Meaning of Negotiable Instrument A negotiable instrument is a specialized type of “contract” for the payment of money that is unconditional and capable of transfer by negotiation. Common examples include cheques, banknotes (paper money), and commercial paper. A promissory note is a written promise by the maker to pay money to the payee. The most common type of promissory note is a bank note, which is defined as a promissory note made by a bank and payable to bearer on demand. Through promissory note a person i.e. maker (drawer) promise to pay the payee a specific amount on a specified date without any condition. So the important points in a promissory note are 1) it is unconditional order 2) a specific amount 3) payable to the order of a person or on demand. A bill of exchange is a written order by the drawer to the drawee to pay money to the payee.the most common type of bill of exchange is the cheque, which is defined as a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date sometime in the future. A cheque is an unconditional order in writing drawn upon a specified banker signed by the drawer, directing to the banker to pay on demand a certain sum of money to or to the order of a person named there in or to the bearer.
Importance of Negotiable Instrument Negotiable instrument is a written document transferable by delivery which can be legally transferred by another party for money. It is a document which is given to another person in exchange for money in the business field. Such an instrument creates a right in favor of a person .It includes a bill of Exchange, Cheque, Promissory note or any document which is transferable in exchange for money. These are the most important documents in the business which values them like money. The following points help to understand the importance of negotiable instruments. 1. It is written documents where there is promise to pay certain sum of money to certain person. It should not be oral promise. 2. It not only gives promissory right but also the right of property which means complete ownership. 3. A bona fide transferee will get better title form the defective transferor. It transferor has defective title a bona fide transferee for the value will get better title of ownership. 4. This instrument is transferable form one person to another person without any formality which very much important for business world. 5. These documents are capable of being transferred by endorsement or by delivery; which is most happening event in case of business. 6. Bill, cheque, promissory notes are highly used for running business for immediate payment and received.
7. A businessman can use negotiable instrument for overall performance of his business because it is just like money.
Difference between promissory note and bill of exchange Promissory note
Bill of Exchange
There are two parties maker and payee There is promise to pay. Notice of dishonor to the maker is not necessary Primary and absolute liability is of the maker on the instrument Maker stands immediate relationship to the payee. It cannot be drawn payable to bearer. It cannot be drawn in sets. No acceptance is necessary.
there are three parties drawer, Drawee & Payee There is an order to pay. Notice must be given to all the persons liable to pay. Secondary and conditional liability of a drawer. Drawer stands and immediate relationship with the acceptor not to the payee It can be drawn payable to bearer. It can be drawn in sets. Acceptance by the drawee is necessary.
Meaning of holder and holder in due course MEANING OF HOLDER The holder is a party of a bill of exchange, promissory note or cheque. It means any person who is legally entitled to the possession of the instrument, and to receive or recover the amount due thereon from the parties liable thereto. That is either the payee of the endorsee of the instrument. MEANING OF HOLDER IN DUE COURSE The holder in due course means any person who for consideration became the possessor of a negotiable instrument if payable to bearer, or the payee or indorse thereof if payable to order, before the amount mentioned in it became payable and without sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. In order to be called a holder in due course a person must possess the following qualifications. He must be a holder. He must be a holder for valuable consideration He must have become the holder of the instrument before its maturity. He must have the negotiable instrument complete and regular on the face of it. He must have become holder in good faith. Discharge of negotiable instrument The term discharge in relation to negotiable instruments has two connotations (1) discharge of the instrument and (2) discharge of one or more parties from liability on the instrument. Discharge of the instrument A negotiable instrument is said to be discharged when it becomes completely useless i.e. no action on that will lie, and it cannot be negotiated further. After a negotiable instrument is discharged the rights against all the parties thereto comes to an end, and no party, even a holder in due course, can claim the amount of the instrument from any party thereto. Discharge of one or more parties
A party is said to be discharged from his liability when his liability on the instrument comes to an end.one or more parties to a negotiable instrument is /are discharged from liability in the following ways: By cancellation: when the holder of a negotiable instrument deliberately cancels the name of any of the party (by drawing a line through the name) liable on the instrument with an intent to discharge him from liability thereon, such party and all indorses subsequent to him, who have a right of action against the party whose name is so cancelled are discharged from liability. By release: if the holder of the negotiable instrument releases any party to the instrument by any method other than cancellation of name (i.e. by a separate agreement of waiver, release or remission), the party so released and all parties subsequent to him, who have a right of action against the party so released are discharged from liability. By payment: when the party primarily liable on the instrument makes the payment in due course to the holder at or after maturity all the parties to the instrument stand discharged because the instrument as such is discharged by such payment. By allowing drawee more than 48 hours to accept: if the holder of a bill of exchange allows the drawee more than forty eight hours exclusive of public holidays to consider whether he will accept the same. By taking qualified acceptance: if the holder of a bill agrees to a qualified acceptance all prior parties whose consent is not obtained to such an acceptance are discharged from liability. By not giving notice of dishonor: any party to a negotiable instrument (other than the party primarily liable) to whom notice of dishonor is not sent by the holder is discharged from liability as against the holder unless the circumstances are such that no notice of dishonor is required to be sent. By non-presentment for acceptance of a bill: when a bill of exchange is payable certain period after sight, its holder must present it for acceptance to the drawee within a reasonable time after it is drawn. If he makes a default in making such presentment the drawer and all indorses who were liable towards such a holder are discharged from their liability towards him. By delay in presenting cheque: it is the duty of the holder of a cheque to present it for payment within reasonable time of its issue. If he fails to do so and in the meanwhile the bank fails causing damage to the drawer, the drawer is discharged as against the holder to the extent of the actual damage suffered by him. By material alteration: any material alteration of a negotiable instrument renders the same void, i.e. discharges the instrument itself, and all parties thereto at the time of making such alteration and not consenting to the change are discharged from liability.
