Negotiable instrument

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  • 1.Negotiable Instrument INTRODUCTION A negotiable Instrument is a piece of paper which entitles a person to the sum of money stated therein and which is transferable from person to person by mere delivery or by mere endorsement and delivery and the person to whom it is so transferred gets it, without the defects in the title of transferor and becomes entitled to the money stated therein and also the further right to transfer it. Negotiable Instruments are different from other contractual relations, owing to the peculiar aspect of negotiability which gives such instruments a very wide acceptance and usage. Such an instrument can be transferred by endorsement or by delivery and the transferee gets a legal title to it which is not effected by or dependent upon the title of the transferor. Money or paper currency was developed as an alternative to the barter systems as a medium of exchange. However, with the growth of commerce and multiplicity of commercial transactions, the inherent risk and inconvenience of using the paper currency came to fore. Further, the dealings based on the money could not be credit based. Thus, an alternative in the form of negotiable instruments, which are basically instruments of credit that can be converted into money was developed. A negotiable instrument is one that embodies the characteristics of negotiability. A negotiable instrument is one, the property of which , is acquired by anyone who takes it as a bonafide, and for value, withstanding and defect of title in the person from whom he took it; from which it follows that an instrument cannot be negotiable unless it is such and in such a state that the true owner could transfer the contract or engagement contained therein by simple delivery of the instrument. Negotiable Instruments are essentially credit instruments with features of negotiability. Therefore, to clearly to understand them one should first understand their commercial character. Credit is the privilege to buy now and pay later. It also includes borrowing of money now with a view to pay later. Instruments which evidence or acknowledge such credits are called Credit Instruments. There are some credit instruments which are not negotiable. That is they are credit instruments but they do not have the features of negotiability. I.O.Us (I owe you) and postal orders are examples of such non-negotiable credit instruments. 1

2. Negotiable Instrument Of the negotiable instruments, some are negotiable under law (i.e. Negotiable Instruments Act of 1881).While the others are negotiable because of mercantile usage and custom. Bills of Exchange, Promissory Notes, and the cheques are the three instruments which are negotiable under law. A detailed discussion of the three instruments follows later, but at this stage a brief distinction between the three instruments is given. Suppose A sells goods worth Rs1000 to B on credit. The credit so allowed may be secured by means of different instruments which are given below: A may draw an unconditional order on B to pay the money himself or some other specified person. Such an order is called the bill of exchange. B may execute an unconditional promise to pay the money to A or his order. The instrument containing the promise is called promissory note. B may draw an unconditional order on his banker (with whom he has deposited money on current account) to pay A or his order a sum of Rs 1000 only. Such an order on the banker is called a cheque. Government of India Bearer Bonds and dividend warrants are examples of instruments which are negotiable according to usage and custom. This is so because Government of India Bonds are similar to promissory notes and dividend warrants are similar to cheques. The law relating to the negotiable instrument in India is governed by the Negotiable Instrument Act 1881and came into effect from the first day of March 1882. It is nothing but codification of English Common Law with such changes as may be necessary to give recognition to Indian usage and custom.The Act does not define the negotiable instruments. It merely states, vide Section 13, that a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or bearer. An instrument may be negotiable by law or by custom. The types of instruments which are negotiable by law are given in this section. There are other instruments recognized by custom to be negotiable like hundies. The distinct feature of negotiability can be summed by saying that all negotiable instruments are transferable but all transferable instruments are not negotiable. A sale of an immovable property represented by an 2 3. Negotiable Instrument instrument of sale is merely transferable and not negotiable. The legal principle is that no one can transfer a better title than what he himself has. All the defects in this title is transferred to the transferee. But in the case of a negotiable instrument a bonafide transferee for value gets a better title than what the previous transferor/s had. Willis in his book, The Law of Negotiable Securities, states that A Negotiable Instrument is property which is acquired by anyone who takes it as bonafide, and for value, not withstanding any defect of title in the person from whom he took it; from which it follows that an instrument cannot be negotiable unless it is such and in such a state that the true owner could transfer the contract or engagement contained therein by simple delivery of the instrument. 3 4. Negotiable Instrument NEGOTIABLE INSTRUMENTS-ACT 1881 The Banking Regulation Act, 1949, does not define Banking Operations. However, it lays down, inter alia, the activities which the banks cannot engage themselves in and for this purpose the Act lays down what constitutes Banking business. The business of banking constitutes acceptance, either for purpose of lending and/or investment, of the deposit payable on demand or otherwise and withdrawable by cheque, or order or otherwise. Accordingly, the major functions of Banks are (1) to mobilize the deposits from the public and (2) to utilize the deposits for the purpose of leading or investment or both. Banks mobilize two types of deposits (a) Demand Deposits payable on demand and (b) time Deposits which are payable after a certain time mutually agreed upon by the customer and the bank, at the time of depositing the money. Demand Deposits are placed in Current Account and Savings Bank Account, whereas Time deposits in Fixed Deposit (Term deposit), Recurring Deposit etc. The Demand Deposits placed in the Bank are withdrawable by cheque/withdrawal slip or even by a simple written letter containing instruction. Transfer of funds from accounts can be done by Telegraphic Transfer/Mail Transfer/Demand Drafts/Bankers cheques (Pay orders) etc. time Deposits can be withdrawn by discharging the receipts on maturity date. Time Deposits can also be withdrawn before maturity date, with banks consent, with penalty. Funds mobilized by the Bank are used for lending or both; the rate of interest on funds lent is higher than the rate of interest paid on deposits. The commercial Banks lend money by way of Overdrafts, Demand Loans, Cash Credit and through purchase or discounting of bills of exchange or hundies for the purpose of financing, trade, commerce, industry or any other business activity. Lending by the Banks is mostly against some security, - goods, book debts, land, livestock, inventory, shares, securities etc. When the advance is secured it is termed as a Secured advance and in cases where the advance is not backed by any security (also called Clean) it is classified as unsecured or clean advance 4 5. Negotiable Instrument CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS These instruments can be transferred from one person to another with ease and simplicity . In the case of instruments which are payable to bearer (they are called bearer instruments)mere delivery is sufficient, for instruments are payable to order (they are called order instruments) endorsement and delivery are required. Compare this with the difficulty involved in transferring, for example, a share in a joint stock company . A separate instrument of transfer has to be executed. Application must be made to the charges in the books of the company. This takes considerable time, apart from the labour and expense involved. Normally no one can convey a better title than what he has. In other words the transferee is also affected by the defects in the title of transferor to this negotiable instruments are an exemption. In the case of negotiable instruments, a holder in due course is not affected by the defects in the title of the transferor. He gets a better title than that of transferor. Actually there are many instruments which are easily transferable but they do not have this feature of negotiability. e.g. a Bill of Lading can be endorsed to another person, but the transferee is affected by the defects of the title in the transferor. That is why Bill of Lading and similar other instruments are referred to as quasi- negotiable instruments. It may not be out of place to mention that even a negotiable instrument can be deprived of this feature. For example, when a cheque is crossed with thee addition of words not negotiable, it is red signal for persons who want to obtain such an instrument. They must be absolutely sure of the title of transferor. In the case of assignment of a debt the assignee should give notice to the party liable to pay, otherwise the assignee cannot enforce his claim. But in the case of negotiable instruments the transferor need not give such notice to the party liable to pay. There are certain presumptions applicable to all negotiable instruments. One such is that the instrument has been obtained for consideration. 5 6. Negotiable Instrument The credit of every party who signs the instrument in one capacity or another is pledged to the instrument. That is why b