Negotiable Instruments

A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer. So, there are just three types of negotiable instruments such as promissory note, bill of exchange and cheque. Cheque also includes Demand Draft [Section 85A]. More specifically, it is a document contemplated by a contract, which (1) warrants the payment of money, the promise of or order for conveyance of which is unconditional; (2) specifies or describes the payee, who is designated on and memorialized by the instrument; and (3) is capable of change through transfer by valid negotiation of the instrument. As payment of money is promised subsequently, the instrument itself can be used by the holder in due course as a store of value; although, instruments can be transferred for amounts in contractual exchange that are less than the instruments face value (known as discounting). Under United States law, Article 3 of the Uniform Commercial Code as enacted in the applicable State law governs the use of negotiable instruments, except banknotes (Federal Reserve Notes, aka "paper dollars").

Characteristics of negotiable instruments

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 transferableis 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 : Consideration : That every negotiable instrument is made or drawn for a consideration. Thus, this need not necessarily be mentioned.

 Date : That the negotiable instrument was drawn on the date shown on the face of it. Acceptance before maturity : That the bill of exchange was accepted before its maturity, i.e., before it became overdue. Transfer before maturity : That the negotiable instrument was transferred before its maturity. Order of Endorsements : That the Endorsements appearing upon a negotiable instrument were made in the order in which they appear. Stamping of the instrument : That an instrument which has been lost was properly stamped. 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. 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)

Types of Negotiable Instruments According to the Negotiable Instruments Act, 1881 there are just

three types of negotiable instruments i.e., promissory note, bill of exchange and cheque. However many other documents are also recognized as negotiable instruments on the basis of custom and usage, like hundis, treasury bills, share warrants, etc., provided they possess the features of negotiability. In the following sections, we shall study about Promissory Notes (popularly called pronotes), Bills of Exchange (popularly called bills), Cheques and Hundis (a popular indigenous document prevalent in India), in detail.

1.

Promissory Note

Suppose you take a loan of Rupees Five Thousand from your friend Ramesh. You can make a document stating that you will pay the money to Ramesh or the bearer on demand. Or you can mention in the document that you would like to pay the amount after three months. This document, once signed by you, duly stamped and handed over to Ramesh, becomes a negotiable instrument. Now Ramesh can personally present it before you for payment or give this document to some other person to collect money on his behalf. He can endorse it in somebody elses name who in turn can endorse it further till the final payment is made by you to whosoever presents it before you. This type of a document is called a Promissory Note. Section 4 of the Negotiable Instruments Act, 1881 defines a promissory note as 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.

Specimen of a Promissory Note

Parties to a Promissory Note There are primarily two parties involved in a promissory note. They arei. The Maker or Drawer the person who makes the note and promises to pay the amount stated therein. In the above specimen, Sanjeev is the maker or drawer. ii. The Payee the person to whom the amount is payable. In course of transfer of a promissory note by payee and others, the parties involved may be a. The Endorser the person who endorses the note in favour of another person. In the above specimen if Ramesh endorses it in favour of Ranjan and Ranjan also endorses it in favour of Puneet, then Ramesh and Ranjan both are endorsers. b. The Endorsee the person in whose favour the note is negotiated by endorsement. In the above, it is Ranjan and then Puneet.

Essential Elements of Promissory Notes Writing Promissory notes must be in writing. There is no such thing as a verbal promissory note. Someone may promise to repay you, but it will be difficult to prove, and you may not be able to get it enforced in court without a written record. For Money A promissory note is valid only if it is a promise to pay money. A promise to give property (or both property and money) is not a promissory note. Payable on Demand or on Specific Date Many differences among promissory notes relate to when and how the borrowed amount will be repaid. Although you are free to negotiate terms that work for your arrangement, your note must either have an end date or be payable when the lender demands it. Unconditional The borrowers payment cannot depend on an event or any other possibility. It must be unconditional. This means once its written and signed, the only thing left to happen is repayment. If payment may or may not happen, the promissory note is not valid. Specific Amount The note must indicate a specific amount owed that will be paid. If the document indicates the payment will be of $10,000 and other amounts owed, the promissory note is not valid. This does not apply to interest that may be required by the note. A note that doesnt state exactly how much interest will be paid over time (i.e., has just an interest rate and not a dollar amount) it is still valid. Transferable

A promissory note must state that its either payable to order or payable to bearer. These phrases mean the amount owed by the borrower could be payable to some unknown third party in the future. In other words, the note is transferrable from one person to another. Signature The individual that owes the money must sign the note. The lender may (but doesnt have to) sign it.

2. Bill of Exchange
Suppose Rajiv has given a loan of Rupees Ten Thousand to Sameer, which Sameer has to return. Now, Rajiv also has to give some money to Tarun. In this case, Rajiv can make a document directing Sameer to make payment up to Rupees Ten Thousand to Tarun on demand or after expiry of a specified period. This document is called a Bill of Exchange, which can be transferred to some other persons name by Tarun. Section 5 of the Negotiable Instruments Act, 1881 defines a bill of exchange as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument.

Specimen of a Bill of Exchange

Parties to a Bill of Exchange There are three parties involved in a bill of exchange. They arei. The Drawer The person who makes the order for making payment. ii. The Drawee The person to whom the order to pay is made. He is generally a debtor of the drawer. iii. The Payee The person to whom the payment is to be made. The drawer can also draw a bill in his own name thereby he himself becomes the payee. Here the words in the bill would be Pay to order or us. In a bill where a time period is mentioned, just like the above specimen, is called a Time Bill. But a bill may be made payable on demand also. This is called a Demand Bill.

Difference between Bills of Exchange and promissory notes

3.

Cheques

Cheque is a very common form of negotiable instrument. If you have a savings bank account or current account in a bank, you can issue a cheque in your own name or in favour of others, thereby directing the bank to pay the specified amount to the person named in the cheque. Therefore, a cheque may be regarded as a bill of exchange; the only difference is that the bank is always the drawee in case of a cheque. The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Actually, a cheque is an order by the account holder of the bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer. Specimen of a Cheque

Different Kinds / Types of Cheques

1. Bearer Cheque When the words "or bearer" appearing on the face of the cheque are not cancelled, the cheque is called a bearer cheque. The bearer cheque is payable to the person specified therein or to any other else who presents it to the bank for payment. However, such cheques are risky, this is because if such cheques are lost, the finder of the cheque can collect payment from the bank. 2. Order Cheque When the word "bearer" appearing on the face of a cheque is cancelled and when in its place the word "or order" is written on the face of the cheque, the cheque is called an order cheque. Such a cheque is payable to the person specified therein as the payee, or to any one else to whom it is endorsed (transferred). 3. Uncrossed / Open Cheque

When a cheque is not crossed, it is known as an "Open Cheque" or an "Uncrossed Cheque". The payment of such a cheque can be obtained at the counter of the bank. An open cheque may be a bearer cheque or an order one. 4. Crossed Cheque Crossing of cheque means drawing two parallel lines on the face of the cheque with or without additional words like "& CO." or "Account Payee" or "Not Negotiable". A crossed cheque cannot be encashed at the cash counter of a bank but it can only be credited to the payee's account. 5. Anti-Dated Cheque If a cheque bears a date earlier than the date on which it is presented to the bank, it is called as "anti-dated cheque". Such a cheque is valid upto six months from the date of the cheque. 6. Post-Dated Cheque If a cheque bears a date which is yet to come (future date) then it is known as post-dated cheque. A post dated cheque cannot be honoured earlier than the date on the cheque. 7. Stale Cheque If a cheque is presented for payment after six months from the date of the cheque it is called stale cheque. A stale cheque is not honoured by the bank. Difference between Bills of Exchange and Cheque

A cheque differs from a bill of exchange in the following respects: Drawee: A cheque is always drawn on a bank or banker while a bill of exchange can be drawn on any person including a banker. Acceptance: A cheque does not require any acceptance, while a bill must be accepted before the drawee can be made liable upon it. Payment: A cheque is payable immediately on demand without any days of grace, but a bill of exchange is normally entitled to three days of grace unless it is payable on demand. Stamp: A bill of exchange must be stamped, whereas a cheque does not require any stamp. Protection: A banker is given statutory protection with regard to payment of cheques in certain circumstances. No such protection is available to the drawee or acceptor of a bill of exchange.

Submitted By

Siddh Shah Roll No. 89

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