Meaning of a Negotiable Instrument

An “instrument” as referred to in the Negotiable Instruments Act, 1881, is a legal document or a legally recognised written paper. Negotiable Instrument means a written document which creates a right in favour of some person and which is freely transferable. It has the unique advantage of negotiability i.e., transferable with a simple procedure requiring just a signature and delivery.




The ownership right (called title’ or ‘property’) in a negotiable instrument can be transferred by a signature on the back of the instrument and delivery to the person to whom the transfer is to be made. The law recognises such a way of transfer of a negotiable instrument and will protect it. Easy negotiability has unique feature which is not there for other documents. For instance, if you have a document evidencing the ownership of a piece of agricultural land, you have to follow certain legal formalities to transfer the ownership rights. If you simply sign on the back and deliver the land document to the buyer, the law will neither consider it valid nor protect the action. Negotiable instruments become necessary for the faster and easy transfer of money, particularly in business. These instruments have also become a convenient addition to currency because they are transferable almost as easily as currency notes.

The Negotiable Instruments Act 1881 deals with only three specific classes of negotiable instruments, which are in common use. They are: (1) promissory note, (2) bill of exchange, and (3) cheque payable either to order or to bearer. The Act does not consider all kinds of instruments which have an element of negotiability in them, such as bills of lading, railway receipts, delivery orders on warehouses, etc. Hence an instrument may be a negotiable instrument and yet may not come under the purview of this Act. It has been held that hundi or document in vernacular is not governed by this Act even though it may be a negotiable instrument by custom and practice in a business community.

As defined by the section 13 of the Act, “negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer”.

“Explanation I— A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable or which is expressed to be payable to particular person, and does not contain words prohibiting transfer or indicating an intention that it shall not be transferrable”.

“Explanation II — A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the, only or last endorsement is an endorsement in blank”.

“Explanation III — Where a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be payable to the order of a specified person and not to him or his order, it is nevertheless payable to him or his order at his option.

“A negotiable instrument may be made payable to two or more payees jointly or it may be made payable in the alternative to one or two, or one or some of several payees”.

Since this is one of the most important sections of the Act, it has been reproduced in full. It should be read with due emphasis on each and every word in it.

The provisions noted are subject to Section 31 of the Reserve Bank of India Act 134. It provides that:

a) No person in India other than the RBI or the Central Government can make or issue a promissory note ‘payable to the bearer’.

b) No person in India other than the RBI or the Central Government can draw or accept a bill of exchange ‘payable to bearer on demand’.

c) A cheque ‘payable to a bearer’ on demand can be drawn on a person’s account with a banker.

The implications of the provisions of section 31 of RBI Act are:

a) No matter whether a promissory note is payable on demand or after a certain duration, it can never be originally made payable to the bearer.

b) A bill of exchange can be made originally payable to bearer, but if it is payable to bearer, it cannot be made payable on demand, it can be made payable only to order. Subsequently, on endorsement in blank, it can be made payable to bearer on demand.

As discussed earlier, negotiable instruments mean promissory note, bill of exchange and cheque. Let us now have a brief description of these three instruments (a detailed description is presented in Unit 21).

A promissory note contains an undertaking i.e., it contains a promise to pay money. It 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 to the bearer of the instrument” (section 4). It is stamped and designed by its drawer or the maker. It is payable to a payee Study the specimen of a promissory note presented below.

 

Specimen of a Promissory Note

Place: New Delhi

Date: 17 Feb 2019

Rs. 50,000

On Demand I promise to pay to Shri Ram Kumar or order a sum of Rupees Fifty Thousand only, for value received.

Signature of S. Gupta

on Revenue Stamp

To

Shri Ram Kumar

220 Asiad Village

New Delhi-110049

 

A bill of exchange contains an order to a person called the drawee. It is “an instrument in written 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” (section 5). It is stamped and signed by the drawer or maker. The order or direction is given to the drawee to pay a certain sum of money (at sight or after a certain time) to another person called payee. The drawee by accepting it to honour (when the time for payment comes) becomes the acceptor. Study the specimen of a bill of exchange presented below.

 

Specimen of a Bill of Exchange

Place: New Delhi

Date: 17 Feb, 2019

Rs. 50,000

On Demand I promise to pay to Shri Ram Kumar or order a sum of Rupees Fifty Thousand only, for value received.

Signature of S. Kumar

on Revenue Stamp

Accepted

Krishnan

To

Shri Krishnan

K-76 Hauz Khas

New Delhi-110016

 

 

In this bill of exchange Mr. S. Kamet is the drawer and Krishnan is the drawee. Krishnan when gives his acceptance, is the acceptor. The above bill is delivered to M r. Ram Kumar and thereby he becomes the ‘holder’. When Ram Kumar wants to negotiate, he signs on the back side and delivers to Mr X. On receiving the value, he becomes the endorser and M r X becomes the endorsee.

A cheque is “a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand” (section 6). A cheque is drawn and signed by a drawer directing a banker (the drawee) to pay on demand a certain sum of money to a payee. No stamp is required.

 

In this cheque Prabha Singh is the drawer, the Punjab National Bank is the drawee and Madhu Sharma is the payee. When Madhu Sharma wants to negotiate, she signs on the back to become the endorser. The specimens presented here are simple versions of these instruments to make a beginning.

When an instrument is to be transferred to a person other than the one mentioned as the drawee in the instrument, it is done by indorsement i.e., signing by the drawee on the back side of the instrument. The person in whose favour the indorsement is made or who becomes a holder after the indorsement, is known as endorsee. There can be many consecutive indorsements and, therefore, many successive endorsees.

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