Chapter 6: Law of Negotiable Instruments

Very Short Question Answer

1. Define negotiable instruments.

The word ‘Negotiable’ means transferable from one person to another in return for consideration and ‘Instrument’ means a written documents by which a right can be created infavour of some person. Thus, a negotiable instrument is a document which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or by endorsement and delivery.

2. Define promissory note.

A promissory note means an instrument in writing except government or bank note containing an unconditional under taking, signed by the maker, to pay a certain sum of money to, or to order of, a certain person, or to the bearer of the instrument.

3. Define bills of exchange.

Bills of exchange means an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money to, or to the order of a certain person or to the bearer of the instrument in a certain date or after certain period of time or on the demand.

4. Give two differences between cheque and bill of exchange.

The difference between cheque and bill of exchange can be shown as follows:

Basis	Bill of Exchange	Cheque
1. Drawee	It can be drawn on any person including a banker.	It is always drawn on a banker only.
2. Acceptance	Acceptance is required before presented for payment.	No prior acceptance is required.

5. Who is a holder in due course?

Any person is a holder in due course who:

• For valuable consideration,
• Becomes the possession of a Negotiable Instrument payable to bearer of the endorsee or payee thereof,
• Before the amount becomes payable, and
• Without having sufficient cause to believe that any defects existed in the title of the person from whom he derives his title.

6. What do you meant by material alteration?

An alteration becomes a material if it:

• Alters the character of identity of the instrument, or
• Changes the rights and liability of the parties or any of the parties to the instrument, or
• Alters the operation of the instrument

Short Question Answer

1. Define promissory note. Distinguish between a promissory note and a bill of exchange. (10)

PROMISSORY NOTE

A promissory note means an instrument in writing except government or bank note containing an unconditional under taking, signed by the maker, to pay a certain sum of money to, or to order of, a certain person, or to the bearer of the instrument.

The person who makes the promissory note and undertakes obligations to pay a certain sum of money mentioned thereon is called Maker. And the person to whom the payment is to be made is called Payee.

DIFFERENCE BETWEEN A PROMISSORY NOTE AND A BILL OF EXCHANGE

The main difference between a promissory note and a bill of exchange are as follows:

Basis	Promissory Note	Bill of Exchange
Number of parties	There are two parties.	There are three parties.
Maker and payee	Maker and payee cannot be the same and single person.	Maker/ drawer and payee can be the same and single person.
Promise and order	Thee is a promise to pay a sum of money	There is an order to pay a sum of money.
Acceptance	Acceptance is not required as it is signed by the person liable to pay on it.	Acceptance is necessary by the drawee before it can be presented for payment.
Nature of liability	Liability of the maker of a promissory note is primary.	Liability of the maker of a bill is secondary.
Payable to bearer	It cannot be drawn payable to bearer.	It can be drawn payable to bearer but not payable to bearer on demand.
Notice of dishonour	No notice is to provided to the maker.	Notice is dishonour must be given to all prior parties.
Maker’s position	Maker is in immediate relation with the payee.	Drawer is not in immediate relation with the payee.
Instrument in set	It cannot be drawn in set.	It can be drawn in set.
Proof of protest	No protest is required in the case of a promissory note.	Foreign bills must be protested for dishonour when such protest is required by law.

2. What is negotiable instrument? Explain the characteristics of negotiable instruments. [10]

NEGOTIABLE INSTRUMENT

The word ‘Negotiable’ means transferable from one person to another in return for consideration and ‘Instrument’ means a written documents by which a right can be created infavour of some person. Thus, a negotiable instrument is a document which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or by endorsement and delivery.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

An instrument creating a right to claim a certain sum of money can be leveled as a negotiable instrument if it satisfies the following features or characteristics. It includes:

Freely transferable: A negotiable instrument is freely transferable which means that it can be transferred from one person to another easily and no legal formalities are necessary to be complied with a transfer. Usually, when we transfer any property to some body, we are required to make a transfer deed, get it registered, pay stamp duty, etc. But such formalities are not required while transferring a negotiable instrument. The ownership is charged by mere delivery (when payable to the bearer) or by valid endorsement and delivery (when payable to order). Further, while transferring, it is also required to give a notice of the prior holder.

Right of holder: The holder of a negotiable instrument has the right to file a suit in his name for payment for all or any of the concerned parties. Holder in due course can sue in his own name without giving notice to the drawer of his becoming holder. All prior parties are liable to him. Hence, the holder in due course can recover the full amount of the instrument.

Better title: It means that the title of holder is free from all defects and a person who receives a negotiable instrument has a clear and undisputable title to the instrument. However, the title of the receiver will be absolute, only if he has got the instrument in good faith and for a consideration. Also the receiver should have no knowledge of the previous holder having any defect in his title. Such a person is known as holder in due course. Example: X sold his goods to Y worth Rs. 100,000 and received a promissory note in return from him. afterwards Y refused to honour the promissory note claiming that the goods were not of agreed quality. In this case,

1. If X sues Y on the promissory note, Y’s defence is good.
2. If X delivered the promissory note to Z, a holder in due course, Y cannot make such defence against Z.

Promise or order: Promise or order to pay must be unconditional which means that it contains an unconditional promise or order to pay. Negotiable instruments are payable to order which expressed to a particular person. An instrument which does not restrict its transferability expressly is negotiable whether the word order is mentioned or not. The word order or beaver is no longer necessary to render an instrument negotiable.

Certain sum of money only: Payment must be in specific sum of money only. It means that the person liable to pay on the instrument has to pay that sum of money mentioned in the instrument and nothing else than that and the payment can be asked in currency but not in goods.

Presumptions: Certain presumptions are applied to all negotiable instrument as to their validity. They are as under:

Present of consideration: It is presumed that every instrument is made, drawn, accepted, endorsed, negotiated or transferred for consideration.

Date of drawn: The date if it appears on the instrument it is presumed that the instrument was made or drawn on the date mentioned thereon.

Time of acceptance: Every accepted bill of exchange was presumed to be accepted within a reasonable time after its date and before its maturity.

Time of transfer: Every transfer of a negotiable instrument was made before its maturity.

Order of endorsement: It is presumed that the endorsements appearing on the instrument were made in the order in which they appear, thereon.

Stamp duty: A lost or destroyed instrument was duly stamped and the stamp was duly cancelled.

Holder: The holder of an instrument is presumed to be a holder in due course.

Proof of protest: The proof of protect is treated as an evidence of dishonour.

In writing: A negotiable instrument needs to be in written form and an oral promise or order is not considered as negotiable instrument.

The above presumptions are rebutable by evidence. If any challenges any of these presumptions, he has to prove his allegation. Further, these presumptions would not arise where an instrument has been obtained by an offence, fraud or some unlawful consideration.

3. Define promissory note. Explain its characteristics.

PROMISSORY NOTE

A promissory note means an instrument in writing except government or bank note Sum of money to, or to order of, a certain person, or to the bearer of the containing an unconditional under taking, signed by the maker, to pay a certain instrument.

The person who makes the promissory note and undertakes obligations to pay a certain sum of money mentioned thereon is called Maker. And the person to whom the payment is to be made is called Payee.

ESSENTIAL ELEMENTS

For an instrument to become a promissory note, it must have the following essentials elements:

1. It must be in writing: The promissory note must be in writing. Mere verbal promise to pay is not enough. Writing includes print, typewriting, hand writing or it may also be in pencil or ink.
2. It must contain a promise to pay: The instrument must contain an express promise to pay. A mere acknowledgement of indebtness or implied undertaking is not sufficient and it cannot be a valid promissory note.
3. It must be definite and unconditional: The promise must be definite and unconditional and when it is certain or conditional, the instrument is valid. The promise to pay must not depend upon the happening or non-happening of some future event or the fulfillment of a condition. If there is a condition and the condition accordingly fulfils, the instrument is still valid.
4. It must be signed by the maker: It must be signed by the maker, otherwise it is incomplete and of not affective though it is written by the maker himself and his name is appears in the body of the instrument. Signature means the writing or otherwise affixing a person’s name or a mark to represent his name, by himself or by his authority with the intention of authenticating a document.
5. Parties of the instrument must be certain: The instrument itself must indicate with certainty as to who the maker of it is and who the payee is. Where the maker and payee cannot be identified with the certainty from the instrument itself, the instrument is not a promissory note. It has been held that the payee may sometimes be misnamed or designated by description only. In such a case, the note is valid if the payee can be ascertained by evidence. For example, a promissory note payable to the manager of a certain company is payable to a certain person.
6. The sum payable must be certain: For a valid promissory note, it is essential that the sum payable to the payee must be certain and definite. For example, A signs instrument in the terms that ‘I promise to pay sums which shall be due to him. It is not valid and gives no right to the payee for such amount stated thereon. Rs. 5000 and all other
7. There must be a promise to pay money only: The payment to be made under the instrument must be in the Nepalese currency. Hence, an instrument containing a promise to pay a certain sum of foreign money or to deliver a certain quantity of goods is not a promissory note. Therefore, an instrument signed by A, saying ‘I promise to pay B Rs. 2,000 and deliver one ton of paddy on 15 July 2015 is not a valid promissory note.
8. Formalities are to be fulfilled: Formalities like number, date, place, consideration, etc. are usually found in an instrument although they are not essential in law. The absence of words ‘for value received’ or date is not essential but it must be affixed with the necessary stamp as per the prevailing law.

4. Define the term discharge of a negotiable instrument and explain the various modes of discharge.

DISCHARGE OF AN INSTRUMENT

When a negotiable instrument ceased from its operation or the parties thereto are free from their obligation or when it comes to an end known as the discharge of negotiable instrument. The term discharge in relation to a negotiable instrument is used in two senses, which are:

• Discharge of an instrument.
• Discharge of one or more parties from liability thereon.

An instrument is said to be discharged when all rights of action under it are completely extinguished and when it ceased to be negotiable. This would happen when the party who is ultimately liable on the instrument is discharged from liability. In such a case even a holder in due course does not acquire any rights under the instrument. In other cases, one or more parties of an instrument may be free from their liability but the instrument continues to be negotiable and the some other parties are continue to be liable on it and this does not discharge the instrument as such.

An instrument may be discharged or terminated either one of the following ways or modes which are discussed as under:

1. By payment in due course: It is the must common or usual mode of discharge of an instrument and in such a case parties thereto also discharged from their liability. When the party who is primary liable to pay makes payment the instrument is discharged. Therefore, a payment by a party who is secondarily liable does not discharge the instrument. The payment includes the payment of the interest due therein as agreed between the parties. .
2. By party primarily liable becoming the holder of the instrument: If the maker of a note or acceptor of a bill or drawer of a cheque becomes its holder at or after it maturity in his own right, i.e., he has an absolute title and does not hold it conditionally or as an agent, the instrument is discharged. Example: A makes a note and delivers it to B, the payee. B, afterwards endorses it to C and C to D. Likewise D delivers it to the person who happens to be the original maker, i.e., to A when the instrument is in the hands of A, it comes to an end or it is discharged.
3. By express walver: When the holder of an instrument at or after its maturity absolutely and unconditionally renounces in writing or gives up his rights against all the parties to the instrument, the instrument is comes to an end.
4. By cancellation: Where an instrument is intentionally cancelled by the holder or his agent and the cancellation is apparent thereon, the instrument is discharged. Cancellation may take place by crossing out signatures on the instrument, or by physical destruction of the instrument with an intention of putting an end to the liability of the parties to the instrument.
5. By discharge as a simple contract: Negotiable instruments are special types of contract and, therefore, the general principles of contracts are applied with exceptions to the negotiable instruments and their validity. Therefore, a negotiable instrument may be discharged in the same way as any other contract for the payment of money. It includes, for example, discharge of an instrument by novation or rescission or by expiry of period of limitation.

Long Question Answer

 1. A holder in due course gets title to a negotiable instrument free from equities. Certain defences which can be set up against a person claiming on a negotiable instrument cannot be set up against a holder in due course. Examine the statement by discussing the privileges of a holder in due course.

MEANING OF HOLDER IN DUE COURSE

Section 2 (i) of the Negotiable Instrument Act, 2034, reads thus, “Holder means a person entitled in his own name to be the possession of a Negotiable Instrument and to receive the amount due on it.”

It implies that if a person entitled in his own name:

1. To be the possession of the instrument, and
2. To receive or recover the amount due thereon from the parties there to.

 In order to be entitled to the instrument in his own name, the holder must named there in as the payee or the endorsee in case the instrument is payable to order, or he must be the bearer thereof in case the instrument is payable to bearer. Therefore, where a person obtained possession of an instrument by theft or as a finder of lost goods, he is not a holder as he cannot obtain or recover the payment of the instrument. If he transfer the instrument to a transferee receiving if for consideration and bona-fide, the transferee becomes the holder. Holder in due Course

Clause (o) of Section 2 of the Negotiable Instrument Act, 2034 provides thus: “Holder in due course means a person having entitlement upon the Negotiable Instrument according to law, in the case of a Negotiable Instrument payable to a bearer and the payee or a endorsee in the case for a Negotiable Instrument payable to the ordered person.”

Any person is a holder in due course who:

• For valuable consideration
• Becomes the possession of a Negotiable Instrument payable to bearer or the endorsee or payee thereof,
• Before the amount becomes payable, and
• Without having sufficient cause to believe that any defects existed in the title of the person from whom he derives his title.

The essential qualifications of a holder in due course may, therefore, be summed up as follows:

• He must be a holder for valuable consideration.
• He must have become a holder (possessor) before the date of maturity of a negotiable instrument.
• He must have become holder of the negotiable instrument in good faith.
• He should take the instrument without any negligence on his part. Hence, a reasonable care on the part of the holder necessary before he acquires title of the negotiable instrument.
• A holder in due course must take the instrument complete and regular on the face of it.

A holder of a Negotiable Instrument will not be a holder in due course if:

• he has obtained the instrument by gift or for an unlawful consideration or by some illegal method, or
• he has obtained the instrument after its maturity; or
• he has obtained instrument mala fide, i.e., not in good faith.

PREVILAGE OF A HOLDER IN DUE COURSE:

A holder in due course gets title to a negotiable instrument free from equities. Certain defences which can be set up against a person claiming on a negotiable instrument cannot be set up against a holder in due course. The special privileges of a holder in due course are as follows:

• Instrument cleansed of all defect: A holder in due course who gets the instrument in goods faith in the course of its journey is not only himself protect against all defects of title of the person form whom he has received it, but also serves, as a channel to protect all subsequent holders. A holder in due course can recover the amount of the instrument from all prior parties although, as a matter of fact, no consideration was paid by some of the previous parties to the instrument or there was a defect of title in the party from whom he took it. Once an instrument passes through the hands of a holder in due course, it is cleansed of all defect provided the holder was himself not a party to a fraud or illegality which affected the instrument in some stage of its journey. Example: A obtain B’s acceptance to a bill by fraud. A endorses it to C who takes it as a holder in due course. The instrument purged of all its defects and gets a goods title to it. In case C endorses it to some other person he will also get a good title to it except when he is a party to the fraud played by A.
• Right not affected in case of an inchoate instrument: The right of a holder in due course to recover money is not at all affected even though the instrument was originally an inchoate stamped instrument and the transferor completed the instrument for a sum greater than what was intended by the maker where instrument is forget it is void.
• All prior parties liable: All prior parties to the instrument (the maker or drawer, acceptor and endorsers or transferors) continue to remain laible to the holder in due course until the instrument is duly satisfied. The holder in due Icourse can file a suit against all the parties liable to pay in his own name though the instrument was not drawn in his name.
• Can enforce payment of a fictitious bill: Where both the drawer and payee of a bill are fictitious persons, the acceptor is liable on the bill to a holder in due course. If the latter can show that the signature of the supposed drawer and the first endorser are in the same hand, for the bill payable to the drawer’s order the fictitious drawer must endorse the bill before he can negotiate it. The acceptor is not relieved from liability to any holder in due course, on the plea that drawer is fictitious, i.e., the acceptor of a bill cannot say, as against the holder in due course, that the other parties to the bill were fictitious.
• No effect of conditional delivery: Where a negotiable instrument is delivered conditionally or for a special purpose and is negotiated to a holder in due course, a valid delivery of it is conclusively presumed and he acquired good title to it. Example: A, the holder of a bill endorses it to B or order” for the express purpose that B may get it discounted. B does not do so negotiates it to C, a holder in due course. C acquires a good title to the bill and can sue all the prior parties on it.
• No effect of absence of consideration or presence of an unlawful consideration: The plea of absence of or unlawful consideration is not available against the holder in due course. The party responsible will have to make payment.
• Estoppel against denying capacity of payee to endorsee: No maker of a note and no acceptor of a bill payable to order shall, in a suit therein by a holder in due course, be permitted to resist the claim of the holder in due course on the plea that the payee had not the capacity to endorse the instrument on the date of the note as he was a minor or insane or that he had no legal existence.
• Estoppel against denying the original validity of instrument: The plea of original validity of the instrument cannot be put forth, against the holder in due course by the drawer of a bill of exchange or cheque, or the maker of a note. But where the instrument is void on the face of it, e.g. promissory note made payable to ‘bearer’, even the holder induce course cannot recover the money. Minors are free from the liability and there is no liability if the signatures are forged.
• Every holders is a holder in due course: Unless otherwise proved by the facts, every holder is presumed to be a holder in due course.