/o Ramappa Chendrashekhar Patil, Resident of No. 227 Pratap Chendra Nilaya College Road, Dharwad-580 001.

Essentials it must be in writing and signed by the maker; it must contain an unconditional and definite promise to pay a certain sum, and nothing more; it must be payable either on demand or after the efflux of a fixed or determinable time in future; It must be payable to, or to the order of a specified person named in the note or to the bearer of the note; most importantly, an instrument to be regarded as promissory note must show a prima facie intention to make such a note and it must be delivered.

Writing No particular form of writing Pen, pencil, typed, etc., May be on paper or cloth etc.,

No need to use specifically the word promise Must be signed by the maker

Undertaking to pay Essential is express promise to pay No Promissory notes Mr. X, I owe you Rs.100 I have received Rs.100 which I borrowed of you, and I have to be accountable to you for the same with interest Deposited with me Rs.100 to be returned on demand

Good examples Rs.1000 balance due to you I am still indebted and do promise to pay Received from X Rs.1000 which I promise to pay on demand with interest I do acknowledge myself to be indebted to X in Rs.1000 to be paid on demand for value received

unconditional Unconditionality is essential to achieve the objective of certainty of promissory note It is indispensable statutory requisite [Black v Pilcher (1909)25 TLR 497] Notes that are payable on contingency are not negotiable

it would perplex the commercial transactions of mankind if paper securities of this kind were issued out in to the world, encumbered with conditions and contingencies and if persons to whom they were offered in negotiation were obliged to inquire when these uncertain events would probably be reduced to certainty.. -- Lord Kenyon in Carlos v FAncourt, (1794) 5 TR 484

Examples I promise to pay X, Rs.5000 in installments with a proviso that no payment shall be made after my death I promise to pay X, Rs.500 on As death, provided he leaves me sufficient money to pay the said sum I promise to pay AB, Rs.500 out of money due to me from XY as soon as XY pays I promise to pay on demand at my convenience

Certainty regarding the sum Bad promissory notes I promise to pay A, Rs.100 and all other sums which may be due to him I promise to pay A, Rs.100 after deducting any interest or money which he may owe me I promise to pay A the proceeds of a shipment of goods value of Rs.2000 I promise to pay A Rs.1000 and all fines according to rule

Payee must be certain The payees name may be set out in any part of the instrument; and so long as it appears on a reading of the whole instrument that the payee is specified with certainty the instrument is a promissory note, assuming other requirements of the definition are satisfied

Other formalities Must be stamped Although not obligatory Generally dated And the place of delivery is mentioned

There are in general two parties to a pro-note the maker and the payee. There can also be Joint makers and Joint Payees

Bill of Exchange 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 - Sec. 5 of NI Act

Essentials Must be in writing Must contain an order to pay Order contained in the bill shall be unconditional Must be signed by the drawer Drawee must be certain Sum payable must be certain Order to pay money and money only The payee must be certain

Three partiesDRAWER DRAWEE/ ACCEPTOR

PERSON WHO MAKES AND GIVES THE ORDER TO PAY

ONE WHO IS DIRECTED TO PAY AFTER SIGNING BECOMES ACCEPTOR

PAYEE

WHO OR TO WHOSE ORDER THE AMOUNT OF THE INSTRUMENT IS PAYABLE

Typical BoE (payable on demand)RUPEES FIFTY THOUSAND Dharwad, March 24, 2008 Pay to Chandrakant R Bellad, or order on demand the sum of Rs.50,000 (Rupees Fifty Thousand only).

Ashok R. Patil, To Bhavesh Solanki, College Road, Dhar