Negotiation Sec- 14 Negotiation is a transfer of an instrument from one person to another in such a manner as to express title & to represent the transferee.

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Presentation transcript:

Negotiation Sec- 14 Negotiation is a transfer of an instrument from one person to another in such a manner as to express title & to represent the transferee the holder thereof. In simple words Negotiation means transfer of a NI by one person to another in order to make the transferee the holder of the instrument. Negotiation by delivery- Transfer of Bearer Negotiable Instrument by delivery which should be Voluntary. Negotiation by Endorsement & Delivery- An Order instrument can be negotiated only by way of Endorsement & Delivery. After Effect of Endorsement- Property is transferred to the endorsee Endorsee get right to negotiate the instrument, sue on instrument © 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal

Essentials of valid endorsement Endorsement Sec- 15 When a maker or holder writes the person’s name on the face or back of the instrument or on the slip of the paper annexed to NI & puts his signatures thereto for the purpose of negotiation, it is called ‘endorsement’. For eg- When an employer signs a check, they are endorsing the transfer of money from the business accounts to the account of the employee. Essentials of valid endorsement On the back or face of the instrument. i.e Writing Must be made by maker or holder. i.e Prepared by Holder Must be properly signed by the endorser.i.e Signed © 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal

A  B B  C C  D D  B Negotiation Back- sec 90 Assignment If a NI is negotiated by the Holder but the Endorser again becomes the holder of Such Negotiable Instrument again then it called Negotiation Back. For e.g A  B B  C C  D D  B Here B is the person who is the prior party to the Instrument. The Holder cannot enforce payment against an Intermediary party to whom he was previously liable thus B can not sue C or D but it can sue A Assignment Assignment of a NI means transfer of ownership of the instrument from one person to another (assignor to assignee). © 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal

Basis Negotiation Assignment Applicable Act Negotiable Instrument act’1881 Transfer of Property Act Meaning Negotiation means transfer of a NI by one person to another in order to make the transferee the holder of the instrument. Assignment of a NI means transfer of ownership of the instrument from one person to another (assignor to assignee). Scope For Transferring NI only For Transferring Right Notice No Notice Required Notice must be given by Assignee to Debtor Stamp Duty No Stamp Duty Required Stamp Duty Required Presumption It is Presumed that every Negotiation is made for some Consideration. No such Presumption. Manner It can be negotiated by way of delivery or order or both Valid only if it is made in Writing and Signed Burden of Proof The Other Party has to prove that negotiation was without any consideration The Assignee has to prove that there was some consideration. © 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal

Holder in Due Course-sec 9 Holder-sec 8 The holder of a N.I. means any person entitle to the possession of the instrument in his own name and to receive the amount thereon from the parties liable thereto. Basically we can say that He must be entitled to Possession of Negotiable Instrument in his own name He must be entitled to Receive or recover the amount due on such instrument. Holder in Due Course-sec 9 A Holder in Due Course means a holder- who takes the instrument bona fide- for value -before it is overdue, and without any notice of defects in the title of the person, who transferred it to him. Basis Holder Holder in Due Course Consideration Not Necessary Maturity Before or After Maturity Right to Sue Cannot sue all prior parties Privileges Less Privileges' than HDC Only if he obtains NI for Consideration Only before Maturity Can Sue all the prior Parties More Privileges than Holder Good Faith Holder even if he obtains NI other than in Good Faith HDC only if he obtains NI in good Faith © 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal

Privileges of a Holder in Due Course**IMPT A Holder who derives title from HDC has the same right as that of HDC. (Sec 53) Every prior party to NI is liable to a HDC. (Sec 36) HDC can claim full amount of the NI (Not exceeding amount covered by Stamp) even though such amount is in excess of the amount authorised by the person delivering an Inchoate NI (Sec 20) No Prior party can allege that NI was delivered conditionally or for a special purpose only. (Sec 46) No prior party can set up a defence that the NI was drawn, made or endorsed by him without any Consideration. (Sec 43) The Person liable in NI cannot set up against the HDC the defences that the instrument had been lost or obtained from the former by means of an offence or fraud or unlawful consideration. (Sec 58) © 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal

Mandatory Grounds for Bank to Dishonour Cheque Stop Payment Signature Mismatch Stale Cheque Closed Bank Account Insanity of Customer Altered Cheque Defect in Title of Holder Death of Customer Post Dated Cheque Insolvency of Customer Defect in Title Of Holder Undated Cheque Loss of Cheque OPTIONAL Grounds for Bank to Dishonour Cheque Insufficient Funds Presentation at Different Branch Presentation after Banking Hours Funds Not Applicable. Non Presentation of Cheque within Reasonable Time Sec 84 If the drawer has sufficient fund in his bank Account and issues a cheque in favour of Creditor and the Creditor fails to present the cheque for payment within reasonable time and in the meanwhile bank fails (Insolvent) then the Creditor cannot recover the amount from the Drawer. For e.g Mr Ram issue cheque of Rs. 1,00,000 to Miss Sita . Mr Ram had Sufficent Fund in the account with Bank.The Cheque was not presented within reasonable time to the Bank for paymment and the bank in themean time become insolvent. Thus is yhis case Miss Sita cannot recover the money from Mr. Ram. 29

Bouncing of Cheque sec 138 to 142 Dishonour of Cheque due to Insufficient Fund is an offence. The Drawer is Punishable with Maximum Imprisonment of 2 Years or Amount equal to the two times(Maximum) of Cheque amount or both. However in order to attract following Condition need to be satisfied- Dishonour due to Insufficient funds; Payment should be for discharge of liability; Cheque must be present within validity period; Notice- demanding payment within 15 days; Complaint within 1 month to Court If Payment is made otherwise than to Discharge Liability then it will not attract liability u/s 138 . For e.g. a person gift a cheque of Rs. 100000 s a gift and later on the Cheque get bounced. Then it will not attract liability under this section. © 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal

Material Alteration- sec 87 An alteration (Cherkhani karna) is called as material alteration if it alters- The Legal Effect of NI The Rights and Liabilities of any of the parties of to a NI. Alteration can be- Crossing of Cheque Filling Blanks of Inchoate Instrument Conversion of Blank Endorsement into Full. Conversion of Bearer Instrument into Order Instrument. Conversion of General Crossing into Special Crossing. Effects- All parties to the NI not consenting to the material alterations are discharged and jisne kiya who gaya… For eg- A bill payable to Mr A was converted to Payable to Mr A & Mr. B The Holder of Bearer Cheque convert it into A/c Payee Cheque © 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal

Acceptance- sec 7 When Drawee draws a bill and the Drawee delivers it to the holder of the bill or gives notice of acceptance to the holder of the bill then it is termed as Acceptance. It should be Written Signed Delivery or Intimation to the holder that the bill has been accepted. General Acceptance: When the drawee, while accepting the bill, does not attach any condition or qualification to it, it is called general acceptance. Qualified Acceptance The acceptance is qualified when it is given subject to some conditions or qualifications : The Holder of the bill may object to the Qualified Acceptance resulting in Automatic Dishonour of Bill due to Non Acceptance. If he give his consent to Qualified acceptance then all prior parties not giving consent will be discharged. © 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal

Liability in case of Fictitious Name sec 42 An acceptor Of BOE which is drawn in FICTITIOUS NAME and Payable to the Drawer’s Order IS NOT Relieved from the Liability to any HDC by reason that such name is Fictitious. Moti moti baate aisa samajha jaye ki Ram ne shyam ke upar bill draw kiya lkn ram ne apna naam nhi likh kar Sita ka naam kar diya… yeh Bill Sita ke order pe payable tha… Shyam ne yeh bill accept kar liya….Ram ne yeh bill Ravan ko Endorse kar diya…. Ab Shyam apni laibility se bhaag nhi sakta is fact pe ki yeh bill sita ke farzi naam pe bana hai…kyk usne yeh bill accept kiya hai…aur ravan ko usse karz chukana padega Suppose: X uses a fictitious name in drawing a bill upon Z. Then he endorses the bill in the same fictitious name to Y, who presents the bill to Z for acceptance. Now if Z accepts the bill, he will be liable for payment in spite of fact that the name of drawer is fictitious. © 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal

Acceptance For Honour sec 108 Acceptance for honour means the acceptance given by some stranger when the original drawee refuses to accept or to give better security when demanded by a notary. The stranger may accept the bill of the honour of any party already liable thereto. Such stranger is called an acceptor for honour or acceptor supra protest Conditions- That the bill has been noted or protested for non acceptance or better security, Acceptance has been made with the consent of holder, The acceptor for honour is not already liable on the bill, that the acceptance is for the honour of any party already liable on the bill, and that the acceptance is by writing on the bill. The party who accept the bill for honour will be liable to pay the amount if the person on whose behalf he accepts the bill and he can recover the same form that party. © 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal

Notice OF Dishonour Sec 93 Payment For Honour sec 108 Just as a bill may be accepted for the honour of a party to bill, it may also be paid for the honour of a party liable to pay the bill. After payments he can recover from that person or any party prior to him. Notice OF Dishonour Sec 93 Notice Of Dishonour need to be given by the holder or any of the parties to the instrument. Any party receiving notice must also transmit the same to all prior parties. Otherwise he can not sue any prior party, if notice has not transmitted. Dispensed with by an express waiver, Party charged would not suffer damage Party not found after due search, Cases where Notice for Dishonour is not Required- When drawer is accepter, Accidental omission, In the case of a PN which is not negotiable, Party promises to pay unconditionally. © 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 40

Notice to Be Given to Noting Protesting To all parties (other than the maker of a note, acceptor of a bill, or drawee of a cheque) to whom the holder seeks to make liable or to their duly authorized agents Where there are two or more persons jointly liable as drawer or endorsers, notice to any one of them is sufficient. In case of death of person, to legal representative and to official assignee in case of insolvency (Sec 97). Noting Noting is the process of recording the fact and reasons of dishonour of a NI by the notary public. It should be done within Reasonable time after dishonour of NI. It is not mandatory. The Dishonoured Bill is presented to Notary Official who in Turn again represent it for acceptance/payment. If the party again refuses then Notary Public records the fact of Dishonour. Protesting Protest is a formal certificate of dishonour issued by the notary public to the holder of a bill or note on his demand. Difference between Noting & Protesting is that noting consists of recording the fact and reasons of dishonor of NI upon the instrument; whereas Protest is the certificate as to the fact that instrument has been dishonoured. © 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal

Discharge of Negotiable Instrument When the party makes the payment in due course at or after maturity (u/s78) , When the holder cancels the instrument with intention to release the party. If it becomes Time Barred- it is Discharged by operation of Law In the case of Negotiation Back When the holder releases or renounces his right against the party primarily on the NI. © 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal

Discharge of One Or More Parties By cancellation By release By allowing drawee more than 48 hours to accept (Sec 83) By taking qualified acceptance (Sec 86) By not giving notice of dishonour By not presentment for acceptance of bill (Sec 61) By delay in presenting cheque (Sec 84) By negotiating back of a bill © 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal

Hundi Dhani Jog Hundi Hundi means a BOE drawn in an Local Language. Darshani hundi Payable at Sight Miadi hundi or Muddati hundi Payable after Specified period Of Time Shah Jog hundi Payable at Shah Nam Jog hundi Payable to a Party named in Hundi or to his order. Hundi Drawn in respect of goods shipped on the vessel and is payable only when the goods reach their destination. Jokhmi hundi Dhani Jog Hundi Hundi Payable to the Bearer. © 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal

#1: The undertaking contained in a promissory note, to pay a certain sum of money is---- Conditional Unconditional May be conditional or unconditional depending upon the circumstances None of the above. Answer : (b) Unconditional © 2013 Gurukul CA/CS

# 2: Which of these is not a negotiable Instrumen as per the Negotiable Instrument t Act,1881 Bill of exchange Delivery note Bearer Cheque Share certificate Answer: (d) Share Certificate © 2013 Gurukul CA/CS

# 3: Which of the following is not a payment in due course under NI Act 1881? Payment should be made in accordance with the apparent tenor of the instrument A payment is made on instrument before the date of maturity Payment is made to the possessor of the instrument Payment made in good faith & without negligence Answer: b) A payment is made on instrument before the date of maturity © 2013 Gurukul CA/CS

Y signs on bill and keeps it with him He writes “accepted” on the back of bill but does not put his signature on bill He puts his signature on face of bill and returns it to X He write ‘accepted on the face of bill but does not put his signature Answer: c) He puts his signature on face of bill and returns it to X © 2013 Gurukul CA/CS

# 5: In which of the following situations could a bill of exchange not be negotiated? The time to pay is not determinable. The promise to pay is conditional. The amount to be paid is “the amount owing on account." All of the above. Answer: d) All of the above © 2013 Gurukul CA/CS

#6: X made a note payable to the order of his son Y as a birthday gift payable after one month. Y presented the note after 3 months and X refused to pay. Can Y sue for payment? Yes, because a note, unlike a cheque, cannot become stale dated Yes, because the note is a negotiable instrument that is required to pay No, because a note, like a cheque, can become stale dated. No, because the note was gratuitous so it is not binding for a lack of consideration. Answer: d) No, because the note was gratuitous so it is not binding for a lack of consideration © 2013 Gurukul CA/CS

# 7: Which of the following is NOT a part the criteria for a holder in due course? The instrument is held by a party immediate to the promisor. The instrument is taken by someone, or through someone, who has given consideration for it. The instrument is taken complete and regular on its face. The instrument is taken before it is overdue and without notice of any dishonour. Answer: a) The instrument is held by a party immediate to the promisor. © 2013 Gurukul CA/CS

S can recover money from B B is discharged from his liability. S can recover from official assignee of the bank S can sue B and Bank jointly Answer: b) B is discharged from his liability © 2013 Gurukul CA/CS