Negotiable instruments have been used since time immemorial and are clearly not a new phenomenon. Negotiable instruments are crucial in business transactions. The Indian Statute concerning negotiable instruments has an explicit mention of promissory notes, bill of exchange and cheque. It is safe to say that amongst the three, in present times, cheque is the most widely used negotiable instrument not only in India but all over the world. An important characteristic possessed by most of these negotiable instruments is that they are freely transferable.
History of Negotiable Instruments Act, 1881
The Negotiable Instruments Act, 1881 was drafted by the third Law Commission. Due to some objections that were received, it was needed to be redrafted in the year 1877. The bill was again revised after some time. It was referred to the New Law Commission in 1880 and after a few recommendations by the aforesaid commission, the Bill was revised again. It was then sent to the original committee which took quite a few recommendations into considerations. The draft was successfully passed in 1881.
Several amendments have been made since then. In fact, this Act was beneficial in providing a remedy against defaulters of a particular negotiable instrument as a criminal remedy in the form of remedy was added in the Act.
Meaning of Negotiable Instrument
In this context, the term negotiable stands for transferable by delivery. The term instrument refers to a written document that creates a right in favour of some person. Hence, we can say that the term negotiable instrument refers to a written document that is transferable by delivery. It includes a promise to pay a specific amount to the bearer of the negotiable instrument. Such a payment could be by demand or on a set time to the bearer. Such a document is signed and creates a legal right to use for the holder of the instrument.
Therefore, it can be understood that a negotiable instrument is always written. Negotiable Instrument being a transferable document, becomes easy to use and is often used by businesses due to the ease in transaction and for many other reasons.
Section 13 of the Negotiable Instruments Act, 1881
According to Section 13 of the Negotiable Instruments Act, 1881 a negotiable instrument is a promissory note, cheque or bill of exchange payable either to the order or to the bearer. The transferable nature of the Negotiable makes it possible to transfer and give a legal right to the party who has received such an instrument. Hence, the holder of the instrument could either fulfil his own payment that was due to him or transfer it to some other person. A similarity between negotiable instruments and contracts is that both documents must have the official signatures of the issuer of the document.
Commonly Used Terms And Their Meanings
Before diving deeper into the kinds of Negotiable Instruments, it necessary to understand the meaning of the following words that are commonly used in the Negotiable Instruments Act, 1881.
1. Maker – Maker is the person who makes a particular promissory note. The maker pays the amount mentioned. In case of any default, the maker would have to compensate for the loss to the party who has suffered damage due to such default in payment.
2. Drawer – Drawer is the one makes the bill of exchange or cheque. In case of dishonour by the drawee or acceptor to compensate the holder, the drawer of that particular bill of exchange becomes bound, provided due notice of dishonour has been given to, or received by the drawer.
3. Drawee – Drawee is the one who is directed by the drawer to make the payment.
4. Acceptor – Acceptor is the one who accepts the task of making the payment as stated in the Bill of Exchange. The drawee once accepts it, he becomes the acceptor. But another party could also be an acceptor to a bill of exchange.
5. Payee – Payee is the person who ought to receive the payment and is mentioned in the instrument. In case of Bill of exchange, there is a possibility that the drawer may be the payee.
6. Holder – Holder can be the payee or the person to whom the instrument may have been endorsed.
7. Holder in due course – A Holder in due course is not the same as a holder. A holder in due course is a person who gets the instrument for consideration. Such a person receives the said instrument in good faith. He can sue all prior parties.
8. Endorsement – The holder, by signing on the back of the instrument, could transfer the ownership. This is a simple act of endorsement.
Types of Negotiable Instrument
There are several types of negotiable instruments. The Act primarily concerns itself with Bill of Exchange, Promissory Note and a Cheque. For the purpose of this article, we may restrict ourselves to the study of Promissory Notes and Bill of Exchange.
Meaning of Promissory Note
We can find the definition of Promissory Note in Section 4 of the Act. Section 4 states, “A “promissory note” is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.” It can be understood that a promissory note is a type of unconditional promise, in a written form. It is made by the debtor as a promise to pay a specific amount of money to the creditor at a certain date that is specified.
The number of parties involved are two i.e., the drawer and the payee. In case of dishonour, there is no need for notice to be given. It is not payable to the bearer on demand. The note should possess a stamp as required by the Indian Stamp Act.
Features of Promissory Note
- A promissory note must be an unconditional undertaking to make payment. The payment must not be dependant upon some contingencies.
- It must be clear as to who is the maker of the promissory note and there should be no ambiguity regarding the same. Similarly, in case of the payee, the promissory note should indicate the person to whom the promise has been made.
- The said amount must be specified in it. The money should be legal tender money.
- It should be in writing and it is necessary for it to be signed by the maker or his authorised agent
- It should be payable to a bearer or to the order of a specific person.
- The note must contain every detail that is needed to be mentioned like the date of maturity, name of the parties involved, signature, the amount that is to be paid, rate of interest, etc.
Advantages of Promissory Note
- It is a simple document and is easily understandable.
- It is advantageous when a loan has simple payment terms.
Disadvantages of Promissory note
- The main shortcoming of a promissory note is that it is not apt for situations that are complex and have extensive terms and conditions.
Bill of exchange
Section 5 of Negotiable Instruments Act, 1881 states “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”. Similar to a promissory note, it is an unconditional order. It directs to make payment of a defined amount to order of certain person or to the bearer of the instrument. It is necessary for the Bill of exchange to be in writing.
Features of a Bill of Exchange
- A bill of exchange is always in writing and is drawn by a drawer who must always sign the instrument.
- There are three parties to a bill of exchange i.e., the drawer, acceptor or drawer and payee (drawer may be the payee).
- In case of its dishonour, due notice has to be given by the holder to the drawer.
- It is necessary that the amount is specified and is certain.
- Bill of exchange must be an express order and not a request. It must be unconditional.
- An essential feature is that the due date is always specified.
Advantages of Bill of Exchange
- Bill of exchange is simple and is easily transferable.
- It is a hassle free and can be easily understood by all. It can be considered as an expedient mode of credit.
- Bill of exchange provides the date on which the payment is to be made and also provides a grace period of three days.
- The terms and conditions like the amount, sum of money to paid, due date etc are expressly mentioned which gives no rise to future ambiguity.
Disadvantages of Bill of Exchange
- It must be accepted by the drawee for it to be binding.
- The drawee is legally bound to pay the money on the due date.
Difference Between Promissory Note And Bill of Exchange
The Difference between promissory note and a bill of exchange are as follows:
1. Number of parties: In case of a promissory note, only two parties are involved i.e., the maker and the payee. The maker can be considered to be a debtor, while the payee is the creditor. In case of a bill of exchange, primarily, three parties are involved i.e., the drawer, the drawee and the payee. Nonetheless, in case of a bill of exchange, it is pertinent to note that the drawer and the payee could be the same person.
2. Payment to the maker: An extremely important point of difference between a promissory note and bill of exchange is that the former cannot be made payable to the maker himself, but the later can be made to the drawer, where the drawer and the payee may be the same person.
3. Unconditional promise and order: In case of a promissory note there is an unconditional promise by the maker of the instrument to make payment to the payee or his order. In case of a bill of exchange, there lies an unconditional order to the drawee to pay according to the direction of the drawer.
4. Prior acceptance: In case of a promissory note, prior acceptance by the maker is not a pre requisite. On the other hand, a bill of exchange is payable after sight must be accepted by the drawee or someone else on his behalf, before it can be presented for payment.
5. Liability: In case of a promissory note, the liability of the maker is primary and absolute. On the contrary, with regards to a bill of exchange, the liability of the drawer is secondary and conditional.
6. Relation: In case of the promissory note, the maker is in immediate relation with the payee. On the other hand, in case of a bill of exchange, the drawer is in immediate relation with the acceptor, not necessarily the payee.
7. Protest for dishonour: Foreign bill of exchange must be protested for dishonour when such protest is required to be made by the law of the country where they are drawn, but no such protest is needed in case of a promissory note.
8. Notice of dishonour: In case of dishonour of a bill of exchange, the holder must give the notice of dishonour to the drawer and the intermediate endorsers. Such a formality is not required in case of a promissory note.
The study of negotiable instruments is extremely crucial from a legal perspective. Most individuals and businesses resort to the use of negotiable instruments like cheques instead of cash. This has led to the popularity of the concept of “cheque bounce” in recent times. Nonetheless, the study of bill of exchange and promissory notes is equally important. These instruments have a clear mention of certain terms and create a legal obligation upon the person who ought to make payment.
The Negotiable Instruments Act, 1881
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