Miscellaneous
Laws & Acts
Negotiable Instruments
Act, 1881
–
The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881. It is an
Act to define and amend the law relating to promissory notes, bills of exchange
and Cheques.
–
The
term “negotiable instrument” means
a document transferable from one person to another.
–
According
to this definition the following are the conditions of
negotiability:
•
The
instrument should be freely transferable. An instrument cannot be negotiable
unless it is such and in such state that the true owner could transfer by simple delivery
or endorsement and delivery.
•
The
person who takes it for value and in good faith is not affected by the defect
in the title of the transferor.
•
Such
a person can sue upon the instrument in his own name.
–
The Act recognizes only three kinds of negotiable instruments under Section
13 but it does not exclude
any other negotiable instrument provided the instrument entitles a person to a
sum of money and is transferable by delivery.
•
Promissory Notes
•
Bills
of Exchange
•
Cheques
–
A
“promissory
note” is an instrument in writing containing an unconditional
undertaking, signed by the maker to pay a certain sum of money to, or to the
order of, a certain person, or only to bearer of the instrument.
–
To be
a promissory note, an instrument must possess the following essentials:
•
be
in writing
•
contain
an express promise
•
undertaking
to pay must be unconditional
•
maker
must sign the promissory note
•
maker
•
payee must be certain
•
sum
payable must be certain
•
be
properly stamped in accordance with the provisions of the Indian Stamp Act.
–
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 only to or to the order of, a certain person or to the bearer of the instrument.
–
Bills of exchange were originally used for payment
of debts by traders residing
in one country to another country with a view to avoid transmission of coin. Now-a-days they are used more as trade bills both in connection with domestic trade and foreign
trade and are called inland bills and foreign bills respectively.
–
A ‘Cheque’ is a bill of exchange
drawn on a specified banker
and not expressed to be payable otherwise than on demand and it includes
the electronic image of a truncated Cheque and a Cheque in the electronic form
GLOSSARY
Negotiable Instrument - “Negotiable instrument” means a document transferable from one person
to another. However the
Act has not defined the term. It merely says that “A negotiable instrument” means a promissory note,
bill of exchange or Cheque
payable either to order or to bearer.
Inland Instruments- A promissory note, bill of exchange or cheque drawn or made in India, and
made payable, or drawn upon any person, resident in India shall be deemed to be
an inland instrument
Foreign Instruments- An
instrument which is not an inland
instrument, is deemed
to be a foreign instrument. it must be drawn outside India
Inchoate or Incomplete Instrument - When one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments, and either wholly
blank or having written thereon
an incomplete negotiable instrument, he thereby
gives prima facie authority to the holder
thereof to make or complete,
as the case may be, upon it a
negotiable instrument, for any amount specified therein, and not exceeding the
amount, covered by the stamp.
Trade Bill- A bill drawn and accepted
for a genuine trade transaction is termed as a trade
bill.
Accommodation Bill- All bills are not genuine trade
bills, as they are often drawn for accommodating a party. Accommodation bill is
a bill in which a person lends or gives his name to oblige a friend or some
person whom he knows or otherwise.
Collecting Banker- Collecting Banker is one who collects
the proceeds of a cheque for a customer.
Endorser- Person who, by signing a negotiable instrument, transfers the title of the instrument (or the property named therein) to another.
Holder- A person is a holder of a negotiable instrument who is entitled in his own name (i) to the possession of the instrument, and (ii) to recover or receive its amount from the parties thereto.
Holder in Due Course- A holder in due course is-
(i) a person who for consideration, obtains possession of a negotiable instrument
if payable to bearer, or
(ii) the payee or endorsee thereof,
if payable to order, before its
maturity and without having sufficient cause
to believe that any defect
existed in the title of the person from whom he derived
his title.
Hundis- Hundis are
negotiable instruments written
in an oriental language. They are sometimes bills
of exchange and sometimes promissory notes, and are
not covered under the
Negotiable Instruments Act, 1881.