There are
certain documents used for payment in business transactions and are Transferred
freely from one person to another. Such documents are called Negotiable Instruments
like cheque, bank draft, bill of exchange, promissory notes etc. Thus we can
say Negotiable Instruments are transferable documents where Negotiable means transferable
and Instrument means document. According to section 13 of the negotiable
Instruments act 1881, a Negotiable Instrument means promissory note bill of
exchange or cheque payable either to order or to bearer.
Note: Implemented w.e.f. March 01, 1882, 147 Sections with 17 Chapters
[138-142 added in 1988 w.e.f. 01.04.89 & 143 –147 added during Dec.2002]
Negotiability: Transfer of the instrument to any person so as to constitute him
holder.
Negotiation: Means transfer without restriction. Transferee taking the
instrument for value and in good faith gets better and absolute title despite
any defect in the title of transferor [endorser]. Negotiation of Bearer Cheque
is completed by delivery and that of order instrument is completed by delivery
and endorsement.
A. Negotiable
Instruments:
1. Promissory
Note
2. Bill of
Exchange
3. Cheque
4. Exchequer
Bill
5. Circular
Note
6. Dividend
Warrant
7. Share
Warrant
8. Bearer
Debenture
9. Bank Note
10. Bank Draft
B. Non Negotiable
Instruments
1. Money Order
2. Postal Order
3. Deposit
Receipt
4. Share
Certificate
C. Quasi
Negotiable Instruments
1. Bill of
Lading
2. Dock Warrant
3. Carriers
Receipt
4. Letters of
Credit
5. Railway
Receipt
Features of a
Negotiable Instrument
1. It is a
written document.
2. A Negotiable
Instrument payable to bearer is transferable merely by delivery whereas a
Negotiable Instrument payable to order is transferable by endorsement and delivery.
3. The holder
of a Negotiable Instrument can sue upon it in his own name.
4. Its works in
the same manner as money and like money it may also be transferred from one
person to another.
5. The
Transferor does not need to give notice to any person at the time of
transferring the Instrument.
6. It is the
simplest and most convenient mode of assignment of a debt.
7. The title to
the Instrument received by a bona fide transferee is not affected by defect in
the title of the transferor.
Types of
Negotiable Instruments
According to
the Negotiable Instruments Act 1881, there are just three types of Negotiable
Instruments example Promissory Note, Bill of Exchange and Cheque.
Though many
Negotiable instruments recognized, only these three are in wide
circulation.
Promissory Note
Sec.4 – Defines
Promissory Note. PN is an instrument in writing, containing an
unconditional
undertaking (or promise), signed by maker, to pay a certain sum of money, to or
to the order of certain person or to the bearer of the instrument.
Parties: Maker and Payee. PN requires to be stamped.
Types: There are two
types of PN.
1. Demand
Promissory Note
2. Usance
Promissory Note (Payable at a later date)
Features of
Promissory Note
1. A Promissory
Note is unconditional
2. It is always
in writing a verbal promise to pay a specified sum of money to a
specified
person.
3. It is made
and signed by the debtor.
4. A promissory
note is made as payable in the Currency of the country
5. A promissory
note drawn for a specified duration should be adequately stamped According to
its value.
6. A promissory
note should be drawn for the payment of a specified sum.
Bill of Exchange:
(Sec 5)
A Bill of
Exchange is an instrument in writing, containing an unconditional order, signed
by maker, directing a certain person to pay, a certain sum of money only, to or
to the order of certain person or to the bearer of the instrument.
Parties: Drawer, Drawee [Acceptor] and Payee
Where no period
is mentioned on PN or BOE for payment, is payable on demand Where the BOE is
lost, the drawer is under obligation [Sec 45A] to issue a duplicate bill.
An instrument
can be made payable to two or more person’s jointly or payable to one of two or
one or some several payees.
Features of Bill
of Exchange
1. A bill must
be in writing, duly signed by its drawer accepted by its Drawee and properly
stamped as per Indian stamp act.
2. It must
contain an order to pay words like please pay rs.5000 on demand and oblige are
not used.
3. The order
must be unconditional.
4. The order
must be to pay money and money alone.
5. The sum
payable mentioned must be certain or capable of being made certain.
6. The parties
to bill must be certain.
Cheque (Sec 6)
A Cheque is a Bill of Exchange drawn on a specified
banker and not
expressed to be
payable otherwise than on demand. It is an unconditional order in writing be
drawn by a customer on his bank. Requesting the specifying bank to pay on demand
a certain sum of money to a person named in the cheque or to the bearer or to the
order of a stated person.
Parties to
Cheque: Drawer [account holder], Drawee [the bank where
the account is maintained] an payee [person named in the cheque]
Types of Cheque
1. Open
Cheque: - A cheque is called open
when it is possible to get cash over the counter at the bank.
2. Crossed
Cheque: - Since open cheque is
subject to risk of theft it is dangerous to issue such cheques. This risk can
be avoided by issuing other types of cheque called crossed cheque.
3. Bearer
Cheque: - A cheque which is Payable
to any person who presents it for payment at the bank counter is called bearer
cheque.
4. Order
Cheque: - An order cheque is one
which is payable to a particular person. In such a cheque the word bearer may
be cut out or cancelled and the word order may be written. The payee can
transfer an order cheque to someone else by singing his or her name on the back
of it.
Electronic Cheque
/ Truncated Cheque
In terms of
amendments to NI Act during Dec 2002, Cheque Means - the Cheque in Electronic
form and truncated cheque transacted during clearing process.
Electronic
Cheque: Electronic cheque is a cheque which contains the
exact mirror image of a paper cheque and is generated, written and signed in a
secured system ensuring the minimum safety standards with the use of digital
signature (with or without biometrics signature and asymmetric crypto system)
Cheque
Truncation: In truncation, the cheque is scanned and
electronic image, instead of physical cheque is transmitted in clearing cycle.
The cheque is truncated either by clearing house or by the bank. Immediately on
generation of an electronic image for transmission, further physical movement
of the cheque in physical form is substituted with such image.
Restrictions on Instruments
being made payable to bearer
RBI Act 1934 –
Section 31, states that no person other than RBI or Central Govt. can draw,
accept, make or issue any bill of exchange or promissory note payable to bearer
on demand. Section 31(2) puts a restriction on making a promissory note payable
to bearer by a person other than RBI/Central Govt.
Cheques in
Practice:
Form of Cheque:
1. NI Act does
not prescribe any specific form of a cheque.
2. Withdrawal
slips used by customers are not regarded as cheques.
3. Withdrawals
by customer by writing an application on a plain paper would not be unlawful
but banks do not permit due to inherent risks except under exceptional circumstances.
4. Cheques
drawn in different inks, scripts and hand writings: Cheques should be paid, if
otherwise in order and paying bank is in a position to read and understand the instructions
of drawer.
Date of Cheque:
Cheques without
date: Not payable. However, holder can complete it.
Cheque bearing a
date being holiday: Cheque can be paid.
Cheque bearing
date in National Saka calendar [Hindu] can be paid.
Cheque bearing
impossible date: e.g. cheque dated 31st Nov, 30th Feb can be paid
on 30th Nov or 28/29th Feb. However cheque dated 26th Jan can’t be paid on 25th
Jan.
Stale Cheque: The validity period of cheque is expired due to date mentioned on cheque
i.e. 3 months from the date.
Revalidation: After cheque becomes stale it can be revalidated any number of
times.
Ante Dated
Cheque: Cheque bearing date prior to actual date of
signing the cheque or prior to opening of account is valid and can be paid till
it becomes stale.
Post dated
cheque: Cheque bear a date not fallen due till
presentment. Such cheque becomes effective only from the date mentioned on
cheque.
Payment of such
cheque is not a payment in due course and additionally poses
following
risks:
- Drawer can stop
payment
- Death /
insolvency or lunacy of customer may happen
- Garnishee Order
may be served on account
Holder: [Sec 8]
The holder
means any person who is entitled in his own name to the possession thereof.
Legal right to possess is enough. A person who was entitled to receive payment
of an instrument and the instrument has been lost, will continue to be treated as
holder.
Quasi Negotiable
Instruments
Quasi
Negotiable Instruments are those Instruments which can be transferred by endorsement
and delivery but the transferee does not get a better title that of the transferor.
Therefore they cannot be classified as negotiable Instruments and hence the negotiable
Instruments act is not applicable to them.