A negotiable instrument is a written document that guarantees the payment of a specific amount of money to the bearer or a named person. It is transferable by delivery (or by endorsement and delivery) and offers the holder the right to receive payment.
Definition
According to the Negotiable Instruments Act, 1881, Section 13, "A negotiable instrument means a promissory note, bill of exchange, or cheque payable either to order or to bearer."
Characteristics of Negotiable Instruments
1. Freely Transferable: Ownership can be transferred by endorsement or delivery.
2. Title of Holder in Due Course: The transferee gets a better title than the transferor if obtained in good faith and without knowledge of any defects.
3. Unconditional Payment: Payment must be made unconditionally to the holder.
4. Certainty of Amount: The amount to be paid is specific and certain.
5. Time of Payment: Either payable on demand or at a fixed future date.
6. Legal Recognition: Governed by the Negotiable Instruments Act, 1881.
Types of Negotiable Instruments
1. Promissory Note:
A written promise by one party (maker) to pay a certain sum of money to another party (payee) on demand or at a specified time.
Key Elements:
- Unconditional promise.
- Amount must be certain.
- Signed by the maker.
Example:
"I promise to pay Mr. X or his order Rs. 10,000 on demand."
2. Bill of Exchange:
A written order by one party (drawer) directing another party (drawee) to pay a specified sum to a third party (payee) on demand or at a fixed future date.
Key Elements:
- Unconditional order.
- Involves three parties: Drawer, Drawee, and Payee.
- Accepted by the drawee.
Example:
"Pay to Mr. X or order Rs. 15,000 after 60 days from today."
3. Cheque:
A type of bill of exchange drawn on a bank, payable on demand.
Key Elements:
- Always drawn on a bank.
- Payable on demand.
- Includes features like crossing (restricts its negotiability).
Types of Cheques:
Bearer Cheque: Payable to the person holding the cheque.
Order Cheque: Payable to a specified person or order.
Crossed Cheque: Requires payment to be credited directly into a bank account.
Other Negotiable Instruments
1. Demand Drafts: Prepaid negotiable instruments issued by banks.
2. Treasury Bills: Short-term instruments issued by the government.
3. Commercial Papers: Used by corporations to raise funds.
Legal Provisions
The Negotiable Instruments Act, 1881, governs their functioning, providing a framework for rights, duties, and remedies related to negotiable instruments.
Key Sections:
Section 13: Defines negotiable instruments.
Section 31: Liability of the drawee (banker) in case of dishonor.
Section 138: Deals with the penalty for cheque dishonor due to insufficient funds.
Advantages of Negotiable Instruments in Banking
1. Ease of Transfer: Facilitates quick and simple transfer of money.
2. Security: Serves as a safe mode of payment, reducing the risk of theft.
3. Legal Protection: Provides remedies in case of dishonor.
4. Certainty: Guarantees a definite amount and date of payment.
5. Trust: Enhances trust among parties in financial transactions.
Dishonor of Negotiable Instruments
Dishonor occurs when the drawee refuses to accept or pay the instrument.
Reasons for Dishonor: Insufficient funds, signature mismatch, or post-dated cheques presented early.
Legal Action: Under Section 138 of the Negotiable Instruments Act, dishonor of a cheque can lead to criminal proceedings.
Conclusion:
Negotiable instruments are integral to banking and commerce. They streamline financial transactions, ensuring security, flexibility, and legal enforceability. With evolving technologies, electronic forms like e-cheques are also gaining prominence.
No comments:
Post a Comment