Negotiable instrument act 1881 & Types of Negotiable Instrument

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Transcript of Negotiable instrument act 1881 & Types of Negotiable Instrument



Features of a Negotiable InstrumentIt is a written document by which certain rights are created and or/ transferred to a certain person.It must be signed by the maker or the drawer as the case may be.There must exist the unconditional order or promise to pay.There must be a time mentioned for such payment.In particular cases, the drawees name should be specifically mentioned.

Elements of NegotiabilitySection 13 defines a negotiable instrument.The definition does not bar the inclusion of other documents which have the element of negotiability.Freely transferable.Can be transferred infinitum.

Negotiable Instruments According to sec. 13(a) of the Act, negotiable Instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer, whether the word order or bearer appear on the instrument or not. Thus, the term, negotiable instrument means a written document which creates a right in favour of some person and which is freely transferable. Although the Act mentions these three instruments( such as a promissory note, a bill of exchange and cheque).

Characterstics Of A Negotiable Instrument1. Transferability:It is easily transferable from person to person by mere delivery or by endorsement and delivery. But all the transferable instruments are not negotiable instruments, but all negotiable instruments are transferable.2.Title:The transferee of a negotiable instrument is known as holder in due course.3.Rights:The transferee of the negotiable instrument can sue in his own name, in case of dishonour. A negotiable instrument can be transferred any number of times till its maturity.

Cont:4. Presumptions:Certain presumptions apply to all negotiable instruments e.g., a presumption that consideration has been paid under it. It is not necessary to write in a promissory note the words for value received or similar expressions because the payment of consideration is presumed.5.Prompt Payment:A negotiable instrument enables the holder to expect prompt payment because a dishonour means the ruin of the credit of all the persons who are parties to the instrument.

Types Of Negotiable Instrument As per sec. 13 othersThe Negotiable Instruments Act states that a negotiable instrument is a promissory note, bill of exchange or cheque payable either to order or to bearer. Negotiable Instruments recognized by Statute are:Promissory noteBills of exchangeCheques Negotiable instruments recognized by usage or custom are:HundisShare warrantsDividend warrantsBankers draftCircular notesRailway receipts

Promissory noteSec. 4 of the Act defines, A promissory note is an instrument is an instrument in writing( not being a currency note or bank note) containing an unconditional undertaking, signed by the maker, to pay a certain person, or to the bearer of the instruments.

Essentials of Promissory note1. It must be in writing: A mere verbal promise to pay is not a promissory note. The method of writing( either ink or pencil or printing, etc.) is unimportant, but it must be in any form that cannot be altered easily.2.It must certainly an express promise or clear understanding to pay: There must be an express undertaking to pay. A mere acknowledgement is not enough.3. promise to pay must be unconditional: A conditional undertaking destroys the negotiable character of an otherwise negotiable instrument. Therefore, the promise to pay must not depend upon the happening of some outside contingency or event. It must be payable absolutely.4. it should be singed by the maker The person who promise to pay must sign the instrument even though it might have been written by the promisor himself.5.The maker must be certain: The note self must show clearly who is the person agreeing to undertake the liability to pay the amount

Cont:6. The payee must be certain:The instrument must point out with certainty the person to whom the promise has been made.7. The promise should be to pay money and money only:Money means the legal tender money and not old and rare coins8. The amount should be certain:One of the most important characteristics of a promissory note is certainly-not only regarding the person to whom or by whom payment is to be made but also regarding the amount.There is a promise to pay certain amount with interest at a specified rate. the amount is to be paid at an indicated rate of exchange9. Other Formalities: The other formalities regarding number, place, date, consideration etc. though usually found given in the promissory notes but are not essential in law

Types of Promissory NotePersonal Promissory Notes: These are used to document a personal loan from a friend or family member.Although many people tend to avoid legal writings when dealing with trusted acquaintances, the use of a promissory note actually demonstrates good faith and effort on behalf of the borrower.Commercial: Promissory notes are almost always a requirement when dealing with commercial lenders such as a bank.Most commercial promissory notes are similar to personal notes, although they can be stricter.If the borrower defaults, the commercial lender is usually entitled to immediate repayment on the balance.Further default can result in a lien being placed on the borrowers property in order to obtain payments

Cont:Real Estate: These are similar to commercial notes with respects to the default consequences.In this case, the lien would be placed on the home; if a mortgage is involved, the information will become public record and can affect the borrowers credit and/or purchasing abilities in future transactionsInvestments: In a business setting, promissory notes are sometimes exchanged in order to raise capital.The note functions much like currency, as it has legal value and can be traded.Promissory notes for investments often involve statements dealing with returns of investment for a certain time period

Bills of exchangeSection 5 of the Act defines, A bills of exchange is an instrument in writing 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 bill of exchange, therefore, is a written acknowledgement of the debt, written by the creditor and accepted by the debtor. There are usually three parties to a bill of exchange drawer, acceptor or drawee and payee. Drawer himself may be the payee.

Mechanics of bill financing sale of goods drawing of bill & acceptance

submitting release of bill of bill Finalization Of accounts Making payment of bills Seller/ drawerBuyer/ drwaeeBanker

Essential conditions of a bills of exchangeIt must be in writing.It must be signed by the drawer.The drawer, drwaee & payee must be certain.The sum payable must also be certain.It should be properly stamped.It must contain an express order to pay money and money only.Number , date , place are not essential.

Types of bills of exchange

Inland & Foreign billsInland bill:It is drawn in India on a person residing in India, whether payable in or outside India, orIt is drawn in India on person residing outside India but payable in India.The following are the inland bills:A bill is drawn by a merchant in Delhi on a merchant in Chennai. It is payable in Mumbai the bill is an inland bill.A bill is drawn by a Delhi merchant on a person in London but is made payable in India. This is an inland bill.

Foreign billA bill drawn outside India & made payable in India.A bill drawn outside India on any person residing outside India.A bill drawn in India on a person residing outside India and made payable outside India.

Distinction between promissory note & Bill of Exchange Basis of difference Promissory note Bill of exchangeNumber of partiesThere are two parties-The maker(debtor),& the payee( creditor).There are three parties-Drawer, drawee & payee:Although any two out of the three may be filled by one and the same person.Payment to the makerA promissory note cannot be made payable the maker himself.Bill of exchange to the drawer and payee or drawee and payee may be the same person.Conditional instrumentit cannot be made conditionally.A bill also cannot be drawn conditionally.Nature of liabilityThe liability of maker is primary & absolute.The liability of a maker of a bill of exchange is secondary and conditional. Maker The maker of a promissory note is in a position of a debtor who promises to pay the sum specified in it.The maker of a bill of exchange is in a position of a creditor who orders to pay the sum specified in it.

Cheques Section 6 of the Act defines, A cheque is a bills of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. A cheque is bill of exchange with two more qualifications ,namely, it is always drawn on a specified banker, and It is always payable on demand. Consequently all cheque are bill of exchange, but all bills are not cheque. A cheque must satisfy all the requirements of a bill of exchange; i.e; must be signed by the drawer, and must contain an unconditional order on a specified banker to pay cer