Meaning of an Instrument

The term instrument means any written document by which a right is created in favour of some person. The word negotiable has a technical meaning whereby rights in an instrument can be transferred by one person to another. Thus, a negotiable instrument is a document by which rights vested in a person can be transferred to another person in accordance with the provisions of the Negotiable Instruments Act, 1881.

Meaning of a Negotiable Instrument. An Instrument as referred to in the Act is a legally recognised written document, whereby rights are created in favour of one and obligations are created on the part of another. The word negotiable means transferable from one person to another either by mere delivery or by endorsement and delivery, to enable the transferee to get a title in the instrument. An instrument is called negotiable if it possesses the following features: Freely transferable Holders title free from defects

i. ii. iii. iv. v.

The holder can sue in his own name

A negotiable instrument can be transferred infinitum A negotiable instrument is subject to certain presumptions

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It must be in writing, which includes, typing, computer print out or engraving. The instrument must be signed by the person who is the maker or a drawer. There must be an unconditional promise or order to pay. The instrument must involve payment of a certain sum of money only and nothing else. The instrument must be payable at a time which is certain to arrive. If it is payable when convenient the instrument is not a negotiable one. In case of a bill or cheque, the drawee must be named or described with reasonable certainty. Forms in which an Instrument must be Payable so as to Constitute a Negotiable Instrument are: (i) Pay A; (ii) Pay A or order; (iii) Pay to the order of A; (iv) Pay A and B; (v) Pay A or B; (vi) Pay A or bearer; (vii) Pay bearer

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Definition of a Promissory Note. A promissory note is an instrument in writing (not being a bank or a currency note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money to the bearer of the instrument (s.4). Essentials of a Promissory Note A promissory must be in writing. It must contain an undertaking or promise to pay. The promise to pay must not be conditional. The promissory note must be signed by the maker. The instrument must point out with certainty the maker and the payee of the promissory note, e.g., son of. resident of, etc. The sum payable must be certain or capable of being made certain. It cannot be payable to bearer on demand (s.31 of R. B. I. Act). It cannot be crossed unlike a cheque.

Specimen of a Promissory Note

New Delhi 1100 01 Jan. 10, 2006 On demand [or six months after date] I promise to pay X or order the sum of rupees ten thousand with interest at 12 per cent per annum only for value received. To X Sd/-A Address. stamp Rs 10,000

Parties to a Promissory Note

1. 2. The maker The payee

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It must be in writing.

It must contain an order to pay and not a promise or request. Words, like Please pay Rs 10,000 to A on demand and oblige, do not constitute the instrument a bill of exchange.
3. 4. 5. 6. 7.

The order must be unconditional. There must be three parties, viz., drawer, drawee and payee. The parties must be certain.

It must be signed by the drawer.

The sum payable must be certain or capable of being made certain.

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The order must be to pay money and money alone.

The number, date and place of the bill are not essential. Oral evidence may be obtained as to date and place of execution.

Specimen of a Bill of Exchange

Rs 10, 000 New Delhi 110 016 Jan. 13, 2006 Six months after date pay to A or order/bearer the sum of ten thousand rupees only for value received. To X Sd/-Y Address Stamp ..

Promissory Note 1. There are only two parties the maker (debtor) and the payee (creditor).

Bill of Exchange There are three parties the drawer, the drawee and the payee although drawer and payee may be the same person. 2. A note contains an unconditional promise by It contains an unconditional order to the drawee to the maker to pay the payee. pay according to the drawers directions. 3. No prior acceptance is needed. A bill payable after sight must be accepted by the drawee or his agent before it is presented for payment. The liability of the drawer is secondary and conditional upon non-payment by the drawee. Notice of dishonour must be given by the holder to the drawer and the intermediate endorsers to hold them liable thereon. The maker or drawer does not stand in immediate relation with the acceptor or drawee.

4. The liability of the maker or drawer is primary and absolute. 5. No notice of dishonour need be given.

6. The maker of the note stands in immediate relation with the payee.

Bills are of different kinds. Some of these are: (1) Inland Bills (2) Foreign Bills (3) Trade and accommodation bills (4) Time Bills (5) Demand Bills (6) Clean Bills (7) Documentary Bills.

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Written instrument

Unconditional order
On a specified banker only A certain sum of money Payee to be certain Payable on demand

Amount of the cheque

Dating of cheques

An endorsement is the mode of negotiating a negotiable instrument. A negotiable instrument payable otherwise than to bearer can be negotiated only by endorsement and delivery.
1. 2. 3. 4. 5. 6. 7.

Kinds of Endorsements Endorsement in blank

Endorsement in full
Restrictive endorsement Conditional endorsement

Endorsement sans recourse

Facultative endorsement Partial endorsement (s.56)

Presentment of a negotiable instrument is made for two purposes: (i) for acceptance and (ii) for payment. Maturity (Ss.21-25). Cheques are always payable on demand but other instruments like bills, notes, etc., may be made payable on a specified date or after the specified period of time. The date on which payment of an instrument falls due is called maturity (s.22). Presentment for Payment. A negotiable instrument must be presented for payment to the maker, acceptor or drawee thereof, as the case may be, by the holder or his agent.

Dishonour of a Bill. A bill of exchange may be dishonoured either by non-acceptance or by non-payment. A negotiable instrument is said be dishonoured by non-payment when the maker, acceptor or drawee, as the case may be, makes default in payment upon being duly required to pay the same (s.92). Noting. Noting is a convenient method of authenticating the fact of dishonour. Where an instrument is dishonoured, the holder, besides giving the notice as referred to above, should get the bill or promissory note noted by the notary public. Protesting (s.100). The protest is the formal notarial certificate attesting the dishonour of the bill and based upon the noting. After the noting has been made, the formal protest may be drawn up by the notary at his leisure.

Meaning of Crossing. Crossing is a unique feature associated with a cheque affecting to a certain extent the obligation of the paying banker and also its negotiable character. Crossing on cheque is a direction to the paying banker by the drawer that payment should not be made across the counter. Significance of Crossing. As payment cannot be claimed across the counter on a crossed cheque, crossing of cheques serves as a measure of safety against theft or loss of cheques in transit. Types of Crossing General crossing

Special crossing

Not Negotiable, A/c Payee Crossing. The combination of not negotiable and A/c payee, crossing is the safest form of crossing. It has double advantage. The instrument is rendered not negotiable (making the paying banker responsible to see that payment is made to the person who is entitled to receive it) plus A/c payee crossing directs the collecting banker to collect it for the payee only and warns that if the amount is collected for someone else, he may be held liable for damages.