MEANING OF NEGOTIABLE INSTRUMENT ?
The word negotiable means “ transferable by delivery ”, and word
instrument means “ a written document ” by which a right is created in favour
of some person. Thus, the term “negotiable instrument” means “ a written
document transferable by delivery ”.
According to Section 13 (1) of the Negotiable Instruments Act . “ A
negotiable instrument means a promissory note, bill of exchange, or cheque
payable either to order or to bearer ”. “ A negotiable instrument may be made
payable to two or more payees jointly, or it may be made payable in the
alternative to one of two, or one or some of several payees ”. [ Section 13(2) ].
INTRODUCTION TO NEGOTIABLE INSTRUMENTS ACT , 1881
The Negotiable Instruments Act was enacted, in
India in 1881. Prior to its enactment, the provision of the
English Negotiable Instrument Act were applicable in
India, and the present Act is also based on the English Act
with certain modifications. It extends to the whole of India
except the State of Jammu and Kashmir. The Act operates
subject to the provisions of Sections 31 and 32 of the
Reserve Bank of India Act, 1934.
FEATURES
• A negotiable instrument is freely transferable
• Negotiable confers absolute and good title on the transferee. It means that a person who receives a negotiable instrument has a
clear and indisputable title to the instruments.
• Example of features are :
1. Writing and Signature :
Negotiable Instruments must be written and signed by the parties according to the rules relating to Promissory Notes, Bills
of Exchange and Cheques.
2. Money :
Negotiable instruments are payable by legal tender money of Malaysia. The liabilities of the parties of Negotiable
Instruments are fixed and determined in terms of legal tender money.
3. Title :
The transferee of a negotiable instrument, when he fulfils certain conditions, is called the holder in due course. The
holder in due course gets a good title to the instrument even in cases where the title of the transferee is defective.
4. The payment must be a certain person :
The person to whom payment of the instrument is to be made must be a certain person.
5. Unconditional order / promise :
A cheque and a bill of exchange contain an order to the drawee where promissory note contains a
promise by the maker to creditor. The promise and order of these instruments must be unconditional one.
6. Popularity :
Negotiable instrument are popular in commercial transactions because of their easy negotiable and
quick remedies.
7. Evidence :
A document which fails to qualify as a negotiable instrument may nevertheless be used as evidence of
the fact of indebtedness.
TYPES OF NEGOTIABLE INSTRUMENTS
There are two types of Negotiable Instruments :
1. Instruments Negotiable by Statute :
The Negotiable Instruments Act mentions only three kinds of negotiable instruments [ Section 13 ]. These are :
Promissory Notes
Bills of Exchange
Cheques
2. Instruments Negotiable by Custom or Usage :
There are certain other instruments which have acquired the character of negotiability by the usage or custom of trade. For
example : Exchequer bills, Bank notes, Share warrants, Circular notes, Bearer debentures, Dividend warrants, Share certificates with
blank transfer deeds, etc.
PROMISSORY NOTES
Section 4 of the Act defines, “ A promissory note is an instrument in writing ( note being a bank-note or a currency note )
containing an unconditional undertaking, signed by the marker, to pay a certain sum of money to or to the order of a certain
person, or to the bearer of the instruments ”.
The person who makes the promissory note and promises to pay is called the maker. The person to whom the payment is
called the payee.
Characteristic of a Promissory note
It is an instrument in writing
It is a promise to pay
Signed by the maker
Other formalities
Definite and unconditional promise
Promise to pay money only
Maker must be a certain person
Payee must be Certain
Sum payable must be certain
It may be payable on Demnd or After a definited Period of time
If cannot be made payable to Bearer on Demand.
Parties to a promissory note
Maker:
Maker is the person who promises to pay the amount stated in the note.
Payee:
Payee is the person to whom the amount of the note is payable
Holder
He is either the payee or the person to who the note may have been
endorsed.
Specimen of promissory note
Bill of exchange
According to section 5 of the 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”. It is also called a draft.
Special Benefits of bill of exchange :
A bill of exchange is a double secured instrument.
In case of immediate reqirement ,a Bill may be discounted with a bank.
Essential elemets of bill of exchange
It must be in writing.
Order to pay
Drawee
Signature of the Drawer
Unconditional Order
Parties
Certainly of Amount
Payment in kind is not valid
Stamping
Cannot be made payable to Bearer on Demand.
Parties to a bill of exchange
Drawer:
The maker of a bill of exchange is called the drawer.
Drawee:
The person directed to pay the money by the drawer is called the drawee.
Payee:
The person named in the instrument to whom or to whose order he money
are directed to be paid by the instruments are called the payee.
Specimen of bill of exchange
Cheque
According to section 6 of the act .A cheque is “a bill of exchange drawn on
a specified banker and not expressed to be payable otherwise than on
demand”.A cheque is also ,therefore a bill of exchange with two additional
qualification:
It is always drawn on a specified banker.
It is always payable on demand.
Special benfits of bill of exchange:
A bill of exchange is a double secured instrument.
In case of immediate ,a bill may be discounted with a bank.
Essential elemets of a cheque
In writing
Express order to pay
Definite and unconditional order
Signed by the drawer
Order to pay certain sum
Order to pay money only
Certain three parties
Drawn upon a specified banker
Payable on demand
Parties to a cheque
Drawer:
Drawer is the person who draws the cheque.
Drawee:
Drawee is the drawer’s banker on whom the cheque has been drawn.
Payee:
Payee is the person who is entitled to receve the payment of a ceque.
Specimen of cheque
