Negotiable Instruments

Chapter 3

Topics Covered in this chapter

OPENING WORDS DEFINITION OF NEGOTIABLE INSTRUMENT ESSENTIAL CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS PROMISSORY NOTE, BILL OF EXCHANGE AND CHEQUE DIFFERENCE BETWEEN BILL OF EXCHANGE AND PROMISSORY NOTE DIFFERENCE BETWEEN A BILL OF EXCHANGE AND A CHEQUE HOLDER AND HOLDER IN DUE COURSE DIFFERENCE BETWEEN HOLDER AND HOLDER IN DUE COURSE HOLDER FOR VALUE PAYMENT IN DUE COURSE SOME RELATED ISSUES

 OPENING WORDS
Negotiable Instruments have great significance in the modern business world. The chief characteristic of a negotiable instrument is its negotiability. i.e., it can be negotiated from one person to another. It is a transferable document that satisfies certain conditions. These instruments pass freely from hand to hand and thus form an integral part of the modern business mechanism. These instruments have gained prominence as the principal instruments for making payment and discharging business obligations. The Negotiable Instruments Act, 1881 is the legislative enactment of the law relating to three classes of negotiable instruments namely Promissory Notes, Bills of Exchange and Cheque which are in common use in monetary transactions.

DEFINITION OF NEGOTIABLE INSTRUMENT

The term negotiable instrument means a written document which creates a right in favor of some person and which is freely transferable. The Negotiable Instruments Act states that a negotiable instrument means a Promissory Note, Bill of exchange or Cheque payable either to order or to bearer which are transferable from hand to hand by way of negotiation but does not contain words prohibiting transfer or indicating an intention that it shall not be transferable. Example: I. Pay to X II. Pay to X or order III. Pay to X or bearer/order IV. Pay to X only V. An instrument Crossed, Account payee only Since the instrument d) and e) are not transferable i.e. the word only prohibits further transfer and A/C Payee Crossing indicates the intention that it shall not be transferable, these are excluded from negotiable instruments. Some Important Definitions: According to Justice K. C. Willis: One the property in which is acquired by any one who takes it bona fide and for value notwithstanding any defect of title in the person from whom he took it Possibly the most expressive definition of negotiable instrument has been suggested by Thomas asAn instrument is negotiable when it is, by a legally recognized custom of trade or by law, transferable by delivery or by endorsement and delivery, without notice to the party liable, in such a way that a) The holder of it for the time being may sue upon it in his own name, and b) The property in it passes to a bona fide transferee for value free from any defect in the title of the person from whom he obtained it. Examples- Bill of Exchange, Promissory Note, cheques etc.

The principal parts of the negotiable instruments are: 1. The Date 2. The Amount 3. Time for Payment 4. Place of payment 5. Stamp

ESSENTIAL CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS:

An examination of the above definition reveals the following essential characteristics of negotiable instruments which make them different from an ordinary chattel2. Easy negotiability: The property in a negotiable instrument is freely transferable. It can be transferable from hand to hand by way of negotiation. In case of order instruments, it is transferable by endorsement and delivery. In case of bearer instruments it is transferable by mere delivery. 3. Title: The holder in due course is not in any way affected by the defective title of the transfer of any party. The term holder in due course means a holder who has accepted a negotiable instrument for value, in good faith and before maturity. 4. Recovery: The holder in due course is entitled to sue upon the instrument in his own name. Thus, he can recover the amount of the instrument from the party liable for payment on the instrument. 5. Presumptions: A negotiable instrument is always subject to certain presumptions. Those will be applicable unless contrary is proved.

PROMISSORY NOTE, BILL OF EXCHANGE AND CHEQUE

PROMISSORY NOTE: definition by rules: According to negotiable instruments Act 1881, section 4.A promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only or to the order of a certain person, or to the bearer of the instrument. A promissory note is drawn and signed by the debtor, who promises to pay the creditor a certain sum of money. The specimen of promissory note is given below:

Tk 8,000

Dhaka 11003 5th April, 2007

Three months after date i promise to pay Mr. Harun the sum of Takas eight thousand, for value received. To Mr. Harun Sd. Stamp Hasanur Rahman

A promissory note may be drawn by more than one person also who may undertake to pay the amount both in their individual capacities as well as jointly. The specimen of a promissory note with joint and several liabilities is given below: Tk . Dhaka..20 On demand we jointly and severally promise to pay to. . ....or order the sum of Takas ............... together with interest on such sum from this date at the rate of percent per annum with . rests, for value received. Stamp (Signaturee across the stamp) Addresses..

Essential requirementsThe essential characteristics of a promissory note may be summarized as follows: 1. It must be in writing 2. It must certain a promise or undertaking to pay 3. The promise to pay must be unconditional 4. It must be signed by the maker 5. The maker must be a certain person 6. The payee must be certain 7. The sum payable must be certain 8. The amount payable must be in legal tender money 9. Other formalities BILL OF EXCHANGE: Definition by rules According to negotiable instruments act 1881 section S, 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 sum of money only to, or to the order of, a certain person or to the bearer of the instrument.

That is, a bill of exchange contains an order from the creditor to the debtor to pay a specified amount to a person mentioned therein. The maker of a bill is called the drawer, the person who is directed to pay is called the drawee; the person who is entitled to receive the payment is called the payee; sometimes the drawer himself is the payee. The specimen of a bill of exchange is given below: Tk. 10, 000 Dhaka, 3rd March 2007

Two months after date pay to Mr. Mamun or order the sum of taka Ten thousand only, for value received. To Mr. Habibur Rashid 201/A, Dhanmondi Dhaka

Accepted Sd/- Habibur Rashid

Stamp Md. Hasanur Rahman

Essential Characteristics The essential characteristics of a bill of exchange may be summarized as follows: 1. It must be in writing 2. It must contain an order to pay 3. The order to pay must be unconditional 4. It must be signed by drawer 5. The drawer, drawee and payee must be certain 6. The sum payable must be certain 7. The bill must contain an order to pay money only 8. It must comply with the formalities as regards date, Consideration, stamps, etc. CHEQUE: Definition by rules According to the negotiable instruments act 1881, section 6, a cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. It is an important document for any transaction in the business world. Thus, a cheque is a bill of exchange with two distinctive features namely1) It is always drawn on a bank 2) It is always payable on demand Features of a Cheque 1) A cheque is printed paper 2) On the printed paper it specifies the bank and branch address 3) It must be in writing 4) A cheque is always drawn on a banker

5) A cheque can only be drawn payable on demand 6) It must have a date 7) Cheque no is also exist 8) It must contain an order to pay 9) It includes an account no of owner of the account holder 10) The order to pay must be unconditional 11) The sun payable must be certain 12) A cheque must contain an order to pay money only Specimen of a Cheque Dutch-Bangla Bank Limited Uttara Branch, Dhaka Current Account No.

. 1

Date 06/06/2007 Pay to Abdullah Al-Mahmud The sum of TakaTwenty five thousand taka only or bearer

Tk. 25,000/=

SB 3907513 A

DIFFERENCE BETWEEN BILL OF EXCHANGE AND PROMISSORY NOTE

Particulars
1. Definition

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 sum of money only to, or to the order of, a certain person or to the bearer of the instrument. In a bill of exchange there are three parties the drawer, drawee and payee A bill of exchange is an order for making the payment Bill payable after sight requires acceptance of the drawee before it is presented for payment

Promissory note
A promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only or to the order of a certain person, or to the bearer of the instrument. In a promissory note there are two parties the maker of the note and the payee A promissory note contains a promise to make the payment Promissory note does not require it

2. Number of parties

3. Promise and order 4. Acceptance

5. Nature of liability

The liability of drawer of a bill of exchange is secondary and conditional The maker or drawer of an accepted bill stands in immediate relation with the acceptor and not the payee A bill of exchange can be drawn payable to bearer Notice of dishonor must be given by the holder to all prior parties who are liable to pay

The liability of the maker of a promissory note is primary and absolute The maker of promissory note stands in immediate relation with the payee A promissory note cannot be drawn payable to bearer No notice is necessary to the maker

6. Makers position

7. Payable to bearer 8. Formalities in case of dishonor

DIFFERENCE BETWEEN A BILL OF EXCHANGE AND A CHEQUE:

Although a cheque, being a class of a bill of exchange must satisfy almost all the essentials of a bill e.g. signed by the drawer, containing an unconditional order, to pay a certain sum of money, to the order of a person or bearer, etc. Yet, there are few points of difference between the two namely1. A bill of exchange is usually drawn on some person or firm while a cheque is always drawn on a bank. 2. A cheque is generally used for inland payments but a bill of exchange may be used both for inland and foreign payments. 3. Drawer cannot hold the drawee liable on a bill of exchange unless the latter 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. 4. A cheque is always payable on demand. A bill of exchange may be payable on demand or on the expiry of a fixed period. 5. 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 due date. 6. A bill of exchange must be properly stamped. A cheque does not require any stamp. 7. A bill of exchange must be duly presented for payments or else and the drawer will be completely discharged. In the case of a cheque, drawer is discharged from liability only when the delay in presentment has caused him some loss on account of failure of the bank. 8. Unlike cheque, a bill of exchange cannot be crossed.

9. A cheque drawn payable to bearer on demand shall be valid but a bill payable on demand can never be drawn payable to bearer. 10. Unlike bills of exchange, cheques usually are not intended for circulation but for immediate payment. 11. Unlike cheques, the payment of a bill cannot be cancelled by the drawer.

HOLDER AND HOLDER IN DUE COURSE:

HOLDER: Definition by Rule According to the negotiable instruments Act 1881, section 8, holder means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. The Holder of a promissory note, bill of exchange, or cheque means the payee or indorsee who is in possession of it or the bearer thereof and does not include a beneficial owner claiming through a benamder A person is called the holder of a negotiable instrument, if the following conditions are satisfied: # He must be entitled to the possession of the instrument in his own name and under a legal title. Actual possession of the instrument is not essential; the holder must have the legal right to possess the instrument in his own name. For example, if a person acquires a cheque or bill by theft, fraud, or forged endorsement or finds it lying somewhere, he does not acquire in his own name legal title thereto and hence he can not be called its holder. # He must be entitled to receive or recover the amount from the parties concerned in his own name. In case of an order instrument, it is essential that the name of the holder appears on the document as its Payee or endorsee. But in case of bearer instrument the name of the bearer is not essential to be appeared. In case a bill, note or cheque is lost or destroyed, the person who was entitled to receive payment at the time the instrument was lost, will continue to be regarded as its Holder, the finder does not become its holder.

HOLDER IN DUE COURSE: Definition by Rule According to the negotiable instruments Act 1881, section 9, 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 endorsee thereof if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that defect existed in the title of the person from whom he derived his title. A person becomes a holder in due course of a negotiable instrument if the following conditions are satisfied:

1. The negotiable instrument must be in the possession of the holder in due course. 2. The negotiable instrument must be regular and complete. 3. The instrument must have been obtained for valuable consideration, i.e., by paying its full value. 4. The instrument must have been obtained before it is matured. 5. The holder in due course must obtain the instrument without having sufficient cause to believe that any defect existed in the title of the transferor.

DIFFERENCE BETWEEN HOLDER AND HOLDER IN DUE COURSE

From the definitions of the terms holder and holder in due course we may derive the following points of difference between them: 1. Consideration: The existence of consideration is not essential in case of a holder, but a holder in due course obtains the instruments after paying its full value. For example, if a Cheque is issued to provide a gift or donation to a charitable trust, the trust does not become its holder in due course. On the other hand, tuition fee paid to a school or college is for a valuable consideration. Hence the school or the college acquires the status of holder in due course. 2. Possession: The person entitled to be called holder in due course must become the possessor of the instrument before it became payable. For example, if a bill of exchange is payable on March 20, 2007, a person who possesses it before this date is entitled to be its holder in due course. In case of a holder neither actual possession nor any time limit within which it must be acquired is required. 3. Defect in the transferors title: The most important point of difference is that a holder in due course acquires an instrument without having sufficient cause to believe that any defect existed in the title of the transferor. This condition is not essential in case of a holder. Example, A debt is due from a partner of a firm to X. The partner endorses in favor of X a cheque drawn in favor of the firm. The circumstances of the case give rise to doubt about the title of the partner to the cheque drawn in favor of the firm. If X satisfies himself about the partners valid title to the cheque he becomes its holder in due course.

HOLDER FOR VALUE:

The negotiable instruments act does not define the term holder for value. In England, according to the bills of exchange act, where value of a bill has at any time been given, its holder is deemed to be a holder for value as regards the acceptor and all parties to the bill who became parties prior to such time. The person, who claims

himself as the holder for value, need not himself give value. It may be given by prior party. Example: A bill is drawn payable to Mr. Asad, who transfers it to Mr. Rahman for value. Mr. Rahman transfers it to Mr. Samad without consideration. Mr. Samad is called holder for value. He can sue Mr. Asad on the bill if it is dishonored.

PAYMENT IN DUE COURSE: Definition by Rule

The payment of a negotiable instrument should be made to the right person by the paying banker or the acceptor of the bill; otherwise the latter shall be responsible for the same. The negotiable instruments Act provides protection to the paying banker or the drawee of a bill, provided the payment is made as required in the Act. Such payment is called payment in due course. According to the negotiable instrument act 1881, section 10, payment in due course means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned. The essential features of a payment in due course are as follows: 1. The payment should be made in accordance with the apparent tenor of the instrument. 2. The payment should be made in good faith and without negligence. 3. Payment must be made to person who has the actual possession of the instrument. Person making the payment must insist on seeing the instrument before payment and obtain its delivery to him on payment. 4. Payment should not be made under circumstances which afford reasonable ground for believing that the person was not entitled to receive the amount mentioned in the instrument.

SOME RELATED ISSUES

BEARER: Bearer means a person who by negotiation comes into possession of a negotiable instrument, which is payable to bearer. DEFECTIVE TITLE: A person who receives an instrument which has been lost or by means of fraud or any other unlawful means is not entitled to receive the amount due there on unless he claims as holder in due course. LIABILITY OF THE DRAWER: The drawer of the negotiable instrument will remain responsible to the payee till it is paid off.

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LIABILITY OF PRIOR PARTIES TO HOLDER IN DUE COURSE: Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied.

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