A negotiable instrument is a document which is signed that promises a sum of payment to the assignee or specified person. These instruments are considered to be written contracts that can be transferred from one person to the other. These are the transferable instruments.
The negotiable instruments are divided into two heads-By statue – Bills of exchange, Cheque and Promissory note
By usage – Banknote, draft, Share warrants, Bearers, Debentures, Dividend warrants and Treasury bills.
1. Bills of Exchange
Bills of exchange are an instrument in writing and also signed by the maker. There is an unconditional promise to pay certain sum of money only to, or to the order of a particular person or to the holder of instrument. According to sec. 5 of the Act an instrument in writing, containing an unconditional order, signed by the maker, directing a particular person to pay a particular sum of cash only to or to the order of, a particular person, or to the bearer of the instrument.
Parties to Bills of exchange
1. Drawer: The person who draws the bill.
2. Drawee: The drawee is the person in whose favour the bill is drawn.
3. Acceptor: The person by whom the bill of exchange is accepted. The acceptor is considered to be the drawee but a stranger may accept it too.
4. Payee: Either the stranger or a drawee may be a payee, which is the person to whom bills are payable.
5. Holder: The payee of the bill is generally the holder. It can also be some other person to whom the payer endorses the bill. The bearer himself is the holder, in case of bearer bills.
6. Endorser: When the holder endorses the bill to another person, he becomes an endorser.
7. Endorsee: The person to whom a bill is endorsed by the endorser.
Forms of Bills of Exchange
1. Trade Bills
When there is a trade transaction trade bill comes into play. For example, when X sells goods to Y, he may draw a bill directing Y to pay later on. This bill will contain the specific date as well as the price on which it is payable.
2. Accommodation Bills
Accommodation bills and trade bills are different from each other as they do not involve any transactions of trade. The consideration for the exchange of goods or services is not important. In accommodation bills, one person lends his name to some other person or friend. This is similar to loan transactions.
3. Inland Bills
A bill of exchange can be considered as an inland instrument when the two conditions are fulfilled. Firstly, the bill must be drawn as well as payable within India. Secondly, it may also be drawn in India upon an India resident but payable in a foreign country.
4. Foreign Bills
The bills which are not the inland bills are considered to be the foreign bills. The foreign bills require three copies and the rules which govern them are different.
2. Cheque
A cheque is a bill of exchange drawn on a specified banker and payable on demand and it can be in electronic form also. According to sec. 6 of the Act a cheque is an order by the customer of the bank directing his banker to pay on demand, the required amount, to or to the order of the bearer or the person named.
Parties to cheque
There are two parties that are drawer and drawee to a cheque. The person who draws the cheque is a drawer and the person and the person on whom it is drawn is a drawee. Apart from these, the person who is liable to pay the amount on the cheque is a payee. Furthermore, there can also be a holder who is usually the first payee. When the cheque is endorsed by the holder to someone, then he becomes the endorsee. On the contrary, an endorsee is a person to whom the cheque is endorsed.
Essential elements of cheque
1. The main elements of cheques are that they’ve drawn on a banker and are payable on demand. There is no need of any formal acceptance.
2. Cheques are often payable either to the drawer himself or to a bearer on demand. Hence, there might be two or more parties to a cheque depending on the situation.
3. Another feature of cheques is that they are usually valid only for six months. There is no need of any stamping as usually other negotiable instruments do.
3. Promissory Note
Promissory Note is an instrument in writing with an unconditional promise to pay a certain amount of money to, or to the order of, a certain person or to the bearer and signed by the maker. It creates a debt on the maker of the promissory notes. According to sec. 4 of the Act a note is an instrument in writing (not being a bank or a currency note) containing an unconditional undertaking, signed by the maker to pay a particular sum of cash, or to the order of, a particular person or to the bearer of the instrument.
Parties of Promissory Note
All promissory notes constitute three primary parties. These include the drawee, drawer and payee.
Drawer: A drawer is a borrower or debtor who promises to pay the debt to the moneylender.
Drawee: Is a person, in whose favour the note is prepared. A person is the creditor and provides goods or services on credit or lends capital.
Payee: A payee is someone to whom the payment is made.
Features of Promissory Note
1. Pay Defined Amount – It’s a promise to pay the money on a particular time or when demanded. The specified amount can neither be subtracted or added.
2. Agreement – A promissory should be in writing, and an oral promise to pay money isn’t accepted.
3. Detailed Information – The note has all the specified information including the name of the drawer and payee, date of maturity, terms of repayment, issue date, name of the drawee, name, and signature of the drawer, principal amount, and the rate of interest, etc.
4. Unconditional Promise – The promise to pay a particular amount of money must be absolute in all cases. In such notes, a conditional guarantee isn’t accepted.
This Article Written by Chhavi Arora, Student of Bharati Vidyapeeth University.
Also Read – What Are The Types Of Negotiable Instruments?
