Negotiable Instrument Act 1881

Negotiable Instrument Act-1881

Introduction:

The Negotiable Instrument Act derived from The English Common Law in the Year 1881 and came into effect from March 01, 1882. It contains 17 Chapters and 141 Sections. This Act has been enacted in our country vide P.O. No. 127 of 1972. Since its inception several amendments have been made to this Act. The Negotiable Instruments Act, 1881 governs all transactions in relation to the negotiable instruments drawn, endorsed, transferred and realized in Bangladesh.

•         The Negotiable Instrument Act-1881 is the legislative enactment of the law relating to the negotiable instruments which are in common use in monetary transactions.

•         The act regulates the issue and negotiation of the various classes of negotiable Instruments which the bankers commonly deal.

•         In fact, it is the legal operational framework of banking.

Negotiable Instruments:

•         According to sec-13 of Negotiable Instrument Act 1881, “Negotiable Instrument” means a promissory note, bill of exchange or cheque payable either to order or to bearer.

•         So, it may be said that, documents of a certain type, used in commercial transactions and monetary dealings, are called Negotiable Instruments.

•         A negotiable instrument is a piece of paper which entitles a person to a sum of money and which is transferable from person to person by mere delivery or by endorsement and delivery. The person to whom it is so transferred becomes entitled to the money and also to the right to further transfer it. 

•         ‘Negotiable’ means transferable by delivery and ‘Instrument’ means a written document by which a right is created in favour of some person. The term Negotiable Instrument literally means‘a document transferable by delivery’.

Example:

1. Pay to X
2. Pay to X or order
3. Pay to X or bearer / order
4. Pay to X only
5. An Instrument Crossed, 'Account Payee Only'.

Since the Instrument 4 and 5 are not transferable i.e. the word prohibits further transfer and A/C payee crossing indicates the intention that it shall not be transferable, these are excluded from negotiable instruments.

Therefore to identify negotiable instruments the characteristics of negotiable instruments under N.I. Act, 1881 are clarified as follows:

•         The instruments like money are transferable from hand to hand by way of negotiation.

•         The instruments like money are transferable from hand to hand for value and are used for settlement of debt.

•         The transferee's title is not affected due to transferor's defective title if the transferee can prove himself as holder in due course.

•         The title of the Holder in due course does not affect for defective title of his prior holders due to fraud, forgery etc.

•         The Holder in due course is entitled to sue in his own name against all the prior parties to realize proceeds of the instruments.

Sec.1- Application of the Act:

            All the negotiable instruments are guided by this Act. Any other Acts which are contradictory to this Act will not be applicable to negotiable instruments. 

Sec.3B- Banker:

            'Banker' means a person transacting the business of accepting for the purposes of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise, and includes any post office savings Bank.

Sec.3C-Bearer:

            Bearer means a person who by negotiation comes into possession of a negotiable instrument, which is payable to bearer.

 Sec.3F-Material alteration:

            It means the alteration of important parts of negotiable instruments i.e. Promissory note, Bill of Exchange and Cheque. The material parts which include date, the sum payable, the time of payment, and the place of payment etc.

Sec.4-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 on demand or at a fixed or determinable future time a certain sum of money only to, or to the 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 gets the money (the creditor) is called Payee.

Sec.5- 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 on demand or at a fixed determinable future time a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument”.

•         It is observed from the above definition that a bill of exchange contains an order from the creditor to the debtor, to pay a certain sum, to a certain person, either on demand or after a certain period. The person who draws the bill is called the ‘drawer’ and the person on whom it is drawn, is called the ‘drawee’ or ‘acceptor’ and the person to whom the amount is payable is called the ‘payee’.

Sec.6-Cheque:

•         A 'Cheque' is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.

•         A cheque is a document of great importance in the business world. It can pass from one hand to another easily and so it has become a popular mode of payment. A cheque is the most commercial and safe method of money transaction because the transfer cost is very low and also the possibility of loss is minimum.

Sec.8- Holder:

•         The holder of a promissory note, bill of exchange or cheque means the payee or endorsee who is in possession of it or the bearer thereof but does not include a beneficial owner claiming through a benamdar.

•         The person legally entitled to receive the money due on the instrument is called the holder.

Essential requisites of a Holder:

Payee or endorsee of the instrument, and

1. in possession of it,
2. or a person who is bearer thereof.

Sec.9- Holder in due course:

•         'Holder in due course' means any person who for consideration becomes the possessor of a promissory note, bill of exchange or cheque if payable to bearer or the payee or endorsee thereof, if payable to order, before it became overdue, without notice that the title of the person from whom he derived his own title was defective.

•         Essential conditions to constitute a 'Holder in due course':

1. Who receives an instrument innocently i.e. in good faith and without negligence.
2. Who has paid value for the same.
3. Who has received the instrument before its maturity.
4. who is in possession of the instrument as a bearer or payee or endorsee.

 For all legal purposes, the title of the holder in due course is superior to that of the true owner.

Rights and privileges of a holder in due course:

1. He obtains a better title to the instrument than that of a true owner.
2. The defective title of the previous endorsers (if any) will not adversely affect his rights.
3. He can pass on a better title to others, since, once the instrument passes through his hands, it is purged of all defects.
4. Until the instrument is finally discharged, every party to that instrument is liable to him.
5. Even the drawer of a negotiable instrument cannot claim invalidity of the instrument against him.

6.      His claim cannot be denied on the ground that the payee has no capacity to endorse

Sec.10- Payment in due course:

•         Payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.

 Sec.10- Payment in due course:

•         Payment in accordance means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances, which do not afford reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.

Sec.13-Negotiable instrument:

•         A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.

Sec.14-Negotiation:

•         When a promissory note, Bill of Exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.

Sec.15-Endorsement:

•         When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face 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” Endorser”.

Sec.18

•         Where amount is stated differently in figure and words, the amounts stated in words shall be the amount ordered to be paid.

 Sec.29B-Forged or unauthorized signature: 

•         An instrument having forged signature of the drawer or the persons required for it not treated as instrument under this Act and will remain inoperative, since nobody is entitled to have title of those instruments.

Sec.30-Liability of Drawer:

•         The drawer of the negotiable instrument will remain responsible to the payee till it is paid off.

Sec.31-Liability of the Drawee of cheque:

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

Sec.36-Liability of prior parties to holder in due course:

•         Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied.

Sec.50-Effect of Endorsement:

•         The endorsement of a negotiable instrument followed by delivery transfers to the endorsee the property therein with the right of further negotiation; but the endorsement may, by express words, restrict or exclude such right, or may merely constitute the endorsee an agent to endorse the instrument, or to receive its contents for the endorser or for some other specified person.

Sec.51-Who may negotiate:

•         Every sole maker, drawer, payee or endorsee, or all of several joint makers, drawers, payee or endorsees, of a negotiable instrument may, if the negotiability of such instrument has not been restricted or excluded as mentioned in section 50, endorse and negotiate the same.

Sec.58-Defective title:

•         A person who receives an instrument which has been lost or by means of fraud or any other unlawful means is not entitled to receive the amount due thereon unless he claims as holder in due course.

Sec.85-Cheque payable to order:

1. Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course;
2. Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing thereon and notwithstanding that any such endorsement purports to restrict or exclude further negotiation.

Sec.85A-Drafts drawn by one branch of a bank on another payable to order:

1.      Where any draft, that is, an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand, purports to be endorsed by or on behalf of the payee, the bank is discharged by payment in due course.

Sec.87-Effect of material alteration:

1. Any material alteration of a negotiable instrument renders the same void as against any one who is a party thereto at the time of making such alteration and does not consent thereto, unless it was made in order to carry out the common intension of the original parties; and any such alteration if made by an endorsee, discharges his endorser from all liabilities to him in respect of the consideration thereof.

Sec.89-Payment of instrument on which alteration is not apparent:

1.      Payment of any negotiable instrument which has been materially altered but not apparent to identify the alteration or any crossed cheque where crossing is not apparent and if otherwise in due course, the paying banker shall be discharged from all liabilities there on and such payment shall not be questioned for alteration.

Sec.122A-Revocation of banker's authority:

The banker can legally return a valid cheque without payment under the following conditions:

1. Countermand of payment
2. Notice of Customer's death
3. Notice of adjudication of customer as an insolvent
4. Insufficient fund
5. Standing instruction as assignment.

 

Sec.123-Cheque crossed generally:

Where a cheque bearers 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, either with or without the words “not negotiable”, that addition shall be deemed a crossing and the cheque shall be deemed be crossed generally.

Sec.123A-Cheque crossed A/C payee:

When a cheque is crossed 'Account payee' -

1. it shall cease to be negotiable and
2. it shall be the duty of the banker collecting payment of the cheque to credit he proceeds thereof only to the account of the payee named in the cheque.

Sec.124-Cheque crossed specially:

Where a cheque bears across its face an addition of the name of a banker, either with or 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 to that banker. 

Sec.126-Payment of cheque crossed generally:

Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to banker.

Payment of cheque crossed specially:

Where a cheque 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.

Sec.127-Payment of cheque crossed specially more than once:

Where a cheque crossed specially to more than one banker, except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof.

Sec.128-Payment in due course of crossed cheque:

Where the banker on whom a crossed cheque is drawn has paid the same in due course, the banker paying the cheque and (in case such cheque has come to the hands of the payee) the drawer thereof, shall respectively be entitled to the same rights, and be placed in the same position in all respects as they would respectively be entitled to and placed in if the amount of the cheque had been paid to and received by the true owner thereof.

Sec.129-Payment of crossed cheque out of the course:

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.

Sec.130-Cheque bearing 'Not negotiable': 

A person taking a cheque crossed generally or specially, bearing in either case the words 'not negotiable' shall not have, and shall not be capable of giving a better title to the cheque than that which the person from whom he took it.

Sec.131-Non-liability of banker receiving payment of cheque:

A banker who had in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not in case the title to the cheque proved defective incur any liability to the true owner of the cheque by reason only of having received such payment.

Sec131A:

The above provisions shall apply to any draft, as defined in sec.85A as if the draft were cheque.

Sec.131 B- Protection to banker crediting cheque crossed “Account Payee”:

Where a cheque is delivered for collection to a banker which does not at the time of such delivery appear to be crossed “Account Payee” or to have had a crossing “Account payee” which has been obliterated or altered, the banker, in good faith and without negligence collecting payment of the cheque and crediting the proceeds thereof to a customer, shall not incur any liability by reason of the cheque having being crossed “Account Payee”, or such crossing having been altered or obliterated, and of the proceeds of the cheque having credited to a person who is not the payee thereof.

 Sec.138- Dishonor of cheque:

According to amendment in 1994 and 2000 penalties in case of dishonor of certain cheque for insufficiency of funds in the account of drawer of the cheque is that such person shall be deemed to have committed an offence and shall be punished with imprisonment for a term which may extend to one year, or with fine which may extend thrice the amount of the cheque, or with both; Provided that-             

1. The cheque has been presented to the bank within a period of validity.
2. The payee or holder in due course of the cheque makes a demand for the payment of the said amount of money by giving a notice, in writing to the drawer of the cheque within fifteen days of the receipt of information by him from the bank regarding the return of the cheque as unpaid and
3. The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

CROSSING:

A cheque without crossing is called an open cheque. It is open to many risks. In order to protect it from risks, crossing has been introduced.

Therefore a cheque may be classified as:

•         an open cheque which is payable over the counter

•         a crossed cheque which is payable only through a collecting banker.

Crossing is of two types -

•         General Crossing

•         Special Crossing.

A cheque (also a banker’s draft) can be crossed generally or specially to a banker by the drawer, or the holder thereof. The addition of a crossing on a cheque provides security and protection for the drawer (or holder) since the drawee bank (i.e. the paying bank) cannot pay out cash against a crossed cheque. As payment of a crossed cheque is required to be made through a banker it can, therefore, be easily detected to whose use the money has been received.

 Essentials of General Crossing (sec. 123 of N.I Act):

•         Two lines are of paramount importance in crossing.

•         The lines must be drawn parallel and transverse.

•         The lines are generally drawn on the left hand side so as not to obliterate or alter the printed number of the cheque.

The words ‘and company or its abbreviation i.e. & co., may be written in between the lines. They themselves are not essential and so, they do not constitute crossing, without two parallel transverse lines. So also, the words ‘Not Negotiable’ may be added to a crossing. But, they themselves do not constitute a crossing.

Significance of General Crossing

 The effect of general crossing is that it gives a direction to the paying banker.

·         The direction is that, the paying banker should not pay the cheque at the counter. It should be paid only to a fellow banker.

·         If a crossed cheque is paid at the counter in contravention of the crossing:

·         The payment does not amount to payment in due course. So the paying banker will lose his statutory protection.

·         He has no right to debit his customers account, since; it will constitute a breach of his customer mandate

·         He will be liable to the drawer for any loss, which he may suffer.

·         He will be liable to the true owner of the cheque who may be a third party, irrespective of the fact, that, there is no contract between the banker and the third party. As a general rule a banker is answerable only to his customer and this liability to a third party here is an exception.

Essentials of special crossing (sec. 124 of the N.I. Act):

·         Drawing of two transverse and parallel lines is not at all essential for a special crossing.

·         The name of a banker must be necessarily specified accross the face of the cheque. The name of the banker itself constitutes special crossing.

·         It must appear on the left hand side, preferably on the corner so as not to obliterate the printed number of the cheque.

·         The two parallel transverse lines and the words ‘Not Negotiable may be added to a special crossing.

Significance of Special Crossing:

·         It is also a direction to the paying banker. The Direction is that, the paying banker should pay the cheque only to the banker whose name appears in the crossing or to his agent. (Sec. 126 of N.I Act)

·         If a cheque specially crossed to a bank is presented by another bank, not in the capacity of its agent, the paying banker is justified in returning the cheque.

·         A special crossing gives more protection to the cheque than a general crossing. It makes a cheque still safer because, a person, who does not have a real claim for it, would find it difficult to obtain payment. In special crossing, the cheque is specially crossed to the payee’s banker. Hence, the banker, in whose favour the cheque has been crossed, knows the payee and his specimen signature well. So, he will not collect it for any person other than the payee.

            If there is any forgery, it can be easily detected by the banker.

But, we cannot say that it gives full protection in the sense, that an unscrupulous person, who has an account in the same bank but at a different branch, can encash it by forging the signature of the payee. It can also be detected. However, there is some danger in special crossing also. To overcome this danger, ‘Not Negotiable’ and ‘A/C Payee’ crossings have been introduced.

Significance of Not Negotiable Crossing:

‘Not negotiable’ does not mean not transferable. Not Negotiable crossing does not affect the transferability, but it kills only the ‘Negotiability’. Negotiability is something different from transferability. Negotiability is a broader term, which includes transferability. As per law, Negotiability means transferability by mere delivery or endorsement and delivery plus transferability free from defect. But transferability does not possess the second quality namely transfer free from defect.

So, if a document is a negotiable one, a bonafide transferee who receives it in good faith and for value paid, can obtain a good title, despite the fact that, the document has prior defects. But, in case a document is a not negotiable instrument, the transferee cannot obtain a good title, when there is a prior bad title. 

Thus, a cheque crossed ‘Not Negotiable’ can be transferred like any other cheque. But the transferee cannot obtain a better title than that of the transferor.           

Significance of A/C Payee Crossing:

‘A/C payee’ crossing does not restrict the transferability of cheques. A/C payee’ crossed cheque can be negotiated. But, if the words ‘or order’, which appear immediately after the payee’s name, are struck through and if the cheque is crossed ‘A/C payee’ that cheque will be considered to be not transferable.

Double Crossing:

Sec. 125 of the N.I Act. Provides that “where a cheque is crossed specially, the banker to whom it is crossed, way again cross it specially to another banker, his agent for collection”.

Who can cross a cheque:

·         The drawer of a cheque can cross it at the time of issuing it.

·         Any holder can cross an uncrossed cheque. He can convert general crossing into special crossing, and he can even add the words ‘Not Negotiable’ or ‘A/C payee’ to a crossing.

·         The banker in whose favor a cheque has been crossed can again cross it in favor of another banker, for the purpose of collection, as an agent.

Opening of Crossing:

The cancellation of crossing is usually termed as ‘opening of crossing. When a drawer wants to cancel the crossing, he is to write the words ‘pay cash’ upon the cheqe, followed by his full signature.

ENDORSEMENT

            A cheque may be either a bearer cheque or an order cheque. A bearer cheque can be transferred by mere delivery, whereas an order cheque requires endorsement before delivery.

            Endorsement is nothing but the process of signing one’s name or affixing an accepted rubber stamp impression on a cheque, for the purpose of transfer.

 Definition of Endorsement (Sec. 15 of N.I Act):

            “Where the maker or holder of a negotiable instrument signs the same, other wise than as such maker, for the purpose of negotiation, on the back or face there of, or on a slip of paper annexed there to ...... he is said to endorse the same, and is called the endorser.”

Significance of Endorsement:

            An endorsement consists of two contracts, namely

            (1) Contract of transfer of the property in the instrument, and

            (2) Contract of a contingent assumption of liability on the part of the endorser. The endorser of a negotiable instrument, by his act of endorsing, signifies the following to his endorsee and to any subsequent holder, that, when the instrument left his hands -

o   He had a good title to it.

o   It was genuine all its particulars at the time of his endorsement.

o   All the previous endorsements were genuine. Sec. 122 of the N.I Act provides that “no endorser of a negotiable instrument shall, in a suit thereon by a subsequent holder, be permitted to deny signature or capacity to contract of any prior party to instrument.”

o   Further the endorser; by his act of endorsing, promises to indemnity the endorsee or any subsequent holder for any loss suffered by them on the dishonour of the instrument, provided, the procedure necessary on dishonour has been duly followed.

            (v) An endorsement carries with a right of further negotiation to the endorsee, along with the right of ownership’.

Assignment Vs. Endorsement:

·         An assignment means the transfer of legal title to a property. Endorsement not only means the transfer of legal title, but also, it includes the assumption of liability till the instrument is finally discharged.

·         In the case of Assignment, the assignee’s title is subject to the title of the assignor. But in the case of endorsement, good title can be passed on to the endorse, even when, there is a defective title.

Kinds of endorsement:

(a) Blank endorsement: (sce 16(1) of N. I Act)

If the endorser signs his name only, the endorsement is said to be “Blank’. Cheques endorsed in blank can be negotiated by mere delivery. Thus, a cheque, originally payable to order, becomes payable to bearer by an endorsement in blank. 

Example: A cheque is payable to X or order. If it is simply signed by X on the back, it constitutes a blank endorsement.

(b)  Special/Full endorsement (Sec. 16(1) of N.I Act):

If the endorser adds a direction to pay the amount to the order of a certain person, then, the endorsement is said to be full.

An instrument, with a blank instrument can be converted into a special instrument by any holder by specifying the name of an endorsee and putting his signature. A cheque, originally a bearer cheque, can be converted into an order cheque, by means of a full endorsement. Example: A cheque in payable to 'X’ or order. He adds a direction to pay the amount to Mr. ‘Y’ or order and puts his signature below.

Endorser’s Liability:

·         As per See. 35 of the N.I Act every endorser is liable to every subsequent holder, in case the instrument is dishonored.

·         Where there are two or more endorsements on an instrument, the liability of the endorser will be fixed in the order in which, their signatures appear on the instrument.

·         The liability of the endorser continues even after death till the instrument is paid. The endorsee can sue even after the death of the endorser. Supposing the endorsee dies, the right to sue the endorsers is available to his legal representatives.

·         The endorser is liable, only if he is served with a notice of dishonor.

·         This liability of the endorser can be excluded by a separate contract to the contrary.

·         The endorser can get rid of his liability by making such endorsement like ‘sans recourse’.

·         When the instrument is paid in due course, the endorser is relieved from his liability.

Reference:

1. The Negotiable Instrument Act, 1881 (Act XXVI OF 1881)
2. Bangladesh Gazette Dated September12, 1994
3. Bangladesh Gazette Dated July 06,2000
4. Banking Theory, Law and Practice by E. Gordon and K. Natarajan
5. Commercial law by A.K. SEN &J.K.MITRA
6. Banking Law and Practice by S.N. MAHESHWARI.
7. BIBM reading materials.