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NEGOTIABLE INSTRUMENT

A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer. So, there are just three types of negotiable instruments such as promissory note, bill of exchange and cheque. Cheque also includes Demand Draft [Section 85A]. More specifically, it is a document contemplated by a contract, which (1) warrants the payment of money, the promise of or order for conveyance of which is unconditional; (2) specifies or describes the payee, who is designated on and memorialized by the instrument; and (3) is capable of change through transfer by valid negotiation of the instrument. As payment of money is promised subsequently, the instrument itself can be used by the holder in due course as a store of value; although, instruments can be transferred for amounts in contractual exchange that are less than the instrument s face value (known as discounting ). [edit] The holder in due course The rights of a holder in due course of a negotiable instrument are qualitatively, as matters of law, superior to those provided by ordinary species of contracts:

The rights to payment are not subject to set-off, and do not rely on the validity of the underlying contract giving rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer is still liable on the cheque) No notice need be given to any party liable on the instrument for transfer of the rights under the instrument by negotiation. However, payment by the party liable to the person previously entitled to enforce the instrument "counts" as payment on the note until adequate notice has been received by the liable party that a different party is to receive payments from then on. [U.C.C. 3-602(b)] Transfer free of equities the holder in due course can hold better title than the party he obtains it from (as in the instance of negotiation of the instrument from a mere holder to a holder in due course) Negotiation often enables the transferee to become the party to the contract through a contract assignment (provided for explicitly or by operation of law) and to enforce the contract in the transferee-assignees own name. Negotiation can be effected by endorsement and delivery (order instruments), or by delivery alone (bearer instruments). In addition, the rights and obligations accruing to the transferee can be affected by the rule of derivative title, which does not allow a property owner to transfer rights in a piece of property greater than his own.

What do you mean by Bills of Exchange?


A bill of exchange as, "an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a sum of money only to or to the order of a certain person or to the bearer of the instrument." A bill of exchange is also called a draft. There are three parties to a bill of exchange namely drawer, drawee and payee. The maker of the bill is called the drawer, the person who is ordered to pay called the drawee and the person to whom or to order the money is directed to be paid is called the payee. To be of real use, the bill of exchange must be accepted. The mere fact that a bill is drawn by one person upon another does not make the drawee liable for its value. The drawee must accept liability before he can be made liable.

What are the main features of a bill of exchange?


A bill of exchange has the following features: A bill of exchange is an instrument in writing. It must be signed by the maker or drawer. Unsigned document will not be legally valid. It contains an unconditional order. There is no condition attached to it. The order must be to pay money and money only. The sum payable must be specific. The money must be payable to a definite person or to his order or to the bearer.

What are the main advantages of Bill of Exchange?


The following are the advantages of a bill of exchange: Bill of exchange fixes the date of payment. The creditor knows when to expect his money and the debtor also knows when he will be required to make payment. A bill of exchange is a negotiable instrument and can be used in settlement of debts.

it is a written and signed acknowledgement of debt and affords conclusive proof of indebtedness. A debtor is free from worries and enjoys full period of credit, as he can never be called upon to pay the amount of the bill before the due to date. A creditor can convert the bill into cash by getting it discounted with the bank.

PROMISSORY NOTEA promissory note is an instrument in writing 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.
What are the essentials of a promissory note?
An instrument to be a promissory note must fulfill the following essentials:
It must be in writing. The promise to pay must be expressed. A mere acknowledgment of debt without express promise to pay is not promissory note. The promise to pay must be unconditional. A promise to pay 'when able' or 'as soon as I possibly can' is conditional. It must be signed by the maker. The maker must be certain. Promise must be to pay a certain sum.

What are the difference between bill of exchange and promissory note?
The following are the points of distinction between a promissory note and a bill of exchange: There are three parties to a bill of exchange, namely, the drawer, the drawee and the payee, while in a promissory note there are only two parties - maker and payee. In a bill of exchange there is an unconditional order to pay, while in a promissory note there is an unconditional promise to pay. A bill of exchange requires an acceptance of the drawee before it is presented for payment, while a promissory note does not require any acceptance since it is signed by the person who is liable to pay. The liability of a maker of a bill of exchange is primary and while the liability of a drawer of a bill of exchange is secondary and conditional. It arises only when the drawee fails to pay that the drawer would be liable as a surety.

What are the difference between cheque and bill of exchange?


A cheque differs from a bill of exchange in the following respects: Drawee: A cheque is always drawn on a bank or banker while a bill of exchange can be drawn on any person including a banker. Acceptance: A cheque does not require any acceptance, while a bill must be accepted before the drawee can be made liable upon it. Payment: A cheque is payable immediately on demand without any days of grace, but a bill of exchange is normally entitled to three days of grace unless it is payable on demand. Stamp: A bill of exchange must be stamped, whereas a cheque does not require any stamp. Protection: A banker is given statutory protection with regard to payment of cheques in certain

circumstances. No such protection is available to the drawee or acceptor of a bill of exchange.

How many kinds of Bills of exchange are there?


There are two kinds of bills: Inland Bill: An inland bill is one which is (i) drawn and payable in India or (ii) drawn in India upon some person resident in India even though it is made payable in a foreign country. Thus in an inland bill of exchange both drawer and drawee belong to the same country. Foreign Bill: A foreign bill is one which is drawn in one country and payable in another country. Foreign bills are drawn in a set of three and each part of the set called a via contains a reference to the other parts. This is done to avoid delay or loss or miscarriage during the transit.

What do you mean by Accommodation bills? Such bills are drawn to help the other party or for mutual benefit. They are not received in lieu of value received by the other party. Cash is received by discounting the bill from the bank and funds are used by the one or all the parties

WHAT DO YOU MEAN BY TRADE BILLWhere a bill of exchange is drawn and accepted for a trade transaction, it is called a trade bill.
What are the difference between Trade Bill and Accommodation Bill?
Following is the distinction between trade and accommodation bill:

Trade Bill: There are drawn for trade purposes. These are drawn against proper consideration. These bills are proof of debt. For obtaining the debt from drawee, drawee can resort to legal action. Accommodation Bill: These are drawn and accepted for financial assistance. These are drawn in the absence of any consideration. These bills are not a proof of debt. Legal action cannot be resorted the recovery of amount against these bills by the immediate parties.

What do you mean by Dishonour of Bill?


If a bill is not accepted or bill if accepted is not paid on the due date, it is said to have been dishonoured. In such a case notice of Dishonour must be given by the holder to the drawer and each prior endorser whom he seeks to make liable. If this is not done, the holder will lose his right to recover the amount from the prior parties.

What is the meaning of 'renewal of a bill'?


Sometimes the drawee of a bill is unable to pay the bill amount on the due date and he may request the drawer to allow him some extra time. If the drawer is agreed to the proposal of the drawee, the old bill is cancelled and a new bill is drawn for the extended period. The process of canceling the old bill and drawing a new bill is called Renewal of the bill. When a bill is renewed, the drawee is liable to pay interest to the drawer for the extended period (from the old due date to the new due date).

WHAT DO YOU MEAN BY ENDORSEMENT OF BILLEndorsement means transfer of bill of exchange or promissory note to another person.the person receiving the bills of exchange or promissory note becomes authorized to receive the payment. The person who transfer the bill

of exchange or promissory note in favour of other person is called endorser. The person to whom the bill of exchange or promissory note is endorsed is called the endorsee. DISCOUNTING OF BILLWhen the holder of the bill takes the amount from a bank against the bill before the due date, it is known as discounting of the bill. The bank charges an amount termed as discounting charges. The charges depend upon the rate of interest and the period of maturity. RETIRING OF BILL under a rebateIf the drawer or the acceptor wishes to pay the amount of bill before the date of maturity, it is called retiring the bill. Usually the holder, in such a cae, would be willing to allow a deduction because of interest involved. Such a reduction is called rebate.

What do you mean by Holder?


Holder means any person entitled in his own name to the possession of the negotiable instruments and to recover or receive the amount due thereon from the parties thereto. A holder must, therefore, have the possession of the instrument and also the right to recover the money in his own name. Thus, a person who though in possession of the instrument but has no right to recover the money due thereon is not a holder. The position of a holder of a bill is important for a number of reasons. No person other than a holder can sue upon a negotiable instrument. With certain exceptions, the holder is entitled to negotiate it.