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Unit 03.pptx

  2. 2. Security Legislations 2
  3. 3. NEGOTIABLE INSTRUMENT • Two parts ‘Negotiable’ and ‘Instrument’ 3
  4. 4. DEFINITION OF NEGOTIABLE INSTRUMENT • it's a promissory note, bill of exchange and cheque, payable either to order or to bearer. 4
  5. 5. SALIENT FEATURES OF A NEGOTIABLE INSTRUMENT. • free transferability • holders title to be free from defects • holder in due course can sue in his own name • can be transferred any number of times 5
  6. 6. PRESUMPTIONS RELATING TO NEGOTIABLE INSTRUMENTS • Regarding consideration • regarding date • regarding acceptance • regarding transfer • regarding the order of the endorsement • regarding lost or destroyed instruments • regarding holder in the due course • regarding dishonor of an instrument 6
  7. 7. PROMISSORY NOTE • an instrument in writing, containing an unconditional undertaking, signed by the maker. 7
  8. 8. VARIOUS CLAUSES CONTAINED IN THE PROMISSORY NOTE • An instrument • Writing • Unconditional • Undertaking • To pay • a certain person 8
  9. 9. PARTIES TO A PROMISSORY NOTE • two parties namely • maker or drawer and payee 9
  10. 10. ESSENTIAL INGREDIENTS OF A PROMISSORY NOTE • In writing • a promise to pay • Unconditional • signed by the maker • certain person • certain sum of money • promise to pay money only • date place number and so on • payable in installments 10
  11. 11. TYPES OF PROMISSORY NOTE • note made payable on demand • made payable after a definite period • not to be made payable to the bearer • duly stamped 11
  12. 12. BILL OF EXCHANGE • instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to you or are to the order of a certain person 12
  13. 13. ANALYSIS OF VARIOUS CLAUSSES CONTAINED IN THE DEFINITION OF BILL OF EXCHANGE • an instrument • in writing • Order • unconditional order • signed by the maker • sum of money • a certain person 13
  14. 14. ESSENTIAL INGREDIENTS OF A BILL OF EXCHANGE • in writing • in order to pay • a unconditional order • signed by the maker • certain persons • A certain sum of money • order to pay money only • e date place number and so on • Duly stamped 14
  15. 15. DISTINGUISH FEATURES OF PROMISSORY NOTE AND BILL OF EXCHANGE • two parties; three parties • Unconditional promise made by the maker; unconditional order given by the drawer • no prior presentation for acceptance; prior presentation for acceptance 15
  16. 16. WHO MAY MAKE, DRAW, ACCEPT OR ENDORSE A PROMISSORY NOTE OR A BILL OF EXCHANGE? • being competent • age of majority • sound mind • No minor, lunatic etc are not eligible 16
  17. 17. TYPES OF BILLS OF EXCHANGE • demand bills of exchange • time bills of exchange 17
  18. 18. PRESENTATION OF THE TIME BILLS FOR ACCEPTANCE • presented to the bill for acceptance purpose • optional for acceptance 18
  19. 19. WHO MAY ACCEPT A BILL OF EXCHANGE? • the drawee of the bill • and accepted for honour • legal representatives of the drawee • official receiver 19
  20. 20. WHEN AND WHERE TO PRESENT THE BILL OF EXCHANGE FOR ACCEPTANCE? • time of presentation of the bill of exchange for acceptance • place a presentation of the bill of exchange for acceptance • when the presentation for acceptance gets automatically excused 20
  21. 21. MODE OF ACCEPTANCE OF A TIME BILL • signature of the drawee • Writing of the word accepted is not necessary 21
  22. 22. TYPES OF ACCEPTANCE OF A TIME BILL • general acceptance • qualified acceptance 22
  23. 23. TYPES OF QUALIFIED ACCEPTANCE OF A TIME BILL • conditional declaring of the payment • undertakes to make the payment 23
  24. 24. WHOM, WHEN AND WHERE TO PRESENT THE BILL OF EXCHANGE FOR PAYMENT? • whom to present the bill of exchange for payment? • time of presentation of the bill of exchange for payment • please a presentation of the bill of exchange for payment • when presentation for payment may become unnecessary 24
  25. 25. DISHONOUR OF A BILL OF EXCHANGE • By non acceptance • Non repayment • Dishonour by non payment • Effect of dishonour • Notice of dishonour • Where not is of dishonour is deemed and necessary 25
  26. 26. NOTING AND PROTESTING FOR DISHONOUR • Noting for dishonour • Protesting for dishonor • Difference between noting and protesting 26
  27. 27. DISCHARGE OF NEGOTIABLE INSTRUMENTS • discharge of instruments • discharge of one or more of the parties from their liabilities all the instruments 27
  28. 28. DISCHARGE OF ONE OR MORE OF THE PARTIES FROM THEIR LIABILITIES ALL THE INSTRUMENTS • by cancellation • by release • by payments • by allowing the drawee more than 48 hours to accept • by taking qualified acceptance of the bill of exchange • by not giving notice of dishonour of the bill of exchange • By non presentation for acceptance of a bill of exchange • by undue delay in presentation of a cheque 28
  29. 29. CHEQUE • A bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand 29
  30. 30. SALIENT FEATURES OFA CHEQUE • bill of exchange • drawn on a specified banker • made payable to the bearer 30
  31. 31. DISTINGUISH FEATURES OF BILL OF EXCHANGE AND CHEQUE • three parties involved, drawee, the drawer and the payee • it contains an unconditional order; it also contains an unconditional order • made payable on demand • drawn on any person; drawn on Bank only • drawn on any format; drawn on the cheque from the specific cheque book. 31
  32. 32. REQUISITES OFA CHEQUE • an instrument • in writing • Order • parties of the cheque • signed by the maker • certain sum of money • certain person • payable on demand only amount payable must be return both in words and figures • check must be dated. 32
  33. 33. ANTI DATED CHEQUE OR ANTE DATED CHEQUE • When you write a date on a cheque that is older than the date on which it is delivered to the bank, a cheque is considered an Ante dated cheque. 33
  34. 34. STALE CHEQUE • A cheque becomes stale after lapse of three months from the date of the cheque if it is not presented for payment by the payee or the holder of the cheque • Example. Suppose a cheque is drawn on 4th April 2019, then it will be valid up to 3 months from the date of issue, i.e. 3rd July 2019. If the cheque is presented after a reasonable time, then it cannot be encashed, because the banks dishonour such cheques. These cheques are called stale cheques. 34
  35. 35. POST DATED CHEQUE • It is a form of a cheque drawn with a future date written on it. • To simply put, post-dated cheque is one which is drawn with a date which is after the date on which cheque was written. • the date that appears on the check is after the date when the check was written. Even with a future date appearing on the check, the check could clear (be paid from) the bank account prior to that date. 35
  36. 36. BEARER CHEQUE • A bearer cheque is the one in which the payment is made to the person bearing or carrying the cheque. • These cheques are transferable by delivery, that is, if you are carrying the cheque to the bank, you can be issued the payment to. 36
  37. 37. ORDER CHEQUE • The order cheque is the one wherein the word bearer is canceled on the cheque. • As the word bearer gets canceled the cheque automatically becomes an order cheque. An order cheque is paid to the payee across the bank's account. 37
  38. 38. WHEN IS AN INSTRUMENT DEEMED PAYABLE TO BEARER? • Made payable to the bearer • made payable to order • based on the principle 38
  39. 39. CROSSED CHEQUE • Any cheque can be crossed by crossed with two parallel lines. Crossing means drawing of two parallel transverse lines across the cheque with or without the words in between those lines. 39
  40. 40. 40
  41. 41. 41
  42. 42. IMPORTANCE OF CROSSING OF CHEQUE: • The significance of crossing of a cheque is that a crossed cheque cannot be encashed by the bearer but can only be collected from the drawee bank in the bank account. • Crossing of cheque provides protection and safeguard to the issuer of the cheque. • In case of a crossed cheque one can easily detect who encashed the said cheque, unlike the case of non-crossed cheque. 42
  43. 43. RULES OF CROSSING OF CHEQUE • A cheque can be crossed generally, may be crossed specially by the holder. • The Cheque holder has the right to add the words “not negotiable” to it. • When an uncrossed cheque or a crossed cheque generally is sent to a banker for the collection, the person may cross it specially to himself. In this case, he does not enjoy the Statutory protection against being sued for conversion. 43
  44. 44. CROSSING OF CHEQUES: • Two methods of crossing of cheques – General and Special crossing of cheques. 44
  45. 45. GENERAL CROSSING OF CHEQUE • 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 of two parallel transverse lines simply, and either with or without the words ‘not negotiable’, that addition shall be deemed to be a crossing of cheque and the cheque shall be deemed to be crossed generally”. 45
  46. 46. 46
  47. 47. To summaries, A cheque is considered to be generally crossed in the following cases: • When there are two transverse parallel lines marked across the face of cheque • When the cheque bears an abbreviation “& Co.” between the two transverse parallel lines • When the cheque bears the words “Not Negotiable” written between the two parallel lines • When the cheque bears the words “A/c. Payee” between the two transverse parallel lines. 47
  48. 48. SPECIAL OR RESTRICTIVE CROSSING OF CHEQUE • A cheque is said to be specially crossed when a particular bank’s name is written in between the two transverse parallel lines on the cheque. 48
  49. 49. 49
  50. 50. MATERIALALTERATION ON CHEQUES • Any alteration in the original state of a cheque such as date, amount, payee's name, changing the word 'order' to bearer appearing after payee's name or in endorsement is called material alteration. ... Without the permission and consent of the drawer, a blank cheque cannot be enforced. 50
  51. 51. EXAMPLE'S • Alteration in instrument date • Alteration in Amount Payable • Alteration in Time of Payment • Alteration of Place of Payment • Alteration in interest rate or any change in its favor, if any • Tearing of the material part of the instrument • Insertion of the place of payment where the bill is generally accepted • Addition of a New Party to the instrument. • Adding words to a blank endorsed bill of exchange so as to convert it into a special endorsement. 51
  52. 52. FORGERY • An altered cheque is the most common type of cheque fraud. The others are being forgeries (imitated signature), falsified cheques (fake), and remote cheques (instead of a signature, there is a false statement that the account holder has authorized a cheque). 52
  53. 53. WHAT ARE THE SIGNIFICANCE /RAMIFICATIONS OF EACH OF SUCH CROSSINGS? • ‘……..and company’ or _____&Co’. • Not Negotiable • A/C Payee • ‘Account Payee’ and ‘Not Negotiable’ • Bank Name(Example: HDFC Bank) • Bank Name, Place main Branch • Bank name, place, branch, a/c William, Current Acc:5555xxx 53
  54. 54. A BEARER CHEQUE-CROSSED A/C PAYEE ONLY • In case of a bearer cheque, the bank must do proper verification before making payment to the bearer of the instrument. • In case of crossed cheque, the name of the individual is already mentioned on the cheque. So, the money is paid to the specified person only. 54
  55. 55. WHO CAN CROSS A CHEQUE? • The Drawer of the Cheque can cross the cheque generally or specially. • If it is an open cheque, then the holder can cross the cheque generally or specially. If the cheque is crossed generally, the holder can cross it specially. 55
  57. 57. DISTINGUISH BETWEEN CHEQUE AND BANK DRAFT • Three parties • Unconditional order • Made payable on demand • No prior presentation • Drawn on cheque; Drawn on bank draft • Made payable to the bearer; made payable only to the order of the payee. 57
  58. 58. HOLDER VS HOLDER IN DUE COURSE • Holder is a person who is entitled for the possession of a negotiable instrument in his own name. Hence he shall receive or recover the amount due thereon. Whereas a Holder-in-due- course is a person who has obtained the instrument for consideration and in good faith and before maturity. 58
  59. 59. MARKING OF CHEQUES AS ‘GOOD FOR PAYMENT’ • Marking at the instance of the drawer of the cheque • Marking at the instance of the payee or holder of the cheque • Marking at the instance of the collecting banker of the cheque. 59
  60. 60. ENDORSEMENTS • It is an amendment to a document or contract, an authorizing signature, or a public declaration of support. 60
  61. 61. VALID ENDORSEMENT • Must be written • Pertain entire instrument in full • Instrument has been made payable • Made payable to order 61
  62. 62. VARIOUS TYPES OF ENDORSEMENTS • In blank • In full • Restrictive • Conditional • Sans recourse • Facultative • Partial 62
  63. 63. EFFECTS OF DIFFERENT TYPES OF ENDORSEMENT • Effect of unconditional endorsement • Effect of an endorsement in bank • Effect of a restrictive endorsement • Effect of a forged endorsement 63
  64. 64. PAYING BANKER • Paying banker is a banker, who actually pays a cheque to his customer or to the order. of his customer. For example, a customer draws a cheque on his banker. 64
  65. 65. DUTIES AND RESPONSIBILITIES OF A PAYING BANKER • Verification of signature of the drawer. • Verification of the genuineness of the instrument. • Payment not stopped by the A/c holder. • Holders title on the cheque is valid. • A/c is not dormant one. • A/c holder is not bankrupt, deceased and insanse. 65
  66. 66. LEGAL PROTECTION TO A PAYING BANKER • Where the Endorsement is forged • In payment of crossed cheques • Payment in due course of business 66
  67. 67. PAYMENT IN DUE COURSE OF BUSINESS • Payment made in Accordance with Tenor • Payment made in good faith and without negligence • Payment made to any person in possession • Payment made under circumstances which do not afford a reasonable grounds for believing that he is not entitled to receive payment • Payment made of the amount therein mentioned 67
  68. 68. WHEN SHOULD THE PAYING BANKER REFUSE PAYMENT? • Where the drawer of the cheque countermands its payment • Bankers liability in paying a stopped cheque • Stop payment information when received by telephone, fax, email etc. • On receiving notice of customers death • On receiving notice of customers insanity • On receiving notice of customers insolvency • On receiving garnishee order • On suspicious title • On suspicious misuse by trustee 68
  69. 69. WHEN THE PAYING BANKER MAY REFUSE PAYMENT? • Insufficient funds in the account • outdated cheque • post dated cheque • cheques not Duly presented • cheques drawn on joint accounts 69
  70. 70. FREQUENT OBJECTIONS ON CHEQUE RETURN • Refer to drawer • insufficient fund • not arranged for • effects not yet cleared • cheque is post dated • cheque is out of date • alteration requires full signature • payee’s separate discharge to the bank required • amount in words and figures differs • crossed cheque: must be presented through a bank • not drawn on us • drawer signature differs • payment stopped by the drawer • drawer is dead • endorsement irregular 70
  71. 71. CRIMINAL PENALTIES IN DISHONOUR OF CHEQUE FOR WANT OF FUNDS • Conditions for application • insufficient funds in the account • payment stopped by the drawer • account closed • Requesting payee not to present the cheque 71
  72. 72. IN DISCHARGE OF A LEGAL DEBT OR LIABILITY • Presented within 6 months • notice of dishonoured cheque within 30 days • giving notice after cause of action • if drawer fails to pay within 15 days of the notice period • on complaint in writing 72
  73. 73. LIABILITY FOR WRONGFUL DISHONOUR • A payer bank is liable to its customer for damages caused by the wrongful dishonor of an instrument. • The bank's liability is limited to actual, provable damages including any potential consequential damages. 73
  74. 74. OFFENCES BY COMPANIES • A criminal liability on account of dishonour of cheque primarily falls on the drawer company and is extended to officers of the Company. • The normal rule in the cases involving criminal liability is against vicarious liability, that is, no one is to be held criminally liable for an act of another. 74
  75. 75. COLLECTING BANKER • Collecting Banker is the one who accumulates the proceeds of a cheque for the customer. • Even though a banker gathers the proceeds of a cheque for the customer solely as a matter of service, hitherto the Negotiable Instruments Act, 1881 ultimately inflicts obligation, statutory in nature. 75
  76. 76. BANKER AS A HOLDER FOR VALUE • A collecting banker is holder for value if he gives the value of the cheque in any form to its customer before collecting the proceeds of the cheque deposited by the latter. • He does not remain an agent of the customer, but becomes the owner of the cheque in his own right since he has paid value for it, and has acquired the ownership right in good faith. 76
  77. 77. STATUTORY PROTECTIONS ENJOYED BY A COLLECTING BAKER • Only for crossed cheques • Only while working as a collecting agent • In good faith and without negligence 77
  78. 78. DUTIES AND RESPONSIBILITIES OF A COLLECTING BANKER • Exercising due care and diligence • When to present cheques received for collection? • When to send notice of dishonour 78

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