MEANING,DEFINITION, FEATURES OF NEGOTIABLE INSTRUMENTS, HOLDER AND HOLDER IN DUE COURSE

JYOTI SAINI, BCOM LLB(HONS.)

1. NEGOTIABLE INSTRUMENTS:DEFINITION,ESSENTIAL FEATURES OF NEGOTIABLE INSTRUMENTS , PROMISSORY NOTES, BILLS OF EXCHANGE

2. NEGOTIABLE INSTRUMENT: MEANING The word “negotiable” means “Transferable by delivery” and the word “instrument” means “a written document by which a right is created in favour of some person. Thus, the term “negotiable instruments” means “a written document transferable by delivery. Negotiable Instruments are written contracts whose benefit could be passed on from its original holder to a new holder. These instruments are transferable signed documents which promises to pay the bearer/holder the sum of money when demanded or at any time in the future. These instruments are transferable. The final holder takes the funds and can use them as per his requirements.

3. NEGOTIABLE INSTRUMENT ACT,1881 The Negotiable Instruments Act was enacted, in India, in 1881. Prior to its enactment, the provision of the English Negotiable Instrument Act were applicable in India, and the present Act is also based on the English Act with certain modifications. It extends to the whole of India. The act provides for the settlement of payments in business as the freely pass from holder to holder in due course due to easy transferability. It provides legal protection to different mercantile instruments. The act regulates different types of negotiable instruments . The act gives definition of promissory note, bills of exchange,cheque and parties to the negotiable instruments

4. DEFINITION OF NEGOTIABLE INSTRUMENT According to Black's Law Dictionary , Negotiable instrument is a written and signed unconditional promise or order to pay a specified sum of money on demand or at definite time payable to order or bearer. In the words of Justice, Willis , A negotiable instrument thus possesses two qualities: ( i ) The right of ownership contained in the instrument can be transferred from one person to another by mere delivery or sometimes by endorsement and delivery, and (ii)T he transferee who takes the negotiable instrument in good faith and for consideration (technically known as a holder in due course) gets a good title to the same even though the title of the transferor is defective. According to Negotiable Instrument Act ,1881 A 'negotiable instrument' means a promissory note, bill of exchange or cheque payable either to order or to bearer.

5. FEATURES OF NEGOTIABLE INSTRUMENTS The time of payment must be certain - It means that the instrument must be payable at a time which is certain to arrive. If the time is mentioned as ‘when convenient’ it is not a negotiable instrument. The payee must be a certain person - It means that the person in whose favor the instrument is made must be named or described with reasonable certainty. The term ‘person’ includes individual, body corporate, trade unions, even secretary, director or chairman of an institution. The payee can also be more than one person. Signature-  A negotiable instrument must bear the signature of its maker. Without the signature of the drawer or the maker, the instrument shall not be a valid one. Delivery-  Delivery of the instrument is essential. Any negotiable instrument like a cheque or a promissory note is not complete till it is delivered to its payee. For example, you may issue a cheque in your brother’s name but it is not a negotiable instrument till it is given to your brother. Easy transferable/negotiability- A negotiable instrument is can be transferred freely without any formality. Absolute Title- a person who receives a negotiable instrument has a clear and undisputable title to the concerned instrument. However, the title of the receiver will be absolute, only if he has got the instrument in good faith and for a valid consideration. Written form: A negotiable instrument must be in writing. This includes handwriting, typing, computer print out and engraving, etc. Unconditional Order - In the negotiable instruments, an unconditional order or promise for payment must be mentioned. · Payment- The instrument should have considered payment of a certain sum of money only and nothing else. To say, one cannot make a promissory note on assets, securities, or goods, etc.

6. PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTS 3.Time of transfer: Unless the contrary is presumed it shall be presumed that every transfer of a negotiable instrument was made before its maturity. 4.Time of acceptance: Unless the contrary is proved, every accepted bill of exchange is presumed to have been accepted within a reasonable time after its issue and before its maturity. This presumption only applies when the acceptance is not dated; if the acceptance bears a date, it will prima facie be taken as evidence of the date on which it was made. Sections 118 and 119 of the Negotiable Instrument Act,1881 lay down certain presumptions which the court presumes in regard to negotiable instruments. Until the contrary is proved the following presumptions shall be made in case of all negotiable instruments: 1.Consideration: It shall be presumed that every negotiable instrument was made drawn, accepted or endorsed for consideration. 2.Date: Where a negotiable instrument is dated, the presumption is that it has been made or drawn on such date, unless the contrary is proved.

7. PROMISSORY NOTE:SECTION 4 A promissory note is a legal instrument (more particularly a financial instrument), in which one party (the maker or issuer) promises in writing to pay a definite sum of money to the other(payee) , either at a fixed or determinable future time or on demand of the payee under specific terms. Section 4 of Negotiable Instruments Act,1881 “Promissory note” – A ‘Promissory Note’ 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.

8. ESSENTIALS OF PROMISSORY NOTE It must be in writing and signed by the maker. B. There must be an undertaking or a promise to pay. C. Such a promise must be unconditional. D. The promise must be in respect of payment of money only E. The amount payable must be certain. F. The payee must be certain. G. It should be dated H. It is payable on demand or after a certain definite period. I. The rate of interest

9. PARTIES TO THE PROMISSORY NOTE Drawer: A drawer is a person who agrees to pay the drawee a certain amount of money on the maturity of the promissory note. He/she is also known as maker. Drawee: She/He is an individual, in whose favour the note is prepared. In usual cases the drawee is also the payee until and unless the promissory note is transferred specifically in favour of the payee. Payee: A payee is someone to whom the payment is made.Most of the times, the payee and drawee are the same people to whom the cash is paid.

10. TYPES OF PROMISSARY NOTE NON-INTEREST BEARING NOTE:  They are promissory notes which do not carry any interest rate with it. The amount that will be paid at the time of maturity is equal to the face value of the promissory note. INTEREST-BEARING NOTE:  Promissory notes which carry an interest rate with it.  The amount that will be paid at the time of maturity is the sum of the face value & interest. DEMAND PROMISSORY NOTE : A demand note is theoretically due from the moment it is executed.  A demand note is not payable, however, until its holder makes demand to its maker for immediate payment. After the holder of a demand note has called the note payable, the maker has an obligation to pay the balance of the note immediately.  If not so paid, the note may be the subject of a legal action to enforce the payment of the indebtedness evidenced by the note.

11. BILLS OF EXCHANGE:SECTION 5 Bill of exchange means a bill drawn by a person directing another person to pay the specified sum of money to another person. Wharton ‘s law lexicon Dictionary defines Bill of exchange as under :- “As an unconditional order in writing, addressed by one parson to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer.” According to Section 5 of Negotiable Instrument Act,1881 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. The definition of a bill of exchange is very similar to that of a promissory note.

12. Essentials of bills of exchange A bill of exchange must be in writing. Must contain an order to pay. Order contained in the bill should be unconditional. Bill must be signed by the drawer. Drawee must be certain Sum payable must be certain. Instrument must contain an orded to pay money and money only. Payee must be certain.

13. Parties to bills of exchange Drawer or Maker: Drawer is the person who draws (or makes) the Bill. He is the person who is entitled to receive the money (i.e. the Creditor). He is required to sign the bill and send it to the drawee for acceptance. Drawee: Drawee is the person on whom the bill is drawn. He is the person who owes the money. The Drawee has to accept the bill of exchange drawn by the drawer. Acceptance is done by signing his name across the face of the bill. Payee: Payee is the person to whom the money is payable. In most cases the drawer of the bill is himself the payee. Drawee in case of need: If the drawer has a doubt that the original drawee will not accept or dishonour the bill, he may write the name of another person for accepting the bill in case the original drawee does not accept it

14. HOLDER AND HOLDER IN DUE COURSE A holder in due course (HDC) is a person who acquires the negotiable instrument bonafide for some consideration, whose payment is still due.. Thus, a person claim to be a ‘holder in due course’ should satisfy the following conditions. He must acquire the instrument for a consideration. The instrument acquired should be before it is matured for payment. It is most important that the holder in the course had no cause to believe that any defect existed in the title of a person from whom he has acquired the instrument Holder  refers to a person; we mean the payee of the negotiable instrument, who is in possession of it. He/She is someone who is entitled to receive or recover the amount due on the instrument from the parties thereto. A person is said to be a holder of negotiable instrument if he satisfies the following two conditions: He should be entitled to possess the instrument in his own name e.g. legal custody of an instrument. He should have a right to receive or recover the amount due on the instrument from the party liable to pay.