Negotiable Instruments Act,1881

• MEANING AND DEFINITION OF NEGOTIABLE INSTRUMENT

The word ‘Negotiable’ means transferable from one person to another in return of consideration and instrument means a written document by which a right is created in favour of some person. Thus, a negotiable instrument is a document which entitle of person to a sum of money and which is transferable from one person to another by mere delivery or by endorsement and delivery.

• The term ‘negotiable’ as such is not defined in the Negotiable

Instrument Act, 1881.Section 13, however, provides that a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.

• FEATURES / CHARACTRERISTICS OF NEGOTIABLE INSTRUMENT

1. Freely Transferable : The property in an negotiable instrument passes from one person to another by delivery, if the instrument is payable to bearer; and by endorsement and delivery, if it is payable to order.

2. Title of holder free from all defects : A person taking an instrument bona fide and for value gets the instrument free from all defects in the title of the transferor. He is not in any way affected by any defect in the title of the transferor or of any prior party.

3. Presumptions : It is presumed by law that every negotiable instrument is made or drawn for a consideration. But it is not an irrebuttable presumption. It must be rebutted by proof that the instrument has been obtained from its lawful owner by means of fraud, undue influence or for unlawful consideration. The onus of proof is on the person who challenges the existence of consideration.

4. Recovery : A person taking an instrument bona fide and for value can sue upon an negotiable instrument in his own name for the recovery of amount.

• Types of negotiable instruments• Instruments negotiable by statute: The Negotiable

Instruments Act, 1881 mentions only three kinds of negotiable instruments. They are, Promissory Note, Bill of Exchange and cheque. These instruments are negotiable by statue.

• Instruments negotiable by custom or usage: There are certain other instruments , which have acquired the character of negotiability by the usage or custom of trade. In India, Government Promissory note, Bankers Draft and pay order, Hundis, Delivery orders and railway receipts for the goods have been held to be negotiable by usage or custom.

• Promissory note • A promissory note is an instrument in writing containing

unconditional undertaking signed by the maker, to pay a certain sum of money only to, or to order of, a certain person, or to the bearer of instrument.

The person who makes the promissory note and promises top pay is called the maker. The person to whom the payment is to be made is called the payee.

For an instrument to become a promissory note, it must have the following essential elements:-

1. The instrument must be in writing.

2. The instrument must contain an express promise to pay. A mere acknowledgement of indebteness is not sufficient.

3. The promise to pay must be definite and unconditional.

4. The instrument must be signed by the maker, otherwise it is incomplete and has no effect.

5. The instrument must point with certainly as to who the maker is and who the payee is. Where the maker and the payee cannot be identified with certainty from the instrument itself the instrument, even if it contains an unconditional to pay, is not a promissory note.

6. The sum payable must be certain and must not be capable of contingent additions or subtractions.

• Bill of Exchange: 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.

The person who gives the order to pay or who makes the bill is called the drawer. The person who is directed to pay is called the drawee. The person to whom the payment is to be made is called the payee.

For an instrument to become a bill of exchange, it must have the following essential elements:

1. It must be in writing

2. It must contain an unconditional order to pay

3. It requires three parties i.e. drawer drawee and the payee.

4. The parties must be certain.

5. It must be signed by the drawer

6. The sum payable be certain.

Cheque:A cheque is a bill of exchange drawn upon a specified banker and

payable on demand.

A cheque is a species of a bill of exchange, but it has the following two additional qualifications, namely:-

I. It is always drawn on a specified banker; and

II. It is always payable on demand.

All cheques are bill of exchange; but all bill of exchange are not cheques