NI Act 1881
NI Act 1881
NI Act 1881
BASIC CONCEPTS
NI Act 1881 – Enactment, Amendments and Applicability
The Negotiable Instruments Act, 1881, was enacted on 09th December 1881 and came in to effect from 1st
March 1882.The Act was amended in the year 1988, to add 5 sections, sections 138 to 142 to the act, to
make bouncing of cheques as cognizable criminal offence. The act was further amended in the year 2002,
to include 5 sections 143 to 147 to the act
The act contains 147 sections in 17 chapters. It extends to whole of India, including Jammu and Kashmir.
NEGOTIATION: MEANING
The act does not contain the definition of the term “Negotiation”. However the definitions of the terms
“Holder” and “Holder in due course” makes us understand that transfer means physical movement of a
negotiable instrument from one person to another, where as negotiation means transfer with title.
According to Section 13 of the Act, “A Negotiable Instrument means a promissory Note, Bill of
Exchange or Cheque payable either to order or to bearer”. According to section 14 of the Act, when a
Promissory Note, Bill of Exchange or Cheque is transferred to any person, so as to constitute that person
the holder thereof, the instrument is said to be negotiated. (Section.14 of the Act).
A Negotiable Instrument is payable to a specific person or a person ordered by him or to the bearer of the
instrument.
A cheque payable to ‘A’ or bearer, is payable to ‘A’ or any person holding the cheque.
A cheque payable to ‘A’ or order is payable either to ‘A’ or a person ordered by ‘A’. A
Negotiable Instrument is negotiable by mere delivery when payable to bearer; by endorsement
and delivery when payable order.
Delivery means mere handing over the instrument. Endorsement is a direction given on the back
of a negotiable instrument either by the payee or any other subsequent transferor of the negotiable
instrument, to the drawee.
As per section 31 of Reserve Bank of India Act 1934, no person other than RBI or Central Government is
empowered to draw, accept, make or issue any Bill of Exchange or Promissory Note payable to bearer on
demand. Currency Notes have all the features of promissory notes. But they are not called promissory
notes, because promissory notes promise to pay money, where as currency notes themselves represent
money.
NEGOTIABILITY VS TRANSFERABILITY
Transfer denotes movement of a financial instrument from one person to another. If the transferor has
title to the instrument, the transferee gets title otherwise won’t. Negotiation is transfer with title. In case
of negotiable instruments, the transferee gets absolute title even though the transferor has defective title
provided the transferee is ‘holder in due course’
PROMISSORY NOTE:
Promissory Note: Definition. (Section 4 of NI Act 1881)
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 to, or to the order of,
a certain person, or to the bearer of the instrument.
FIGURE. 1 PROMISSORY NOTE FORMAT
Rs 45000/-
On Demand, I / We, Mr. Ram S/o Shyam, aged about 35 years, R/o R.K.Puram, Hyderabad,
and Mr. Bheem S/o Som, aged about 53 years, R/o K.R.Puram, Hyderabad, do here by
promise to pay an amount of Rupees Forty Five thousand only, to M/S Model Bank, Road
No 3, Clean Street, Hyderabad, or order, at a rate of Interest of 12% per annum for value
received
Signature of the
Borrower on the
Hyderabad Revenue Stamp
20.06.2018
Pay, after 45 days sight, an amount of Rupees. Forty Five Thousand only, to M/S Model
Bank, Road No 3, Clean Street, Hyderabad, or order for value received
Karta Raj
Business Chowk, Hyderabad
Drawn on:
Karma Dev.
Govind Gunj, Karimnagar
CHEQUE:
Cheque is a mandate, a direction, an order made by the account holder to the banker with whom he is
maintaining an account to pay a specific sum either to him or to a third party.
Cheques are not only used for withdrawing cash from a bank account, but also used as a means to settle
personal and business transactions either for lending or borrowing of money. They are used as substitutes
of money for cashless transactions.
A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise
than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic
form.
Figure No. 3 FORMAT OF A CHEQUE
1 5 0 3 2 0 1 8
HDFC BANK Banjara Hills, Hyderabad
D D M M Y Y Y Y
IFSC /RTGS/NEFT: 0000521
Valid for 3 months only
A/c No 14141414141414
Payable at par at all branches of HDFC Bank
D.Sreenivasa Chary
(D.SREENIVASA CHARY)
Signature of Account Holder
786786 500240002 442218 31
PARTIES TO A CHEQUE
There are three parties to a cheque.
1) Drawer of the Cheque ( Account Holder)
2) Drawee, i.e. The party on whom the cheque is drawn (Bank)
3) Payee. The party to whom the payment is to be made.The parties to the Cheque format given in
Figure 10.3are, Mr. D.Sreenivasa Chary –the drawer of the cheque Mr. P.Rama Shastry –the
payee and M/s HDFC Bank –the drawee bank.
GENERAL ENDORSEMENTS
General Endorsements are basically of two types.
1) Endorsement in blank, and
2) Endorsement in full
1) ENDORSEMENT IN BLANK:
On the back of the negotiable instrument, if the endorser signs his name only, the endorsement is said to
be "in blank".
Example: 1: Mr. Kiran gave cheque to Mr. Lalu. Mr.Lalu wanted to transfer the cheque to Mr. Mohan. If
Mr.Lalu, simply signs on the back of the cheque and hands it over to Mr. Mohan it is called as the
endorsement in blank
2) ENDORSEMENT IN FULL:
On the back of the negotiable instrument, if the endorser signs his name and adds a direction to pay the
amount mentioned in the instrument to, or to the order of, a specified person, the endorsement is said to
be "in full", and the person so specified is called the "endorsee" of the instrument.
Example: 2: In the above example.1, if Mr. Lalu writes Pay to “Mr. Mohan or order”, and signs there
under the endorsement is called as endorsement in full. In such a case, Mr. Lalu is called as endorser and
Mr. Mohan is called as the endorsee. Such an endorsement acts as a direction by Mr. Lalu to the Bank to
make payment to Mr. Mohan
1. RESTRICTIVE Pay to ‘P’ only ‘P’ cannot further endorse the cheque
ENDORSEMENT ‘O’ to anybody
2. PER PRO ENDORSEMENT Pay to ‘S’ or order The endorser “T” is the agent of ‘R’
(per procuration i.e. on behalf “T” Per Pro. ‘R’
of)
3. SANS RECOURSE Pay to ‘X’ or order ‘W’ is not liable in the event of
ENDORSEMENT Sans Recourse ‘W’ bouncing of the cheque
(Without recourse
to the endorser )
4. FACULTATIVE Pay to ‘X’ or order On bouncing of the cheque, even if a
ENDORSEMENT Notice of dishonor waived. notice of dishonor is not served
‘W’ by”X” on “W”, still “W” becomes
liable on the cheque.
5. NEE ENDORSEMENT Pay to ‘C’ or order The endorsement is used for the
(Formerly known as) ‘RK’(Nee ‘RS’) people who have changed their
names. In the present example, the
maiden name of a woman is ‘RS’,
after marriage it is changed as ‘RK’
.
CROSSING
Crossings are applicable to cheques only.
They are not applicable to Promissory notes and Bills of Exchange.
Drawing two transverse parallel lines across the face of cheque is called ‘crossing’.
Crossing implies that the cheque shall not be paid across the counter and it shall be paid only
when presented through a banker.
A cheque which is not crossed is called an open cheque.
Open cheques can be paid across the counter, if they are otherwise in order.
All crossings are deemed as instructions to paying banker.
Crossing of a cheque can be done either by the drawer or any subsequent holder of the cheque.
But cancellation of the crossing is to be done by the drawer of the cheque only.
TYPES OF CROSSING.
Crossings are of two types. 1). General Crossing and 2) Special Crossing
1) GENERAL CROSSING
Two transverse parallel lines across the face of a cheque are compulsory to constitute a general crossing.
In between these two line if there are any word and, if such words have some meaning and if such
meaning implies as ‘instruction to banker’ such words are to be taken note of, otherwise they are to be
ignored. The different types of general crossings are furnished in Figure. No.10.4.
Figure. No.4 GENERAL CROSSINGs
2) SPECIAL CROSSING
Special crossing gives a specific direction to the paying bank stating that the cheque shall not be
honoured unless presented by a specific bank. In between the two transverse parallel lines, if the name of
a bank is mentioned it is called special crossing. In fact two transverse parallel lines across the face of the
cheque are not compulsory to constitute a special crossing. The impression of a rubber stamp showing the
bank and branch name over the cheque is also called special crossing. The round stamp, clearing stamp
showing the name of the Bank and branch constitute a special crossing. The different types of special
crossings are furnished in Figure No.10.5.
Figure. No.5 SPECIAL CROSSINGs
HDFC BANK
Dilshuknagar.
Branch
HYDERABAD