LEGAL ASPECTS OF BUSINESS

PROF. DEEPIKA ARORA

 THE NEGOTIABLE INSTRUMENT ACT, 1881

 The negotiable Instrument Act was originally drafted in the year 1866
and implemented in the year 1881.
 This act was implemented during the British rule of India and is still in
function even in modern India.
 The negotiable instrument act which was implemented in 1881, was
amended in the year 1988 to include cheque defaulters.
 THE NEGOTIABLE INSTRUMENT ACT, 1881
 Majority of payments were done in the form of cheques, especially
those of high amounts.
 Hence, the act of dishonour of cheques was common before 1988
when there was no law against it.
 The 1988 amendment of the negotiable instrument act helped
to control the dishonouring of cheques by specifying it as a criminal
activity.
 Under this act, the people issuing cheques without having sufficient
money in their accounts are considered to be defaulters and are
charged a penalty, considering it as a criminal offense.
 THE NEGOTIABLE INSTRUMENT ACT, 1881

 However, even after this first amendment, there were many loopholes
in the act which led to different interpretations of the act by different
high courts.
 In an effort to close these loopholes, the negotiable instrument act was
amended again in the year 2002 by inserting five new sections in the
act. The new amendment came into force from the year 2003.
 THE NEGOTIABLE INSTRUMENT ACT, 1881

 Negotiable instruments are commercial documents that are used as

means of payment of goods and services.
 They are the documents of certain type used in the commercial
transactions and monetary dealings and are significant part of the
modern business world.
 The need to pay for goods and services in physical cash is obviated by
using negotiable instruments.
 THE NEGOTIABLE INSTRUMENT ACT, 1881

 The law dealing with negotiable instruments in India is known as the

Negotiable Instruments Act, 1881.
 The Act applies to the whole of India.
 The Act mainly covers three types of negotiable instruments:
1. promissory notes,
2. bills of exchange, and
3. cheques.
 TYPES OF NEGOTIABLE INSTRUMENTS

 Negotiable instruments are financial documents that guarantee the payment of a

specific amount of money either on demand or at a set time, transferable from one
person to another. The main types of negotiable instruments are:
 1. Promissory Note
• A written promise by one party (the maker) to pay a certain sum of money to another
party (the payee) on demand or at a specified future date.
• Example: A note issued by an individual or business to secure a loan.
 2. Bill of Exchange
• A written order from one person (the drawer) directing another (the drawee) to pay
a third party (the payee) a certain sum of money either on demand or at a future
date.
 TYPES OF NEGOTIABLE INSTRUMENTS

 3. Cheque
• A written order from a bank account holder (the drawer) directing the bank
(the drawee) to pay a specific amount of money to a named person or the
bearer (the payee) on demand.
• Cheques are widely used in everyday transactions for payments and
transfers.
 4. Bank Draft
• A type of cheque where the bank guarantees payment. The bank acts as the
drawer and ensures the payment is made to the payee.
• Often used for large or secure payments as it reduces the risk of dishonor.
 TYPES OF NEGOTIABLE INSTRUMENTS

 5. Bearer Instrument
• A negotiable instrument where the person in possession (the bearer) can
claim the money. Ownership is transferred by simple delivery without needing
endorsement.
• Example: A bearer cheque or a bearer bond.
 6. Dividend Warrants
• Issued by companies to pay dividends to shareholders. It allows shareholders
to receive payments directly from the company’s bank account.
 Each type of negotiable instrument serves specific purposes in commerce
and banking, allowing ease of transfer and certainty of payment.
 A STORY: PROMISSORY NOTES

Ramesh Raj
Priya
 THE AGREEMENT

 Raj needs 10,000 to buy some new equipment for his small business.
 Priya agrees to lend Raj the money, but she wants some form of
assurance that Raj will repay her.
 Raj promises to pay Priya back in two months, along with 5% interest.
 CREATING THE PROMISSORY NOTE

 Raj writes a promissory note for Priya. The note says, "I, Raj, promise to
pay Priya 10,000 plus 5% interest on or before two months from today."
 This note is a negotiable instrument because it is a written promise that
can be transferred to someone else if needed.
 PRIYA’S NEED

 A month later, Priya needs some money urgently to pay for her son's
school fees.
 Instead of waiting for Raj to pay her back, Priya decides to transfer the
promissory note to Ramesh, a friend who agrees to give Priya 9,800 in
exchange for the note.
 Priya endorses the note by signing it and handing it over to Ramesh.
 THE TRANSFER

 Now, Ramesh holds the promissory note.

 This means that Raj now owes the money to Ramesh instead of Priya.
 This transfer of the promissory note is what makes it a negotiable
instrument—it can be passed from one person to another.
 THE PAYMENT

 At the end of the two months, Ramesh goes to Raj and presents the
promissory note.
 Raj pays Ramesh the 10,500 (10,000 principal + 500 interest), and
Ramesh returns the note to Raj.
 The transaction is complete, and everyone is happy.
 PROMISSORY NOTE

 A promissory note is a written promise by one person to pay a specific

amount of money to another person or to the bearer of the note at a
certain time or on demand.
 PROMISSORY NOTE: ESSENTIALS
1. It must be in writing not oral
2. It must contain a promise or undertaking to pay
3. The promise to pay must be definite and unconditional.
4. It must be signed by the maker
5. The maker must be a certain person
6. The payee must be certain
 A note in favour of fictitious person is illegal and void.
 A note made payable to the maker himself is a nullity.
 PROMISSORY NOTE: ESSENTIALS
7. The sum payable must be certain
[Link] amount payable must be in the money (Indian currency)
9. Bank note or currency note is not a promissory note
10. Payable on demand or after a definite period of time
11. Other formalities
 Date
 Consideration
 Place
 Stamp
CHEQUE
 STORY

•Priya: A businesswoman who runs a small stationery shop.

•Arun: An employee at a local bank.

•Mohan: A supplier who sells paper and office supplies to Priya.

 CHEQUE

 Priya needs to pay Mohan 20,000 for a large order of supplies. Instead
of paying in cash, she decides to write him a cheque.
 Cheque: A written order by Priya (the drawer) to her bank to pay a
specific amount to Mohan (the payee) from her account.
 The bank (the drawee) is instructed to make this payment.
 WRITING THE CHEQUE
 Priya takes out her chequebook and writes a cheque payable to Mohan.
 Date: Shee writes the date as "1st September 2024."
 Payee: In the "Pay to the order of" section, she writes “Mohan."
 Amount: She writes 20,000 in both numbers and words (“Twenty
Thousand Rupees only").
 Signature: Priya signs the cheque at the bottom.
 This makes the cheque a negotiable instrument that can be transferred.
 MOHAN DEPOSITS THE CHEQUE
Mohan goes to his bank and endorses the cheque by signing the back.
 Endorsement: He writes "For deposit only to account number
987654321" and signs “Mohan.“
 The bank sends the cheque to Priya’s bank for processing.
 Presentment: Mohan's bank presents the cheque to Priya’s bank for
payment. The cheque must be presented within a reasonable time:
3 months
 MOHAN DEPOSITS THE CHEQUE

 Priya’s bank verifies her account balance and confirms that she has
enough money to cover the cheque.
 The amount is deducted from her account and credited to Mohan's
account.
 The cheque clears, and the funds are transferred from Priya’s
account to Mohan's account. This is the final step in the cheque
process
 DISHONOR OF THE CHEQUE
 If Priya didn’t have enough funds in her account, the cheque would
be dishonored, and Mohan’s bank would return it unpaid.
 Mohan could then take legal action against Priya under Section 138
of the Negotiable Instruments Act.
 The court may order Priya to pay the amount with interest and
possibly impose a fine.
 Dishonor: If the cheque bounces (is dishonored), the payee has legal
recourse to recover the amount, including penalties.
 CHEQUE: PARTIES

 Drawer: He is the maker of the cheque and the person who is directing
the bank to pay a certain sum of money to a certain person or to the
bearer.
 Drawee: Drawee is the party upon whom the cheque is drawn. It is
always a bank in case of a cheque.
 Payee: Payee is the party who presents the cheque for payment.
He/She is the person who receives money from the bank.
 ESSENTIAL ELEMENTS OF CHEQUE
1. A cheque must be in writing.
2. It should contain an unconditional order.
3. It is always drawn by a customer on his or her specified bank.
4. It must be signed by the customer.
5. It is always payable on demand.
6. It should contain an exact amount to be paid.
7. The payee must be certain person whom the payment of cheque is to
be made.
8. A cheque should be duly dated.