Law 3Law on Negotiable Instruments COURSE OUTLINE • 1.1 Negotiability of instrument • 1.2 Functions and kinds of negotiable instruments • 1.3 Construction of ambiguous instrument • 1.4 Parties and their liabilities • 1.5 Indorsements • 1.6 Accommodation party • 1.7 Consideration jeanromblon,cpa_demo_journalizing 7 Consideration • 1.12 Forgery and its effects • 1.COURSE OUTLINE • 1.cpa_demo_journalizing .10 Requisites of holder in due course • 1.8 Manner and consequence of transfer of instruments • 1.13 Discharge of negotiable instruments and the parties secondarily liable jeanromblon.9 Dishonored instruments and its effects (including clearing house rules and BP 22) • 1.11 Defense of parties • 1. cpa_demo_journalizing .ACT NO. 2031 • jeanromblon. 1911 The law relating to negotiable instruments is contained in the Negotiable Instruments Act. 2031 February 03. ’ The word instrument means ‘a written document by which a right is created in favor of some person. Thus. the term “negotiable instrument” literally means ‘a written document which creates a right in favor of somebody and is freely transferable by delivery.What is Negotiable Instrument? A piece of paper which entitles a person to a certain sum of money and which is transferable from one to another person by a delivery or by endorsement and delivery.’ The word negotiable means ‘transferable by delivery jeanromblon.cpa_demo_journalizing . 6 .Characteristics of negotiable Instruments • • Free transferability or easy negotiability Negotiable instrument is freely transferable. Title of holder is free from all defects A person who takes negotiable instrument bona-fide and for value gets the instrument free from all defects in the title. The holder in due course is not affected by defective title of the transferor or of any other party. signed by the maker. 7 . to pay a certain sum of money only to or to the order of a certain person or the bearer of the instrument.Promissory Note : A “promissory –note” is an instrument in writing [not being a bank-note or a currency-note} containing an unconditional undertaking. Specimen of a promissory note Php. To Mr. Address………. …………… Sorsogon Signature of Mr Y 8 . X of Mumbai or order a sum of Php Fifty Thousand for value received. 2008 Three moths after the date.. I promise to pay Mr. 5000/- Mla November 25. (b) The Endorsee – the person in whose favour the note is negotiated by endorsement jeanromblon. • . the parties involved may be – (a) The Endorser – the person who endorses the note in favour of another person.(ii) The Payee – the person to whom the amount is payable.cpa_demo_journalizing .Parties to a Promissory Note There are primarily two parties involved in a promissory note. In course of transfer of a promissory note by payee and others. They are: • (i) The Maker or Drawer: The person who makes the note and promises to pay the amount stated therein. S for Php. X purchases goods from Mr. Eg .Bill of Exchange • A bill of exchange is an instrument in writing containing an unconditional order. X to pay Php. 1000/Mr.Mr. Y buys goods from Mr. 10 . Y for Php. S. or to the order of a certain person or to the bearer of the instrument. Y may order Mr. 1000/Mr. directing a certain person to pay a certain sum of money only to. 1000/Then Mr. signed by the maker. This is called a Demand Bill. jeanromblon.In a bill where a time period is mentioned.cpa_demo_journalizing . is called a Time Bill. He is generally a debtor of the drawer.Parties to a Bill of Exchange There are three parties involved in a bill of exchange (i) The Drawer – The person who makes the order for making payment.. But a bill may be made payable on demand also.The drawer can also draw a bill in his own name thereby he himself becomes the payee. (iii)The Payee – The person to whom the payment is to be made. In the above specimen (ii)The Drawee – The person to whom the order to pay is made. just like the above specimen. Here the words in the bill would be Pay to us or order. • Once the bill is drawn. • • the Drawee is under no obligation to accept the bill • • If it is accepted. sign and date it and return it to the • Drawer. the Drawee at this point becomes the Acceptor • • The acceptor promises at that point to pay the bill in accordance with its terms • • If the Drawee refuses to accept. it is sent to the Drawee for acceptance who would • write “accepted” across the face of the bill. the bill is said to be dishonoured jeanromblon.cpa_demo_journalizing . Form of negotiable instruments . or at a fixed or determinable future time. (b) Must contain an unconditional promise or order to pay a sum certain in money. .cpa_demo_journalizing .An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer.• • • • • • Section 1. and (e) Where the instrument is addressed to a drawee. he must be named or otherwise indicated therein with reasonable certainty jeanromblon. (c) Must be payable on demand. (d) Must be payable to order or to bearer. • It must be signed by the maker. • It must be unconditional. The promise to pay must be definite. It must be definite. Undertaking to pay must be unconditional.Essential characteristics of a Promissory Note • • • • Promissory note is a negotiable instrument It must be in writing It is a promise to pay money only. 14 . consideration. are generally found in the promissory notes but they are not essential in law. • Amount of the promissory note must be certain. place etc.• Maker of the promissory note must be a certain person and the payee must also be certain. date. 15 . • Other formalities like number. the person thereby directed to pay is called the "Drawee".” The maker of a bill of exchange or Cheque is called the “Drawer".Cheque “A cheque is a bill of exchange drawn on a specified banker and expressed to be payable otherwise than on demand. 16 . It is always drawn on a specified banker.Essential characteristics of a Cheque • • • • • A cheque is a negotiable instrument. A cheque can be bearer. order or crossed 17 . It is always payable on demand. It is a bill of exchange. a drawer is a person who draws a cheque and who has an account in the bank ad payee is a person to whom the amount of cheque is made payable. a drawee is always a specified bank. 18 .• A cheque requires no acceptance in the ordinary course of business as it is intended for immediate payment. • In case of a cheque. interest of a person in a negotiable instrument to another person so as to give a good title to the transferee and make a transferee a holder of such instrument.Negotiation “It is a process of transferring the ownership. title.” 19 . right. Mr. But if he hands over a cheque to Mr.Negotiation does not mean a simple transfer. 20 . Y does not become its holder but only a bailee. Simple transfer may not necessarily involve the transfer of property in the negotiable instrument but negotiation implies the transfer of property or ownership. Y asking him to keep the same in his safe. the cheque is not negotiated to Mr. Y. Eg -X hands over a cheque to Mr. X has negotiates the instrument. Y here Mr. 21 . the transferee must become the holder of the instrument. • As a result of such transfer.Essentials of negotiation • There must be transfer of a negotiable instrument to another person. actual possession of the instrument is not passed.” It is physical act of delivering the instrument or handing over the delivery. actual or constructive. 22 .Modes of negotiation: • Negotiation by delivery – The negotiable Instrument is transferred by delivery. • Negotiation by endorsement and delivery – The negotiable Instrument payable to order is negotiable by the holder by endorsement and delivery thereof. Endorsee .The person who signs on the back or on the face of the instrument or on the slip is an endorser.The person to whom the instrument is endorsed is called the endorsee.” Endorser .Endorsement “Literal meaning of the term endorsement is writing on an instrument. 23 . 24 .Endorser signs his name either on the back or face of the instrument. • Full or special endorsement .Types of Endorsement • General or blank endorsement .It specifies the name of the person to whom or to whose order the payment must be made. • Partial endorsement – Endorsement is made for remaining balance of payment. 25 . • Conditional endorsement – The liability of the endorser is limited or negative. 26 . Promissory notes and Cheques may be dishonored by non payment • Bills of exchange may be dishonored by non payment or by non-acceptance as they require acceptance from drawees.Dishonour of negotiable instrument • Negotiable instruments. 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