Negotiable Instrument

Definition: Negotiable Instrument implies a financial document used for fund transfer from one person to another. Basically, it is an instrument that bears the signature of the maker, promising payment of a specified sum to the person whose name is written on it, or the assignee, either on-demand or on a future specified date.

Further, the negotiable instrument creates a right in favor of the party to whom it is assigned. And, it is freely transferable from one party to another either by delivery, or endorsement and delivery, wherein the new holder receive a good title.

Important: In India, Negotiable Instruments are regulated by ‘Negotiable Instruments Act, 1881.

Characteristics of Negotiable Instrument

A negotiable instrument is characterized by:

• The person holding the negotiable instrument is presumed as the owner of the property, which the document contains.
• It is transferable from one party to another freely. Also, the instrument can be transferred innumerably till its maturity.
• A holder in due course, i.e. the transferee of the document, gets a title that is free from any defects as regards previous holders of the instrument.
• Holder in Due Course or HDC has the right to sue the transferor, in his own name, if it is dishonored.
• It has to be in writing, and duly signed by the maker.
• For the creation of liability, the instrument must be drawn and delivered to the party concerned.

Presumptions as to Negotiable Instrument

1. Consideration: It is drawn, accepted, or endorsed for consideration. The presumption is that there is a presence of consideration in every negotiable instrument.
2. Date: It contains a date on which the instrument is drawn or made.
3. Time of acceptance: Unless otherwise is proved, the instruments are presumed to be accepted within a reasonable time, i.e. after it has been issued and prior to its maturity.
4. Time of transfer: Unless otherwise is proved, it is presumed that all the transfers are made before the instrument is matured.
5. Order of Endorsement: Unless otherwise is proved, it is presumed that endorsements showing upon the instrument, were in the sequence in which they appear.
6. Stamp: Unless otherwise is proved, it is presumed that the lost promissory note bear the stamp
7. Holder in Due Course: Unless otherwise is proved, it is presumed that the holder of the instrument, is the holder in due course. Here, it is inferred that each holder of the instrument has paid adequate consideration for it and possessed it in good faith. However, when the instrument is obtained from its legal owner using unlawful means such as fraud or any other offense, then the holder is required to prove that he is a holder in due course.

Types of Negotiable Instrument

Promissory Note

A written instrument signed by the maker and carrying an unconditional promise to pay the given amount only to the person whose name is specified in the instrument, or to any other person on his order or to the bearer of the instrument.

Bill of Exchange

A written financial instrument carrying the signature of the maker, with an unconditional order, directing a person to pay the specified amount mentioned in the instrument only to the person whose name is specified in the instrument, or to any other person on his order or to the bearer of the instrument.

Cheque

A cheque is a type of bill of exchange that directs the specified banker, to pay the specified amount to the person whom the document has been issued or to the person whose name is specified in the instrument or to the bearer, by deducting the same amount from the drawer’s account. One thing is to be noted that a cheque is always payable on demand.

Classification of Negotiable Instrument

• Order Instrument: Instruments that are payable to the person whose name is specified in the document or its assignee.
• Bearer Instrument: Instruments in which the name of the payee is not given or the words ‘or bearer’ are written in place of the payee’s name or when the last endorsement is blank.
• Inland Instrument: Instruments that are drawn in the country and drawn upon a person who is a resident of the country, such an instrument is called inland instrument.
• Foreign Instrument: Any instrument which is either not drawn in the country or made in the country or not made payable in the country, is called a foreign instrument.
• Ambiguous Instrument: When an instrument is vague and is not able to be recognized in particular, as a bill or exchange or as a promissory note, it is called an ambiguous instrument. So, it is at the discretion of the holder, to treat it as either of the types, then it will be treated accordingly.
• Inchoate Instrument: These are incomplete instruments. If any person signs and delivers a paper to another person, stamped as per negotiable instruments act, which is either completely blank or containing the words ‘incomplete.
• Time Instrument: An instrument that is payable after a definite time, is a time instrument.
• Demand Instrument: An instrument that is payable at sight or on demand of the payee, is called a demand instrument.

A word from Business Jargons

A negotiable instrument represents an I Owe You (IOU) note, committing to pay the specified sum, in writing.