Negotiable Instruments

Act , 1881

The Negotiable Instruments

05/30/10 Act,1881 1
 NEGOTIABLE INSTRUMENTS
The Negotiable Instruments act,1881 governs the law relating
to the negotiable instruments in India. The act relates to
Promissory Notes, Bills of Exchange & Cheques.
CHARACTERISTICS OF NEGOTIABLE INSTRUMENT-
 Free transferability – It can be transferred by mere delivery or by
endorsement & delivery.
 The Holder of the instrument is presumed to be the owner of the
property contained therein.
 The Holder in due course gets it free from all defects including fraud
provided he was not party to it.
 The Holder in due course is entitled to sue for recovery of the sum in his
own name.
 The instrument is transferable till maturity & in case of cheque till it
becomes stale i.e. on the expiry of 6 months from the date of issue.
KINDS OF NEGOTIABLE INSTRUMENTS
 Promissory Notes
 Bills of Exchange

 Cheques

PROMISSORY NOTES – It is an instrument in writing

containing an unconditional undertaking signed by the maker to
pay a certain sum of money only to the bearer of the instrument.
PARTIES TO A PROMISSORY NOTES – There are basically
two parties to a promissory notes. The person making or
executing the note promising to pay the amount stated is called
the Maker. The person to whom the amount is payable is called
payee.
 CHARACTERISTICS OF PROMISSIORY NOTE
 It must be in writing
 It must contain an express promise to pay. An
implied promise is not enough to constitute a
promissory note.
 The promise or undertaking to pay must be definite
& unconditional.
 The maker must sign the negotiable instrument
without which it is taken as incomplete &
ineffective .
 The negotiable instrument must clearly point out the
maker.
 The sum payable must be certain without any scope
of additions or subtractions.
 CHARACTERISTICS OF NEGOTIABLE INSTRUMENT

 The payment must be in money & not in kind.

If the instrument contains an agreement to pay
in kind then it cannot be considered as a
promissory notes.
 The promissory note should clearly point out
the person who is to receive payment on the
note.
 The promissory note must be properly stamped
in accordance with the provisions of the Indian
Stamp Act.
 BILLS 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 a certain person or to the bearer of
the instrument.
PARTIES TO BILL OF EXCHANGE –
 The person who draws the bill is called the Drawer.
 The person on whom the bill is drawn is called the Drawee.
 The person who accepts the bill is called the acceptor.
 The person to whom the sum stated in the bill is payable is the payee.
 The person who is in the lawful possession of the bill is called the Holder.
 The person who indorses the bill in favour of another person is called the indorser.
 The person in whose favour the bill is indorsed is called the indorsee.
CHARACTERISTICS OF BILLS OF EXCHANGE
 It must be in writing.
 It must contain an unconditional order to pay when the
drawer draws it.
 The drawer must sign it to make it valid. Absence of the
drawer’s signature will render it invalid and ineffectual.
 The parties must be certain. The bill should indicate the
person who is the drawee.
 The sum payable must be certain.
 It must follow with other formalities like number, date,
consideration, stamp etc.
 Cheque

“a bill of exchange drawn on a



specified banker and not expressed

to be payable otherwise than on
demand
 it includes the electronic image of a
truncated cheque and a cheque in
the electronic form.”
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 Cheque
Marking of Cheques

 At drawer's instance
 At holder’s instance
 At collecting Banker’s instance

Crossing of Cheques

 General crossing
 Special crossing
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 Crossing of Cheques
 A cheque can be an open or crossed cheque
 Open cheques can be encashed directly across the counter
by presenting to drawee bank. But if it is lost or stolen it can
be encashed by any body unless countermanded (stop
payment)
 Crossing of the cheque was introduced with a view to avoid
the losses that may result from the open cheques
 Crossing is a direction to the bank to pay the money
generally to a bank or to a particular bank
 It is made with the intention to make the payment secured
 Its negotiability is not affected unless
“Not Negotiable“ is inserted but it is still transferable
Modes of Crossing
 Where a cheque bears across it face an addition of words "and
company” or any abbreviation thereof, between two parallel
traverse lines, or of two parallel simply, the addition shall be
deemed a crossing and it is known as ‘general crossing’.

 General Crossing- In general crossing it is the responsibility of the

drawee bank not to make payment otherwise than a bank

continued….
Other modes
 Special Crossing -Across its face it bears an addition of the
name of a banker with or without the words “ Not
Negotiable”.
 Restrictive Crossing-” Account payee” are added to the
general or special crossing. The amount has to be credited
to the account of the payee. They are not negotiable.
 Not Negotiable Crossing- It means that the title of the
transferee cannot be better than the transferor. It is
crossed so, as a protection to the drawer or holder of the
cheque against miscarriage or dishonesty in the course of
transit by making it difficult to get cashed, until it reaches
its destination.
 Distinguishing Features
 Bill of Exchange  Cheque
 Drawn on any person  Drawn on a banker
 Bill must be accepted  Cheque requires no
before drawee can be acceptance
called for payment  Not entitled to any
 Entitled to 3 days of days of grace
grace  May be crossed
 Not crossed  Does not require
 Requires stamp stamp
 May be protested for  Not protested for
dishonour dishonour

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 Indorsement:
 When the maker or holder of a negotiable instrument signs the same
for the purpose of negotiation, on the back or face thereof or on a slip
of paper annexed thereto, or so signs for the same purpose a stamped
paper intended to be completed as a negotiable instrument, he is said
to indorse the same, and is called the inndorser

Essentials of Valid Indorsement: -

 It must be on the instrument itself

 It must be signed by the indorser
 It must be completed by the delivery of the instrument

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 Kinds of endorsement
 Endorsement in blank: If there is only name of the endorser
( payable to bearer)
 Endorsement in full- If it made to a specified person, A
blank endorsement may be converted into full.
 Sans recourse endorsement- Exclude his personal liability
by limiting the liability.
 Conditional endorsement- If a condition is specified by the
endorser
 Restrictive endorsement- if it specified to one person only
 Facultative endorsement-If the provisions of giving notice of
dishonor is waived by the endorse
 Features of indorsement

 Intention should be there for negotiating the instrument.

 Effected by the signature of drawer or holder of a
negotiable instrument.
 Indorsement can be made on the back or face of
instrument generally – it can be made on a plain paper or
on a stamp paper)
 The person who signs is called – Indorser/endorsor
 The person in whose favour it is made is called-
Indorsee/endorsee.
 The additional slip pf paper, if used for indorsement is
called as “ allonge”
 Capacity Of Partners:
Every person capable of contracting, according to the law to
which he is subject, may bind himself and be bound by the
making, drawing, acceptance, endorsement, delivery and
negotiation of a promissory note, bill of exchange or cheque.

 Minors
 Persons of unsound mind
 Corporations
 Agents
 Partners
 Hindu Joint Family
 Legal Representatives

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 Holder ( Sec 8)
 A person who is entitled to hold the negotiable instruments
in his own name, to possess the instrument and to recover
or receive its amount due from the parties thereto is called
a holder.
 To be a holder the person must be named in the
instrument as a payee, or the endorsee or a bearer thereof
Holder in due course (HDC)
 If a person proves that he acquired the instrument
for a valuable consideration, then he is known as
holder in due course.
 The holder in due course should show that for
consideration he became the payee or indorsee of
the instrument , if it is payable to the order.
 In such cases, the instrument should have been
indorsed and delivered to him, as his title to the
instrument will be incomplete without delivery.
 Important points in dishonour of
cheques
1) Cheque should presented for payment within 6 months
from its date or within its validity period.
2) Within thirty days of the receipt of information by him from
the bank regarding the return of the cheque as unpaid, a demand
notice should be given in writing by the payee or holder in due
course to the drawer of the cheque.
3) Within 15 days of receipt of above notice, if the drawer fails to make
payment, then the holder or holder in due course has right to file a
criminal complaint for the offence within 30 days from the date of
cause of action (refer to Section 142).
 Punishment for the offence of
dishonour of cheque

i. Imprisonment for a term which

may extend to two years,
ii. or with fine which may extend
to twice the amount of the
cheque
iii. or with both
 The Securitization and
Reconstruction of Financial assets
and Enforcement of Security
Interest Act, 2002. (SARFAESI ACT )

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 Recovery of Debt
 The recovery of bad debts was to be executed by
establishment of Debt Recovery Tribunals ( 29 Tribunals).
 In order to provide opportunity for an appeal from the
decision of the Tribunal the Government had established
DRAT i.e. Debt Recovery Appellant Tribunals (5 DRATs).
 The recovery performance was not encouraging and
therefore the Government wanted to enact an Act for
controlling on the NPA’s and on the creditor’s right of
enforcement of security interest.

Therefore the Parliament enacted the SARFAESI Act,
2002
 Objectives of the Act
 It has laid down the legal framework for securitization of
the Assets.
 The transfer of NPA’s to asset reconstruction companies
for the disposal of the assets and to realize the
proceeds.
 To enforce the security interest without the Court
intervention.
 One of the provisions in the Act empowers the banks
and financial institutions to take over the immovable
property that is hypothecated or charged to enforce the
recovering of debt by directly seizing the property .
 Purpose
 The Act was made to help banks and other financial institutions
in recovering the NPA’s.
 It has been made with a combination of three concepts
 Securitization
 Asset Reconstruction and
 Enforcement of security interest without the Court intervention

An amendment is brought to this Act for facilitating SARFAESI

Act,2002, Debt Recovery law, 1993 and Companies Act by
passing The Enforcement of Security Interest and Recovery of
Debts Laws ( Amendment ) Act, 2004.
The Amendment was based on the ruling of the SC in Mardia
Chemicals Vs. ICICI Bank
 What are the benefits of the Act?

Securitization and Asset Reconstruction:

 The main objective is to sell the secured NPA
loans to investors through a special purpose
vehicle called Securitization Company.
 Such Company will take over the financial assets
and the company which takes over will be treated
as a secured creditor for all purpose.
 What will the Securitization Company
Do?
 The Securitization Company will formulate a separate
scheme for each assets or set of assets.
 Then it will invite Qualified Institutional Buyers (QIB’s) for
investing in such a scheme.
 Then such company will issue security receipts to QIB’s.
 Such receipts will represent the individual interest in such
financial assets.
 The company will realize the financial assets and redeem the
investment by paying the proceeds to QIB’s under each scheme.
 Asset Reconstruction (AR)
 It involves securitization and enforcement of the security
interest. Such company has to register with the RBI.
 It will be considered to be a Public Financial Institution under the

Companies Act.
The Purpose of the AR is :
 Registration of Securitization or Reconstructions of Companies

with the RBI and to comply with the formalities for their
registration and
 The effect of non -registration or rejection of such application of

such companies.
 Once the Asset Reconstruction Company (ARC) takes over the

assets, the company will be treated as a lender or secured

creditor.
 ARC will acquire NPA loan from banks and Financial Institutions

by issuing debentures, bonds or by entering into special

arrangements.
 What does ARC do?

 ARC formulates a scheme for each of financial assets taken over

and invites investment from QIB’s in such schemes.
 ARC issues security receipts to QIB’s.
 ARC realizes the financial assets and redeems the investment and
pays returns to QIB’s under each scheme.
 AR involves any one or more of the following measures:
 Rescheduling of payment of dues payable by the borrower
 Enforcement of security interest in accordance with the provisions
of the Act
 Settlement of dues payable by the borrower
 Taking possession of securities
 Provisions of the act
 The provisions of this act are applicable only for NPA
loans with outstanding above Rs. 1.00 lac. NPA loan
accounts where the amount is less than 20 % of the
principal and interest are not eligible to be dealt with
under this Act.
 Non-performing assets should be backed by securities
charged to the bank by way of hypothecation or
mortgage or assignment . Security interest by way of
Lien, pledge, hire purchase and lease not liable for
attachment under sec. 60 of CPC, are not covered
under this act.
 Process for enforcement under
the act

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Secured NPA
Bank
• Exceeding
• se 1 lakh empowere
• Default amount more as secured
than 20%principal and creditor
interest under the
• Other than exempted Act
categories under
section 31

Appeal to DRAT

• Deposit of 50 % Right to appeal to DRT

of debt
• Within 45 days
claimed/determi
• DRT to dispose of
 Process
In case borrower fails to discharge his liability in full
within the period specified in subsection(2) , the
secured creditor may,
 take possession of secured assets of the borrower
including the right to transfer by way of lease ,
assignment or sale for realizing the secured asset;
 Take over the management of secured asset of the
borrower including the right to transfer by the lease
, assignment or sale and realize the secured asset;
 Appoint any person to mange the
secured assets the possession of
which has been taken over by
secured creditor
 The Act empowers the Bank
 To issue demand notice to the defaulting borrower
and guarantor, calling upon them to discharge
their dues in full within 60 days from the date of
the notice.
 To give notice to any person who has acquired any
of the secured assets from the borrower to the
surrender the same to the bank.
 To ask any debtor of the borrower to pay any sum
due or becoming due to the borrower.
 Any security interest created over Agricultural land
cannot proceeded with.
 Sec 13 (3)
 If on receipt of demand notice, the
borrower makes any representation or
raises any objection, Authorized Officer
shall consider such representation or
objection carefully and if he comes to the
conclusion that such representation or
objection is not acceptable within 1 week
of receipt of such representation or
objection.
 Sec 13 (4)
 The Act provides for four measures which

can be taken by the secured creditor in

case of non-compliance with the notice
served upon the borrower.
2. under clause (a) of sub-section (4), the
secured creditor may take possession of
the secured assets including the right to
transfer the secured assets by way of
lease, assignment or sale.
3.under clause (b) of sub-section (4), the
secured creditor may take over the
management of the secured assets
including right to transfer.
4. Under clause (c) of sub-section (4), the
secured creditor may require any person
who has acquired any secured assets
from the borrower or from whom any
money is due to the borrower to pay the
same to him as it may be sufficient to
pay the secured debt
Sec 13 (10)
Where dues of the secured creditor are not fully
satisfied with the sale proceeds of the secured
assets, the SECURED CREDITOR may file an
application in the form and manner as may be
prescribed to the DRT having jurisdiction or a
competent court , as the case may be , for
recovery of the balance amount from the
borrower/guarantors
 Exemptions from Enforcement
 Lien
 Pledge
 Security in Air Crafts/ Shipping Vessels
 Conditional Sale/ Hire Purchase/ Lease
 Unpaid Sellers Rights
 Security Interest in Agricultural Land
 Properties not liable for Attachment (Civil Procedure Code)
 Any Financial asset: not exceeding Rs 1.00 lakh or where
the amount due is less than 20% of the Principal amount
and Interest.
 THANK YOU

Anjali Kumari
Manali Tongia
Megha Kharkwal

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