Complete guide on Negotiable Instruments Act, 1881
Date : 03 Mar, 2020
Post By Kunal Jain
The advancement of modern-day trade and business practices has resulted in the development of newer ways to facilitate financial transactions. These ‘new’ ways and means of transactions are usually referred to as negotiable instruments.
In previous times cash transaction was the only means for exchanging goods and services for their value, however, in modern times other transaction instruments like cheque, bill of exchange,hundis, etc are also used in such transactions.
These modern-day methods of transacting in instruments other than cash have made the business practices very easy and simple.
According to Section 13 of the Negotiable Instrument Act,1881 negotiable instrument is defined as
“A promissory note, bill of exchange or cheque payable either to order or to the bearer”
Hence, in simple words, negotiable instruments can be defined as documents possessing monetary value which are exchangeable. Therefore the two main characteristics of the negotiable instruments are :
Transferability
Monetary / financial value
In simpler words, negotiable instruments can also be referred to as written contracts which can be fluidly be transferred from one holder to the other along with the rights which the NI (a negotiable instrument) has inherited from the original holder.
TYPES OF NEGOTIABLE INSTRUMENT
Under the NI Act, 1881 negotiable instruments can be classified into the following:
Promissory notes
Bills of exchange
Cheques
Promissory note:
According to section 4 of the NI Act, 1881 a promissory note can be defined asunder
“ a promissory note is an instrument in writing (not being a banknote 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”
In simple words, a promissory note is a written contract through which a person promises to pay the agreed amount of money at a pre-decided date or a promissory note is a written document through which a person acknowledges the amount of money along with the interest that he owes to you or vice versa along with the date on which all of the mentioned and acknowledged amount shall be paid.
Bills of exchange
According to section 5 of the NI Act,1881 bills of exchange can be defined as under
“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”
In simple words bills of exchange are a legally binding written document that directs one party to pay a certain sum of money which is usually pre-determined to the other party.
The party which owes the money is called the “payer” and the party which is entitled to receive the money is called “payee” or “seller”.
Cheques The cheque is defined under section 6 of the NI Act,1881 as: “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.” In simple words, a cheque is an unconditional order in writing to the bank, duly signed by the person who has deposited the money in the bank. A cheque is an instruction to the banker to pay the mentioned amount of money to the bearer (the person holding the cheque) of the cheque or to such party as instructed in the cheque. Cheques in today’s age are slowing declining as a mode of payment due to the availability of online methods of payment and due to its slow processing time. Although under the NI Act,1881 only the abovementioned negotiable instruments are recognized, however by the usage or customs the following negotiable instruments are also valid and acknowledged: Hundis Share warrants Dividend warrants Bakers draft Circular notes Railway receipts HOLDER According to section 8 of the NI Act, 1881 a holder is a person who is entitled in his own name to the possession of the instrument and the person who has the right to receive and recover the amount due from the parties. Under the NI Act,1881 the following can be the holder of the negotiable instruments Payee: The payee is always the original holder of the instrument unless and until he endorses the instrument Endorsee The person to whom the instrument is endorsed becomes the holder Bearer The person to whom the instrument is delivered becomes the holder in cases of bearer instruments. Legal representative or heir: A legal heir or representative can become the holder of the negotiable instrument of a deceased person by the operation of law even though he is not the original payee or bearer of the instrument. The negotiable instruments in India are governed by the Negotiable Instruments Act, 1881. The main aim and objective of this act are to ensure that the negotiable instruments can be passed from one person to another, hand in hand, without compromising the value and legality of the instrument like any other goods. Since the usage of negotiable instrument makes the business transactions convenient, this act ensures to recognize and maintain the objectivity and worth of such instruments in order to ensure the free flow of the goods and services in the market and to ensure the protection of these alternate payment methods. How can Lawtendo help? LawTendo has around 15000+ lawyers across India on our platform. LawTendo strives to facilitate cost-efficient and quality legal service to our clients. You can contact us at +91-9671633666 or [email protected].
RISHI PAL SINGH VARMA