Unit 4 Negotiable Instruments Act: Structure

Legal Aspects of Business Unit 4
Sikkim Manipal University Page No. 76

Unit 4 Negotiable Instruments Act
Structure:
4.1 Introduction
Objectives
4.2 Negotiable Instruments Act
4.3 Definition & Features
4.3.1 Promissory Notes, Definition, Essentials
4.3.2 Bill of Exchange, Definition, Essentials
4.3.3 Cheque, Definition, Distinction between a Cheque and a Bill of
Exchange
4.3.4 Bank Draft and Hundis
4.4 Parties to Negotiable Instruments
4.4.1 Holder
4.4.2 Holder in Due Course
4.5 Negotiation of Negotiable Instruments
4.5.1 Definition
4.5.2 Modes of Negotiation
4.6 Dishonour and Discharge
4.6.1 Dishonour of Negotiable Instruments
4.6.2 Discharge of the Instrument and Parties
Self Assessment Questions I
4.7 Summary
4.8 Terminal Questions
4.9 Answers to SAQs and TQs
4.1 Introduction
Negotiable instruments are the most common credit devices used in modern
business. They are basically written promises or orders to pay money, and
may be transferred from person to person. The law relating to negotiable
instruments is contained in the Negotiable Instruments Act, 1881. The chief
objective of this Act is to legalise the system under which negotiable
instruments pass from hand to hand in negotiation like ordinary goods. The
Act is based on the principles of English Law. In fact the law of negotiable
instruments is not the law of a single country but of the whole of the
commercial world and the general rule of the law will be of the same pattern
in all the countries.
Objectives:
After studying this unit, you will be able to:
Explain the features of negotiable instruments.
Define Promissory note, bill of exchange and cheque.
Mention the parties to negotiable instruments.
4.2 Negotiable Instruments Act
The law relating to Negotiable Instruments is contained in the Negotiable
Instruments Act, 1881, as amended up-to-date. It deals with three kinds of
negotiable instruments, i.e., Promissory Notes, Bills of Exchange and
Cheques. The provisions of the Act also apply to hundis (an instrument in
oriental language), unless there is a local usage to the contrary. Other
documents like treasury bills, dividend warrants, share warrants, bearer
debentures, port trust or improvement trust debentures, railway bonds
payable to bearer etc., are also recognised as negotiable instruments either
by mercantile custom or under other enactments like the Companies Act,
and therefore, Negotiable Instruments Act is applicable to them.
4.3 Definition & Features
The word negotiable means transferable by delivery, and the word
instrument means a written document by which a right is created in favour
of some person. Thus, the term negotiable instrument literally means a
written document transferable by delivery.
According to Section 13 of the Negotiable Instruments Act, a negotiable
instrument means a promissory note, bill of exchange or cheque payable
either to order or to bearer. The Act, thus, mentions three kinds of
negotiable instruments, namely notes, bills and cheques and declares that
to be negotiable they must be made payable in any of the following forms:
a) Payable to order: A note, bill or cheque is payable to order which is
expressed to be payable to a particular person or his order. But it
should not contain any words prohibiting transfer, e.g., Pay to A only or
Pay to A and none else is not treated as payable to order and
therefore such a document shall not be treated as negotiable instrument
because its negotiability has been restricted. There is, however, an
exception in favour of a cheque. A cheque crossed Account Payee
only can still be negotiated further, of course, the banker is to take extra
care in that case.
b) Payable to bearer: Payable to bearer means payable to any person
whom so ever bears it. A note, bill or cheque is payable to bearer which
is expressed to be so payable or on which the only or last endorsement
is an endorsement in blank. The definition given in Section 13 of the
Negotiable Instruments Act does not set out the essential characteristics
of a negotiable instrument. Possibly the most expressive and all
encompassing definition of negotiable instrument had been suggested
by Thomas which is as follows:
A negotiable instrument is one which is, by a legally recognised custom
of trade or by 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 bonafide transferee for value, notwithstanding any
defect in the title of the transferor."
Characteristics of Negotiable Instruments:
An examination of the above definition reveals the following essential
characteristics of negotiable instruments which make them different from an
ordinary chattel:
1. Easy negotiability: They are transferable from one person to another
without any formality. In other words, the property (right of ownership) in
these instruments passes by either endorsement and delivery (in case it
is payable to order) or by delivery merely (in case it is payable to
bearer), and no further evidence of transfer is needed.
2. Transferee can sue in his own name without giving notice to the
debtor: A bill, note or a cheque represents a debt, i.e., an actionable
claim and implies the right of the creditor to recover something from his
debtor. The creditor can either recover this amount himself or can
transfer his right to another person. In case he transfers his right, the
transferee of a negotiable instrument is entitled to sue on the instrument
in his own name in case of dishonour, without giving notice to the debtor
of the fact that he has become holder.
3. Better title to a bonafide transferee for value: A bonafide transferee
of a negotiable instrument for value (technically called a holder in due
course) gets the instrument free from all defects. He is not affected by
any defect of title of the transferor or any prior party. Thus, the general
rule of the law of transfer applicable in the case of ordinary chattels that
nobody can transfer a better title than that of his own does not apply to
negotiable instruments.
Examples of Negotiable Instruments: The following instruments have
been recognized as negotiable instruments by statute or by usage or
custom: (i) Bills of exchange; (ii) Promissory notes; (iii) Cheques;
(iv) Government promissory notes; (v) Treasury bills; (vi) Dividend warrants;
(vii) Share warrants; (viii) Bearer debentures; (ix) Port Trust or Improvement
Trust debentures; (x) Hundis; (xi) Railway bonds payable to bearer, etc.
Examples of Non-negotiable Instruments: These are: (i) Money orders;
(ii) Postal orders; (iii) Fixed deposit receipts; (iv) Share certificates;
(v) Letters of credit.
4.3.1 Promissory Note-Definition & Essentials
Definition: According to Section 4 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.
Essentials of a Promissory Note: From the definition given in the Act it
follows that to be a valid promissory note an instrument must fulfill the
following essential requirements:
1. It must be in writing: A promissory note has to be in writing. An oral
promise to pay does not become a promissory note. The writing may be
on any paper, on any book. It may be in pencil or in ink and includes
printing or typing. No particular form of words is necessary, even a
promise contained in a letter will suffice, provided the other requirements
of Section 4 are complied with. The following is the usual form of a
promissory note:
2. It must contain a promise or undertaking to pay: There must be a
promise or an undertaking to pay. The undertaking to pay may be
gathered either from express words or by necessary implication. A mere
acknowledgement of indebtedness is not a promissory note, although it
is valid as an agreement and may be sued upon as such.
3. The promise to pay must be unconditional: A promissory note must
contain an unconditional promise to pay. The promise to pay must not
depend upon the happening of some uncertain event i.e., a contingency
or the fulfillment of a condition. If an instrument contains a conditional
promise to pay, it is not a valid promissory note.
4. It must be signed by the maker: It is imperative that the promissory
note should be duly authenticated by the signature of the maker.
5. The maker must be a certain person: The instrument itself must
indicate with certainty who is the person or are the persons engaging
himself or themselves to pay.
6. The payee must be certain: Like the maker the payee of a promissory
note must also be certain.
7. The sum payable must be certain: For a valid promissory note it is
also essential that the sum of money promised to be payable must be
certain and definite.
Rs. 1,00,000 Udupi 15-11-2006
Sixty days after date I promise to pay to Mr. P. S. Rao or order
the sum of rupees one lakh only with interest thereon at 12 per
cent per annum for value received.
Sd.
Stamp
M. D. K. Kini
8. The amount payable must be in legal tender money of India: A
document containing a promise to pay a certain amount of foreign
money or to deliver a certain quantity of goods is not a promissory note.
9. Other formalities: Though it is usual and proper to state in a note the
place where it is made and the date on which it is made but their
omission will not render the instrument invalid. But a promissory note
must be properly stamped as required by the Indian Stamp Act and each
stamp must also be duly cancelled. The makers signature with the date
across the stamp cancels the stamp effectively. Although an unstamped
or inadequately stamped promissory note is invalid, but the amount of
loan can be recovered if proved otherwise.
4.3.2 Bill of Exchange-Definition & Essentials
Definition: Section 5 of the Negotiable Instruments Act defines a bill of
exchange as follows: 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.
Parties to a bill of exchange: There are three parties to a bill of exchange
viz., drawer, drawee and payee. The person who makes the bill is called the
drawer. The person who is directed to pay is called the drawee. The
person to whom the payment is to be made is called the payee. The
drawer, or if the bill is endorsed to the payee, the endorsee, who is in
possession of the bill is called the holder. The holder must present the bill
to the drawee for his acceptance. When the drawee accepts the bill, by
writing the words accepted and then signing it, he is called the acceptor.
Drawee in case of need: Sometimes the name of another person may be
mentioned in a bill of exchange as the person who will accept the bill, if the
original drawee does not accept it. Since another person so named is to be
approached in case of need, he is known as drawee in case of need.
Acceptor for honour: When a bill of exchange has been noted or protested
for non-acceptance or for better security and any person accepts it supra
protest for honour of the drawer or of any one of the endorsers, such person
is called an acceptor for honour.
Essentials of a Bill of Exchange: To be a valid bill of exchange an
instrument must comply with the requirements of the definition given in
Section 5, which are as follows:
1. It must be in writing.
2. It must contain an order to pay. A mere request to pay on account will
not amount to an order.
3. The order to pay must be unconditional.
4. It must be signed by the drawer.
5. The drawer, drawee and payee must be certain.
6. The sum payable must be certain.
7. The bill must contain an order to pay money only.
8. It must comply with the formalities as regards date, consideration,
stamps, etc.
Specimen of a Bill of Exchange:
Rs. 1,00,000 New Delhi, 15 November 2006
Three months after date pay to C or order the sum of rupees
one lakh only, for value received.
To Sd.
Alok, 135 Sadar Bazar, Delhi
Stamp
Basha
Accepted
Sd/- Alok
4.3.3 Cheque- Definitions & Distinction between a Cheque and a Bill of
Exchange
Definition: A cheque is a bill of exchange drawn on a specified banker and
not expressed to be payable otherwise than on demand. Thus, a cheque is
a bill of exchange with two distinctive features, namely: (i) it is always drawn
on a bank, and (ii) it is always payable on demand.
Distinction between a Cheque and a Bill of Exchange: Although a
cheque, being a species of a bill of exchange, must satisfy almost all the
essentials of a bill, e.g., signed by the drawer, containing an unconditional
order, to pay a certain sum of money, to the order of a person or the bearer,
etc., yet there are few points of difference between the two, namely:
1. A cheque is always drawn on a banker, while a bill may be drawn on
any person, including a banker.
2. A cheque can only be drawn payable on demand, whereas a bill may
be drawn payable on demand or on the expiry of a certain period after
date or sight.
3. A cheque drawn payable to bearer on demand is valid but a bill drawn
payable to bearer on demand is absolutely void and illegal.
4. A cheque does not require any acceptance by the drawee before
payment can be damanded. But a bill requires acceptance by the
drawee before he can be made liable upon it.
5. A cheque does not require any stamp, whereas a bill of exchange must
be properly stamped.
6. Three days of grace are allowed while calculating the maturity date in
the case of time bills (i.e., bills drawn payable after the expiry of a
certain period). Since a cheque is always payable on demand, there is
no question of allowing any days of grace.
7. Unlike cheques, a bill of exchange cannot be crossed.
8. Unlike cheques, the payment of a bill cannot be countermanded by the
drawer.
9. Unlike bills, there is no system of Noting or Protest in the case of a
cheque.
10. The drawer of a bill is discharged from liability, if it is not duly presented
for payment, but the drawer of a cheque will not be discharged by delay
of the holder in presenting it for payment, unless through the delay, the
drawer has been injured, e.g., by the failure of the bank the drawer has
lost the money which would have otherwise discharged the amount of
the cheque. However, where the drawer is so discharged, the payee
may rank as creditor of the bank for the amount of the cheque.
4.3.4 Bank Draft and Hundis
A bank draft is an order issued by one bank on another bank or on its own
branch (usually drawn on its own branch) instructing the latter to pay a
specified sum of money to a specified person or his order. It is a negotiable
instrument and is very much like a cheque, with the following distinctions:
a) It can be drawn only by a bank on another bank or on its another branch
and not by an individual as in the case of a cheque.
b) It cannot so easily be countermanded as a cheque.
c) It cannot be made payable to bearer.
Hundis: Hundis are negotiable instruments written in Hindustani language.
Sometimes they are in the form of promissory notes but usually they are like
bills of exchange in form and substance. The provisions of the Negotiable
Instruments Act apply to Hundis unless there is a local usage to the
contrary. They are quite popular among the Indian merchants from the very
old days.
4.4 Parties to Negotiable Instruments
4.4.1 Holder:
The holder of a negotiable instrument means any person entitled to the
possession of the instrument in his own name and to receive or recover the
amount due thereon from the parties liable thereto. Thus, in order to be
called a holder a person must satisfy the following two conditions:
1. He must be entitled to the possession of the instrument in his own
name. Actual possession of the instrument is not essential. What is
required is a right to possession under some legal or valid title. If a
person is in possession of a negotiable instrument without having a right
to possess the same, he cannot be called the holder. Thus, a thief, or a
finder on the road, or an indorsee under a forged indorsement, although
may be having the possession of the instrument, cannot be called its
holder because he does not acquire legal title thereto and hence is not
entitled in his own name to the possession thereof.
2. He must be entitled to receive or recover the amount due thereon from
the parties liable thereto. In order to be called a holder the person must
have the right to receive or recover the amount of the instrument and
give a valid discharge to the payer. Thus, one may be the bearer or the
payee or indorsee of an instrument but he may not be called a holder if
he is prohibited by a court order from receiving the amount due on the
instrument.
4.4.2 Holder in due course
The holder in due course means any person who for consideration became
the possessor of a negotiable instrument if payable to bearer, or the payee
or indorsee thereof if payable to order, before the amount mentioned in it
became, payable, and without sufficient cause to believe that any defect
existed in the title of the person from whom he derived his title. Thus, in
order to be called a holder in due course a person must possess the
following qualifications:
1. He must be a holder i.e., he must be entitled to the possession of the
instrument in his own name under a legal title and to recover the amount
thereof from the parties liable thereto.
2. He must be a holder for valuable consideration i.e., there must be some
consideration to which law attaches value. The consideration, however,
need not be adequate. A donee, who acquires title to the instrument by
way of gift, is not a holder in due course for want of consideration,
although he is a holder. The consideration must also be lawful.
3. He must have become the holder of the negotiable instrument before its
maturity. The holder who acquires a negotiable instrument after maturity
cannot be a holder in due course. In case of instruments payable on
demand, e.g., a cheque, he must have taken the instrument within a
reasonable time of its issue.
4. He must take the negotiable instrument complete and regular on the
face of it. It is the duty of every person who takes a negotiable
instrument to examine its form and contents thoroughly, for if it contains
any material alteration which has not been confirmed by the drawer
through his signature, or if it is incomplete, say, drawers name is not
there or it is not properly stamped, he will not become a holder in due
course.
5. He must have become holder in good faith without having sufficient
cause to believe that any defect existed in the title of the transferor. He
must exercise great care and take all necessary precautions in finding
out if the transferors title was defective. He must take the instrument
without any negligence on his part.
4.5 Negotiation of Negotiable Instruments
The process of transferring the title or ownership of negotiable instruments
is called negotiation.
4.5.1 Definition
According to Section 14, When a promissory note, bill of exchange or
cheque is transferred to any person, so as to constitute that person the
holder thereof, the instrument is said to be negotiated. Thus negotiation
implies a transfer of negotiable instrument so as to constitute the transferee
a holder thereof, who should be entitled in his own name to sue on the
instrument and recover the amount due thereon. There must be a transfer
with intention to pass title and in the manner prescribed by the Act.
Every maker, drawer, payee or indorsee, and if there are several makers,
drawers, payees or indorsees, all of them jointly can negotiate an
instrument, provided the negotiability of such instrument has not been
restricted or excluded by any express words used in the instrument. But the
maker, drawer, payee or indorsee cannot negotiate an instrument, unless he
is in lawful possession or is holder thereof.
A negotiable instrument may be negotiated until payment or satisfaction
thereof by the maker, drawee or acceptor at or after maturity, but not after
such payment or satisfaction. Thus, negotiability of an instrument stops only
when the party ultimately liable thereon pays it at or after maturity. It can be
negotiated even at or after maturity if it has not been paid or satisfied. A
payment before maturity does not stop negotiability. The acceptor or maker
who receives the instrument after payment but before maturity may reissue
it.
4.5.2 Modes of Negotiation
There are two ways of negotiating or transferring a negotiable instrument:
1. Negotiation by mere delivery: A negotiable instrument payable to
bearer is negotiable by delivery thereof. Thus, a bearer instrument may
be negotiated by delivery only. It does not require signature of the
transferor (i.e. indorsement) and the transferee becomes the holder
thereof by mere possession. The transferor of a bearer instrument is not
liable on its dishonour.
2. Negotiation by indorsement and delivery: A negotiable instrument
payable to order is negotiable by the holder by indorsement and delivery
thereof. Thus the negotiation of an order instrument requires two
formalities, namely, first the holder should indorse it and then deliver to
his indorsee.
In both the modes of negotiation stated above, delivery with the intention of
transferring the ownership of the instrument to the transferee is essential.
Mere delivery without the intention of passing the property is not sufficient to
constitute a complete negotiation.
Indorsement:
Section 15 defines indorsement as follows: When the maker or holder of a
negotiable instrument signs the same, otherwise than as such maker, for the
purpose of negotiation, on the back or face thereof or on a slip of paper
annexed thereto, or so signs for the same purpose a stamped paper
intended to be completed as negotiable instrument, he is said to indorse the
same, and is called the indorser.
Thus, an indorsement consists of the signature of the holder usually made
on the back of the negotiable instrument with the object of transferring the
instrument. If no space is left on the back of the instrument for the purpose
of indorsement, further indorsements are signed on a slip of paper attached
to the instrument. Such a slip is called allonge and becomes part of the
instrument. The person making the indorsement is called an indorser and
the person to whom the instrument is indorsed is called an indorsee.
Kinds of Indorsements: Indorsements may be of the following kinds:
1. Blank or general indorsement: If the indorser signs his name only and
does not specify the name of the indorsee, the indorsement is said to be
in blank. The effect of a blank indorsement is to convert the order
instrument into bearer instrument which may be transferred merely by
delivery.
2. Indorsement in full or special indorsement: If the indorser, in addition
to his signature, also adds a direction to pay the amount mentioned in
the instrument to, or to the order of, a specified person, the indorsement
is said to be in full.
3. Partial indorsement: Section 56 provides that a negotiable instrument
cannot be indorsed for a part of the amount appearing to be due on the
instrument. In other words, a partial indorsement which transfers the
right to receive only a part payment of the amount due on the instrument
is invalid.
4. Restrictive indorsement: An indorsement which, by express words,
prohibits the indorsee from further negotiating the instrument or restricts
the indorsee to deal with the instrument as directed by the indorser is
called restrictive indorsement. The indorsee under a restrictive
indorsement gets all the rights of an indorser except the right of further
negotiation.
5. Conditional indorsement: If the indorser of a negotiable instrument, by
express words in the indorsement, makes his liability, dependent on the
happening of a specified event, although such event may never happen,
such indorsement is called a conditional indorsement.
In the case of a conditional indorsement the liability of the indorser would
arise only upon the happening of the event specified. But the indorsee can
sue other prior parties, e.g., the maker, acceptor etc., if the instrument is not
duly met at maturity, even though the specified event did not happen.
4.6 Dishonour and Discharge of Negotiable Instruments
4.6.1 Dishonour of Negotiable Instruments
A negotiable instrument may be dishonoured by (i) non-acceptance or
(ii) non-payment. As presentment for acceptance is required only in case of
bills of exchange, it is only the bills of exchange which may be dishonoured
by non-acceptance.
Dishonour by Non-acceptance:
A bill of exchange is said to be dishonoured by non-acceptance when the
drawee makes default in acceptance upon being duly required to accept the
bill.
Dishonour by Non-payment:
A promissory note, bill of exchange or cheque is said to be dishonoured by
non-payment when the maker of the note, acceptor of the bill or drawee of
the cheque makes default in payment upon.
Effect of Dishonour
As soon as a negotiable instrument is dishonoured (either by non-
acceptance or by non-payment) the holder becomes entitled to sue the
parties liable to pay thereon. The drawer of cheque, maker or note, acceptor
and drawer of bill and all the indorsers are liable severally and jointly to a
holder in due course. The holder must, however, give notice of dishonour
to all parties against whom he intends to proceed. He may (at his option)
also have the instrument noted and protested before a notary public.
4.6.2 Discharge of the Instrument and the Parties
The term discharge in relation to negotiable instruments has two
connotations, viz., (1) discharge of instrument, and (2) discharge of one or
more parties from liability on the instrument.
Discharge of the Instrument
A negotiable instrument is said to be discharged when it becomes
completely useless, i.e., no action on that will lie, and it cannot be
negotiated further. After a negotiable instrument is discharged the rights
against all the parties thereto comes to an end, and no party, even a holder
in due course, can claim the amount of the instrument from any party
thereto.
Discharge of the party primarily and ultimately liable on the instrument
results in the discharge of the instrument itself. For example, in the following
cases and instrument is deemed to be discharged:
1. When the party primarily liable on the instrument (i.e., the maker of the
note, acceptor of the bill or drawee bank) makes the payment in due
course to the holder at or after maturity. A payment by a party who is
secondarily liable does not discharge the instrument because in that
case the payer holds it to enforce it against prior indorser and the
principal debtor.
2. When a bill of exchange which has been negotiated is, at or after
maturity, held by the acceptor in his own right, the instrument is
discharged.
3. When the party primarily liable becomes insolvent, the instrument is
discharged and the holder cannot make any other prior party liable
thereon. Similarly, an instrument stands discharged when the primary
party liable is discharged by material alteration in the instrument or by
lapse of time making the debt time barred under the Limitations Act.
4. When the holder cancels the instrument with an intention to release the
party primarily liable thereon from the liability, the instrument is
discharged and ceases to be negotiable.
Discharge of One or More Parties
A party is said to be discharged from his liability when his liability on the
instrument comes to an end. When only some of the parties to a negotiable
instrument are discharged, the instrument continues to be negotiable and
the undischarged parties remain liable on it.
One or more parties to a negotiable instrument are are discharged from
liability in the following ways:
1. By cancellation: When the holder of a negotiable instrument
deliberately cancels the name of any of the party liable on the instrument
with an intent to discharge him from liability thereon, such party and all
indorsers subsequent to him, who have a right of action against the
party whose name is so cancelled, are discharged from liability. If the
name of an indorser has been cancelled then all the indorsers
subsequent to him will be discharged but those prior him will remain
liable. Where the cancellation is done under a mistake or without the
authority of the holder if will not discharge any party.
2. By release: If the holder of a negotiable instrument releases any party
to the instrument by any method other than cancellation of names (i.e.,
by a separate agreement of waiver, release or remission), the party so
released and all parties subsequent to him, who have a right of action
against the party so released, are discharged from liability.
3. By payment: When the party primarily liable on the instrument makes
the payment in due course to the holder at or after maturity, all the
parties to the instrument stand discharged.
4. By allowing drawee more than 48 hours to accept: If the holder of a
bill of exchange allows the drawee more than forty-eight hours, to
consider whether he will accept the same, all previous parties not
consenting to such allowance are thereby discharged from liability to
such holder.
5. By taking qualified acceptance: If the holder of a bill agrees to a
qualified acceptance all prior parties whose consent is not obtained to
such an acceptance are discharged from liability.
6. By not giving notice of dishonuour: Any party to a negotiable
instrument (other than the party primarily liable) to whom notice of
dishonour is not sent by the holder is discharged from liability as against
the holder, unless the circumstances are such that no notice of
dishonour is required to be sent.
7. By non-presentment for acceptance of a bill: When a bill of
exchange is payable certain period after sight, its holder must present it
for acceptance to the drawee within a reasonable time after it is drawn. If
he makes a default in making such presentment the drawer and all
indorsers who were liable towards such a holder are discharged from
their liability towards him.
8. By delay in presenting cheque: It is the duty of the holder of a cheque
to present it for payment within reasonable time of its issue. If he fails to
do and in the meanwhile the bank fails.
Self Assessment Questions I
1. The law relating to negotiable instruments is contained in
the...
2. The three kinds of negotiable instruments are.
3. The word negotiable means .
4. Payable to bearer means.
5. A bill, note or a cheque represents a
4.7 Summary
Negotiable instruments are basically written promises or orders to pay
money, and may be transferred from person to person.
A negotiable instrument means a promissory note, bill of exchange or
cheque payable either to order or to bearer.
A note, bill or cheque is payable to order which is expressed to be
payable to a particular person or his order.
Payable to bearer means payable to any person whom so ever bears
it.
Negotiable instruments are easily transferable from one person to
another without any formality.
A bonafide transferee of a negotiable instrument for value gets the
instrument free from all defects.
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.
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.
A cheque is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand.
The holder of a negotiable instrument means any person entitled to the
possession of the instrument in his own name and to receive or recover
the amount due thereon from the parties liable thereto.
When a promissory note, bill of exchange or cheque is transferred to
any person, so as to constitute that person the holder thereof, the
instrument is said to be negotiated.
4.8 Terminal Questions
1. Define negotiable instrument. What are its essential characteristics?
2. Define a promissory note. What are its essentials?
3. What is a bill of exchange? What are its elements?
4. Define a cheque. How it differs from a bill?
5. Explain the terms: (i) holder and (ii) holder in due couse.
6. What is an indorsement ? Explain different kinds of indorsement.
7. What is dishonour of a negotiable instrument?
4.9 Answers to SAQs and TQs
SAQs I
1. Negotiable Instruments Act, 1881
2. Promissory Notes, Bills of Exchange and Cheques.
3. Transferable by delivery
4. Payable to any person whom so ever bears it
5. Debt
Answers to TQs:
1. Refer to 4.3
2. Refer to 4.3.1
3. Refer to 4.3.2
4. Refer to 4.3.3
5. Refer to 4.4.1 & 4.4.2
6. Refer to 4.5.2
7. Refer to 4.6.1

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Legal Aspects of Business Unit 4

Sikkim Manipal University Page No. 76

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