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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.
Answer: There are 3 kinds of instruments are honored or recognized as negotiable instruments-
i) Promissory Notes
ii) Bills of Exchange and
iii) Cheque
i) Right to Ownership
ii) Right to Delivery
Promissory Notes:
Promissory Note
Address:
Date:
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.
Point:
Bill of Exchange
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:
(Primary Liability)
(Secondary Liability)
Point:
Personal Cheque
Bank Name: Date:
Bank Account No.
Mr. A___
Signature
Differences between bill of exchange and Cheque:
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:
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: