NEGOTIABLE INSTRUMENTSVIS-À-VISCHEQUE Samir K Mahajan

Meaning: Negotiable Instruments

Negotiable instruments are documents meant for making payments, which can be transferred from one person to another many times before final payments.

they take the form of written order or unconditional promise to pay a fixed sum of money on demand or at a certain time

they (i.e. their Ownership) can be transferred from one person to another before the final payment is made.

Once the instrument is transferred, the holder obtains full legal title to the instrument.

Negotiable instruments are integral part of business mechanism.

Samir K Mahajan

Most Important Negotiable Instruments

PROMISSORY NOTE

BILL OF EXCHANGE

CHEQUE

Other such instruments which posses features of negotiability

Hundis (a popular indigenous bill prevalent in India) Treasury bills DraftsCertificates of deposits etc

Samir K Mahajan

PARTIES TO A PROMISSORY NOTE: TWO PARTIES INVOLVED

Maker or Drawer – the person who makes the note and promises to pay the amount stated therein. He is the debtor.

Payee – the person to whom the amount is payable. He is the creditor.

In course of transfer of a promissory note by payee and others, the parties involved may be

Endorser/ transferor – the person whoendorses the note in favour of another person

Endorsee/ transferee – the person in whosefavour the note is negotiated by endorsement

Samir K Mahajan

PROMISSORYNOTE

A promissory note is ‘an instrument in writing (notbeing a bank note or a currency note) containing anunconditional undertaking, signed by the maker, to pay acertain sum of money only to a certain person or to theorder of a certain person or to the bearer of theinstrument’.

The amount may be payable on demand or afterexpiry of certain period of time.

Rs. 10,000/- NewDelhi

September 25, 2013

On demand, I promise to pay Ramesh, s/o Ram Lal of Meerut or order a sum of Rs 10,000/- (Rupees Ten

Thousand only) for value received.

To , Ramesh Sd/ Sanjeev

Address…….. Stamp

Specimen of Promissory Note: Payable On Demand

Rs. 10,000/- New Delhi

September 25, 2013

Three months after date, I promise to pay Ramesh, s/o Ram Lal of Meerut or order a sum of Rs 10,000/-

(Rupees Ten Thousand only) with interest at the rate of twelve percent per annum until payment, for value

received.

To , Ramesh Sd/ Sanjeev

Address…….. Stamp

Specimen of Promissory Note: Payable after date with interest

Samir K Mahajan

BILL OF EXCHANGE

Bill of exchange is ‘an instrument inwriting containing an unconditional order,signed by the maker, directing a certainperson to pay a certain sum of money onlyto the person or to the order of a certainperson, or to the bearer of theinstrument’.

The amount may be payable on demandor after expiry of certain period of time.

PARTIES TO A BILL OF EXCHANGE: THREE PARTIES INVOLVED

Drawer of the bill – The person who makes the order for making payment. He is the creditor.

Drawee/Acceptor/payer of the bill – The person to whom the order to pay is made. He is generally a debtor. The drawee must accept the bill issued by drawer.

The Payee of the bill – The person to whom the payment is to be made.

The “drawer” can also draw a bill in his own name thereby hehimself becomes the “payee”.

In course of transfer of a bill of exchange by payee and others,the parties involved may be

Endorser/ transferer – the person who endorses the note infavour of another person

Endorsee/ transferee – the person in whose favour the noteis negotiated by endorsement

Samir K Mahajan

Rs.10,000/- New Delhi

September25, 2013

Five months afterdate, pay Tarun orto hisorderthe sum ofRupees Ten Thousandonly forvalue received.

To , Sanjoy Accepted Sd/ Rajeeb

Address…….. Sanjoy Stamp

SPECIMEN OF A BILL OF EXCHANGE : PAYABLE AFTER DATE - TIME BILL

SPECIMEN OF A BILL OF EXCHANGE : Payable on Demand –Demand Bill

Rs.10,000/- New Delhi

September 25, 2013

For this bill of exchange, pay to us or order of ourselves, the sum of Rupees Ten Thousand only for

value received.

To , Sanjoy Accepted Sd/ Rajeeb

Address…….. Sanjoy StampSamir K Mahajan

CHEQUES

A cheque is a document wherein an account

holder of a bank orders the bank to pay a

specified amount to a specified person

named therein or to the order of the specified

person or to the bearer.

A cheque is a bill of exchange drawn on a

specified banker and not expressed to be

payable otherwise than on demand.

In India, a customer with a saving bank

account or current account in a bank can

issue a cheque in his own name or in favour of

others.

Samir K Mahajan

PARTIES TO CHEQUE

Drawer: the person (or persons) who draws/ signs the cheque

Drawee : the bank on whom a cheque is drawn

Payee: the beneficiary named on the cheque/

person in whose favour a cheque is drawn

the “payee” of a cheque can be the “drawer” himselfthe “payee” of a cheque can be the “drawee” too

In course of transfer of a cheque by payee and

others, the parties involved may be –

Endorser/transferor – the person who endorses

the cheque in favour of another person.

Endorsee/transferee – the person in whose

favour the cheque is negotiated by endorsement

DATING OF CHEQUE

A Cheque not dated at all is valid.

Any holder of the cheque including the banker may insert a date.

However bankers generally return a undated cheque.

Cheque may be ante-dated or post-dated or a date on a public holiday, and thus are not invalid for

those reasons.

A cheque has a life of three months from the date of the cheque.

Cheque may be :

o Ante-dated Cheque

o Post-dated Cheque

.

Samir K Mahajan

ANTE-DATED CHEQUE : Ante-Dated Cheque bears a date earlier than the date of issue. e.g A cheque

issued (by drawer) on 30 September 2013 may bear a date 30 August 2013.

Such a cheque is valid up to three months from the date of the cheque.

A cheque presented for payment after three months from the date of the cheque is stale cheque . A

stale cheque is not honored by the bank.

POST DATED CHEQUE : Post Dated Cheque are written by the drawer for payment in a future date.

cannot be honored earlier than the date on the cheque.

For example, if a cheque presented/issued on 30 September 2013 bears a date of 30 October 2014 , itis a post-dated cheque. The bank will make payment only on or after 30 October 2014.

Samir K Mahajan

DATING OF CHEQUE contd.

CHEQUES

1) OPEN CHEQUE

BEARER CHEQUE

ORDER CHEQUE

2)CROSSED CHEQUE

TYPES OF CHEQUE

Samir K Mahajan

Open cheque/ Uncrossed cheque

The payment of "Open Cheque" or an "Uncrossed Cheque” can be obtained at the counter of the bank.

The holder of an open cheque can do the following:

Cash the cheque over the counter at the bank

Deposits the cheque in his own account

Passes /transfers/endorses it to someone else by signing on the back of a cheque

An open cheque may be a

bearer cheque or

a cheque with specificname

an order cheque or

Samir K Mahajan

BEARER CHEQUE

A bearer cheque (when not crossed) is made

payable to the bearer i.e. the person who presents

it to the drawee bank ( at the counter) for

encashment.

The words ‘or bearer’ mean that (when not crossed)the bank on which the cheque is drawn hasauthority to pay it to any person in possession of it,even if that person found it or stole it, unless thebank has reason to suspect that the cheque mighthave fallen into the wrong hands.

appears as 'Pay Mr X or bearer'.

bearer cheque can be altered to order cheque by

deleting and inserting ‘or order” on it

can be transferred by mere delivery; they need

no endorsement.Samir K Mahajan

such cheque are risky; this is because if such cheques

are lost/theft, the finder of the cheque can collect

payment from the bank

ORDER CHEQUEIf a cheque is an ‘order’ cheque then (when not

crossed) the drawee bank should pay it:o to the named payee; oroto any person to whom the named payee hasordered it to be paid, by endorsing the cheque

normally appear as 'Pay Mr. X or order'

if word "bearer" appears on face of a cheque, itis deleted, and in its place the word "or order" iswritten.

The payee can transfer/ endorse an order chequeto someone else by signing his or her name onthe back of it. The bank then has to pay to theperson to whom it is endorsed /transferred).

The bank must take care to ascertain that theperson demanding payment is the right person

Samir K Mahajan

CROSSED CHEQUE

When cheque is crossed, the drawer is telling the

bank not to pay it at the counter but to credit it

at payees’ account with the bank.

The crossing of a cheque is intended

o To ensure that the cheque is not encashed by a

wrong person, by concealing his identity,

o to ensure that its payment is made to the right

payee.

A cheque whether in bearer or order form

when crossed must be collected by the bank

(e.g. Credited into a customer’s account ).

‘Crossed cheque’ avoids the danger of

theft/loss as in case of open cheque.

Samir K Mahajan

Types of crossing. General Crossing

Special Crossing

CROSSING OF CHEQUE

Objectives of crossing:

It prevents the payment of the cheque to a wrongful holder.

It ensures safe payment.

It facilitates in tracing the recipient of the payment.

Further it is a guard against any cheating or theft.Samir K Mahajan

GENERAL CROSSING

The drawing up of two simple parallel lines

on the face of the cheque at the top left

hand corner with or without the words

such as: & Co., Not negotiable, or Account

Payee only is known as general crossing.

The effect of general crossing is that the

crossed cheque cannot be paid at the

counter of the bank.

Its payment can only be deposited into

the payee’s account only.

Samir K Mahajan

SPECIAL CROSSING

When a banker’s name is written

in between the two parallel lines, the

cheque is said to be specially crossed.

In fact, drawing of two transverse

and parallel lines is not necessary in

case of a special crossing.

When a cheque has been specially

crossed, the drawee/paying banker

will make the payment only to that

banker in whose favour/name it has

been crossed.

The payment of such cheque is not

made unless the bank named in

crossing is presenting the cheque.

Samir K Mahajan

WHO CAN CROSS A CHEQUE?

a) A cheque may be crossed generally or specially by the drawer.

b) Holder may also cross it.

c) Holder may turn a general crossing into special crossing.

d) A banker may cross an uncrossed cheque & it may cross it especially to itself

or to another banker for purpose of collection through it.

Samir K Mahajan

OPENING OF CROSSING/CANCELLATION OF CROSSING

If the crossing on a cheque is cancelled, it is called opening of the crossing. The cheque

thereafter becomes an open cheque.

Only the drawer of the cheque is entitled to open the crossing of the cheque by writing the

words ‘Pay Cash’ and canceling the crossing along with his full signature.

The paying banker must be very careful in ascertaining the validity or genuineness of the

drawer’s signature opening the crossing.

If drawer’s signature (already on the cheque) is forged by the holder in order to open the

crossing and the payment is obtained at the counter, the banker will remain liable to the true

owner of the cheque.

Samir K Mahajan

ENDORSEMENT

Endorsement means transfer of any document or negotiable instrument (e.g. Cheque) to another personby signing on its back or face or on a slip of paper attached to it. A negotiable instruments in bearer formneed not be endorsed (mere delivery will do). A negotiable instrument payable otherwise than to abearer can be negotiated only by endorsement and delivery.

A person who signs the cheque and transfers the instrument is an endorser/transferor and in whosefavour it is transferred is endorsee/transferee.

Samir K Mahajan

Significance of Endorsement

When a cheque is endorsed and delivered, the endorsee or transferee gets a valid tittle to it. The endorsee acquiresa right to negotiate the instrument to anyone he / she like, provided his endorser did not restricts further

endorsement.

By making an endorsement the endorser promises that in case of dishonor, he / she provides a guarantee to

compensate the holder. Thus if the cheque is dishonoured, the holder can sue any or all of the previous parties,

and recover the amount of the cheque from any or all the previous parties.

When, however, a cheque is endorsed back to the earlier endorser, the intermediate parties are not liable to him.

This is technically known as negotiation back. For instance, ‘A’ issues a cheque to ‘B’, ‘B’ endorses the cheque to

‘C’, ‘C’ to ‘D’, ‘D’ to ‘E’ and ‘E’ back to ‘A’. The cheque thus is endorsed back to ‘A’ and ‘A’ is now the holder of

the cheque.

If the cheque is dishonoured, ‘A’ can sue ‘E’, ‘D’, ‘C’, or ‘B’. However, ‘A’ himself is liable to ‘E’, ‘D’, ‘C’, or ‘B’

as the original endorser. Hence if ‘A’ is allowed to sue ‘E’, ‘D’, ‘C’, or ‘B’ ; they ,in turn, can sue ‘A’. Hence, ‘A’

is not allowed to sue intermediate parties.

‘A’ can further negotiate the cheque if he cancels endorsement for the intermediate parties i.e. ‘E’, ‘D’, ‘C’, or

‘B’. This is technically known as ‘taking up a bill’.

Samir K Mahajan

Crossed cheque with two parallel line is no more a bearer cheque, and thus the holder get the paymentonly in his or her account only and not across the counter. But such crossed cheque allows the payee tomake further endorsements.

“Account Payee” cheque can not be endorsed further. Only payee of the cheque is entitled to get creditof the amount , i.e., the amount will be credited to his account only.

A cheque with pay A or B only with further words “Not Transferable” restricts the transferability to

any other person and is only payable to the person or payee noted therein.

For a cheque crossed as “NOT NEGOTIABLE” , it does not mean that the cheque cannot be

transferred further. It still can be endorsed but the transferee will not get the better title than the

transferor. Thus, the cheque remains transferable but its important quality i.e. negotiable is

withdrawn.

CAN A CROSSED CHEQUE BE ENDORSED?

Samir K Mahajan

SIGNIFICANCE OF “NOT NEGOTIABLE” CROSSING : Example

Example 1: ‘A’ writes cheque to B. B as the payee has a right to the funds from A's cheque . B can sue Aif the cheque is dishonored.

Example 2: B endorses the same cheque to C. If the cheque is dishonored by A, C can sue either A or Bas he has also accepted the cheque in good faith and gave value.

Example3: C loses the cheque and it is found by D. D forges C's endorsement and endorses it over to E.(the cheque has now become defective).

E receives it in good faith and for value without any knowledge of D’s defective/ illegal title. E does

not acquire a better title to the cheque than D (because D had none).

SIGNIFICANCE OF “NOT NEGOTIABLE” CROSSING : Example (Contd.)

If the cheque is dishonored, E can sue D but has no recourse to sue A, B or C as it is marked "notnegotiable". Without the words "not negotiable“, E could have sued A, B, or D as prior endorsers. (C can'tbe sued as his endorsement was forged).

Further, If E had passed it on to F, F could sue D and E but not A, B or C.

Or in case of dispute, E/F who ever last transferee will have to return the cheque or pay equivalent in

money to A, the true owner of the cheque. E cannot also pass a good title to anyone else, say to F .

TYPES OF ENDORSEMENT

.

1. Endorsement in Blank or General Endorsement

In case of an endorsement in blank, the payee or endorser does not specify an

endorsee and he simply signs his name.

Because no payee is specified, such an endorsement essentially turns the instrumentinto a bearer security.

The most well-known example of a blank endorsement is a check made payable to"cash" and endorsed on the back with the signature of the account holder

Samir K Mahajan

TYPES OF ENDORSEMENT contd.

.

2. Endorsement in Full or Special Endorsement

In case of special endorsement or endorsement in full, the payee or endorser specifies the

person to whom or to whose order the instrument is to be paid.

The specified person i.e. the endorsee then becomes the payee of the instrument.

Samir K Mahajan

TYPES OF ENDORSEMENT contd.

.

3. Restrictive Endorsement

A restrictive endorsement prohibits further negotiation of a negotiable instrument.

o For example, if B endorses an instrument payable to bearer as: Pay the contents to C only

or Pay C for my use, the right of C to further negotiate is excluded.

Samir K Mahajan

TYPES OF ENDORSEMENT contd.

4. Partial Endorsement

A partial endorsement intends for transfer of a part of the amount payable to the

endorsee, or intends to transfer the instrument to more than one endorsees (two or

more) separately.

Such endorsement does not result in negotiation of the instrument. Legally such anendorsement is invalid.

Samir K Mahajan

TYPES OF ENDORSEMENT (contd.)

5. Conditional Endorsement

A conditional endorsement makes the liability of endorser on the instrument or

right of the endorsee to receive the amount due thereon dependent on the

happening of an particular event.

o For example, “pay C if he returns from London”. Thus C gets the right to receive

payment only on the happening of a particular event, i.e., if he returns from

London.

o In such case, the endorser will not be liable to the subsequent holder if the specified

event does not take place.

Samir K Mahajan

ESSENTIALS OF A VALID ENDORSEMENT

An endorsement in order to operate as mode of negotiation must comply with the following conditions:

Endorsement must be made by the maker or holder of the instrument such as cheque. A stranger

cannot endorse it.

Endorsement must be on the instrument and be signed by the endorser. The endorsement may be on

the back or the face of the instrument and if no space is left on the instrument, it may be made on a

separate paper attached to it . It is not necessary to write the full name, initial may be sufficient. Thumb-

impression should be attested.

Endorsement must not be partial. Endorsement must be on the entire bill. Partial endorsement does

not result in negotiation of the instrument.

Samir K Mahajan

essentials of a valid endorsement contd.

Endorsement must be completed by delivery of the instrument. The delivery must be made by the

endorser himself or by somebody on his behalf with the intention of passing property therein.

If a person endorses an instrument to another and keeps the same with him rather than delivering the

same, and if it is found after his death and then delivered to the endorsee, the latter gets no right on the

instrument.

If delivery is conditional, endorsement is not complete until the condition is fulfilled.

Samir K Mahajan

for details, follow

Negotiable Instruments ACT, 1881.