Essentials Of a Negotiable Instrument

The following are the essential characteristics of a negotiable instrument:

1) It is essential for the negotiability of an instrument that it should be expressed to be payable to order or bearer or some other equivalent words should be used authorising the payee to assign or transfer the same to a third person. Hence, an instrument, to be negotiable, must be made or drawn payable in one of the following forms, viz., “To A or order”.” To the order of A”, “To A or bearer”, or “To bearer”. It is not necessary that the form “To.... should be used. Any other word/form (e.g., pay to the order of A) conveying the same meaning will be equally effective.




The paper currency (currency note) issued by the Government/Reserve Bank of India is one in which the value is payable to bearer. The Reserve Bank of India Act, 1934, states that no person other than the Reserve Bank or the Central Government can draw, accept, make or issue any bill of exchange, hundi, or promissory note payable to bearer on demand. Similarly, promissory notes are not to be made or issued as payable to bearer (Sections 31 and 32 of the Reserve Bank of India Act). Thus, the free negotiability is conditioned to some extent. Even though the bill or note cannot be drawn/made payable to bearer on demand, the endorsement in blank can still make it a bearer document. The cheque has not been brought under the above restriction.

 

2) It is already stated that a negotiable instrument means a promissory note, bill of exchange, or cheque payable either to order or to bearer. It is payable to order when it is expressed to be so payable and also when it is payable to a particular person and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable. Though the Act deals only with three kinds of negotiable instruments mentioned above, it does not mean that there can be no other kinds of negotiable instruments at all. Negotiability of an instrument is also accepted by widely practised custom and long usage amongst merchants. To decide whether a certain instrument is negotiable or not, the test is not to see whether it is mentioned in section 13 of the Act. As stated in a case if “an instrument is by the custom of trade transferable, like cash, by delivery, and is also capable of being sued upon by the person holding it pro tempore then it is entitled to the name of a negotiable instrument, and the property in it passes to a Bonafede transferee for value though the transfer may not have taken place in the market over”.

Thus, there are several instruments which are not referred to in section 13 but are negotiable by custom and usage. Accordingly, dividend warrants are negotiable by custom. But share certificates, with blank transfer deeds indorsed in blank by their registered owner, and deposit receipts are not negotiable instruments. A railway receipt can also be transferred by indorsement according to the mercantile custom, and the endorsee is competent to maintain a suit for the loss of goods against the railway administration concerned.

 

3) You must be aware of crossed cheque with words “A/C payee only”, payable to order or to bearer. In a negotiable instrument, if the words “not negotiable” are used with special crossing, then it is still transferable but not negotiable. The Act does not provide specifically for a crossing ‘A/c payee’ or ‘A/c payee only’. It seems that an indorsement or crossing containing the words “A/c payee” or “A/c payee only” does not restrict the negotiability of the instrument. It is only a direction to the collecting banker to put the money into the account of the person shown as the payee, on the face of the instrument. The only result of such crossing is that when it is put into the hands of the collecting banker, he is cautioned that the money must be put into the account of the payee only and not in any other account, and if the money is put into some other account, the banker is liable for negligence

 

4) ‘‘When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated” (section 14).

A negotiable instrument may be transferred in one of the two ways (1) by negotiation, or (2) by assignment. The Act deals only with the former mode of transfer. Transfer of actionable claims is dealt with by the Transfer of Property Act. The present section is confined in its application to promissory notes, hundis, bills and cheques. Hence, when such a document is transferred to a person by indorsement or delivery, or by both, as laid down in this Act, the instrument is said to be negotiated, as distinct from transfer by means of a document under the Transfer of Property Act. Thus, if the instrument is payable to bearer, it may be negotiated by mere delivery and no indorsement is needed. But where the instrument is payable to order, the transfer will be affected by indorsement and delivery. The payee or indorse is a ‘holder’ by negotiation.

 

5) “When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument he is said to indorse the same and is called the ‘endorser’’ (section 15).

The word ‘indorsement’ means the signing of one’s name on the instrument or any paper attached to it with the clear intention of transferring the same thereby. However, an indorsement is usually made only on the back of the instrument. It is not essential for its validity that it should be written only on the back. An indorsement made on the face of the instrument as good as the one made on the back of it.

An instrument is said to be negotiated when it is transferred under such circumstances as to make the transferee, the holder of it. Sections 47 and 48 deal with the mode of transfer. (The meaning of ‘holder’ is discussed later in this unit). If the instrument is payable to order, it can be negotiated only by indorsement and delivery. If it is payable to bearer, it can be negotiated by mere delivery.

The important difference between transfer by indorsement and transfer by modes other than indorsement of a negotiable instrument is that with the latter case the assignee will acquire the instrument as any other movable property, no more than the right, the title and interest of his transferor (assignor). whereas in the former case, the assignee, by indorsement, will have all the rights and advantages of a “holder in due course” of a negotiable instrument (the holder-in-due-course has been explained in detail later in this unit).

The characteristics of a negotiable instrument considered so far may be summarised as follows:

1) Three types of instruments are specifically recognised by the Act. They are promissory notes, bills of exchange and cheques.

2) Negotiability or freely transferable character is their nature.

3) It should be expressed in the instrument that it is payable to order or bearer.

4) Hundi is a bill of exchange in vernacular.

5) ‘A/c Payee’ crossing on a cheque directs the collecting banker to put the money into the account of the payee.

6) Indorsement is done by signing, by convention, on the backside of the instrument.

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