Table of Contents

Negotiable instrument and its types

Table of Contents

Theoretical overview

Negotiable instrument: ‘Negotiable’ means transferable and ‘Instrument’ means a written document. Therefore negotiable instrument is the written document, which guaranteeing the payment of specific amount of money.

Negotiable instrument is generally a signed document which is easily transferable in nature once its transfer the holder of an instrument will have legal right to use it. A negotiable instrument is a signed document promising the amount of payment to a specified person or assignee.

As per section 13 of the Negotiable Instruments Act, “A negotiable instrument means a promissory note, bill of exchange or check payable either to the order or to the bearer.”

Kinds of negotiable instruments

Promissory note

a/c to section 4 of negotiable instrument act 1881 promissory note is an instrument in written (which is not bank note or currency note) containing an unconditional undertaking signed by a maker to pay certain sum of money to certain person.

a promissory note is written promise b/w the two parties- one party promise to pay the other party. For example you lend your friend $700 and he agrees to  pay you back by 1st January the amount is due on full date.

The parties to promissory note are :

  1. The maker: the person who makes the note promising to pay the amount.
  2. The payer:  one to whom the note is payable and the person is called holder.

Essentials of promissory notes:

  1. Written: it must be written an oral promise is not valid.
  2. Promise to pay: it must include clear undertaking to pay.
  3. Unconditional: the promissory note must be unconditional & definite. The promise to pay must not depend upon happing of uncertain event. If an instrument contains a conditional promise to pat it is not valid promissory note.
  4. Signed by the maker: The maker must sign the promissory note of an undertaking to pay to the payee or his order.       
  5. Certain parties-The maker must be a certain person, i. e., the note must show clearly who is the person engaging himself to pay.

Bills of exchange

a/c to section 5 of negotiable instrument act 1881 bills of exchange is an instrument in written containing unconditional undertaking order by the maker directing a certain person to pay a certain sum of money to certain person. It is made by the seller.

Parties involved in a bill of exchange are:

  1. Drawer:  The   person,   who   draws   or   writes   the   bill,   is   called   the   drawer.
  2. Drawee   or   Acceptor:   The   person,   on   whom   the   bill   is   drawn,   is   called   the   drawee.
  3. Payee: The person, to whom the bill will be paid, is called the payee. The drawer may himself be the payee.

Essential elements

  1. The bill of exchange must be in writing
  2. The   bill   of   exchange   must   contain   an   unconditional   order   to   pay.  
  3. The   drawer,   drawee   and   the   payee   of   a   bill   of   exchange   must   be   certain.
  4. The amount of money which is payable through the bill must be certain. Money means the legal tender money. 
  5. The drawer must sign the bill. It must be properly dated and stamped.
  6. The   drawee   must   accept   the   bill   by   putting   his   signature   on   the   bill.
  7. A   bill   may   be   payable   on   demand   or   after   the   expiry   of   a   fixed   period   of   time.

Cheque

a/c to section 6 of negotiable instrument act 1881 a cheque is bill of exchange drawn on specific bank. Cheques are signed and authorized by someone who deposits money in a bank and specifies the amount required to be paid as well as the name of the holder (recipient) of the check. The cheque is valid for 3 months.

Essential of cheque:

  1. It is always drawn on a banker. 
  2. It is always payable on demand.
  3. A cheque can be drawn on bank where the drawer has an account
  4. Cheques may be payable to the drawer himself. It may be made payable to bearer on demand unlike a bill or a note.
  5. The banker is liable only to the drawer. A holder has no remedy against   the banker if a cheque is dishonoured.
  6. A cheque is usually valid for three months.
  7. Money order: – Money orders are like cheques in that they promise to pay an amount to the holder of the order. Issued by financial institutions and governments, money orders are widely available, but differ from checks because there is usually a limit to the amount of the order – usually $1,000. Entities that require more than $1,000 need to have multiple buy orders.

Relevant sections:

  • section 13 of the Negotiable Instruments Act, “A negotiable instrument means a promissory note, bill of exchange or check payable either to the order or to the bearer.”
  •  Section 4 of the Negotiable Instruments Act defines promissory note.
  • Section 5 of the Negotiable Instruments Act define bills of exchange.
  • Section 6 of the Negotiable Instruments Act define cheque.

Important Maxims: 

  • NEMO DAT QUDO NON HABET: nobody can transfer a better title of his own.

Points to remember:

  • Negotiable instrument is generally a signed document which is easily transferable in nature once its transfer the holder of an instrument will have legal right to use it. A negotiable instrument is a signed document promising the amount of payment to a specified person or assignee.
  • As per section 13 of the Negotiable Instruments Act, “A negotiable instrument means a promissory note, bill of exchange or check payable either to the order or to the bearer.”
  • promissory note is an instrument in written (which is not bank note or currency note) containing an unconditional undertaking signed by a maker to pay certain sum of money to certain person.
  • bills of exchange is an instrument in written containing unconditional undertaking order by the maker directing a certain person to pay a certain sum of money to certain person. It is made by the seller.
  • A cheque is bill of exchange drawn on specific  bank.

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