The Negotiable Instruments Act

The Negotiable Instruments Act  

Introduction:

Negotiable instruments have a great importance in the business world and by extension in banking. They are instruments for making payments and discharging business obligations. Negotiable instruments are mainly governed by state statutory law. Every state has adopted Article 3 of the Uniform Commercial Code (UCC), with some modifications, as negotiable instruments.

Negotiable Instrument:

The Negotiable Instruments Act does not define a negotiable instrument but   merely states, a negotiable instrument mean a promissory note, bill of exchange or cheque payable either to order or bearer (Section 13). Thomas defines a negotiable instrument is one which is, legally recognized by custom of trade or by law. So a negotiable instrument is a-

1.      Written instrument

2.      Signed by the maker or drawer of the instrument.

3.      Unconditional promise or order to pay.

4.      A fixed amount of money.

5.      On demand or at an exact future time.

6.      To a specific person, or to order, or to its bearer.

Characteristics of negotiable instruments: The important characteristics are as follows:

 

1.      Free Transferability: A negotiable instrument may be transferred by delivery from one person to another. In these instruments right of ownership passes either by delivery or by endorsement if it is payable to order.

Thus, a Fixed Deposit Receipt, is not an negotiable instrument, because it non-transferable. On the other hand all instruments which are transferable are not negotiable instruments e.g. share certificate. A negotiable instrument may be transferred any number of times till it is discharged.

2.      Title to transferee: The transferee of a negotiable instrument is known as holder in due course. A bonafide transferee for value is not affected by any defect of title on the part of the transferor. This is the main distinction between a negotiable instrument and other ordinary transfer. It constitutes an exception to the general rule that no one can give a better title then he himself has. (Not applicable).

3.      Entitlement to sue:  The transferee of the negotiable instrument can sue in his own name, in case of dishonor. A negotiable instrument can be transferred any number of times till it is discharged. The holder of the instrument needs not to give notice to the transferor (debtor).

4.      Prompt Payment:  A negotiable instrument enables the holder to expect prompt payment because a dishonor means the ruin of the credit of all persons who are parties to the instrument.

5.      Presumptions: Every negotiable instrument is subject to certain presumptions. For deciding the rights of the parties on the basis of a bill of exchange, the Court is entitled to make certain presumptions under section (118-119). These are briefly stated as follow:

a.       Consideration: That every negotiable instrument is made or drawn for a consideration. Thus, this need not necessarily be mentioned.

b.      Date: That the negotiable instrument was drawn on the date shown on the face of it.

c.     Acceptance before maturity: That the bill of exchange was accepted before its maturity i.e. before it became overdue. 

d. Transfer before maturity: That the negotiable instrument was transferred before its maturity.

e.   Order of Endorsements: That the Endorsements appearing upon a negotiable instrument were made in the order in which they appear.

f.       Stamping of the instrument: That an instrument which has been lost was properly stamped.

g.   Holder in due course: The holder of a negotiable instrument is the ‘holder in due course, but this presumption would not arise that the instrument has been obtained from its lawful owner or its lawful custodian by means of offence or fraud or unlawful consideration. 

h.      Proof of dishonor: If a suit is filed upon an instrument which has been dishonored, the Court shall, presume the fact of dishonor unless it is disproved. (Section 119)

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