Legal environment of Business Course code: EM 526

Presentation on Negotiable instruments

Name Tanzila Rahman Bipul Biswas Tahmida Jakia : ID 03-11-20-050 03-10-19-063 03-11-20-037

S.K.M. Moklesur Rahman 03-10-19-072

Md. Arman

03-10-19-046

Negotiable Instruments

Documents of certain type, used in commercial transactions and monetary dealings, are called Negotiable Instruments.

Negotiable means transferable by delivery

Instrument means a written document by which a right is created in favour of some persons.

The term Negotiable Instrument, literally means a document transferable by delivery.

Thus a Negotiable Instrument is one which, the true owner could transfer, the contract or engagement contained therein by simple delivery of the instrument.

Negotiable Instruments

According to Banglapedia 'negotiable instrument' refers to financial instruments that can be sold, paid or transferred by mere endorsement. These are payable either to order or to a bearer by endorsement in due course. Negotiable instruments got their formal identity and recognition with the promulgation of the Negotiable Instruments Act, 1881.

Negotiable Instruments
An analysis of the definition by Judge Wills expressed the following characteristics of a negotiable instruments:

Property in the instrument passes from hand to hand by mere delivery

The holder in due course is not affected by defects in the title of his transferor or of previous holders. The holder in due course can sue in his own name. The holder in due course is not affected by certain defenses which might be available against previous holders, e.g., fraud to which he is not a party. It passes from hand to hand like cash and can be conveniently assigned in discharge of dents.

Promissory Note (Pro-Note or Hand Note)

Definition 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 order of a certain person, or to the bearer of the instrument.

The person who makes the promise to pay is called the Maker. He is the debtor and must sign the instrument. The person who will get the money (the creditor) is called payee.

Promissory Note (Pro-Note or Hand Note)

Essential Elements

The instrument must be in writing The instrument must be signed by the maker of it The instrument must contain a promise to pay. The promise to pay must be express. It cannot be implied or inferred. A mere acknowledgement of indebtedness is not enough.

The promise to pay must be unconditional. If the promise to pay is coupled with a condition it is not a promissory note.
The maker of the instrument must be certain and definite.

A promissory note must be stamped according to the Stamp Act of the country

Promissory Note (Pro-Note or Hand Note)

An instrument is valid as a promissory note if it is so drafted as to satisfy the essential requirements of a promissory note. Subject to this condition the parties may use any form desired. Some typical forms are given below: on demand IAB promise to pay CD or his order the sum of Tk. 2000.00 for value received. IAB promise to pay CD Tk. 2000.00 IA acknowledge myself to be indebted to B in Tk. 2000.00 and promise to pay the said amount on demand for value received. At three months after date IA promise to pay B the sum of Tk. 2000.00 only. Value received

Bill of Exchange
Definition 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.

The maker of the bill of exchange is called the Drawer.

The person who is directed to pay is called the Drawee. The person who will receive the money is called the Payee.

When the payee has custody of the bill, he is called the Holder.
It is the holder's duty to present the bill to the drawee for his acceptance. The drawee signifies his acceptance by signing on the bill. After such signature the drawee becomes the Acceptor. In a bill of exchange sometimes the name of another person is mentioned as the person who will accept the bill if the original drawee does not accept it. Such a person is called the Drawee in case of need.

Bill of Exchange
Essential Elements of Bill of Exchange: A bill of exchange be valid must fulfill the following requirements:

The instrument must be in writing. The instrument must be signed by the drawer The instrument must contain an order to pay, which is express and unconditional. The drawer, drawee and the payee must be certain and definite individuals.

The amount of money to be paid must be certain.

The money must be payable to a definite person or according to his order.

A bill of exchange must be properly stamped.

The bill may be made payable on demand or after a definite period of time.

Differences between a promissory note and a bill of exchange

Number of parties: In a promissory note there are two parties-the maker and the payee. In a bill of exchange there are three partiesthe drawer, drawee and the payee.

Promise and order: In a promissory note there is a promise to pay. In bill of exchange there is an order to pay.
Acceptance: A promissory note is signed by the person liable to pay; therefore, no acceptance is necessary. A bill of exchange except in certain cases , requires to be accepted by the drawee before it is binding upon him.

Liability: The maker of promissory note is primarily liable on the instrument. The drawee of a bill is liable only when the drawee does not accept the instrument or pay the money due.

Differences between a bill of exchange and a cheque

Bill of exchange
Payable on demand, or at a fixed or determinable future date Drawn on anyone Cant be crossed (always negotiable) Continuing security Obligation from acceptance of bill Substantial trading transactions

Cheque
Payable on demand Drawn on a financial institution Can be crossed Presented for payment within a reasonable time Ongoing relationship Day-to-day transactions

Comparison among bill of exchange, promissory note and cheque

Bill of exchange Nature Basic parties Payers qualification Primary debtor Maturity Acceptance Entrusted payment Drawer, drawee, payee No restriction Acceptor On demand Determinable future time

Promissory note Self payment Drawer & payee Drawer Drawer On demand

Cheque Entrusted payment Drawer, drawee, payee Banks No On demand

Requirements for negotiable instruments :

Be in writing

Be signed by the maker or drawer

Be an unconditional promise or order to pay State a fixed amount of money Not require any undertaking in addition to the payment of money

Be payable on demand or at a definite time

Be payable to order or to bearer

Factors That Do Not Affect Negotiability

Undated checks.

Pre or Post-Dating Checks.

Handwritten Terms.
Outweigh typed or printed terms.

Words outweigh Figures. With Interest.

Check says Nonnegotiable.

Methods of Negotiation
Negotiable instruments may be negotiated in two ways:
By endorsement and delivery; or By delivery only.

There are various types of endorsement:

Special endorsement; Conditional endorsement; Qualified endorsement; and Anomalous endorsement.

Indorsement
The signature (and other directions) written by or on behalf of the holder somewhere on the instrument. The signature may:
Appear alone Name an individual to whom the instrument is to be paid, or Be accompanied by other words

Indorsement is a signature, with or without words or statements. Indorser: person who transfers instrument by signing it and delivering to another person.

Indorsements
Blank Indorsements. Special Indorsements. Qualified Indorsements.

Restrictive Indorsements
Conditional Indorsements. Indorsements for Deposit and Collection.

Restrictive Indorsements
Trust (Agency) Indorsements.

Miscellaneous Indorsement Problems

Misspelled Names. Indorsement should be identical to the name on the instrument. Alternative or Joint Payees. Only one of the payees needs to indorse.

Suspension of the Drawers Obligation.

Holder
Holder
According to section 8 the holder of a promissory note , bill of exchange or cheque 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
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, a thief, or a finder on the road although may be having the possession of the instrument, cannot be called its holder because he does not acquire the legal title thereto and hence is not entitled in his own name to the possession thereof.

He must be entitled to receive or recover the amount from the parties concerned in his own name.

Holder in Due course

Holder in due course:
A person becomes a holder in due course 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 and to recover the amount thereof from the parties liable thereto. The negotiable instrument must be regular and complete in all respects. Alterations, if any, must be confirmed by the drawee through his signature. Holder of an incomplete document cannot be its holder in due course.

The instrument must have been obtained for valuable consideration, i.e., by paying its full value. A banker, who receives a cheque as a gift, will not be called holder in due course without consideration. The consideration must be legal and adequate. For example, if a cheque is given in respect of a debt incurred in gambling, the consideration for the cheque is unlawful. If the value of the of the consideration falls short of the amount of the instrument, the person will be deemed as holder in due course to the extent of the value of consideration.

 Prerequisites for being holder in due course

A person who claims to be holder in due course is required to prove: That he is a holder: That he is a holder for consideration: Acquisition before maturity: That he has no knowledge of defective title.

Right of a holder:
The holder of a negotiable instrument enjoys the following rights: An endorsement in blank may be converted by him into an endorsement in full. He is entitled to cross a cheque either generally or specially with the words Not negotiable. He can negotiate a cheque to a third person, if such negotiation is not prohibited by the direction given in the cheque. He can claim payment of the instrument and can sue in his own name on the instrument.

A duplicate copy of a lost cheque may be obtained by a holder.

Difference between holder and holder in due course

1. Meaning: Holder means any person entitled in his own name to the possession of the
negotiable instrument and to recover or receive the amount due thereon from the parties thereto. A holder in due course on the other hand, means a holder who takes the instrument in good faith for consideration before it is overdue and without any notice of defect in the title of the person who transferred it to him. 2. Consideration: A person who claims to be a holder in due course must show that he acquired the instrument for consideration. However consideration may not pass from a holder of the instrument. 3. Title : Holder of negotiable instrument does not acquire a better title than that of the person from whom he acquired the instrument. Thus a holder does not acquire a good title if the title of any of the prior parties is defective. But a holder in due course gets a good title even though there was a defect in the title of any prior parties to the instrument. 4. Liability: A holder in due course can sue all prior parties to a negotiable instrument until the instrument is duly satisfied. Whereas a holder of the instrument can enforce it against the person who has signed it and also against the transferor from whom he obtained it. 5. Maturity:A person will be a holder in due course only if he acquires the instrument before the amount mentioned in it become payable. But a holder may acquire the instrument even after it has become due for payment.

Cheque
Types of Cheque
Open cheque: A cheque is called Open when it is possible to get cash over
the counter at the bank. The holder of an open cheque can do the following: Receive its payment over the counter at the bank, Deposit the cheque in his own account Pass it to some one else by signing on the back of a cheque. Crossed cheque: Since open cheque is subject to risk of theft, it is dangerous to issue such cheques. This risk can be avoided by issuing another types of cheque called Crossed cheque. Bearer cheque: A cheque which is payable to any person who presents it for payment at the bank counter is called Bearer cheque. A bearer cheque can be transferred by mere delivery and requires no endorsement.

Cheque
Types of Cheque (Contd)
Order cheque: An order cheque is one which is payable to a particular person. In such a cheque the word bearer may be cut out or cancelled and the word order may be written. The payee can transfer an order cheque to someone else by signing his or her name on the back of it.
Ante-dated cheques:- Cheque in which the drawer mentions the date earlier to the date of presenting if for payment. Stale Cheque:- A cheque which is issued today must be presented before at bank for payment within a stipulated period. After expiry of that period, no payment will be made and it is then called stale cheque. Find out from your nearest bank about the validity period of a cheque. Post-dated Cheque:- Cheque on which drawer mentions a date which is subsequent to the date on which it is presented, is called post-dated cheque

Crossing cheque
Crossing of Cheque:
A cheque is said to be crossed when two parallel transverse lines are drawn across the face of the cheque, with or without words like & Co, or not negotiable inserted between them.

General Crossing: Where a cheque bears across its face an addition of the words and company or any abbreviation thereof, between two parallel transverse lines, or two parallel transverse line simply, either with or without the words not negotiable that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally.

Crossing cheque
Crossing of Cheque (Contd) Special Crossing: where a cheque bears across its face an addition of the name of banker, either with or without the without the words not negotiable that addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially and to be crossed specially and to be crossed to that banker.[ Section 124]

Persons who can Cross a Cheque: Crossing is an instruction or a direction to

the paying banker. Obviously, the drawer of a cheque is competent to cross it generally or specially. Section 125, however, permits the following persons also to cross the cheque:

The holder of a cheque may cross it generally or specially, if; it is uncrossed or may cross it specially if it is crossed generally or may add the words 'not negotiable' in case of both types of .crossing.
The banker to whom the cheque is crossed specially may again cross it especially to another banker, his agent, for collection. This is called Double Special Crossing.

 Liability of the Paying Banker on Crossed Cheques

According to the section 126 Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker and where and where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed or his agent for collection.
"Any banker paying a cheque crossed generally, otherwise than to a banker, or a cheque crossed specially, otherwise than to the banker to whom the same is crossed, or his agent for collection being a banker, shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid."

Acceptance
Acceptance: only applies to bill of exchange. Presentation: precondition for acceptance by drawee, except for sight draft Payer should decide whether to accept such draft within three days from the receipt of it. If accepted, indicate the date of acceptance and such express words as "acceptance" on the face of the draft, and affix the signature or seal on it.

Draft payable at a fixed date after sight: date of payment must be indicated on it.

Dishonor
Occurrence and certificate of dishonor

Occurrence Upon maturity Prior to maturity Non-payment Non-acceptance Drawee or acceptors death or disappearance Drawee or acceptors bankruptcy Drawee or acceptors closure

Certificate Certificate of refusal Certificate of refusal Bankruptcy order Administrative decision

Notice of dishonor
Bearer shall inform the previous parties: within 3 days from receipt of certificate of dishonor or rejection of acceptance Upon receipt of such notice by the predecessor, he shall inform his next immediate predecessor within 3 days. Notice: contain major written items of the instrument and explanation for rejection

Protection of lost-instrument holders

If lost before payment is due, lost-instrument holder may notify drawee to suspend payment. Within 3 days of giving the notice for suspension of payment or after the loss of the instrument, lost-instrument holder may apply to court for publication of public notice for assertion of claims Holder other than the lost-instrument holder comes forward to claim the rights during the foregoing withholding period, the litigation method shall be utilized

Liabilities of Parties to Negotiable Instruments

Liability of drawer :
The drawer of a bill of exchange or cheque is bound in case of dishonour by the drawee or acceptor thereof, to compensate to the holder, provided due notice of dishonour has been given to, or received by, the drawer as hereinafter provided. (a) (b) a bill of exchange may be dishonoured by non-acceptance a bill of exchange may be dishonoured by non-payment

Liability of drawee of a cheque:

The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque when duly required to do so, and in default of such payment, must compensate the drawer for any loss or damage caused by such default.

Liabilities of Parties to Negotiable Instruments

Liability of drawer :
The drawer may be punished with imprisonment for a term up to one year or with fine up to thrice the amount of the cheque or with both because of insufficiency of funds was deemed as an offence . To Provide for such punishment, provided the following conditions are fulfilled: 1.The cheque should be presented to the paying banker in time 2.The dishonor of the cheque should be on account of insufficiency of funds only if either the amount of money standing to the credit of the account of is insufficient or that the amount of cheque exceeds the amount arranged to be paid from that account by an agreement with the bank. 3.The payee or holder in due course should give notice in writing to the drawer demanding payment, within 15 days of his receiving information of dishonor. 4.If the drawer fails to make payment to the drawee within 15 days of the receipt of the notice. 5.The complaint can be made only by the payee or holder in due course.

Liabilities of Parties to Negotiable Instruments

Liability of Maker and Acceptor: In the absence of a contract to the contrary, the maker of a promissory note and the acceptor before maturity of a bill of exchange are bound to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance respectively, and the acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the holder on demand. Effect of forged Endorsement on acceptors liability An acceptor of a bill already endorsed is not relieved from liability by reason that such endorsement is forged, if he knew or had reason to believe that the Endorsement was forged when he accepted the bill .

Liabilities of Parties to Negotiable Instruments

Liability of acceptor of a bill drawn in a fictitious name

An acceptor of a bill of exchange drawn in a fictitious name and payable to the drawers order is not relieved from liability to any holder in due course claiming under an Endorsement by the same hand as the drawers signature, and purporting to be made by the drawer. (Section 42 ) Liability of endorser The endorser of an instrument by endorsing and delivering the instrument, before maturity, undertakes the responsibility that 1. That on the due presentment it shall be accepted, (if a bill), and paid; and

2. That if it is dishonoured by the drawee, acceptor or maker, he will indemnify the holder or subsequent endorsers who are compelled to pay, provided due notice of dishonour is received by him.

Thank You All

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