Q.2 What are the negotiable instruments? Discuss in detail.
Answer
NEGOTIABLE INSTRUMENTS
Under the Negotiable Instruments Act, 1881 “a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer”. However, in general terms a Negotiable Instrument is one which is, by a legally recognized custom of trade of law, transferable by delivery or by endorsement and delivery in such circumstances that (a) the holder of it for the time being may sue on it in his own name; and (b) the property in it passes, free from equities, to a bona fide transferee for value, notwithstanding any defect with title of the transferor”.
CHARACTERISTICS
• Negotiable instruments are transferable from person to person like cash. In other words, the property attributed to these instruments passes from one person to another, either by endorsement or by delivery.
• The transferee of a negotiable instrument is entitled by law to sue on the instrument in his own name in case of dishonour.
• A bona fide transferee of a negotiable instrument for value takes if free from all defects in the title of his transferor. This is the main difference between negotiable instrument and other subjects or ordering transfer.
KINDS
There are three main kinds of negotiable instrument:
• Bills of exchange;
• Cheques;
• Promissory notes;
These are discussed in detail as under:
BILLS OF EXCHANGE
“An instrument in writing, containing an unconditional order, signed by the maker, directing a certain person, to pay certain sum of money, only to or to the order of a certain person, or to the bearer of the instrument”.
Characteristics are:
• It must be in writing.
• It must be singed by the maker.
• It must contain an unconditional order.
• It must direct a certain person to pay a certain amount of money to a certain person or his order or to bearer.
• It must be properly stamped.
PARTIES
There are generally three parties to a Bill of Exchange:
• Drawer: Drawer is the person giving the order.
• Drawee: Drawee is the person to whom the order is addressed.
• Payee or Endorsee: Payee or Endorsee is the person named in the instrument to whom or to whose order the money is directed to be paid.
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”. In general term, it is a bill of exchange drawn on a banker which is payable on demand. A cheque is a peculiar type of negotiable instrument which resembles a bill of exchange in particulars but does not so resemble in other. Thus:
• a cheque does not require acceptance;
• it is not intended for circulation;
• but for immediate payment;
• it is not entitled to any days of grace;
• it is always drawn on a banker;
• it is payable to bearer on demand (unless crossed).
VARIETIES
Open cheque
This can be presented to the banker on whom they are drawn and paid by them “over the counter”.
Crossing
This is a device adopted by the business community and sanctioned by law, which has the effect of making cheques payable to a bank only or to a particular bank in an account with such bank. Crossing is of two types. General crossing which consists of drawing two parallel transverse lines, across the fact of cheque, either with or without the words “not negotiable” and/or the words “and Co” in between. If in addition to general crossing, the name of specified banker to whom the cheque is to be payable, is also written on the face of the instrument, with or without the words “not negotiable”, it is called special crossing”.
Order cheque
This is a cheque (a) which is expressed to be so payable or (b) which is expressed to be payable to a particular person, without containing words prohibiting transfer or indicating that it shall not be transferable or (c) which is expressed to be payable to the order of a certain person.
Marked cheque
This means a cheque which is “marked” or certified by the banker on whom it is drawn, to the effect that it would be honoured when presented for payment.
PROMISSORY NOTES
“This is an instrument in writing (not being a bank note or currency note) containing an unconditional undertaking signed by the maker, to pay on demand or at a fixed or determinable future time, a certain sum of money only, to or to the order of a certain person or to the bearer of the instrument”
No precise form is necessary but the above definition lays down that the following are the essentials of a Promissory Note:
• It must be an unconditional written promise.
• It must be singed by the maker called “promiser”.
• It must contain a promise to pay a certain sum in money only.
• The money should be payable to or to the order of a certain person or to the bearer of the Promissory Note.
• It may be made by two or more persons and they may be liable thereon jointly and severally.
• The amount promised in the Promissory Note must be payable on demand or at a fixed or a determinable future time.
A Promissory Note is incomplete untill it has been delivered to the payee or the bearer. Moreover, the sum promised in a Promissory Note can be made payable by stated installments. The Promissory Note may be made by two or more makers who may be liable thereon jointly and severally, according to is tenor.
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