Negotiable instruments

The Negotiable Instruments Act 1881

Introduction

The word negotiable means transferable from one person to another and the term instrument means any written document by which a right is created in favour of some person. Thus the negotiable instrument is a document by which the right vested in a person can be transferred to another person in accordance with the Negotiable Instruments Act 1881.

The term Negotiable Instrument has been defined as “Negotiable Instrument means a promissory note, bill of exchange, or cheque payable either to order or to the bearer”

Main Features of Negotiable Instrument

An instrument is called negotiable if it possesses the following characteristic features:

Freely Transferable Transferability may be by Delivery By endorsement and Delivery

Holder’s Title must be free from Defects:

The Holder of the negotiable instrument in due course acquires a good title not withstanding any defect in previous holder’s title. A holder in due course is one who receives the instrument for value and without any notice as to the defect in title of the transferor

Promissory Note

Egs of Promissory Note

Promissory Note

A promissory note is an instrument in writing (not being a part of a bank note or a currency – note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money to, or to the order of a certain person or to the bearer of the instrument

Examples : “ I promise to pay B or order Rs

500/-” “I promise to pay Rs 500 and all

other sums which shall be due to him”

“I promise to pay Rs 500 on D’s death , provided D leaves me enough to pay that sum”.

“ I promise to pay Rs 500/- and to deliver to him my black horse on 1st January next”

Essentials of Promissory Note It must be in writing It must contain express promise to pay :- ‘I am liable

to pay’ The promise to pay must be unconditional It must be signed by maker The maker must be certain- It must describe the name

& designation of the maker, sum of money There are 2 parties involved i.e. maker and the payee The payee must be certain- It is essential that it must

contain a promise to pay some person ascertained by name or designation.

The sum payable must be certain The payment must be in legal money A currency note is not a promissory note

Bill of Exchange

Bill of Exchange

Section 5, is defined as “A bill of exchange is 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”.

Characteristic of Bills of Exchange

It must be in writing It must contain an order to pay and a

promise or request The order must be unconditional There must be 3 parties ie : drawer,

drawee, and payee The parties must be certain It must be signed by the drawer Number, date and place are not

essential

Cheque

Cheque

A cheque is defined as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand

Thus a cheque is a bill of exchange with 2 added features:

It must be drawn on a specified banker &

It is always payable on demand and not otherwise

Crossed Cheque

Crossing of the Cheque

Crossing of a cheque 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 of a Cheque is a direction to a particular Banker by the Drawer that Payment should not be made across the Counter. The payment on the crossed Cheque can be collected only through a Banker.

Crossing of the Cheque is affected by drawing two parallel Transverse lines .

The Cheque that is not crossed is an open Cheque

Distinction

CHEQUE

It must be drawn only on Banker

The amount is always payable on demand

The Cheque is not entitled to days of grace

Cheque can be crossed

BILL OF EXCHANGE

It can be drawn on any person including a Banker

The amount may be payable on demand or after a specified time

A usance ( time) bill is entitled to 3 days of grace.

Crossing of Bill of Exchange is not possible

Distinction

PROMISSORY NOTE

There are 2 parties – Maker (Debtor) and the payee (Creditor)

A note contains an unconditional promise by maker to pay the payee

BILL OF EXCHANGE

There are 3 parties – The Drawer , the drawee, and the payee

It contains an unconditional order to the drawee to pay according to the drawer’s directors

PROMISSORY NOTE BILL OF EXCHANGE

1. It contains a promise to pay.

2. It is presented for payment without any previous acceptance by the maker.

3. It cannot be made payable to the maker himself. The maker and the payee cannot be the same person.

4. In the case of a promissory note there are only two parties, the maker and the payee.

5. A promissory note can never be conditional.

6. In case of dishonour no notice of dishonour is required to be given by the Holder

1. It contains an order to pay.2. It is required to be

accepted either by the drawee or by some one else on his behalf, before it can be presented for payment.

3. The drawer and payee or the drawee and the payee may be the same person.

4. There are three parties, drawer, drawee and payee.

5. A bill of exchange cannot be drawn conditionally, but it can be accepted conditionally with the consent of the holder.

6. A notice of dishonour must be given in case of dishonour of a Bills of Exchange. 

CHEQUE BILL OF EXCHANGE

1. Drawee: Cheque can be drawn only on a banker.

2.  Time of payment: A cheque is payable on demand.

3.  Grace period: Cheque is payable on demand and no grace period is allowed.

4.  Notice of dishonour: Notice of dishonour is not necessary.

5.  Acceptance: A cheque is not required to be presented for acceptance. It needs to be presented only for payment.

6. Crossing: A cheque may be crossed.

7. Validity period: A cheque is usually valid for a period of six months.

1. The drawee may be any person.

2. A bill may be drawn payable on demand or on expiry of certain period after date or sight.

3.  While calculating maturity three day’s grace is allowed.

4.  A notice of dishonour is required.

5.  Bills require presentment for acceptance and it is better to present them for acceptance even when it is not essential to do so.

6. A bill of exchange cannot be crossed.

7.  A bill may be drawn for any period.