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Negotiable InstrumentsChapter 60

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Th e law on negotiable instruments operating in India iscalled t h e Negotiable Instruments Act, 1881.

It recognises t h ree main kinds of instruments promissory notes, bills of exc h ange and c h eques.

A negotiable instrument is made by a person and maych ange many h ands before being presented for

payment.

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P romissory Note, Bill Of Exc h ange And C h eque

A promissory note is an instrument in writing,undertaking to pay a certain sum of money to a

person, onh

is demand.

No person in India, ot h er t h an t h e ReserveBank of India or t h e Central Government, canmake or issue a promissory note payable to

bearer.

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A bill of exc h ange is an instrument in writing, directing a person to pay a certain sum of money to a person or to t h e bearer of t h e instrument.

No person ot h er t h an t h e Reserve Bank of India or t h e CentralGovernment can draw or accept a bill of exc h ange, payable to

bearer, on demand.

A ch eque payable to bearer on demand, can be drawn on a banker.

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P arties T o Negotiable Instruments

Th e person w h o draws up a bill of exc h ange or c h eque, iscalled t h e drawer of t h e instrument .

A person w h o is entitled to t h e possession of a negotiableinstrument in h is own name and to receive payment, iscalled t h e h older of t h e negotiable instrument .

Th e law introduces an additional dimension. It makes adistinction between t h e cases w h ere a person h as come toh old an instrument for a consideration, and w h ere h e h asnot paid any consideration.

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A person w h o h olds an instrument for aconsideration is called a h older in due course .

A h older in due course gets a better title t h anth e transferor.

Not only does a h older in due course get agood title, all persons after h im in t h e ch annel,get a good title.

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Negotiation And Disc h arge Of Negotiable Instruments

Th e act of transferring a negotiable instrument iscalled negotiation .

Th ere are two modes of negotiation of negotiableinstruments.

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Th e first is negotiation by mere delivery .

In contrast are instruments payable to order .An instrument payable to order can benegotiated by t h e h older by endorsement anddelivery.

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If t h e signature of t h e maker, drawer or acceptor isforged on a negotiable instrument, it is termed as aforged instrument .

A forged instrument h as no existence in law, and t h us,is a nullity.

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A forged endorsement h as no standing.

P rotection, h as, h owever, been granted to a paying banker w h o pays in due course, its customers c h eque payable to order and bearing a forged endorsement.

Disc h arge is th e word used for t h e end of t h e life of a negotiable instrument.

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Bank And Its Customer

A banker must h onour its customers c h eque.

If a bank dis h onours a c h eque wit h out reason, it h asto compensate its customer, t h e drawer.

A non-trader customer is entitled to general damages,

for t h e monetary loss. However, a trader or a businessman customer is entitled to claim specialdamages for t h e loss of credit and reputation.

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A c h eque is said to bounce or be dis h onoured by non- payment, w h en t h e banker defaults in its payment,even w h en h e is required to pay.

Bouncing of a c h eque can become an offence if a person h as been given a c h eque towards t h esettlement of some liability.

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