Any instrument that has the following characteristics is deemed to be negotiable instrument.
(i) title passes on mere delivery, or endorsement and delivery
(ii) the holder may sue in his own name
(iii) no notice of assignment need to be given
(iv) The holder takes instrument in good faith, has given value, and he has no notice of defection in the title of transferor.
By definition, a negotiable Instrument is the instrument that can be transferred in the name of another person, by the initial payee who has the right of possession of it. The process of transferring the instrument on mere delivery, or endorsement and delivery from one person to some other person to the satisfaction of payee’s own debt is known as negotiation.
The following are the parties associated to Negotiable instruments:
- Maker/drawer: the person who makes or executes the note promising to pay the amount stated therein.
- Drawee: The person directed to pay the money by the drawer. The drawee is the paying bank in case of cheque.
- Payee: Payee is the person whose name is written on the promissory note or bill of exchange or cheque. The payee is entitled to receive amount mentioned in the note or bill or cheque.
- Holder: Holder is either the payee or some other person to whom he may have endorsed the promissory note or bill of exchange or cheque. A person cannot be a holder unless he is the payee or indorsee (endorsee) thereof.
- Holder in due course: Holder in due course means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque, if payable to bearer, or the payee or indorsee thereof, if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.”
- Endorser: A signature of the owner (the holder of the instrument) would serve the legal rights to transfer an instrument to another party. The holder of the instrument who transfers his right to another party by endorsement is called endorser.
- Endorsee: If the endorser adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the person so specified is called the “endorsee” of the instrument.
- Endorsement: If the endorser signs his name only, it is called endorsement in blank. If the endorsement contains the instructions of endorser to pay the amount mentioned in the instrument to, or to the order of, a specified person, the endorsement is called endorsement in full.
- Drawee in case of need: In addition to drawee’s name, the name of a person is given in the bill or endorsement, to be resorted in case of need. Such person is called drawee in case of need.
- Acceptor for honour: In the event of refusal of acceptance of bill by the original drawer or in cases of providing better security when demanded by notary public, with the consent of the holder some other person who is originally not liable for payment of bill, may accept it for honor of any party liable on the bill . Such acceptor is called ‘Acceptor for honour”.
The principal advantages of negotiable instruments are that they pass through operation of law to a bona fide transferee for value by mere delivery or by endorsement and delivery. The negotiableinstrument can be transferred in the name of another person without the necessity of the complex procedure of executing the deed of assignment. A promissory note or bill of exchange or cheque payables either to the order or bearer are deemed as the instruments under negotiable instrument acts of 1881. A demand draft issued by the bank is a bill of exchange therefore it is also a negotiable instrument. There are other kind instruments like hundis, dividend warrants, railway receipts, and delivery orders etc., which are by usage recognized as negotiable instruments. Let us study definitions of Negotiable Instruments under N.I.Act.1881
- Promissory Note
The characteristic of promissory note is that it should be in writing and signed by the maker. Further, the maker should be certain, payee must be certain, amount should be certain and it should be in terms of only money.
Section 4 of NI Act 1881 states that;
“ A promissory note is an instrument in writing (not being a bank note or currency note),containing an unconditional undertaking, signed by the maker, to pay certain sum of money only to, or to the order of a certain person or to the bearer of the instrument”
From the section 4 of NI act, we understand that a promissory note which is signed by the maker is a negotiable instrument. It is actually an undertaking from the debtor to pay certain sum of amount to the creditor or to his order. The person who promises to pay is called as the maker and the person to whom payment is promised is called as the payee or holder. A promissory note can be either payable on demand or at a specific time.
- Bills of exchange
The bills of exchange are a kind of negotiable instruments generally arising out of trade transactions. The major advantage of bills of exchange is that the drawer of a cheque or acceptor of a bill of exchange is liable to discharge his liability as a Principal debtor under Negotiable Instrument Act 1881. Banks also extend credit facilities against bills as bills finance is a short term and self- liquidating finance in nature.
The Section 5 of the NI act defines bill of exchange as under
“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 to, or to the order of, a certain person or to the bearer of the instrument.”
We may therefore infer the section 5 of N.I.Act 1881 and call an instrument as “bill of exchange” if it satisfies the following conditions.
- It is an instrument in writing.
- It contains unconditional order directing a certain person to pay certain sum to the order of or to the bearer of the instrument.
- It is signed by the maker.
Types of bills of exchange
Demand bills, Usance bills, clean bills, Documentary Bills, Accommodation bills, Hundis etc. are the different kind of bills of exchange in usage for different types of trade transactions. A cheque is also a kind of bill of exchange. However cheque has some peculiarities from other bills of exchange. The difference between a cheque and other type of bill of exchange is that a cheque is always a drawn on a bank and it is always payable on demand, whereas bill of exchange normally made payable after a fixed period.
Inland and foreign bills
If a bills of exchange drawn or made in India and made payable in India or drawn upon any person resident India, it is called inland bills of exchange. When a bill of exchange is drawn, made or made payable outside India, it is called foreign bills of exchange.
The following types of Bills of exchange are used by traders and manufacturers:
(i) Documentary Bills: The Documentary bills are the most popular bills of exchange which are used by traders and manufacturers in India. Those documents accompanied with documents of dispatch like Lorry Receipts, Railway Receipts, Bill of Lading, Air consignment note etc., are called documentary bills.
(ii) DP bills: A documentary bill may be payable on demand or at a specified future date. In case, the documents of title to goods are to be delivered to the buyer of the goods (drawee) against payment of bill amount. Such bills are called DP (Delivery against Payment).
(iii) DA bills: In case of the documents to the title of goods are to be delivered to the drawee (Buyer) against acceptance of bills without demanding immediate payment of bills, such bills are called DA (Delivery against Acceptance) bills.
(iv) Clean bills: If no title to goods is attached to a bill, it is called Clean Bill. A clean bill may either be demand bill or Usance bill. A bill which is made payable, with the expression like on demand; at sight; on presentation or no time is specified is called Demand Bill. The Demand bills are required to be paid by the drawee immediately when it is presented to him for payment.
- Usance Bills
Section 22 of Negotiable instrument act 1881 provides that “every promissory note, bill of exchange which is not expressed to be payable on demand, at sight or on presentment is at maturity on the third day after the date on which is expressed to be payable”.
Thus, in case of Usance bills, three days of grace is available to drawee for payment, after the date which it is expressed to be payable in the bill. Hence, Usance due date of bills will be the last day of grace.Usance bills are the bills payable by the drawee at a specified period ‘after date’ or ‘after sight ’of the bill. The term ‘after date’ means the due date will be calculated from the date of the bill. The term ‘after sight’ means the due date will be calculated from the date of presentation of bill for the acceptance of the drawee. A Usance bill shall be adequately stamped at the time when it is drawn as it attracts stamp duty which varies according to value of the bill and usance period.
Advantages of Usance Bills: As a business strategy, the suppliers of goods like traders or manufacturing company may offer to sell their products to their clients on credit basis. The supplier of goods raises a bill of exchange expressed to be payable ( examples: 30/45/60/90/120 days etc.) after sight/ date of bills. The client on acceptance of such bills binds himself liable to make the payment of the bills at a fixed future date. The supplier of goods may present the accepted bills to his banker and request the bank to discount such bills so that he gets immediate money for the goods sold by him. The banks discount such bills if they hold reports on both supplier and client that both are of good financial standing. In the case of discounted bills the drawer’s liability is changed to that of a surety and acceptor of the bill is principal debtor.
- Usage of Hundis in India
Hundis are bills of exchange drawn in an Oriental language/ Vernacular language in India. Hundies have been in usage in India from ancient times but usages are not uniform and they are different at different places. There are three parties to a hundi. The drawer of an hundi draws it on another person (drawee) who is ordered to pay the amount to a third party (holder). An endorsement in hundis is restrictive as such endorsee of a hundi for collection has no right to transfer it. The duly paid and discharged Hundi is called Khokha.
Definition of aChequeunder section 6 of N.I act.1881
A cheque is defined insection 6 of Negotiable Instruments act. 1881 which provides that,
“A cheque is a bill of exchange, drawn on a specified banker and expressed to be payable otherwise than on demand”.
The electronic image of a truncated cheque and a cheque in the electronic form (e-cheque) are also termed as ‘cheque’ after coming into force of The Negotiable Instruments (Amendment And Miscellaneous Provisions) Act, 2002.
Distinction between Promissory note and Bills of exchange
|Sr.No.||Promissory Note||Bills of exchange|
|1||In a Promissory note there will be two parties namely maker (debtor) and a payee (creditor).||In a Bills of exchange, there will be three parties namely drawer, drawee and payee.|
|2||A Promissory note contains an unconditional promise by the maker to pay to the payee or his order.||A bill contains unconditional order to the drawee to pay according to the instruction of the drawer.|
|3||A Promissory note cannot be made payable to the maker himself.||In Bills of exchange, the drawer and payee can be the same person.|
|4||A Promissory note is presented for payment without any prior acceptance by the maker.||A Bill is payable after sight must be accepted by the drawee or someone else on his behalf prior to presentation of the same for payment.|
|5||In Promissory note the liability of the maker is absolute and primary.||The liability of the drawer of the Bills is conditional and secondary.|
|6||In Promissory note, sending notice of dishonor to the maker is not necessary||Holder shall serve the notice of dishonor to drawer and intermediate endorsee/s.|
|7||A Promissory note cannot be made payable to bearer.||A Bill can be drawn payable to bearer (provided it is not payable on demand)|
|8||There is no need of protest for dishonor in case of Promissory note||In case of foreign bills, if the bill is dishonoured, it must be noted and protested. This is in addition to notice of dishonor already served on all the parties to the bill dishonored foreign bills must be protested.|
Distinction between Cheque and Bills of exchange
|Sr,No.||Cheque||Bills of exchange.|
|1||Cheque is always drawn on a bank.||Bill is drawn on some person or firm.|
|2||A Cheque is presented for payment without any prior acceptance by the drawer.||A Bill is payable after sight must be accepted by the drawee or someone else on his behalf prior to presentation of the same for payment.|
|3||Cheque is drawn payable on demand||Bill may be drawn payable on demand or expiry of certain period, after date/after sight.|
|4||No grace period is allowed for payment of cheque.||Grace period of three days allowed in case of usance bills.|
|5||The drawer of a cheque is discharged from his liability only if he suffers any damage by delay in presenting the cheque.||The drawer of a bill is discharged from his liability if the bill is not presented for payment.|
|6||Cheque may be crossed||No need to cross the bills|
|7||No need of stamp duty payable on cheque||Bills of exchange should be properly stamped|
|8||Cheques can be drawn payable to bearer||Bills payable on DEMAND cannot be drawn payable to bearer.|
|9||Payment of cheque can be countermanded by the drawer.||Payment of bill cannot be countermanded.|