CAIIB BRBL Module B Unit 2 : Negotiable Instruments Act, 1881

21/10/2023

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CAIIB Paper 4 BRBL Module B Unit 2 : Negotiable Instruments Act, 1881 (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 4 (BANKING REGULATIONS AND BUSINESS LAWS) includes an important topic called “Negotiable Instruments Act, 1881”. Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.

In this article, we are going to cover all the necessary details of CAIIB Paper 4 (BRBL) Module B (IMPORTANT ACTS/LAWS & LEGAL ASPECTS OF BANKING OPERATIONS – PART A) Unit 2 : Negotiable Instruments Act, 1881, Aspirants must go through this article to better understand the topic, Negotiable Instruments Act, 1881 and practice using our Online Mock Test Series to strengthen their knowledge of Negotiable Instruments Act, 1881. Unit 2 : Negotiable Instruments Act, 1881

Introduction

The Negotiable Instruments Act came into force from 1st March 1882 and presently extends to the whole of India.
This is the law in the country governing the making, negotiation and payment of negotiable instrument including a customer’s cheque by a banker, and the respective rights, obligations of the parties to a negotiable instrument including protections available to the parties thereto.
The Act has been amended a number of times the latest being in 2018 (w e f from 01-09-2018) whereby Section 143A and 148 was introduced which deal primarily with providing interim compensation during the pendency of the criminal complaint and criminal appeal.

Effect of insertion of Section 143A

With the insertion of Section 143A, the new provision was introduced wherein a competent Court while trying a cheque dishonour offence is empowered to order the drawer of the cheque to pay interim compensation not exceeding 20% of the cheque amount to the complainant, where the drawer pleads not guilty to the accusation made in the complaint.
However, if the drawer of the cheque is acquitted, the Court shall direct the complainant to repay to the drawer, the amount of interim compensation, with interest at the bank rate as published by the RBI, prevalent at the beginning of the relevant financial year, within 60 days from the date of the order, or within such further period not exceeding 30 days as may be directed by the Court

Negotiable Instruments

As per Section 13 “(1) A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.

Characteristics

Those are contracts between two or more persons.
Those are always in writing.
Those have an amount expressed in a particular currency.
Those have a tenor after which they become payable or are payable on sight.
Those are payable to ‘order’ or ‘bearer’.
Where those are payable to order those are transferable by endorsement and delivery and where payable to bearer by simple delivery.
Those are always signed by the issuer.
Those usually have a beneficiary if payable to order.
Those are dated.

Types

Promissory Note

According to Section 4: “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 a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.”

Illustrations: A signs instruments in the following terms:

(a) “I promise to pay B or order Rs. 500.”

(b) “I acknowledge myself to be indebted to B in Rs. 1,000, to be paid on demand, for value received.”

Bill Of Exchange

According to Section 5: “A Bill of Exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay certain sum of money only to or to the order of a certain person or to the bearer of the instrument.”

There are 3 parties involved

Drawer: The party that issues a bill of exchange “creditor”
Drawee: The party to which order to pay is sent “debtor”
Payee: The party to which bill of exchange is payable “beneficiary”

Thus the essential characteristics of a ‘Bill of Exchange’ are:

It must be in writing.
It must be signed by the drawer.
The drawer, drawee and payee must be certain.
The sum payable must also be certain.
It should be properly stamped.
It must contain an express order to pay money and money alone.

Cheque

According to Section 6: “A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.”

Banker has legal duty to make payment of a cheque if:

The cheque is properly drawn.
There is sufficient balance in the account.
There is no legal restraint on the bank’s duty to pay.

It includes cheque in electronic form and truncated cheque

Difference between Promissory Note and Bill of Exchange

Differences between Bill of Exchange and Cheque

Payment Of Cheques – Protection To Bankers’ /Customers’

Bankers’ Duty to Pay in terms of Section 31 of the Negotiable Instruments Act (NI ACT) 1881 “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”.

In case of wrongful dishonor, the drawee is only liable to the drawer for compensation and not to the payee, any holder or endorsee, except in the following circumstances –

Winding up of the bank. Here the holder would become a creditor as far as the Bank is concerned and entitled to make a claim
The bank does not heed the crossing on the cheque, pays and consequently.

Payment in Due Course:

Protection to a paying Banker is however available under the NI Act provided payment of a cheque is made in ‘due course’.
Payment in due course is defined in Section 10 of the NI Act. In terms of Section 10,” ‘Payment in due course’ 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 does not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned”.

Additional Protection to the Paying Banker:

In terms of Section 85 of the NI Act, additional protection to the paying banker is available against fraudulent endorsements of the payee/other endorsees in an order or bearer cheque provided payment is made in due course.

Material Alterations

A materially altered cheque may be declared null and void. Banker has to be very careful whenever there is a material alteration in the cheque presented for payment. It should be ensured that any material alteration is made with the consent or authority of the drawer and is confirmed by his/her signature.

The following instances of material alteration may be considered important

Alteration in the date of the instrument which might have the effect of hastening or delaying the time of payment.
Alteration of the name of the payee (beneficiary)
Alteration of the amount which is the most common form of fraudulent alteration.
Alteration of an order cheque to a bearer cheque.

Where Alteration Is Not Apparent

In terms of the amended Section 89 “(1) Where a promissory note, bill of exchange or cheque has been materially altered but does not appear to have been so altered, or where a cheque is presented for payment which does not at the time of presentation appear to be crossed or to have had a crossing which has been obliterated, payment thereof by a person or banker liable to pay, and paying the same according to the apparent tenor thereof at the time of payment and otherwise in due course, shall discharge such person or banker from all liability thereon; and such payment shall not be questioned by reason of the instrument having been altered, or the cheque crossed”.

Protection To The Collecting Banker

Sec. 131 grants protection to a collecting banker. This is applicable to both cheques and drafts.

Conditions for Protection

The collecting banker acts in good faith.
It acts without negligence.
It receives payment for a customer.
The cheque is crossed generally or specially to the collecting bank
It verifies the prima facie genuineness of the cheque for collecting payment under CTS clearing.
It looks for any fraud, forgery or tampering that can be verified with due diligence and ordinary care, and is apparent on the face of the cheque to be truncated.

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CAIIB Paper 4 Module B UNIT 2 -NEGOTIABLE INSTRUMENTS ACT, 1881 (Ambitious_Baba)