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BBA 1st Semester Business Low Notes

Payment in due course

Table of Contents

Business Low Notes :-

The payment of a negotiable instrument should be made to the right person by the payjng banker or the acceptor of the bill, otherwise the latter shall be responsible for the same. The payment of a negotiable instrument is not without certain risks.

Thus, the Negotiable Instrument Act provides protection to the paying banker or the drawee of a bill, provided the payment is made as required in the Act. Such payment is called as payment in due course.

According to Section 10 ‘’payment in due course” is 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 a reasonable ground for believing that he is not entitled to receive payment of the amount mentioned therein.

A payment in due course has the following essential features :

  1. The payment should be made according to the true intentions of the parties to the negotiable instrument, as is apparent from the document itself. Payment may be made either in cash or through a clearing house or by a draft. If the banker makes payment of a post-dated cheque before the date mentioned therein or pays a crossed cheque at the counter, then he acts against the true intentions of the drawer and hence the payment will not be treated as payment in due
  2. The payment should be made in good faith and without negligence. The banker should made the payment in the good faith, i.e., honestly and not fraudulently. He should take all necessary precautions and act as a reasonable person will act in the particular circumstances of a
  3. Payment must be made to the person in possession of the instrument in circumstances which do not arouse suspicion about his title to posses the instrument and receive payment thereof. The payment of the order cheque should be made to the right person after proper identification. Sometimes the appearance and behaviour of the person presenting the cheque at the counter may arouse a suspicion in the mind of the banker about the validity of the formers’ authority to receive

Capacity of Parties (who can be parties to negotiable instrument)

The capacity to make draw, accept, negotiate and indorse a negotiable instrument depends upon the capacity to enter into contracts. Therefore, every person competent to contract may incur liability by becoming a party to a negotiable instrument.

Thus, a minor , lunatic or a drunken person does not incur liability and can not become a party to the negotiable instrument, but he can acquire rights under it. So if a cheque is drawn in favour of a minor , i.e., he is a payee, he can recover the amount stated in the cheque. Also the absence of capacity of one or more of the parties to a negotiable instrument in no way diminishes the liability of the competent parties.

A draws a cheque in favour of B, a minor. B endorses it in favour of C, who in turn endorses it in favour of D. The cheque is dishonoured by the bank. D can recover from C and   A, but not from B, the minor; and C can recover from A but not from B.

An insolvent person cannot draw, make, accept or indorse a negotiable instrument, although if  he indorses it as payee to a holder in due course, the letter can recover from all parties, except  the insolvent.

A corporation or company can incur liabilities under a negotiable instrument if it is so empowered by its memorandum of association. A trading company has, however an implied authority to execute a negotiable instrument, while a non-trading company has no such implied authority.

The Karta or manager of Joint Hindu Family can bind the Joint Family by executing a negotiable instrument, provided the transaction is for the benefit of the family or is for legal necessity.

( BBA 1st Semester Business Low Notes )

Liability of Parties

Business Low Notes :-

  1. The maker of a promissory note and the acceptor of a bill of exchange are primarily responsible for the payment
  2. The drawer of a bill or cheque is bound in case of dishonour by the drawee or acceptor thereof, to compensate the holder, provided due notice of dishonour has been given to, or received by,the

In consequence, the maker of a note, the drawer of a cheque, the drawer of a bill until acceptance, and the acceptor are respectively liable on the instrument as principal debtor. The

other parties i.e., the intermediate indorses and drawer of a bill after acceptance, are liable thereon as sureties for the maker, drawer or acceptor.

In between parties are liable as sureties, each prior party is also liable thereon as a principal debtor in respect of each subsequent endorsement.

A draws a bill payable to his own order on B, who accepts it. A afterwards indorses the   bill to C, C to D and D to E. As between E and B, B is the principal debtor, and A, C and D     are his securities. As between E and A, A is the principal debtor and C and D are his sureties.   As between E and C, C is the principal debtor and D is his surety.

The maker of a note and the acceptor before maturity of a bill are bound to pay the amount at maturity to the holder. The acceptor of a bill at or after maturity must pay the amount to the holder on demand.

The drawer of a cheque (i.e., the paying banker) must pay it when presented for payment if the drawer has sufficient funds to his credit with the banker.

Business Low Notes Negotiation

Negotiation of an instrument is the process by which the ownership of an instrument is transferred from one person to another. According to Section 14 of the Act, when a note, bill or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.

A negotiable instrument can also be transferred (by a separate deed of assignment); but in that case, the privileges of negotiation will not be available to the assignee, i.e., he will not enjoy the rights of a holder in due course.

The object of negotiation of instruments and their assignment is the same, i.e., the transfer of ownership from one person to another but there are some points of distinction between the  two which are as Under :

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