BUSINESS LAWThe Negotiable Instruments

Act, 1881

Introduction

A document/ instrument that creates a right in favour of some person

A document guaranteeing the payment of a specific amount of money, either on demand, or at a set time

Types› Promissory Note› Bill of Exchange› Cheque

Promissory Note

An instrument wherein one party (the maker or issuer) makes an unconditional promise in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee under specific terms

A written, dated and signed two-party instrument containing an unconditional promise by the maker to pay a definite sum of money to a payee on demand or at a specified future date

Bill of Exchange

A written order by the Drawer to the Drawee to pay money to the Payee

A written order used primarily in international trade that binds one party to pay a fixed sum of money to another party at a pre-determined future date

An unconditional order issued by a person or business which directs the recipient to pay a fixed sum of money to a third party at a future date. It must be in writing and signed and dated. Also known as Draft

Cheque

A cheque is a negotiable instrument instructing a financial institution to pay a specific amount of a specific currency from a specified transactional account held in the drawer’s name with that institution. Both the drawer and the payee may be natural persons or legal entities

A bill of exchange drawn on a bank by the holder of an account; payable into a bank account if crossed, or on demand if uncrossed

Cheque - TypesBearer Cheque - When the words "or bearer" appearing on the face of the cheque are not cancelled. Payable to the person specified therein or to any other who presents it to the bank for payment. Such cheques are risky as if lost, the finder of the cheque can collect

Order Cheque - When the word "bearer" appearing on the face of a cheque is cancelled and when in its place the word "or order" is written on the face of the cheque. Payable to the person specified therein as the payee, or to any one else to whom it is endorsed (transferred).

Uncrossed / Open Cheque - When a cheque is not crossed. The payment of such a cheque can be obtained at the counter of the bank. An open cheque may be a bearer cheque or an order one.

Crossed Cheque - Crossing of cheque means drawing two parallel lines on the face of the cheque with or without additional words like "& CO." or "Account Payee" or "Not Negotiable". A crossed cheque cannot be encashed at the cash counter of a bank but it can only be credited to the payee's account.

Cheque - Types

Anti-Dated Cheque - If a cheque bears a date earlier than the date on which it is presented to the bank. Such a cheque is valid upto six months from the date of the cheque.

Post-Dated Cheque - If a cheque bears a date which is yet to come (future date). A post dated cheque cannot be honored earlier than the date on the cheque.

Stale Cheque - If a cheque is presented for payment after six months from the date of the cheque it is called stale cheque. A stale cheque is not honored by the bank.

Essentials Must be in writing Amount/ date/ time/ name/ stamp - must

be mentioned Free transfer Rights of the holder

› To recover money himself› To transfer his right to another person

Unconditional promise/ order to pay Exception to the rule “No one can transfer

the better title than he himself has”