INTRODUCTION

A negotiable instrument is a piece of paper which entitles a person to a sum of money and which is transferable from person to person by mere delivery or by endorsement and delivery. The person to whom it is so transferred becomes entitled to the money also to the right to further transfer it. Thus, negotiable instruments play a major role in the trade world.

The maxim of law nemo dat quod non-habet (no one can transfer a better title than he himself has). This is the general principle relating to transfer of property is that no one can become the owner of any property unless he purchases it from the true owner or with his authority.

Before delving deeper into the “Negotiable Instrument Act”, let us see some of the basic concepts that would be required for a better understanding of the statute. Negotiable Instruments play an important role in financial transactions. A negotiable instrument is a signed written document. The purpose of this document is to transfer the specific amount of money to the assigned person. 

The instrument bears the promise to pay the sum of money at an assigned future date or on-demand as the case may be. One of the common examples that we can see in our day-to-day life is a draft that is the specific amount of money payable by the payer or the personal check. There are no certain set of fixed conditions to consider a document as the negotiable instrument; however, for an instrument to be negotiable, it must be signed with a mark or signature, by the maker of the instrument that is the one who issues drafts. The person who promises the amount of money is known as the drawer of funds and the person receiving it is known as the drawee of funds.

What are Negotiable Instruments?

Documents of a certain type, used in commercial transactions and monetary dealings, are called Negotiable instruments. The word 'negotiable' means transferable from one person to another and the term 'instrument' means 'any written doc. by which a right is created in favor of some person.' Thus, the negotiable instrument is a doc. by which rights vested in a person can be transferred to another person in accordance with the provisions of the Negotiable Instruments Act, 1881.

Definition:

According to section 13 of Negotiable Instruments Act, 1881- A 'negotiable instrument' means a promissory note, bill of exchange or cheque payable either to order or to bearer.

Types 

Most of the negotiable instruments transactions can be categorized into three parts. However, there are no explicit statements that it is limited or it must be specified into only three parts. The railway receipts or the delivery orders are also common examples of negotiable instruments.

Promissory notes

This transaction generally takes place between the debtor and the creditor. The debtor creates the instrument promising the amount of money on a specified date. 

Essentials or Characteristics of a Promissory Note:

From the definition, it is clear that a promissory note must have the following essential elements.
1. In writing - A promissory note must be in writing. Writing includes print and typewriting.
2. Promise to pay - It must contain an undertaking or promise to pay. Thus, a mere acknowledgement of indebtedness is not sufficient. Notice that the use of the word ‘promise’ is not essential to constitute an instrument as promissory note.
3. Unconditional - The promise to pay must not be conditional. Thus, instruments payable on performance or non- performance of a particular act or on the happening or non-happening of an event are not promissory notes.
4. Signed by the Maker – The promissory note must be signed by the maker, otherwise it is of no effect.
5. Certain Parties - The instrument must point out with certainty the maker and the payee of the promissory note.
6. Certain sum of money - The sum payable must be certain or capable of being made certain.
7. Promise to pay money only - If the instrument contains a promise to pay something in addition money, it cannot be a promissory note.
8. Number, place, date etc. - These are usually found in a promissory note but are not essential in law. If a promissory note does not bear a date, it is deemed to have been made when it was delivered.
9. Installments - It may be payable in installments.
10. It may be payable on demand or after a definite period - Payable 'on demand' means payable immediately or any time till it becomes time-barred. A demand promissory note becomes time barred on expiry of 3 years from the date it bears.
11. It cannot be made payable to bearer on demand or even payable to bearer after a certain period
12. It must be duly stamped under the Indian Stamp Act - It means that the stamps of the requisite amount must have been affixed on the instrument and duly cancelled either before or at the time of its execution. A promissory note, which is not so stamped, is a nullity.

Bills of Exchange

This is just the opposite of the promissory notes as this is an order from the creditor to the debtor. Here, the creditor makes the instrument that instructs the debtor to pay the payee a certain amount of money. The bill is created by the creditor.

Characteristic Features of a bill of exchange:
1. It must be in writing.
2. It must contain an order to pay and not a promise or request.
3. The order must be unconditional.
4. There must be three parties, viz., drawer, drawee and payee.
5. The parties must be certain.
6. It must be signed by the drawer.
7. The sum payable must be certain or capable of being made certain.
8. The order must be to pay money and money alone.
9. It must be duly stamped as per the Indian Stamp Act.
10. Number, date and place are not essential.

Cheque

This is just one of the forms of bill of exchange. In this case, the drawee is a bank and such cheques are payable on demand. The bank is instructed by the debtor to pay a certain amount of money to the assigned payee.

Essentials Of Cheque:

1. In Writing: The cheque must be in writing. It cannot be oral.
2. Unconditional: The language used in a cheque should be such as to convey an unconditional order.
3. Signature of the Drawer: It must be signed by the maker.
4. Certain Sum of Money: The amount in the cheque must be certain.
5. Payees Must be certain: It must be payable to specified person.
6. Only Money: The payment should be of money only.
7. Payable on Demand: It must be payable on demand.
8. Upon a Bank: It is an order of a depositor on a bank.

Parties to Bills of Exchange

Drawer: The maker of a bill of exchange is called the ‘drawer’.

Drawee: The person who is to pay the money by the drawer is called the ‘drawee’,

Acceptor: If someone else accepts the money in place of the drawee then he is called the ‘acceptor’.

Payee: Payee is the person to whom the money is to be paid as directed by the instrument. He is considered to be the actual beneficiary. Where he signs his name and makes the instrument payable to some other person, that other person does not become the payee.

Endorser: When the holder transfers the instrument to someone else, the holder becomes the ‘endorser’.

Endorsee: The person to whom the bill is indorsed is called an ‘endorsee’.

Holder: A person who is legally entitled to the possession of the negotiable instrument in his own name and to receive the amount thereof, is called a ‘holder’.

Parties to a Promissory Note

Maker-He is the person who promises to pay the amount stated in the note. He is the debtor.

Payee- He is the person to whom the amount is payable that is the creditor.

Holder- He is the payee or the person to whom the note might have been endorsed.

Parties to a Cheque

Drawer-He is the person who draws the cheque, i.e., the depositor of money in the bank.

Drawee- It is the drawer’s banker on whom the cheque has been drawn.

Payee- He is the person who is entitled to receive the payment of the cheque.

Ways from which negotiation can be done and  different types of endorsements

The transfer of an instrument by one party to another so as to constitute the transferee a holder thereof is called ‘negotiation’.It can be done by every maker, drawer, payee or endorsee – provided the negotiability is restricted.

Modes of Negotiation -

Negotiation by mere delivery
Negotiation by endorsement and delivery.

Section 15 talks about the endorsement of instrument 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 annexe thereto, or so signs for the same purpose a stamp paper intended to be completed as a negotiable instrument, he is said to endorse the same, and is called the “endorser.”

An endorsement is completed by the delivery of the instrument to the endorsee.

“An endorsement means an endorsement completed by delivery.”

Types of Endorsement is given under Sec.16(1)

Blank of General endorsement: The effect of blank endorsement is to convert the order instrument into bearer instrument which may be transferred merely by delivery.

Endorsement in full or special endorsement

• Partial endorsement – Sec.56 prohibits
• Restrictive endorsement (Sec.50) – [ the endorsee cannot further negotiate]
• Conditional endorsement (Sec.52): The law permits a conditional endorsement and therefore it does not in any way affect the negotiability of the instrument.
• Sans recourse endorsement (Sec.52) – The endorser expressly excludes his own liability on the NI to the endorsee or any subsequent holder in case of dishonor of the instrument.
• Facultative endorsement: The endorser expressly gives up some of his rights under the Act.

Holder (Sec.8):

• He must be entitled to the possession of the instrument in his own name.
• He must be entitled to receive or recover the amount due thereon from the parties liable thereto.
• Where a NI is a bearer one, any person who is in the possession of such instrument.
• Where a NI is in the name of a partner of a firm, it naturally becomes a holder.

Holder in due course (Sec.9):

Any person who for the consideration paid becomes the possessor of a NI, before its maturity, in good faith; and
Without any sufficient reason to believe that any defect existed in the title of the person from whom he obtained it.
 

Essentials: 

• He must be holder in due course.
• He must be holder for valuation consideration.
• He must become a holder of the NI before the date of maturity.
• He must become a holder of the NI in good faith.

Dishonour of cheque and penalties.

Law relating to dishonour of cheque is mentioned from sec.138 to 142 of the Act as amended by Negotiable Instruments (Amendment) Act 2015 which is as follows:

• A person must have drawn a cheque on an account maintained by him in a bank for payment of a certain amount of money to another person from out of that account.
• The cheque has been issued for the discharge in whole or in part of any debt or other liability.
• The cheque has been presented to the bank within the period of three months from the date on which it is drawn or within the period of its validity whichever is earlier.
• That the cheque is returned by the bank unpaid, either because of the amount of money standing to the credit of the account id insufficient to honour the cheque or that it exceeds the amount to be paid from that account by an agreement made with the bank
• The payee or the holder in due course of the cheque makes a demand of the said payment by giving notice in writing to the drawer of the cheque within 30 days of the receipt of the information by him from the bank regarding the return of the cheque as unpaid
• Drawee fails to make the payment within 15 days of the receipt of the said notice
• When a cheque is presented in the concerned bank by the drawee within the stipulated time i.e within the three months from the date of issue the drawee bank issue ‘ Check Return Memo’ to the payee mentioning the reason for non – payment.

Reasons for Dishonour of Cheque

• Insufficient Funds
• Signature not matching
• Account Closed
• Cheque was presented after three months
• Payment stopped by account holder
• Disparity in the words and figures mentioned in the cheque
• In case of a joint account where both signatures are required but only one is there
• Death of the customer
• Insanity of the customer
• Crossing limit of the overdraft

 Section 138 of the Act is talks about Dishonor of cheque for insufficiency of funds in the accounts and penalties for the same.

Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honor the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may extend to one year, or with fine which may extend to twice the amount of the cheque, or with both.

Conclusion:

The above discussion makes clear that Negotiable instruments are the documents which are related to the business transactions. Negotiable instruments play a major role in trade world. We can use negotiable instruments for international trades. These instruments can either be negotiable or non-negotiable. But they must come under one of the two categories. An instrument can become negotiable either by statute or by mercantile usage. These instruments are in written form so in case of non- payment the person to whom the payment to be made can sue the other person by whom the payment shall be made. Bill of exchange, cheque and promissory notes are three important negotiable instruments with different features.

These are the instruments which are broadly used for international trade. These instruments are freely transferable by one person to another person any number of times. Cheque is a document for easy payment but payment can only be made on demand and a cheque is valid only for 3months. There is no requirement of stamping. There is a particular form of cheque and it is an order to pay. BOE is a written document that shows the indebtedness of the debtor towards the creditor. It must be stamped and it cannot be made payable on demand. Promissory note is a written promise to pay at a future specified date. These negotiable instruments are still in use even after the electronic revolution. The electronics revolution is considered as the next major step which replaces the negotiable instruments.