JOINT-STOCK COMPANY

A company is an association of persons formed for carrying out business activities and has a
legal status independent of its members. The company form of organisation is governed by
The Companies Act, 1956.

A company can be described as an artificial person having a separate legal entity, perpetual
succession and a common seal. The shareholders are the owners of the company while the
Board of Directors is the chief managing body elected by the shareholders. Usually, the
owners exercise an indirect control over the business. The capital of the company is divided
into smaller parts called ‘shares’ which can be transferred freely from one shareholder to
another person (except in a private company).

Features:

The definition of a joint stock company highlights the following features of a company.

(i) Artificial person: A company is a creation of law and exists independent of its members.
Like natural persons, a company can own property, incur debts, borrow money, enter into
contracts, sue and be sued but unlike them it cannot breathe, eat, run, talk and so on. It is,
therefore, called an artificial person.

(ii) Separate legal entity: From the day of its incorporation, a company acquires an identity,
distinct from its members. Its assets and liabilities are separate from those of its owners. The
law does not recognise the business and owners to be one and the same.

(iii) Formation: The formation of a company is a time consuming, expensive and

complicated process. It involves the preparation of several documents and compliance with
several legal requirements before it can start functioning. Registration of a company is
compulsory as provided under the Indian Companies Act, 1956.

(iv) Perpetual succession: A company being a creation of the law, can be brought to an end
only by law. It will only cease to exist when a specific procedure for its closure, called
winding up, is completed. Members may come and members may go, but the company
continues to exist.
(v) Control: The management and control of the affairs of the company is undertaken by the
Board of Directors, which appoints the top management officials for running the business.
The directors hold a position of immense significance as they are directly accountable to the
shareholders for the working of the company. The shareholders, however, do not have the
right to be involved in the day-to-day running of the business.

(vi)Liability: The liability of the members is limited to the extent of the capital contributed
by them in a company. The creditors can use only the assets of the company to settle their
claims since it is the company and not the members that owes the debt. The members can be
asked to contribute to the loss only to the extent of the unpaid amount of share held by them.
Suppose Akshay is a shareholder in a company holding 2,000 shares of Rs.10 each on which
he has already paid Rs. 7 per share. His liability in the event of losses or company’s failure to
pay debts can be only up to Rs. 6,000— the unpaid amount of his share capital (Rs. 3 per
share on 2,000 shares held in the company). Beyond this, he is not liable to pay anything
towards the debts or losses of the company.

(vii) Common seal: The company being an artificial person acts through its Board of
Directors. The Board of Directors enters into an agreement with others by indicating the
company’s approval through a common seal. The common seal is the engraved equivalent of
an official signature. Any agreement which does not have the company seal put on it is not
legally binding on the company.

(viii) Risk bearing: The risk of losses in a company is borne by all the share holders. This is
unlike the case of sole proprietorship or partnership firm where one or few persons
respectively bear the losses. In the face of financial difficulties, all shareholders in a company
have to contribute to the debts to the extent of their shares in the company’s capital. The risk
of loss thus gets spread over a large number of shareholders.

(iv) transfer, transmission, forfeiture and surrender of shares,

(v) conversion of shares into stock and its reconversion into shares,
(vi) issue of share warrants and rights of their holders,
(vii) alternation of capital,

MEMORANDUM OF ASSOCIATION

A memorandum or memo is a document or other communication that aids the memory by

recording events or observations on a topic, such as may be used in a business office. The
plural form is either memoranda or memorandums.

A memorandum may have any format, or it may have a format specific to an office or
institution. In law specifically, a memorandum is a record of the terms of a transaction or
contract, such as a policy memo, memorandum of understanding, memorandum of
agreement, or memorandum of association. Alternative formats include memos, briefing
notes, reports, letters or binders. They could be one page long or many. If the user is a cabinet
minister or a senior executive, the format might be rigidly defined and limited to one or two
pages. If the user is a colleague, the format is usually much more flexible. At its most basic
level, a memorandum can be a handwritten note to one's supervisor.

Document that regulates a firm's external activities and must be drawn up on the formation of
a registered or incorporated firm. As the firm's charter it (together with the firm's articles of
association) forms the firm's constitution. Also called 'memorandum,' it gives the firm's
name, names of its members (shareholders) and number of shares held by them, and location
of its registered office.

It also states the firm's (1) objectives, (2) amount of authorized share capital, (3) whether
liability of its members is limited by shares or by guaranty, and (4) what type of contracts the
firm is allowed to enter into. Almost all of its provisions (except those mandated by corporate
legislation) can be altered by the firm's members by following the prescribed procedures. The
memorandum is a public document and may be inspected (normally on payment of a fee) by
anyone, usually at the public office where it is lodged (such as the registrar of companies
office), called articles of incorporation in the US.

Significance of Memorandum of Association

Therefore, if the contract which a person enters into with the company is beyond the powers
of the company as defined in the objects clause of the Memorandum, such contract will not
been force able against the company. It is a well established rule that a company can do only
those acts as are permitted by the objects clause. Therefore, all those who want to deal with a
company should make it points to study the Memorandum of Association.

The memorandum of association is the significant company formation documents in addition

to articles of association, companies house registration form 10 and form 12. A memorandum
of association is must for all limited liability companies that introduce company's internal
affairs such as name of the company, objects of the company, liability of the members,
amount of share capital the company proposes, name of the initial members or share holders
and many more.

Requirements with respect to Memorandums

(1) The memorandum of every company shall state -

(a) the name of the company with "Limited" as the last word of the name in the case of a
public limited company, and with "Private Limited" as the last words of the name in the case
of a private limited company;

(b) The State in which the registered office of the company is to be situate; 

[(c) in the case of a company in existence immediately before the commencement of the
Companies (Amendment) Act, 1965, the objects of the company;

(d) In the case of a company formed after such commencement,-

(i) The main objects of the company to be pursued by the company on its incorporation and
objects incidental or ancillary to the attainment of the main objects;

(ii) Other objects of the company not included in sub-clause (i); and

(e) In the case of companies (other than trading corporations), with objects not confined to
one State, the States to whose territories the objects extend.]

(2) The memorandum of a company limited by shares or by guarantee shall also state that the
liability of its members is limited.
(3) The memorandum of a company limited by guarantee shall also state that each member
undertakes to contribute to the assets of the company in the event of its being wound up while
he is a member or within one year after he ceases to be a member, for payment of the debts
and liabilities of the company, or of such debts and liabilities of the company as may have
been contracted before he ceases to be a member, as the case may be, and of the costs,
charges and expenses of winding up, and for adjustment of the rights of the contributories
among themselves, such amount as may be required, not exceeding a specified amount.

(4) In the case of a company having a share capital-

(a) Unless the company is an unlimited company, the memorandum shall also state the
amount of share capital with which the company is to be registered and the division thereof
into shares of a fixed amount;

(b) No subscriber of the memorandum shall take less than one share; and

(c) Each subscriber of the memorandum shall write opposite to his name the number of
shares he takes.

The memorandum shall -

(a) be printed,

(b) be divided into paragraphs numbered consecutively, and

(c) be signed by each subscriber (who shall add his address, description and occupation, if
any), in the presence of at least one witness who shall attest the signature and shall likewise
add his address, description and occupation, if any.

Articles of Association
Section 26 to 32 of the Companies Act, 1956 specifically deals with the issue of Articles of
Association. Section 26 of the Companies Act, 1956 is as follows: 

“Section 26. There may be in the case of public company limited by shares and there
shall in the case of an unlimited company or a company limited by guarantee or a
private company limited by shares, be registered with the memorandum, articles of
association signed by the subscribers of the memorandum, prescribing regulations for
the Company.” 

Thus, while it is a requirement for the Private Limited Companies to have an Articles of
Association, it is an option when it comes to Public Limited Companies.  The detailed
provisions of the Companies Act, 1956 regulates the Public Limited Companies while liberty
is given to the Private Limited Companies to have their own regulations on many issues or
aspects. Normally, a care is taken while preparing articles of association of a Public Limited
Company in view of their exposure, stakes and professional guidance. 

The schedules to the Companies Act, 1956 provides model Articles of Association which can
be adopted by different kind of companies.  I do strongly feel that preparation of Articles of
Association is a difficult exercise unless the model articles are adopted or only very few
changes are made to the model articles to the extent provided under the Companies Act,
1956.  

I want to express my view on preparation of Articles of Association of Private Limited

Companies as Public Limited Companies normally are very careful and takes a good
professional advice on everything from the beginning. 
It is the settled company law principle that Articles can not override the provisions of the Act.
Again, certain privileges under the Companies Act, 1956 are available only when those are
backed by the Articles of Association. Though, we use the word ‘preparation’, I feel that the
professionals advising the Company or involved in incorporation of a Company normally
may only do few additions or alternations to the model Articles of Association provided in
the Act itself. But, when the promoters want to have their own say on the Company’s
regulation, two preliminary things should be in mind while preparing Articles of Association
of a Private Limited Company and those are: 

1.    It is not correct to delete the regulations contained in the model articles of association
without considering its impact and in view of the fact that many provisions of the Act can be
availed only when those are backed by the Articles of Association.
2.    While incorporating a regulation which is not there in the model articles provided, one
should be very careful about the provisions of the Companies Act, 1956 and no provision
should go against the provisions of the Act.
It is settled legal principle that any act which is against the Memorandum and Articles, and
which is against the provisions of the Act are void and those are normally referred to as “ultra
vires”. 
Though, there is a principle of “doctrine of constructive notice”, we can not expect the third
parties to probe into the Company with which they are entering a business transaction and it
is not possible practically in many cases. Only Public Financial Institutions or the Financial
Institutions may be in a position to probe company’s internal regulations and other things
when the Company approaches them for a loan. Barring that, in many cases, a third party
may not be able to look at the company’s internal regulations and other internal issues and
also we are aware of “doctrine of indoor management” etc, though it operates in a different
situation. 
In view of numerous complications with incorrect drafting of Articles of Association, a few
points which can be considered while preparing an Articles of Association of a Company or
getting a Private Limited Company incorporated. 

1.    It is to be remembered that though we use the word “preparation of articles” while
getting a company incorporated, it is actually an adoption even when the promoters insist for
few changes in the model articles provided in the Act.

2.    It is advisable to convince the promoters not to insist for additions, changes, alternations
or deletions in the model articles provided in the Act.

3.    Promoters are to be convinced that the Articles can be altered easily.

4.    It is to be remembered that the additions, changes or alternations in the model articles
provided requires careful scrutiny of the provisions of the Act.

5.    Unless it is necessary to have a new regulation in the Articles of Association or a new

regulation is must for promoting the Company, it is better not to resort to additions,
alternations, changes etc. in the model Articles provided in the Act. 
Articles of association is a rule or a law that can bind an association
Usually, the Articles contain rules and regulations regarding:
(i) share capital an variation of rights,
(ii) exercise of lieu by the company,
(iii) calls on shares,
(viii) conduct of any proceedings at general meetings of shareholders,
(ix) voting by members.
(x) powers, rights, remuneration, qualification and duties of directors,
(xi) proceedings of Board,
(xii) appointment of manager, secretary, etc.,
(xiii) seal of the company,
(xiv) dividend, reserves and capitalization of profits
(xv)accounts, and,
(xvi) winding up.

Significance of articles of association

The articles of association are very important for the company. They are important because
they are the regulations that govern the relationship between shareholders and directors of the
company. They are required for the establishment of a company under the law. They govern

the laws of issuing of shares, voting and dividend

rights etc

STATUTORY MEETINGS

Every public company limited by shares, and limited by guarantee and a having a share
capital must hold a general must hold a general meeting of its members within a period of not
less then one month nor more than six months from the date on which the company is entitled
to commence business (Sec. 165).

The meeting is know as Statutory Meeting. The Board must, at least twenty-one days before
the day of the meeting, forward to every member a report called the Statutory Report along
with the notice of the meeting. If the meeting is not held, every director or other officer who
is in default shall be punishable with a fine up to Rs. 500. Moreover, the Court may, on
application of the Registrar or a contributory, order the winding up of the company or direct
the meeting be held.

The business of the meeting is to consider the statutory report.

The Statutory Report stat the following:

(a) the number of shares allotted distinguishing those allotted as fully or partly paid up
otherwise than in cash, the extent to which they are partly paid up, the consideration for the
shares allotted and the total amount received in cash:

(b) an abstract of the receipts and payments under distinctive heads made up to a date within
seven days of the date of the report

(c) an account of the total amount of cash received by the company in respect of all the shares
allotted

(d) an account or estimate of the preliminary expenses including commission and discount
paid, or payable, on the issue or sale of shares and debentures

(e) names, address and occupations of the directors and auditors, and also of its manager and
secretary, if any, and any change that may have occurred since the date of incorporation

(f) if any contract is to be modified, the particulars of such contract with those of the
proposed modification or the actual modification which is to be submitted for approval at the
meeting

(g) the extent to which underwriting contracts, if any, have not been carried out and the
reasons therefore

(h) the arrears, if any, due on calls from directors and manager

(i) the particulars of any commission, or brokerage paid or to be paid, in connection with the
issue or sale of shares or debentures to any of the persons employed in the management of the
company.
It should be noted that a company cannot alter the terms of any contract referred to in the
Prospectus before the statutory meeting. At least two directors (one of them being the
manging director, if there if one) must certify the report. The auditors of the company must
also certify the report in so far as it relates to the shares allotted by the company, each
received, in respect thereof, and the receipts an payments account. A copy of the report, duly
certified must be filed with the Registrar.

A list of members showing the number of shares held by each one of them has to be produced
at the meeting and kept open accessible to the members while the statutory meeting
continues. Members can raise any matter relating to the formation of the company or arising
out of the statutory report. No notice is necessary for discussion, but a resolution cannot be
passed unless proper notice has been given. The statutory meeting can be adjourned from
time and a resolution can be passed t an adjourned meeting if proper notice has been given in
the meantime.

ANNUAL GENERAL MEETING

The Companies Act requires every company without exception to hold every year a general
meeting of its members. Such a meeting is in addition to any other that may be necessary.
The first annual general meeting has to be held within 18 months of the date of incorporation
and if it is so held, it shall not be necessary, for the company to hold annual general meeting
in the year of incorporation and in the next year. In the following year, it must be held within
15 months of the preceding annual general meeting.

In case of subsequent meetings, an extension up to three months may be granted by the

Registrar The meeting must be held during business hours and must not be held on public
holiday. It can be held only in the city, town or village, where the registered officer is
situated. A notice of 21 days is necessary for the holding of the meeting. If any default is
made in holding the meeting, the Central Government has the power, on the application of a
member of the Company, to call the meeting or direct that the meeting be called. The usual
business of the meeting is as follows:

(a) Consideration and adoption of the annual accounts, i.e., the balance sheet and the profit
and loss account and the report of the directors and auditors thereon

(b) Election of directors in place of those who retire

(c) Appointment of auditors

(d) Declaration of dividend

If any business other than those enumerated above is to be transacted, it is known a special
business and can be transacted by giving its notice along with the notice of the annual general
meeting.

The notice of the meeting must be accompanied by a copy of the balance sheet at the close of
the financial year, a profit and loss account for that year, the directors; report relating to the
accounts and the auditors' report relating to the accounts and the auditors; report. The date of
the meeting is determined in consultation with the Board of Directors. It is usual to keep the
share transfer books closed for a period and give notice of it to the members so that those
who hold blank transfer deeds may get themselves registered as members. This is necessary
because if any dividend is declared it will be paid only to those who are registered as
members. It is usual to publish a notice in the daily press.
COMPANY SECRETARY

The Company Secretary

v       Is a vital link between the company and its Board of Directors, shareholders,
government and regulatory authorities. 

v       Ensures that Board procedures are both followed and regularly reviewed and
provides guidance to Chairman and the Directors on their responsibilities under
various laws.

v       Commands high position in the value chain and acts as conscience seeker of the
company.

In India every company having a paid up share capital of Rs.50 million (5 crores) or more is
required to appoint a qualified person as Company Secretary. A qualified Company Secretary
should be a member of Institute of Company Secretaries of India. A company having not less
than Rs.one million (10 lacs) paid up capital and not required to appoint a full time company
Secretary should file a compliance certificate signed by a practicing Company Secretary with
Registrar of Companies.

Section 383A of the Companies Act, 1956 provides for the mandatory appointment of a
whole time secretary where the paid up capital of the Company exceeds Rs.50 million (5
crores). If the capital is less than Rs.50 million (5 crores), the company is required to obtain a
secretarial compliance certificate and attach the same to the Directors' Report and file it with
the Registrar of Companies.

Statutory declarations of compliance under various other provisions of the Companies Act,
1956 are also to be certified by practising company secretaries. Under the MCA 21 e filing
regime several forms (including some, exclusively) are required to be pre-certified by
practising company secretaries.

The annual returns of companies listed on recognized stock exchanges are to be signed by a
practising company secretary.
Further, the Securities and Exchange Board of India (SEBI) also recognizes the Company
Secretary as the Compliance Officer and the practising company secretary to issue various
certificates under its Regulations. Further, the practising Company Secretaries are also
authorised to certify compliance of conditions of corporate governance in case of listed
companies.

The Reserve Bank of India also authorises company secretaries to issue various certificates.

The Institute of Company Secretaries of India is the premier professional body to develop and
regulate the profession of Company Secretaries in India. It was set up by an Act of
Parliament in 1980.

When the Companies Bill, 2009 is passed by the parliament and becomes an Act, the
National Company Law Tribunal(NCLT) will be given powers of a court and all matters
relating to Company Law would be heard before it instead of High Court. Only a Company
Secretary would be eligible to appear before NCLT and not a lawyer. This will open more
opportunities for a Company Secretary.

COMPANY AUDITOR
The general definition of an audit is an evaluation of a person, organization, system, process,
enterprise, project or product. The term most commonly refers to audits in accounting, but
similar concepts also exist in project management, quality management, and energy
conservation.

Types of auditors

 External auditor / Statutory auditor is an independent Public accounting firm engaged

by the client subject to the audit, to express an opinion on whether the company's
financial statements are free of material misstatements, whether due to fraud or error.
For publicly-traded companies, external auditors may also be required to express an
opinion over the effectiveness of internal controls over financial reporting. External
auditors may also be engaged to perform other agreed-upon procedures, related or
unrelated to financial statements. Most importantly, external auditors, though engaged
and paid by the company being audited, are regarded as independent auditors.
The most used external audit standards are the US GAAS of the American Institute of
Certified Public Accountants; and the ISA International Standards on Auditing developed by
the International Auditing and Assurance Standards Board of the International Federation of
Accountants

 Internal auditors are employed by the organization they audit. They perform various
audit procedures, primarily related to procedures over the effectiveness of the
company's internal controls over financial reporting. Due to the requirement of
Section 404 of the Sarbanes Oxley Act of 2002 for management to also assess the
effectiveness of their internal controls over financial reporting (as also required of the
external auditor), internal auditors are utilized to make this assessment. Though
internal auditors are not considered independent of the company they perform audit
procedures for, internal auditors of publicly-traded companies are required to report
directly to the board of directors, or a sub-committee of the board of directors, and not
to management, so to reduce the risk that internal auditors will be pressured to
produce favorable assessments.

Auditors of financial statements can be classified into two categories

An auditor is required to conduct an independent review of the financial statements and offer
an opinion as to whether the annual accounts give a true and fair view of the company’s state
of affairs and financial position. To achieve this goal, the auditor needs to examine not only
the company’s internal accounting system but also to inspect its assets and review the
accounting transactions. It involves testing the reliability, competency and adequacy of
evidence in support of all transactions. 

Sec.227 of the Companies Act, 1956 prescribes the ‘Duty and Liability of the Auditor’.
Statutorily, the Auditor is required to employ reasonable skill and care as with any other
person having specialized knowledge. The duty of safeguarding the assets of the Company is
primarily that of the management and the Auditor is entitled to rely upon the internal control
instituted by the management. He has to take into account any deficiencies he may note
therein. The Auditor does not conduct the audit with the objective of discovering all frauds
because in the first place, it would not be possible to complete the audit within the time limit
prescribed by the law for the presentation of accounts to the shareholders. Further, the cost of
doing this would be prohibitive and disproportionate to the benefits which may be derived by
the shareholders

An auditor is not concerned with the policy of the company. It is not a part of the auditor’s
duty to give advice, either to directors or shareholders, about operational aspect of the
business. It is not his prerogative to see whether the business of a company is being
conducted prudently or imprudently, profitably or unprofitably. His business is to ascertain
and state the true financial position of the company at the time of the audit. The auditor has a
fiduciary relationship with the shareholders of a company. Therefore, he has a moral
obligation to see and ensure that the statements issued are made with the utmost skill,
safeguards their interests and depicts the true and fair state of affairs of the company.

The Institute of Chartered Accountants of India, in its statement of Standard Auditing

Practices ,identified the basic Principles governing an Audit has listed certain principles for
independent audit of financial information. These principles are as follows:

 Integrity and independence.

 Confidentiality
 Skills and competence
 Responsibility
 Accounting systems and internal control
 Planning
 Evidence and documentation.

STATEMENT FEATURES OF A NEGOTIABLE INSTRUMENT

The important characteristics are as follows –

(1) Free Transferability : A negotiable instrument may be transferred by delivery if it is

a bearer instrument or by endorsement and delivery if it is an  instrument payable to
order.

Thus, a Fixed Deposit Receipt, which is marked as ‘not transferable’is not a negotiable
instrument. On the other hand all instruments which are transferable are not negotiable
 instruments e.g. share certificate. An instrument to be negotiable must possess other
features also.  

Further, a negotiable instrument may be transferred any number of times till it is

discharged.

(2)           Title to transferee : The transferee, who takes the instrument bona fide and for
valuable consideration, obtains a good title despite any defects in the title of the
transferor. To this extent, it constitutes an exception to the general rule that no once can
give a better title then he himself has.

(3)           Entitlement to sue : The holder can sue in his own name.  

(4)           Presumptions : Every negotiable instrument is subject to certain presumptions

which are as under –  

Presumption as to negotiable instrument  

For deciding cases in respect of rights of parties on the basis of a bill of exchange, the Court
is entitled to make certain presumptions. These are briefly stated as follow :  

1.             Consideration : That every negotiable instrument is made or drawn for a

consideration. Thus, this need not necessarily be mentioned.  

2.             Date : That the negotiable instrument was drawn on the date shown on the face of
it.

3.             Acceptance before maturity : That the bill of exchange was accepted before its
maturity, i.e., before it became overdue.  

4.             Transfer before maturity : That the negotiable instrument was transferred before
its maturity.

5.             Order of Endorsements : That the Endorsements appearing upon a negotiable

instrument were made in the order in which they appear.
6.             Stamping of the instrument : That an instrument which has been lost was
properly stamped. 

7.             Holder is Holder in due course : That the holder of a negotiable instrument is the
‘holder in due course’, except where the instrument has been obtained from its lawful
owner or its lawful custodian by means of offence or fraud.

8.             Proof of dishonour : If a suit is filed upon an instrument which has been
dishonoured, the Court shall, on proof of the protest, presume the fact of dishonour
unless it is disproved. (Section  119)
CLASSES OF NEGOTIABLE INSTRUMENT:

1. PROMISORY NOTE:

A promissory note, referred to as a note payable in accounting, or commonly as just a

"note", is a negotiable instrument, wherein one party (the maker or issuer) makes an
unconditional promise in writing to pay a sum of money to the other (the payee), either at a
fixed or determinable future time or on demand of the payee, under specific terms. They
differ from IOUs in that they contain a specific promise to pay, rather than simply
acknowledging that a debt exists. In common speech, other terms, such as "loan," "loan
agreement," and "loan contract" may be used interchangeably with "promissory note" but
these terms do not have the same legal meaning. Whereas a promissory note is evidence of a
loan, it is not the loan contract, which would contain all the terms and conditions of the loan
agreement

The Promissory Note always includes the amount of money owed (this is called the
Principal), the interest rate on the owed money, and the date by which repayment should
occur (Maturity Date). In the case of a "Demand Promissory Note", the Maturity Date is not
listed and the debt must be repaid whenever the lender demands. Often, in this case, the
borrower has only a few days' notice to repay the debt. A Promissory Note also usually
documents any grace periods allowed for payment, and any penalties that will occur should
the borrower default on payment.
2. BILL OF EXCHANGE

A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to
the payee. A common type of bill of exchange is the cheque, defined as a bill of exchange
drawn on a banker and payable on demand. Bills of exchange are used primarily in
international trade, and are written orders by one person to his bank to pay the bearer a
specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were
a common means of exchange. They are not used as often today.
 Bill of exchange, 1933

A bill of exchange is an unconditional order in writing addressed by one person to another,

signed by the person giving it, requiring the person to whom it is addressed to pay on demand
or at fixed or determinable future time a sum certain in money to order or to bearer. (Sec.126)

It is essentially an order made by one person to another to pay money to a third person.

A bill of exchange requires in its inception three parties—the drawer, the drawee, and the
payee.

The person who draws the bill is called the drawer. He gives the order to pay money to the
third party. The party upon whom the bill is drawn is called the drawee. He is the person to
whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he
indicates his willingness to pay the bill. (Sec.62) The party in whose favor the bill is drawn or
is payable is called the payee.

The parties need not all be distinct persons. Thus, the drawer may draw on himself payable to
his own order. (Sec. 8)

A bill of exchange may be endorsed by the payee in favour of a third party, who may in turn
endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the
amount of the bill against the drawee and all previous endorsers, regardless of any
counterclaims that may have disabled the previous payee or endorser from doing so. This is
what is meant by saying that a bill is negotiable.

In some cases a bill is marked "not negotiable" – see crossing of cheques. In that case it can
still be transferred to a third party, but the third party can have no better right than the
transferor.

Following are the various features of a bill of exchange.

·         A bill should be in writing, duly signed by its drawer, accepted by its drawee and properly
stamped as per Indian Stamp Act.
·         It should contain an order to pay. Words like ‘please pay Rs 5,000/- on demand and
oblige’ are not used.
·         The order should be unconditional.
·         The order should be to pay money and money alone
·         The sum payable mentioned should be certain or capable of being made certain.
·         The parties to a bill should be certain.

3. CHEQUES

A cheque is a document/instrument (usually a piece of paper) that orders a payment of

money. The person writing the cheque, the drawer, usually has a current account (British), or
checking account (US) where their money was previously deposited. The drawer writes the
various details including the money amount, date, and a payee on the cheque, and signs it,
ordering their bank, known as the drawee, to pay that person or company the amount of
money stated.

Cheques are a type of bill of exchange and were developed as a way to make payments
without the need to carry around large amounts of gold and silver. Paper money also evolved
from bills of exchange, and is similar to cheques in that they were originally a written order
to pay the given amount to whoever had it in their possession (the "bearer").

The four main items on a cheque are

 Drawer, the person or entity who makes the cheque

 Payee, the recipient of the money
 Drawee, the bank or other financial institution where the cheque can be presented for
payment
 Amount, the currency amount

Cheques were introduced in India by the Bank of Hindustan, the first joint stock bank
established in 1770.

In 1881, the Negotiable Instruments Act (NI Act) was enacted in India, formalizing the usage
and characteristics of instruments like the cheque, the bill of exchange and promissory note.
The NI Act provided a legal framework for non-cash paper payment instruments in India.

In 1938, the Calcutta Clearing Banks' Association, which was the largest bankers' association
at that time, adopted clearing house.
In addition to regular cheques, a number of variations were developed to address specific
needs or to address issues when using a regular cheque.

CROSSING OF CHEQUES

A crossed cheque is a cheque which is payable only through a collecting banker and not
directly at the counter of the bank. Crossing ensures security to the holder of the cheque as
only the collecting banker credits the proceeds to the account of the payee of the cheque.
When two parallel transverse lines, with or without any words, are drawn generally, on the
left hand top corner of the cheque. A crossed cheque does not affect the negotiability of the
instrument. It can be negotiated the same way as any other negotiable instrument.

Types of Crossing There are two types of negotiable instruments:-

• General Crossing

• Special Crossing

• Account Payee or Restrictive Crossing

• ‘ Non Negotiable ‘ Crossing

Cheque crossed generally

Where a cheque bears 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 to be crossed generally. [section 123]

SIGNIFICANCE:

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

2. The direction is that the paying banker should not pay the cheque at the counter.
 3. If a crossed cheque is paid at the counter in contravention of the crossing:

1) He has no right to debit his customers account, since , it will constitute a breach of
his customer’s mandate,

2) He will be liable to the drawer for any loss, which he may suffer,

3) He will be liable to the true owner of the cheque who may be the third party.

4. The main intention of crossing a cheque is to give protection to it.

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. [section 124].

SIGNIFICANCE:

1. It is a direction to the paying banker.

2. A special crossing gives more protection the cheque than a general crossing.

Account Payee or Restrictive Crossing

This crossing can be made in both general and special crossing by adding the words Account
Payee. In this type of crossing the collecting banker is supposed to credit the amount of the
cheque to the account of the payee only. The cheque remains transferable but the liability of
the collecting banker is enhanced in case he credits the proceeds of the cheque so crossed to
any person other than the payee and the endorsement in favour of the last payee is proved
forged. The collecting banker must act like a blood hound and make proper enquiries as to
the title of the last endorsee from the original payee named in the cheque before collecting an
'Account Payee' cheque in his account.

Not Negotiable Crossing

The words 'Not Negotiable' can be added to general as well as special crossing and a crossing
with these words is known as Not Negotiable crossing. The effect of such a crossing is that it
removes the most important characteristic of a negotiable instrument i.e. the transferee of
such a crossed cheque cannot get a better title than that of the transferor ( cannot become a
holder in due course ) and cannot covey a better title to his own transferee, though the
instrument remains transferable.

HOLDER AND HOLDER IN DUE COURSE

A Holder in Due Course (HDC) doctrine is a commercial law rule that facilitates transfer of
debt or other obligation to pay to parties not connected to the original transaction, and
insulates the final buyer of that debt from challenges by either party of the original
transaction due to non-performance by the other party. For example, if A promised to pay
some money to B and B transferred that obligation to C, then C is insulated from any conflict
arising between A and B. B may then sue A for non-performance, but is still obligated to pay
the original obligation to C.

The definition given in Section 8 implies that any person:

 Who is entitled in his own name to the possession of the negotiable instrument.
 Has right to receive or recover the amount from the parties thereto.