What are Negotiable Instruments?
AUTHOR: Kareena Bakhtyarpuri
3rd Year, B.A. LL. B
Student at Institute of Law, Nirma University
In the world of globalization where business is increasing every second, the ease of doing business is the quintessential requirement; the negotiable instruments have proved to be an important tool in doing so. Negotiable instruments are commonly used today as they prove to be helpful in facilitating commercial transactions. A negotiable instrumentis a document which is signed by the issuer guaranteeing to pay the holder certain sum of money on demand or at a specified date.
According to Section 13(i) of Negotiable Instrument Act, 1881; a negotiable instrument includes a promissory note, bill of exchange or cheque.
The person who transfers the negotiable instrument to the other is the issuer or drawer of funds and the person to whom such instrument is transferred is the bearer or the holder. The instrument should contain the name of the person to whom the payment is to be made. Negotiable instruments are a mode of transferring debt from one person to the other. These instruments are a form of written contracts the benefit of which could be passed from its holder to the new holder. In need of funds, a negotiable instrument also becomes source of money. Once the instrument is transferred from the issuer to the holder, the latter obtains a valid legal title on the instrument. The holder who acquires it in good faith receives a good title i.e. one which is free from all defects.
Negotiable instruments are commercial documents with legal life that can be transferred. The most peculiar feature of a negotiable instrument is that it is easily transferable. Its transfer needs no lengthy formalities and it can be simply transferred by a simple delivery.Further, its use is not limited to individuals and it can be transferred to artificial persons like a body corporate, trade unions etc.As negotiable instruments are transferable in nature, its holder may take the funds in cash or use them suitable for the transaction or as per his preference. These commercial documents guarantee only payment of specified amount of money and make no other promise on behalf of issuer of the instrument.
As negotiable instruments are as good as cash, they should be dealt with great care.
Types of Negotiable Instruments
Negotiable instruments are of various kinds. Most common ones being cheques, delivery orders, custom receipt, promissory notes, certificate of deposit, travelers’ cheque, bill of exchange etc… Bill of exchange, promissory notes and cheque are negotiable instruments recognized in Negotiable Instruments Act and they are thus referred as negotiable instruments by statute. The other category of negotiable instruments is called as negotiable instruments by usage. These mainly include the delivery orders, rail receipts and government promissory notes.
A promissory note is an instrument in writing which contains an undertaking by the maker of such instrument to pay certain amount of money to the holder of the instrument. There are two parties involved in the transaction i.e. the person who draws such a promissory note is called the maker and the person who receives it is called the payee.
A promissory note is payable at a fixed future date or on demand. However, the other person (for example a seller) to whom such note is paid is not bound to accept it and the acceptability of the promissory note depends much on the credibility of the person making it. In simple terms, a promissory note describes the amount that a person owes to the other along with the date of payment of such amount and rate of interest if any.
Bill of Exchange
A bill of exchange is a written instrument containing an order to a person (debtor) to pay a certain specified amount of money to another person (creditor). Some bills of exchange are due to be paid on demand while some are to be paid on a future date. The person who draws owes the money is the payer while the one who receives such payment is payee. When a bill of exchange is issued by a financial institution it is called bank draft, and when it is issues by an individual it is called as trade draft.
In certain transactions, a third party i.e. financial institutions like bank acts as a guarantee for payment and is a party to such bill of exchange. This helps in reduction of risks.
A cheque is a type of bill of exchange. It is a written instrument payable only on demand. It is an express order addressing the banker which requires him to pay the specified amount mentioned in the instrument to the holder and is signed by the issuer. There are two parties involved in this transaction i.e. the drawer, who makes the bill of exchange and the drawee, to whom the money is to be paid.
There are different types of cheques namely crossed cheques, open cheque, bearer cheque, marked cheque, travellers’ cheque etc… However, if the person who has drawn the cheque does not have sufficient funds and the cheque is returned, he can be prosecuted under Negotiable Instruments Act.
While a promissory note is an unconditional promise to pay some amount of money, a bill of exchange is an unconditional order to pay an amount of money.
While a cheque is drawn on a banker, the bill of exchange may be drawn on any person including a banker. Also the amount mentioned in cheque is always payable on demand; however the amount mentioned in a bill of exchange is paid on demand or on a specified date.
However, it is to be noted that forgery is nullity in law and in case of forged instruments, no title is transferred and such instruments do not have an existence in eyes of law.
The topic discussed here is a brief of the subject matter and should not be substituted as proper legal advice. If a matter comes up under this topic then it is strictly advisable to consult a professional for advice and for the procedure and practice to be followed.
The author is a third-year student from Institute of Law, Nirma University. She has varied interests including Constitution Law and Competition Law. She also showcases interest in writing research articles on contemporary matters in various areas of law and loves to write! She affirms to the strong belief that everyone should have a balanced life and thus can always be seen enthusiastically participating in extracurricular activities. A firm believer in hard work and effort, she doesn’t settle down unless she knows she has addressed the job to a hundred percent of her capabilities.