Category: Management Notes

Classification of Goods

Exiting Goods: Which are owned or possessed by the seller at the time of making of contract. For example Manikchand, the Gutka maker have 1 Ton of Vimal Pan Masala in his godown.

Future Goods: Goods which are going to exists in future. For example, there is new phone launched named as “Ache Din”, which will be available in future. This good will be future goods.

Contingent Goods: These goods are not certain. For example if Business man Adani says he will sell Gold to Bappi Lehri if he finds a gold in mine. After digging if Gold is found, then fine, if not then also fine. Such goods are contingent goods.

We can classify existing goods further in specific, ascertained and unascertained goods.

Specific Goods: These are goods which are identified by buyer at the time of contract of sale. For example you go to showroom and identify a particular bike or car. Important thing is these goods must be identified at the time of contract and not subsequently.

Unascertained goods: Unascertained goods are the goods which are not identified or ascertained at the time of making of the contract. They are indicated or de fined only by description or sample.

For example, If A agrees to sell to B one packet of salt out of the lot of one hundred packets lying in his shop, it is a sale of unascertained goods because it is not known which packet is to be delivered. As soon as a particular packet is separated from the lot, it becomes ascertained or specific goods.

Ascertained Goods: Ascertained Goods are those goods which are identified in accordance with  the agreement after the contract of sale is made. This term is not de ned in the Act but has been judicially interpreted. In actual practice the term ‘ascertained goods’ is used in the same sense as ‘specific goods.’ When from a lot or out of large quantity of unascertained goods, the number or quantity contracted for is identified, such identified goods are called ascertained goods.  

Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for [a term which may be extended to two years], or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless:

(a) The cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;

(b) The payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, [within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c) The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation: For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.

Dishonour is of 2 kinds:

1. Dishonour of bill of exchange by non-acceptance
2. Dishonour of promissory note, bill of exchange or cheque by non-payment

When presentment for payment is made and the maker, acceptor or drawee, as the case may be, makes default in making the payment, there is dishonour of the instrument. And also, if there are certain circumstances when presentment for payment is excused and the instrument is deemed to be dishonoured even without presentment. Thus, when the maker, acceptor or drawee intentionally prevents the presentment of the instrument is deemed to be dishonoured even without presentment.

Notice of dishonour

Notice of dishonour means information about the fact that the instrument has been dishonoured.

Notice of dishonour is given to the party sought to be made liable and, therefore it serves as a warning to the person to whom the notice is given that he could now be made liable.

Enormous delay in giving notice of dishonour may put an end to the plaintiff’s right in respect of the dishonoured instrument.

Notice of dishonour is to be given by a person who wants to make some prior party of his liable on the instrument. Therefore, such a notice may be given:

1. Either by the holder
2. A party to the instrument who remain liable for it

Dishonour of cheque

A person suffers a lot if a cheque issued in his favour is dishonoured due to the insufficiency of funds in the account of the drawer of the cheque. To discourage such dishonour, it has been made an offence by an amendment of the Negotiable Instrument Act by the Banking, Public Financial Institution and Negotiable Instrument Laws (Amendment) Act, 1988.

A new Chapter VII consisting of Sections 138 to 142 has been inserted in the Negotiable Instrument Act.

Section 138 makes the dishonour of cheque an offence. The payee or holder in due course can have recourse against the drawer, who may be held liable for the offence.

Various differences between holder and holder-in-due-course can be explained on the basis of the following

• Entitlement
• Maturity
• Right to recover amount
• Privileges
• Consideration
• Title
• Notice of defect in the Title

1. Entitlement: Holder is a person who is entitled for the possession of a negotiable instrument in his own name. Hence he shall receive or recover the amount due thereon. Whereas a Holder-in-due-course is a person who has obtained the instrument for consideration and in good faith and before maturity.
2. Consideration: Consideration is not necessary to become a holder. The instrument may also be given by way of a donation or gift and thus, the donee of an instrument can also become a holder of it. However, consideration is a must to become a holder-in-due-course and thereby the donee of a negotiable instrument can be a holder but not holder-in-due-course.
3. Maturity: A holder may acquire the instrument even after its maturity. But a holder-in-due-course must acquire the instrument before its maturity failing which he will not enjoy the rights of a holder-in-due-course.
4. Title: A holder does not acquire a better title than that of transferor. In simple words, if the title of any of the prior party is defective, his title will not be defect free. Whereas, a holder-in-due-course derives a good title freed from all defects. His title is better than that of the transferor.
5. Right to recover amount: A holder has a right to recover the amount due on the instrument from the transferor (i.e., just preceding party) only from whom he has obtained the instrument. Holder-in-due-course, on the other hand, can recover the amount due on the instrument from any of the prior parties till the instrument is duly discharged. Thus, all prior parties shall remain liable towards the holder-in-due-course, jointly as well as severally, till the instrument is duly discharged.
6. Notice of defect in the Title: A holder-in-due-course is not only supposed to have acquired the instrument without any notice of the defect of the title of the person from whom he obtained it, but also there should be no cause on his part to believe that any defect sustains in the transferor’s title. But a holder is exempt from this condition. He may have notice of defect in the title but he shall not be liable for it unless he is a party to that defect, fraud, or forgery.
7. Privileges: A holder-in-due-course enjoys certain privileges under the Negotiable instruments Act (as discussed earlier), which are not available to a holder.

Comparison Chart

The law relating to “negotiable instruments” is contained in the Negotiable Instruments Act, 1881. The Act extends to the whole of India. The Negotiable Instruments Act, 1881, has been amended for more than a dozen times so far.

The latest in the series are: (i) the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (effective from 1st April, 1989), and (ii) the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 (effective from 6th February, 2003). The provisions of all the Amendment Acts have been incorporated at relevant places in Part IV of this book.

The Negotiable Instruments Act, 1881, as amended up-to-date, deals with three kinds of negotiable instruments, i.e., Promissory Notes, Bills of Exchange and Cheques.

Definition:

The word negotiable means ‘transferable by delivery,’ and the word instrument means ‘a written document by which a right is created in favour of some person.’

Thus, the term “negotiable instrument” literally means ‘a written document transferable by delivery.’

According to Section 13 of the Negotiable Instruments Act, “a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.” “A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees” [Section 13(2)].

The Act, thus, mentions three kinds of negotiable instruments, namely notes, bills and cheques and declares that to be negotiable they must be made payable in any of the following forms:

(a) Payable to order:

A note, bill or cheque is payable to order which is expressed to be ‘payable to a particular person or his order.’ For example, (i) Pay A, (ii) Pay A or order, (iii) Pay to the order of A, (iv) Pay A and B, and (v) Pay A or Bare various forms in which an instrument may be made payable to order.

But it should not contain any words prohibiting transfer, e.g., ‘Pay to A only’ or ‘Pay to A and none else’ is not treated as ‘payable to order’ and therefore such a document shall not be treated as negotiable instrument because its negotiability has been restricted.

It may be noted that documents containing express words prohibiting negotiability remain valid as a document (i.e., as an agreement) but they are not negotiable instruments as they cannot be negotiated further.

(b) Payable to bearer:

‘Payable to bearer’ means ‘payable to any person whosoever bears it.’ A note, bill or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank.

Thus, a note, bill o^r cheque in the form “Pay to A or bearer,” or “Pay A, B or bearer,” or “Pay bearer” is payable to bearer. Also, where an instrument is originally ‘payable to order,’ it may become ‘payable to bearer’ if endorsed in blank by the payee.

For example, a cheque is payable to A. A endorses it merely by putting his signature on the back and delivers to B with the intention of negotiating it (without making it payable to B or S’s order). In the hands of B the cheque is a bearer instrument.

Section 31 of the Reserve Bank of India Act:

It is important to note that the above definition is subject to the provisions of Section 31 of the Reserve Bank of India Act, 1934, which as amended by the Amendment Act of 1946, provides as under:

1. No person in India other than the Reserve Bank or the Central Government can make or issue a promissory note ‘payable to bearer.’
2. No person in India other than the Reserve Bank or, the Central Government can draw or accept a bill of exchange ‘payable to bearer on demand’.
3. A cheque ‘payable to bearer on demand’ can be drawn on a person’s account with a banker.

The effect of the above provisions is that:

(i) A promissory note cannot be originally made ‘payable to bearer,’ no matter whether it is payable on demand or after a certain time. It must be made ‘payable to order’ initially. However, on being endorsed in blank it can become ‘payable to bearer’ or ‘payable to bearer on demand’ subsequently and it shall be valid in that case.

(ii) A bill of exchange may be originally made ‘payable to bearer’ but it must be payable otherwise than on demand (say, payable three months after date) in that case. If it is ‘payable on demand’ then it must be made ‘payable to order.’ However, on being endorsed in blank subsequently, it can become ‘payable to bearer on demand.’

(iii) A cheque drawn on a bank can be originally made ‘payable to bearer on demand’ and it shall be valid. In fact cheques are always payable on demand.

The object of the above provisions of the Reserve Bank of India Act is to prevent private persons from infringing the monopoly of ‘Note Issue’ of the Reserve Bank and the Government of India.

For, if individuals are allowed to issue instruments ‘payable to bearer on demand,’ then there may be someone so rich and well known person whose bills of exchange and promissory notes may be taken as currency notes.

A currency note bears the words’ I promise to pay the bearer the sum of Rupees 10, 50 or 100,’ as the case may be. The general public is, therefore, prohibited to issue such notes or bills.

Section 32 of the Reserve Bank of India Act, 1934, makes the issue of such bills or notes a criminal offence and declares them illegal and unenforceable at law. Accordingly, ‘a promise to pay A or bearer’ or ‘a promise to pay the bearer’ is not enforceable at law and the document containing such a promise is illegal and void.

The definition given in Section 13 of the Negotiable Instruments Act does not set out the essential characteristics of a negotiable instrument. Possibly the most expressive and all-encompassing definition of negotiable instrument had been suggested by Thomas who is as follows:

“A negotiable instrument is one which is, by a legally recognised custom of trade or by law, transferable by delivery or by endorsement and delivery in such circumstances that (a) the holder of it for the time being may sue on it in his own name and (b) the property in it passes, free from equities, to a bona fide transferee for value, notwithstanding any defect in the title of the transferor.”

Essential Features of Negotiable Instruments are given below:

1. Writing and Signature:

Negotiable Instruments must be written and signed by the parties according to the rules relating to Promissory Notes, Bills of Exchange and Cheques. Demand Drafts are also construel as Negotiable Instruments in the limiting case as they have the same property as N.I. Instrumes.

2. Money:

Negotiable instruments are payable by legal tender money of India. The liabilities of the parties of Negotiable Instruments are fixed and determined in terms of legal tender money.

3. Negotiability:

Negotiable Instruments can be transferred from one person to another by a simple process. In the case of bearer instruments, delivery to the transferee is sufficient. In the case of order instruments two things are required for a valid transfer: endorsement (i.e., signature of the holder) and delivery. Any instrument may be made non-transferable by using suitable words, e.g., “pay to X only.”

4. Title:

The transferee of a negotiable instrument, when he fulfils certain conditions, is called the holder in due course. The holder in due course gets a good title to the instrument even in cases where the title of the transferrer is defective.

5. Notice:

It is not necessary to give notice of transfer of a negotiable instrument to the party liable to pay. The transferee can sue in his own name.

6. Presumptions:

Certain presumptions apply to all negotiable instruments. Example: It is presumed that there is consideration. It is not necessary to write in a promissory note the words “for value received” or similar expressions because the payment of consideration is presumed. The words are usually included to create additional evidence of consideration.

7. Special Procedure:

A special procedure is provided for suits on promissory notes and bills of exchange (The procedure is prescribed in the Civil Procedure Code). A decree can be obtained much more quickly than it can be in ordinary suits.

8. Popularity:

Negotiable instruments are popular in commercial transactions because of their easy negotiability and quick remedies.

9. Evidence:

A document which fails to qualify as a negotiable instrument may nevertheless be used as evidence of the fact of indebtedness.

Negotiable Instruments are written contracts whose benefit could be passed on from its original holder to a new holder. In other words, negotiable instruments are documents which promise payment to the assignee (the person whom it is assigned to/given to) or a specified person. These instruments are transferable signed documents which promises to pay the bearer/holder the sum of money when demanded or at any time in the future.

As mentioned above, these instruments are transferable. The final holder takes the funds and can use them as per his requirements. That means, once an instrument is transferred, holder of such instrument obtains a full legal title to such instrument.

Promissory Notes

A promissory note refers to a written promise to its holder by an entity or an individual to pay a certain sum of money by a pre-decided date. In other words, Promissory notes show the amount which someone owes to you or you owe to someone together with the interest rate and also the date of payment.

For example, A purchases from B INR 10,000 worth of goods. In case A is not able to pay for the purchases in cash, or doesn’t want to do so, he could give B a promissory note. It is A’s promise to pay B either on a specified date or on demand. In another possibility, A might have a promissory note which is issued by C. He could endorse this note and give it to B and clear of his dues this way.

However, the seller isn’t bound to accept the promissory note. The reputation of a buyer is of great importance to a seller in deciding whether to accept the promissory note or not

Bill of exchange

Bills of exchange refer to a legally binding, written document which instructs a party to pay a predetermined sum of money to the second(another) party. Some of the bills might state that money is due on a specified date in the future, or they might state that the payment is due on demand.

A bill of exchange is used in transactions pertaining to goods as well as services. It is signed by a party who owes money (called the payer) and given to a party entitled to receive money (called the payee or seller), and thus, this could be used for fulfilling the contract for payment. However, a seller could also endorse a bill of exchange and give it to someone else, thus passing such payment to some other party.

It is to be noted that when the bill of exchange is issued by the financial institutions, it’s usually referred to as a bank draft. And if it is issued by an individual, it is usually referred to as a trade draft.

A bill of exchange primarily acts as a promissory note in the international trade; the exporter or seller, in the transaction addresses a bill of exchange to an importer or buyer. A third party, usually the banks, is a party to several bills of exchange acting as a guarantee for these payments. It helps in reducing any risk which is part and parcel of any transaction.

Cheques

A cheque refers to an instrument in writing which contains an unconditional order, addressed to a banker and is signed by a person who has deposited his money with the banker. This order, requires the banker to pay a certain sum of money on demand only to to the bearer of cheque (person holding the cheque) or to any other person who is specifically to be paid as per instructions given.

Cheques could be a good way of paying different kinds of bills. Although the usage of cheques is declining over the years due to online banking, individuals still use cheques for paying for loans, college fees, car EMIs, etc.  Cheques are also a good way of keeping track of all the transactions on paper. On the other side, cheques are comparatively a slow method of payment and might take some time to be processed.

The Negotiable Instruments (Amendment) Bill, 2017

The Negotiable Instruments (Amendment) Bill, 2017 has been introduced in the Lok Sabha earlier this year on Jan 2nd, 2018.  The bill seeks for amending the existing Act. The bill defines the promissory note, bill of exchange, and cheques. The bill also specifies the penalties for dishonor of cheques and various other violations related to negotiable instruments.

As per a recent circular, up to INR 10,000 along with interest at the rate of 6%-9% would have to be paid by an individual for cheques being dishonored.

The Bill also inserts a provision for allowing the court to order for an interim compensation to people whose cheques have bounced due to a dishonouring party (individuals/entities at fault). Such interim compensation won’t exceed 20 percent of the total cheque value.

As per section 2(1)(c) of the Company Secretaries Act, 1980 ‘Company Secretary’(“CS”) means a person who is a member of the Institute of Company Secretaries of India. CS has been defined as ‘Key managerial personnel’, in relation to a company

S.203 of Companies Act, 2013 read with Rules 8 and 8A of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provide that following companies must appoint a qualified company secretary:

(a) Listed Company 

(b) Public company which have a paid-up capital of Rs.10 crores or more; 

(c) Other companies which have a paid-up capital of Rs.5 crores or more. 

It is to be noted that the provisions of compulsory appointment of CS are not applicable to S.8 (licensed i.e. non-profit) companies.

Process of appointment of CS: A CS shall be appointed by resolution of Board of Directors, containing the terms and conditions of appointment including the remuneration.

Penalty for not appointing CS when mandatory: If any company makes any default in complying with the provisions of section 203, such company shall be liable to a penalty of Rs.5 lakh  and every director and key managerial personnel of the company who is in default shall be liable to a penalty of Rs.50,000 and where the default is a continuing one, with a further penalty of Rs.1,000 for each day after the first during which such default continues but not exceeding Rs.5 lakh. Until 2-11-2018, the section provided for a fine which could be imposed only by Court but now, the penalty can be imposed by Registrar of Companies (“ROC”) who is authorized for this purpose. Earlier, the offence was compoundable but the procedure of compounding had to be complied with but now, directly penalty can be imposed.

Role and Functions of CS

The profession of CS began on a humble note in the late 19th century. There have been many instances of courts viewing CS as a clerk or even a servant in the past. This view was changed by the landmark English decision of Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd. Lord Denning MR observed that there has been a change in the role of CS’s over a period of time, they are no longer mere clerks and may sign contracts on the company’s behalf. Salmon LJ observed that CS is like ‘chief administrative officer’ of the company so he has ostensible authority regarding administrative matters.

This view has been incorporated in the Companies Act, 2013 which has included CS in the category of Key Managerial Persons.

Functions

The functions of Company Secretary shall include the following u/s 205(1) of Companies Act, 2013:

1. to report to the Board about compliance with the provisions of this Act, the rules made thereunder and other laws applicable to the company;
2. to ensure that the company complies with the applicable secretarial standards;
3. to discharge such other duties as may be prescribed.

Other duties of Company Secretary: Other duties of Company Secretary, as specified in Rule 10 of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 such as guiding directors of a company, facilitate the convening of Board meetings, obtaining approvals, representing before regulators, assisting the Board in discharge of affairs including good corporate governance and such other matters as may be entrusted to him.

Record keeping and filing of returns: A CS is expected to maintain registers and keep records as are required under Companies Act. CS has to ensure that required returns and documents are filed with ROC in time as per legal requirements. CS has to coordinate between Registrars and Share Transfer Agents.

Demat shares: CS coordinates between depository and stock exchange in case of issuance of Demat shares.

Service to shareholder: A CS is expected to serve as a link between shareholders and the company. He has to ensure that shareholders get proper service, like transfer and transmission of shares, keep proper records of members, payment of dividend, rights/bonus issue, etc. He has to solve the difficulties and problems of shareholders and reply to their correspondence.

Meeting of members and board: CS is required to coordinate Board meetings and general meetings e.g. finalising dates, sending notices, making arrangement for meetings, advise Chairperson of meeting on legal requirements, etc. He has to draft minutes of meetings of members, the board of directors and committee of directors, get them approved by Chairperson, record the minutes and get them signed within the prescribed time.

Service to Board: CS is expected to provide services to the Board of Directors to enable them to do their work effectively. He should organise Board meetings, keep minutes, etc. If the Board of Directors is the brain of the company, the Secretary is the ears, eyes, and hands of the Board. He is expected to work as ‘friend, philosopher and guide’ of the Board of Directors to advise them about legal provisions. It is expected that he advises directors about their legal responsibilities. He should keep them informed of the company’s operations so that they can make effective decisions for the management of the company and ensure that provisions of the law are not violated.

Coordination between departmental heads and Board: CS is a link between the Board of Directors and other executives who have to function under overall supervision and control of the Board. He has to coordinate approvals required by various departments. He is also normally expected to advise other departments about legal requirements.

Secretary of the audit committee: CS will be secretary of the Audit Committee which is required to be formed by listed companies under SEBI’s listing agreement. He is appointed as ‘Compliance Officer’.

CS as Compliance Officer ofa listed company: As per Regulation 6 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the listed entity shall appoint a qualified company secretary as the compliance officer (not applicable to mutual funds). The CS should (a) ensure conformity with regulatory provisions applicable (b) coordinate with Board, stock exchange and depositories (c) ensure that correct procedures have been followed (d) monitoring email address of grievance redressal division for registering complaints by investors.

Conscious keeper: CS is often termed as ‘conscious keeper’ of the company. He should ensure that all legal requirements in respect of various laws are complied with and the company is a ‘good corporate citizen’, fulfilling its social obligations as well.

Additional duties: In addition to duties as CS, he is entrusted with additional duties like looking after legal, personnel, financial matters and even general administration.

Removal of CS

A CS can be removed/dismissed like other employees. Since he is appointed by Board, the removal can also be only by Board. The removal has to be in accordance with the employment agreement. A resolution from the Board would be necessary for removal. There is a need for clear and sufficient reason for removal. Principles of natural justice (“PNJ”) like Audi alteram partem, nemo judex in causa sua, reasoned order etc. need to be followed. A Secretary appointed for a fixed period can also be removed. If a Secretary resigns or is removed, the change must be filed with ROC within 30 days in e-Form.