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Negotiable instrument

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

Characteristics

1. Freely transferable2. Title of holder free from all defects

A person who is holding negotiated instrument he is free from a defect in the title of the

transferor

Ex: S sells certain goods to B. B gives a promissory note to S for the price. He refuses to

pay the promissory note, claiming that the goods are not according to order. If S sues B

on the note, Bs defence is good. But if he negotiates the note to H, a holder in duecourse, Bs defence will be of no avail.

3. RecoveryA holder of the negotiable instrument can sue for recovery of the amount.

4. Presumptions Negotiable instrument is for consideration Dated Reasonable Time of acceptance Before the maturity it should transferred Stamp when there is a dishonor

ENDORSEMENT:

Endorsement means writing ofones signature on the face or back of a bill for the purpose of

transferring the title of the bill to another person. The person who endorses is called the

Endorser.The person to whom a bill is endorsed is called the Endorsee. The endorsee is entitled to

collect the money.

Types of endorsement:

MEANING OF BILL OF EXCHANGE

According to the Negotiable Instruments Act 1881, a bill of exchange is defined as aninstrument 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. The following features of a bill of exchange emerge out of this definition.

A bill of exchange must be in writing. It is an order to make payment. The order to make payment is unconditional. The maker of the bill of exchange must sign it. The payment to be made must be certain. The date on which payment is made must also be certain.

The bill of exchange must be payable to a certain person.

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The amount mentioned in the bill of exchange is payable either on demand or on theexpiry of a fixed period of time.

It must be stamped as per the requirement of law.

Parties of a bill of exchange

1. Drawer- Drawer is the creditor who draws the bill. For him bill is the Bill Receivable.2. Drawee- Drawee is the debtor who accepts to pay the bill. For him bill is the bill

payable.

3. Endorser- Endorser is one who endorses the bill to settle his account with his creditor.4. Endorsee- Endorsee is one who receives the bill from the endorser.5. Payor- Payor is the drawee who pays the bill.6. Payee- Payee is one who receives the payment from the drawee. One who holds the bill

at the time of maturity, receives the payment.

PROMISSORY NOTEThis definition suggests that when a person gives a promise in writing to pay a certain sum of

money unconditionally to a certain person or according to his order the document is called is a

promissory note.

Following features of a promissory note emerge out of the above definition:

It must be in writing It must contain an unconditional promise to pay. The sum payable must be certain. It must be signed by the maker. The maker must sign it. It must be payable to a certain person. It should be properly stamped.

A promissory note does not require any acceptance because the maker of the promissory notehimself promises to make the payment

Distinguish between Bill of Exchange and Promissory NoteBoth a bill of exchange and a promissory note are instruments of credit and are similar in many

ways. However, there are certain basic differences between the two.

Basis Bill of Exchange Promissory Note Drawer It is drawn by the creditor It is drawn by the debtor Order or

Promise

and Parties

It contains an order to make

payment. There can be three

parties to it, viz. the drawer, the

drawee and the payee.

It contains a promise to make

payment. There are only two

parties to it, viz. the drawer and

the payee. Acceptance It requires acceptance by the

drawee or someone else on his

behalf.

It does not require any

acceptance.

Payee Drawer and payee can be thesame party.

Drawer cannot be the payee of it.

Notice In case of its dishonour duenotice of dishonour is to be

given by the holder to the

drawer

No notice needs to be given in

case of its dishonour.

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CHEQUE

A cheque is a bill of exchange drawn upon a specified banker and payable on demand. . It is the

electronic form means it contains the exact mirror image of the proper cheque, and is generated,

written and signed in a secure system ensuring the minimum safety standards with the use of

digital signature and asymmetric crypto system.

Types

Open chequeA cheque which is payable in cash across the counter of a bank Crossed cheque

It is the one on which two parallel transverse lines with or without the words &Co are

drawn.

Types of crossing

1. General crossingA cheque is said to crossed generally where it bears across its face an addition of the

words &Co or any abbreviation between two parallel transverse lines either with or

without the not negotiable.

2. Special crossingWhere a cheque bears across its face an addition of the name of a banker, either with or

without the words not negotiable the cheque is deemed to be crossed specially.

3. Restrictive crossingA cheque which additionally contains the words A/C Payee in the general or special

crossing cheque with or with out the words not negotiable

CLASSIFICATION OF NEGOTIABLE INSTRUMENT

1. Bearer and order instruments

A negotiable instrument is payable to bearer A negotiable instrument is payable to order

2. Inland and foreign instrumento Drawn in Indian and payable in Indiao Drawn outside India & made payable in outside or inside India is foreign

instrument

3. Instrument payable on demand-a cheque always payable on demand

4. Time instrument-which is payable after a period

5. Accommodation bill-a bill drawn,accepted or indorsed for without consideration

6. Fictitious bill-when the name of the drawer or the payee or both is fictitious in a bill, the bill is called a

fictitious bill

7. Escrow-when a negotiable instrument is delivered conditionally or for a special purpose

8. Ambiguous instrument-faulty draft instrument which cannot be identified as bill of exchange or promissory

note.

9. Inchoate instrument-incomplete instrument

LIABILITY OF PARTIES

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1. Liability of drawer-Liable in case of dishonour by the drawee2. Liability of drawee -must pay the bill or cheque when required3. Liability of the maker and acceptor-Liable to pay to the holder4. Liability of indorser -Liable to all subsequent holders for dishonour before the maturity

DISHONOR OF NEGOTIABLE INSTRUMENTBill may be dishonored by non-acceptance or by non-payment but a cheque and Note

are dishonored by non-payment only

1. Dishonor by non-acceptance(sec.91) BOE is dishonoured by non-acceptance in any ofthe following ways.

If the drawee does not accept the bill within 48hours from the time of presentmentthough it is presented for the acceptance

When the presentment is excused and the bill is not accepted. When the drawee incompetent to contract When the drawee gives qualified acceptance or conditional acceptance When the drawee is a fictitious person or he cannot be found2. Dishonor by non-payment(sec.92)-when the maker or the drawee makes default in

payment

NOTICE OF DISHONOR

When the negotiable instrument is dishonoured the holder must give a notice to all the prior

parties whom he wants to make liable on the instrument

Object of the notice-inform the party about their liability which accrues as a result of

dishonour.

1. Notice by whom

o Notice by holder or any prior partyo chain method of giving noticeo Notice by principal or agent

2. Notice to whom

o Notice to all parties whom the holder seeks to make liableo Notice to party or his agent or legal representative or assignee

3. Form of notice

o The notice may be in oral or in writteno It must be given within a reasonable time at the place of business

4.Exceptions for notice (sec.98)

Notice of dishonor is not necessary-o When it is dispensed with or waived by the party entitled theretoo When the drawer himself has stopped the paymento When the party cannot be found after a reasonable searcho When the promissory note is not negotiableo When the concerned party is already knowing the fact of dishonourment and

has promised to make the payment.

NOTING AND PROTESTING

Noting means the recording of the fact of dishonor by a Notary public upon the instrument

within a reasonable time after dishonor(sec.99)

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The certificate of noting is called protest(sec.100). It is a formal notarial certificate attesting

the dishonor of instrument

Contents of Notingo -The fact of dishonouro -The date of dishonouro -The reasonso -The notary charges

Contents of protesto -The instrumento -The name of the person against whom it is protestedo -The reasons of dishoouro -The place and time of dishonouro -The signature of the notary public