Banking Awareness Question Day 8

Banking Awareness Question Day 8: The Negotiable Instrument Act, 1881

Negotiable Instrument Act: According to Section 13 of the Negotiable Instrument Act, 1881, Negotiable Instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer. A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees.

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A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, with the payer usually named on the document.

More specifically, it is a document contemplated by or consisting of a contract, which promises the payment of money without condition, which may be paid either on demand or at a future date.

According to Section 13 of the Negotiable Instruments Act, A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.

1. Promissory Note:
  • 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.
2. Bill 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, or to the order of, a certain person or to the bearer of the instrument.
  • A promise or order to pay is not “conditional”, within the meaning of this section and section 4, by reason of the time for payment of the amount or any installment thereof being expressed to be on the lapse of a certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain.
  • The sum payable may be “certain”, within the meaning of this section and section 4, although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an installment, the balance unpaid shall become due.
  • The person to whom it is clear that the direction is given or that payment is to be made may be a “certain person”, within the meaning of this section and section 4, although he is misnamed or designated by description only.
3. Cheque”
  • A cheque is 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.
  • Explanation: I: For the purposes of this section, the expressions-

(a) a cheque in the electronic form means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric cryptosystem;
(b) a truncated cheque means a cheque that is truncated during the course of a clearing cycle, either by the clearinghouse or by the bank whether paying or receiving payment, immediately on the generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.

  • Explanation II: For the purposes of this section, the expression clearinghouse means the clearing house managed by the Reserve Bank of India or a clearing house recognized as such by the Reserve Bank of India.

4. Demand Drafts:

It is a bill drawn either on demand or otherwise by one bank on another in favor of a third party or by one branch of a bank on another branch of the same bank or by the head office on a branch or vice versa.

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ESSENTIALS OF ENDORSEMENT 

The following are the essential elements of endorsements:
1. A negotiable instrument must be signed by the maker or holder.
2. It must be signed on the back or face of the instrument or on a slip Of paper attached with the instrument.
3. It must be made with the intention of transferring the instrument to a third person in such a way that he must have the right to recover the money due to under it.
4. It must be either blank “or’ ‘in full” as defined in section 16.
5. It must be completed by the delivery of the instrument with the intention of assigning the resort in the instrument.

  • An endorsement is said to be in blank if while endorsing the instruments the indorser signs only his name on the negotiable instrument.
  • For an endorsement to be in full while endorsing the instrument the indorser also has to add a direction to pay the amount mentioned in the instrument to, or to the order of a specified person. The person so specified in the endorsement is called the endorsee of the instrument.

The different classes of endorsement are as under;

1. BLANK OR GENERAL ENDORSEMENT:

When the endorser of the instrument signs on the back of- the  Instrument only his name without writing the name of the endorsee, such endorsement is known as blank or general endorsements. By this type of endorsement, an order instrument becomes bearer and any holder of the instrument can get a payment of the instrument.

2. SPECIAL OR FULL ENDORSEMENT

If the endorser of the instrument sings on the back of the instrument his name and also mentions the name of the endorsee, such endorsement is called special or full endorsements. Here the payment is made only to the specific person or his order.

3. RESTRICTIVE ENDORSEMENT

When the endorser of the instrument writes such words that the instrument cannot be further negotiated or endorsed by the endorsee then it is called restrictive endorsements. For example, the endorser endorses it as “Pay A only” or ”Pay A and none”.

4. PARTIAL ENDORSEMENT

An endorsement that purports to transfer to the endorsee only a Part Of the amount of the instrument then it is called a partial endorsement. This type of endorsement is not supported by law and is not a valid endorsement.

5. CONDITIONAL ENDORSEMENT

When the endorser of the instrument attaches any condition for transferring the property In the instrument to the endorsee, the endorsement is said to be a conditional endorsement.

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