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Negotiable Instrument

What is Negotiable Instrument?

Answer: The Negotiable Instruments Act was enacted, in India, in 1881. Negotiable means
transferable by delivery and instrument means a written document by which a right is created in
favor of some person.

According to Section 13 (a) of the Act, Negotiable instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer, whether the word order or bearer
appear on the instrument or not.

Negotiable instrument means a) a written document which b) creates a right in favor of some
person and which is freely transferable.

How many instruments are honored or recognized as negotiable instruments?

Answer: There are 3 kinds of instruments are honored or recognized as negotiable instruments-

i) Promissory Notes
ii) Bills of Exchange and
iii) Cheque

2 types of rights created by these 3 instruments-

i) Right to Ownership
ii) Right to Delivery

Promissory Notes:

Section 4 of the Act defines, A promissory note is an instrument a) in writing (note


being a bank-note or a currency note) containing an b) unconditional undertaking, c) signed by
the maker, d) to pay a certain sum of money to or to the order of e) a certain person, or to the
bearer of the instruments.

Elements of Instruments of Promissory Notes:

i) It must be a document in writing


ii) It must be with unconditional undertaking
iii) It must be signed by the maker
iv) It must pay in a particular certain sum of money
v) It must pay to a particular person (payee).
Point:

- Promissory notes use to give as gifts, rewards.


- It is only two party papers. There is no 3rd party between Maker and Payee.
- Payee can get the money from bank.
- If payee doesnt get the money from bank, payee can go to maker and get the money.
- If the pattern of promissory notes has changed by the bank, still the payee can get the
money. Because as the notes has all the criteria of promissory note, so bank is bound pay
to payee.
- Primary right and liability is payee to maker.
- A promissory note is payable on demand. So thats mean there will be no condition such
as, I will pay him 500tk on 27th December,2016. Or I will pay him 500tk after I marry
Mr. Y.

Promissory Note
Address:
Date:

I, Mr. A promise to pay Mr. B 5000tk (five thousand taka only).

To, Mr. B Mr. A___


Signature

Bill of exchange:

Section 5 of the Act defines, A bill of exchange is an instrument a) in writing containing


b) an unconditional order, c) signed by the maker, d) directing a certain person e) to pay a certain
sum of money only to, or to the order of f) a certain person or to the bearer of the instrument.

Elements of bill of exchange:

i) It must be a document in writing.


ii) It must be with unconditional undertaking.
iii) It must be signed by the maker.
iv) It must be directed someone to pay the amount to a particular person.
v) It must pay in a particular certain sum of money.
vi) It must pay to a particular person (payee).

Maker Third Party Payee


(Known as Drawer) (Known as Payee)
(Bank, Financial agency)
(Known as Drawee)
There are three parties involved in a bill of exchange:

i. The DrawerThe person who makes the order for making payment.
ii. Drawee-The person or financial institution to whom the order to pay is made,
generally a debtor of the drawer.
iii. The PayeeThe person to whom the payment is to be made.

Rights and liabilities:

1. Primary liability in case of bill payee to drawee.


2. Secondary liability in case of bill payee to drawer.
3. If drawee fails to pay the amount, then drawer will be the primary liability.

Point:

- Cheque is a bill of exchange.


- There is no order to pay, but only a request to pay.
- Right to ownership creates when drawer make the bill.
- Right to delivery creates when payee get the amount from the bank or financial agency.

Bill of Exchange

Bank Name: Date:


Bank Account No:

Please pay 500tk (five hundreds taka only) to Mr. B.

Mr. A___
Signature

Cheque:

Section 6 of the Act defines A cheque is a bill of exchange drawn on a specified banker,
and not expressed to be payable otherwise than on demand.
Elements of Cheque:

i) It must be a document in writing.


ii) It must be with unconditional undertaking.
iii) It must be signed by the maker.
iv) It must be directed someone to pay the amount to a particular person.
v) It must pay in a particular certain sum of money.
vi) It must pay to a particular person (payee).

Drawer Drawee (Bank) Payee

(Primary Liability)

(Secondary Liability)
Point:

- All bill of exchange is not always cheque.


- Primary liability is payee to drawee.
- Secondary liability is payee to drawer.
- Right to ownership and right to delivery create at the same time (at the payment time).
- It is always drawn on a specified banker.
- It is always payable on demand.

Personal Cheque
Bank Name: Date:
Bank Account No.

Pay Mr. B 5000tk (five thousand taka only).

Mr. A___
Signature
Differences between bill of exchange and Cheque:

Topic Bill of Exchange Cheque

Maturity The date at which it falls due. A cheque no grace period is


allowed.
Durability 3 days of grace are allowed. Within during time to right to
delivery.
Acceptance A bill of exchange must be A cheque does not require any
accepted before its payment such acceptance.
can be claimed.
Notice of dishonor Notice of dishonor of a bill is No such notice is necessary in
necessary. the case of cheque.
Liability Before matured time, there After matured time, there will
will no liability. be no liability.
Payable Bill of exchange may be Always payable on demand.
payable on demand or it may
be payable
after a certain period of
time.
Validity Time Not Applicable 3 months

Right and liabilities of Parties

General Rule: No third party will get the negotiable instrument without entitled his name.

Unknown Parties:

Holder: According to section 8 the holder of a promissory note , bill of exchange or cheque
means any person (a) entitled in his own name to the possession thereof and (b) to receive or
recover the amount due thereon from the parties thereto.

The person legally entitled to receive the money due on the instrument, is called the holder.

Holder in due course: The holder in due course means any person who for consideration
became the possessor of a negotiable instrument if payable to bearer, other payee or endorsee
thereof if payable to order, before the amount mentioned in it became payable, and without
sufficient cause to believe that any defect existed in the titled of the person from whom he
derived his titled (section 9)
To be a holder in due course of a negotiable instrument, the person has to satisfy below
conditions:

a) He must be a holder in due course.


b) He must be a holder of valuable consideration.
c) He must become a holder of the negotiable instrument before the date of maturity.
d) He must become a holder of the negotiable instrument in good faith.

Rights of a holder in due course:

1) Liability of prior parties to holder in due course:


According to section 36 Every prior party to a negotiable instrument (its maker or
drawee, acceptor or endorser) is liable thereon to a holder in due course until the
instrument is duly satisfied. It means that a holder in due course can recover the amount
of the negotiable instrument, from any or all of the previous parties (endorsee) to the
instrument.

2) Estoppels against denying original validity of the instrument:


Section 120 provides that no maker of a promissory note and no drawer of bill of
exchange or cheque and no acceptor of a bill of exchange for the honor of the drawer
shall in a suit thereon by a holder in due course be permitted to deny the validity of the
instrument as originally made or drawn.

3) Estoppels against denying capacity of payee to endorse:


No maker of a promissory note and no acceptor of a bill of exchange payable to order
shall, in a suit thereon by a holder in due course, be permitted to deny the payees
capacity at the date of note or bill, to endorse the same (section 121). By virtue of the
section 121, a holder in due course can claim payment in his own name despite the
payees incapacity (being an insolvent) to endorse the instrument.

4) Estoppels against denying signature or capacity of prior party:


No endorser of a negotiable instrument shall, in a suit thereon by a subsequent holder, be
permitted to deny the signature or capacity of any prior party to the instrument
(Section122).

Endorsement: When the maker or holder of a negotiable instrument signs the same, otherwise
than as such maker, for the purpose of negotiation on the back or face thereof or on a slip of
paper annexed thereto, or so signs for the same purpose a stamped paper intended to be
completed as a negotiable instrument, he is said to endorse the same, and is called the "endorser"

Endorser: The person who sings the instrument for the purpose of negotiation is called the
endorser.

Endorsee: The person in whose favor instrument is transferred is called the endorsee.
Types of Endorsement
There are 2 kinds of endorsements recognized:

1. Endorsement in blank:
If the endorser signs his name only, the endorsement is said to be in blank (Section 16).
The endorser does not specify the name of endorsee with effect that an instrument
endorsed in blank becomes payable to the bearer (subject to the provisions as regards
crossed cheques) even though originally payable to order (Section 54) and no further
endorsement is required for its negotiation.

For Example, If a cheque is payable to X or order and X merely signs on its back, such
endorsement is called endorsement in blank. Such endorsement makes it a bearer cheque
which may be further negotiable by mere delivery. But if such a cheque is a crossed one,
its payment cannot be made at the counter of the bank, even if it is endorsed in blank. If
the endorsement in blank is followed by endorsement in full, it becomes payable to or to
the order of the person mentioned in the last endorsement.

2. Endorsement in Full:
If in addition to his signature, the endorser adds a direction to pay the amount mentioned
in the instrument to or to the order of, a specified person, the endorsement is said to be
endorsement in full (Section 16).

If in the above illustration X adds the words Pay to Y or Pay to Y or order, such
endorsement is called endorsement in full. The instrument will then be payable to Y or
his order and will necessitate endorsement by Y for its further negotiation.

Chain of Title:

A B C D E F G H

Lost Instruments:

F (who lost the instrument)

G (who find to the instrument) H (innocent instrument holder who deceived by G)


Acceptance means an acceptance completed by delivery or notification
Bearer means the person in possession of a bill or note which is payable to bearer;
Bill means bill of exchange and Note means promissory note;
Delivery means transfer of possession, actual or constructive, from one person to
another,
Holder means the payee or endorsee of a bill or note that who is in possession of it, or
the bearer thereof:
Holiday means any day appointed by law, to be kept as a holiday, or as a day of fast or
thanksgiving, but not Christmas Day or Good Friday;
Endorsement means an endorsement completed by delivery,

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