Samacheer Kalvi 12th Commerce Notes Chapter 22 The Negotiable Instruments Act, 1881
→ The word “Negotiable” means transferable from one person to another in return for consideration.
→ The word “Instrument” means a written document by which a right is created in favour of certain person.
→ A negotiable instrument is a document which entitles a person to a certain sum of money and which is transferable from one person to another by mere delivery or by endorsement and delivery.
→ According to section 13 of the Negotiable Instrument Act 1881, a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.
→ Characteristics of a Negotiable Instrument – transferability, title of the holder free from all defects and right of the transferee to sue.
→ Negotiability refers to the transferability of all the rights and titles on an instrument by delivery by endorsement and delivery vesting with the bonafide transferee for value even better title that what the transferor had.
→ Assignability refers to the transferability of personal properties and rights from one person to another as gift or sale or as security.
→ According to section 5 of the Negotiable Instrument Act “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”.
According to section 6 of the Negotiable Instrument Act 1881, defines a cheque as “A bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on-demand”.
→ Promissory Note:
According to section 4 of Negotiable Instrument 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”.
→ Crossing a cheque refers to the practice of drawing two parallel transverse lines across the face of a cheque with or without the words ‘and Co’. The effect of this crossing is that the , drawee bank will pay the amount of a cheque only to the banker.
→ Endorsements:
Section 15 of the Negotiable Instrument Act 1881 defines endorsement as follows. “When the maker or holder of a negotiable instrument signs “the name otherwise that as such maker 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 endorse the same and is called the endorsee”.
I. Find out the type of instrument and the reason?
(a) A bill is drawn payable to X or bearer.
It must be expressed to be payable Bill can be made payable to bearer only. Bearer instrument.
(b) Bill drawn in London upon a merchant in Chennai and accepted and payable in Bangalore.
Bill of exchange
Inland instrument remains an inland instrument even if it has been endorsed in a foreign country.
(c) Bill drawn in Delhi upon a merchant in London and accepted and payable in London.
Bill of exchange
An instrument which is not inland instrument is called foreign instrument.
(d) Bill drawn in London on a merchant in Agra and endorsed in Delhi.
Inland instrument remains an inland instrument even if it has been endorsed in a foreign country.
(e) A Bill drawn by Bajaj Auto Agent on Bajaj Auto Ltd.
Promissory Note
An ambiguous instrument means an instrument which can be construed either as promissory note or a bill of exchange.
(f) Bill drawn by A on Y (an imaginary person not in existence) and endorsed to B
Promissory Note
Bill which is drawn accepted without consideration Accommodation instrument.
(g) X gives a blank cheque to Y or gives undated cheque to Y
Promissory Note
It is defined as an instrument which is payable sometimes in future.
(h) X signs stamped and blank promissory note and keep it locked in his drawer
Promissory Note
It means an incomplete instrument in same respect.
II. Find out which of the following is a promissory note?
(i) X promises to pay a sum of ₹ 500 on telephone.
No
(ii) Mr. Y, I owe you ₹ 500
Promissory Note
(iii) I promise to pay Y ₹ 500 + some other charge ,
No
(iv) I promise to pay Y ₹ 500 on Z’s death
No
(v) I promise to pay Y (myself) ₹ 500
Promissory Note
(vi) I promise to pay Y ₹ 500 and to deliver to him my black horse on first January next.
Clues: Answer should be given after reading the characteristics of Promissory note
Promissory Note
III. Classify the following endorsement with reasons
(i) No other words except B’s signature
When the endorser puts his more signature on the back of an instrument without mentioning name of the person to where the endorsement is made – Blank endorsement.
(ii) Pay C
When an endorsement restricts or prohibits further negotiability of the instrument. It is called Restrictive endorsement.
(iii) Pay C or order
Ordinarily the endorsement becomes liable to subsequent parties in the event of dishonour of the instrument. But if he makes it clear that . the subsequent holders should not look to him for payment in case it is dishonoured the endorsement is called San’s Recourse endorsement.
(iv) Pay C only
Where the endorser of a negotiable instrument makes his liability dependent upon the happening of an event which may or may not happen, it is called conditional endorsement.
(v) Pay C or order for the account of B
When an endorsement restrict or prohibits further negotiability of the instrument, it is called restrictive endorsement.
(vi) Pay C or order being the unpaid residue of the bill
Where the endorsement seeks to transfer only a part of the amout payable under the instrument, the endorsement is called partial endorsement does not operate as a negotiation of the instrument.
(vii) Pay C or order on safe receipt of goods
Where the endorser in addition to his signature, specifies the person to whom or to whose order the instrument is payble the endorsement is called endorsement in full.
(viii) Pay C Sans Recourse
Ordinarily the endorser becomes liable to subsequent parties in the event of dishonour of the instrument but if he makes if clear that the subsequent holders should not look to him for payment in case it is dishonoured the endorsement is called San’s Recourse endorsement.
(ix) Pay C, notice of dishonour dispensed with
To make an endorser liable on the instrument, notice of dishonour must be given to him. But if the endorsing waives this right by a writing “Notice of dishonour waived” at the time of endorsing it is called facultative endorsement.