Types of Parties under Negotiable Instruments Act, 1881
1.
2. INTRODUCTION
•Negotiable instrument refers to a promissory note, bill of exchange or cheque payable either
to order or to bearer.
•It is a piece of paper which carries some value and is transferable from one person to
another by mere delivery or by endorsement and delivery.
3.
4. PROMISSORY NOTES
It must be in writing
It must contain an unconditional promise to pay.
The sum payable must be certain.
The promissory notes must be signed by the maker.
It must be payable to a certain person.
It should be properly stamped.
A promissory note is a written agreement to pay a specific amount at a future date or on demand to a specific party. Some
characteristics of promissory notes are as follows:
5. BILL OF EXCHANGE
It must be a written document.
It must name all relevant parties.
It must be addressed from one party to another.
It must bear the signature of the party giving it.
It must outline the time when the money is due.
It must outline the amount of money that must be paid.
A bill of exchange is essentially a formal, written IOU that states when a certain amount of money needs to be paid. It must have
the following characteristics:
6. CHEQUE
Cheques can be
issued against
savings or current
accounts
A cheque is always
drawn on a
specified banker
It is an
unconditional order
The payee of a
cheque is fixed and
certain and cannot
be changed
The payment will
only be made in the
name of the
payee/beneficiary
It is an instrument
that is payable on
demand
A cheque will be
considered invalid if
does not contain
the date
A cheque is nothing but a written bill of exchange that is written by a bank account holder to pay for goods or
services. Following are the characteristics:
7.
8. DRAWER & DRAWEE
•The maker of a bill of exchange or cheque is called the “drawer”.
•The person thereby directed to pay is called the “drawee”.
9. ACCEPTOR
•After the drawee of a bill has signed his assent upon the bill, or, if there are more parts
thereof than one, upon one of such parts, and delivered the same, or given notice of such
signing to the holder or to some person on this behalf, he is called the “acceptor”.
10. PAYEE
•The person named in the instrument, to whom or to whose order the money is by the
instrument directed to be paid, is called the “payee”.
11. HOLDER
•Holder is either the payee or some other person to whom he may have endorsed the promissory
note or bill of exchange or cheque.
•A person cannot be a holder unless he is the payee or endorsee (endorsee) thereof.
12. HOLDER IN DUE COURSE
•Holder in due course means any person who for consideration became the possessor of a promissory note,
bill of exchange or cheque, if payable to bearer, or the payee or endorsee thereof, if payable to order,
before the amount mentioned in it became payable, and without having sufficient cause to believe that any
defect existed in the title of the person from whom he derived his title.
13. ENDORSER
•A signature of the owner (the holder of the instrument) would serve the legal rights to transfer an
instrument to another party.
•The holder of the instrument who transfers his right to another party by endorsement is called
endorser.
14. ENDORSEE
•If the endorser adds a direction to pay the amount mentioned in the instrument to, or to the order
of, a specified person, the person so specified is called the “endorsee” of the instrument.
15. EXAMPLES
•Abhinav, owner of the bank account writes a cheque on the name of Vikram. Now Vikram can cash the
amount written on the cheque at the cash counter of Abhinav bank.
•Shakti acknowledges herself to be indebted to Bhumi in Rs. 1,000 to be paid on demand, for value received.
This is an example of promissory note.
•Akshat orders Yash to pay ₹ 50,000 for 90 days after date and Yash accepts this order by signing his name,
then it will be a bill of exchange.
16. CONTD.
•A typical example is if you are cashing a paycheck. The bank that cashes your check is the drawee,
your employer who wrote the check is the drawer, and you are the payee.
•When a customer uses a manufacturer’s coupon as part of a sales transaction, the store accepting the
coupon can be seen as the drawee in relation to the customer.
17. CONTD.
•Where a bill is payable to “Priyanka or order”, and she writes on its back “Priyanka”, it is an
endorsement in blank by Priyanka and the property in the bill can pass by a mere presentation.
•A bill made payable to Priyanka or order, and endorsed “pay to the order of Sanmati” would be
specially endorsed and Sanmati endorses it further. One can turn a blank endorsement into a special
one by adding an order making the bill payable to the transferee.
18. CONCLUSION
•A negotiable instrument is a document that guarantees the payment of a specific amount of money to
a specified person (the payee) and requires payment either on-demand or at a set date.
•Negotiable instruments are distinct from non-negotiable instruments in that they can be transferred to
different people, and, in that case, the new holder obtains full legal title to it.