Negotiable instrument

A negotiable instrument is a document that can be transferable from one assignee to another, in simple terms if a person gets into a contract with someone and promise to pay a certain amount to a specific person or a specific party. So a negotiable instrument is an instrument that can be used in place of money to buy goods and services with a promise to pay the amount of payment after a specific time in exchange for the said instrument.

These instruments are transferable and the final holder takes funds and can use them as per his requirements. That means, once an instrument is transferred, the holder of such instrument is entitled to obtain a full legal title to such instrument.

Where an instrument is by the custom of trade transferable in this country, like cash, by delivery, and is also capable of being sued upon by the person holding it pro tempore for the time being. There it is entitled to the name of a negotiable instrument, and the property in it passes to a bona fide transferee for value[1].

Features of Negotiable Instrument.

  1. Easy to transfer: A negotiable instrument is easily and freely transferable, without any formalities.
  2. Must be written: all negotiable instruments must be in writing, but wringing includes handwritten documents, printed documents, engraved documents, and printed documents.
  3. Time of payment must be certain: the Negotiable instrument is an instrument written for payment and any document without payment cannot be called Negotiable instrument.   

Now the question is who is Holder?

If a person is entitled to the possession of a negotiable instrument in his own name he will be the holder.

A person must fulfill the following conditions to be recognized as holder[2]:

  1. He should be entitled in his name to the possession of the instrument.
  2. He should have the right to receive or recover the amount clue thereon from the parties.

So, in simple terms the holder of the negotiable instrument is the person who is entitled the possession of the instrument and has right to claim or receive the amount clue from the party.

 What are the kinds of Negotiable instruments?

The negotiable instruments includes three kinds which are follows:-

  1. Promissory Notes
  2. Bill of exchange
  3. Cheque

Promissory Note:-

A promissory Note is an instrument in writing (not being a bank note or a currency- note) containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of, a certain person, or bearer of the instrument[3].

Following are the requirements to be fulfilled by any instrument to be called as Promissory note:-

  1. Must be written and signed by the maker.
  2. There must be an undertaking or a promise to pay
  3. The promise must be unconditional.
  4. Promise must be in respect of payment of money only.
  5. The amount payable must be certain.
  6. The payee must be certain.

Like in case of Bal Mukand Vs Joint Hindu Family Known as Munna Lal Pamji Lal and others. The plaintiff sued their defendants to recover rs 1400 as principal with Rs 300 as interest. On the basis if the document described as promissory note, the language of the document being as under:

“Aage rupya chauda sau (ank 1400) rokri liya jis baij dar 12 ane saiekra dena mange tab dena.”

The ending words “manage tab dena” means “payment to be made when demanded”  which brought question before Court was this document is Promissory Note.

It was held that the acknowledgment of the payment constitutes the promissory note because it does satisfy the conditions of the valid promissory notes[4].

In Mohammad Akbar Khan Vs. Attar Singh, it was held that if the document was a mere receipt of money it was not a promissory note even though it indicated that the amount was by way of a loan which was to be repaid according to certain terms.

In B.B. Lohar Vs. Prem Prakash Goyal, it was held that mere acknowledgment of receipt cannot constitute the document as a promissory note.

Bill of Exchange:-

Bill of exchange is a negotiable instrument which involves three parties, the person who makes or draws the bill of exchange is known as “Drawer” of the bill and the person to whom the bill of exchange is drawn for is known as “Drawee” and the person to whom the amount is payable is “Payee”.

Features of bill of exchange:

  1. Parties of the instrument: the bill of exchange has three parties.
  2. Certain period: the bill of exchange is drawn for a specific period from the date of issue.

Cheque:

A cheque is a bill of exchange drawn on a specific banker and not expressed to be payable otherwise than on demand it includes the electronic image of a truncated cheque and a cheque in the electronic form[5].

Basic characteristics of the cheque;

  1. Bank: in the case of a Cheque the drawee is always the bank.
  2. Payable on demand: Cheque is always payable on demand.
  3. Crossing the cheque: the Cheque has a system of crossing.

Conclusion

The Negotiable Instrument is an instrument that can be used in place of cash to make complete transactions often this instrument is used by businessmen. The negotiable instrument has three kinds Promissory Notes, a Bill of exchange, and the Cheque.

Every negotiable instrument possesses its importance and benefits and all three are different from each other every instrument is used for different purposes, and as per the purposes the negotiable instrument is used in the transaction.


[1] Smith’s  Leading case.

[2] Section 8 of the Negotiable instrument Act, 1881.

[3] Section 4 of the Negotiable instrument, 1881.

[5] Section 6 of the Negotiable instrument Act, 1881.

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