NEGOTIABLE INSTRUMENTS, RELATED PARTIES AND LIABILITIES
Name: Nonalisha DC,
Roll no: 51, Section: B, 9thsem
A signed document that ensures payment to a specified individual or
assignee is known as a negotiable instrument. Said otherwise, it is a sort of
IOU that has been formalized, IOU, "I owe you," is a document that
acknowledges the existence of a debt. A signed, transferrable document
that assures the bearer a certain amount of money at some point
afterwards or upon demand and it must be signed to be valid. In most
cases, the payee must be named on the document. Once the instrument is
transferred, the payee assumes full legal ownership of the funds and can
either take them as cash or use them in another manner.
According to Negotiable Instrument Act, 2034, ‘’Negotiable instrument
means a Promissory note and Bill of exchange’’
The purpose of a negotiable instrument is to transfer funds from one entity
to the other. The term ‘negotiable’ refers to the fact that the note can be
assigned to another party. Once transferred, no additional demands or
stipulations are made on the bearer of the document. By contrast, a ‘non-
negotiable’ instrument cannot be assigned or transferred. This gives
negotiable instruments some flexibility, which is particularly useful for when
funds are required at a later date.
Although there are many different types of documents that fall under this
category, personal cheques and promissory notes are two mostly used
examples of negotiable instruments. The following are among some of the
most common types of negotiable instruments:
Bills of exchange
Promissory notes
Cheques
1. Cheque
The most common example of a negotiable instrument is probably a
money order. This is a written document with a predetermined payment
amount. These payments are disbursed to the bearer by the payer's
financial institution upon receipt, either in cash or to a specified bank
account. Even though they are gradually being replaced by online
banking, cheques continue to offer businesses a useful paper trail.
According to Negotiable Instrument Act, 2034,"Cheque" means a Bill of
Exchange drawn on a certain Bank payable on demand.
2. Bill of Exchange
Used in transactions related to both goods and services, bills of
exchange are legally binding documents. They instruct one party to pay
a predetermined sum to a secondary party. The payer signs the bill of
exchange, creating a written contract of payment. When issued by a
financial institution, a bill of exchange is often called a bank draft. When
issued by an individual, it’s called a trade draft.
According to Negotiable Instrument Act, 2034
"Bill of Exchange" means an instrument in writing containing an
unconditional order, signed by the maker, directing a certain person to
pay a certain sum of money to, or to the order of a certain person or to
the bearer of the instrument in a certain date or after certain period of
time or at the demand.
3. Promissory notes
When a promissory note is issued, it shows the amount owed together
with the date of payment and interest rate. Like other negotiable
instruments, they are written documents showing the promise of
payment between a payer and payee. The document contains all
relevant information, including interest rate, principal amount, date of
issue, and payer signature. The benefit of a promissory note is that it
enables businesses to obtain financing from sources outside of official
financial institutions.
According to Negotiable Instrument Act, 2034, "Promissory Note"
means an instrument in writing except government or Bank note
containing an unconditional undertaking, signed by the maker, to pay a
certain sum of money to, or to the order of, a certain person, or to the
bearer of the instrument.
Parties related to Negotiable Instrument
1. Maker or Drawer: The maker or drawer is the first party in a negotiable
instrument. This party is responsible for creating the instrument and
making a promise to pay a specific sum of money to the bearer or a
designated payee.
According to Section 2(l) of Negotiable Instrument Act, 2034, "Drawer"
means a person who makes or draws a Bill of Exchange.
2. Drawee: The drawee is the second party in a negotiable instrument and
they are the party directed by the maker or drawer to make the
payment.
According to Section 2(l) of Negotiable Instrument Act, 2034, "Drawee"
means a person thereby directed for the payment of the Bill of
Exchange.
3. Payee: The payee is the party whose name is mentioned on the
negotiable instrument as the intended recipient of the payment.
According to Section 2(j) of Negotiable Instrument Act, 2034,
"Payee" means the person named in the instrument to whom or to
whose order the money is by the instrument directed to be paid.
4. Holder : A holder is any individual or entity who holds possession of the
negotiable instrument. A person can become a holder by being the
payee or by receiving the instrument through endorsement from the
previous holder.
According to Section 2(k) of Negotiable Instrument Act, 2034, "Holder"
means a person entitled in his own name to the posession of a
Negotiable Instrument and to recieve the amount due on it.
5. Endorser: The endorser is the holder of the negotiable instrument who
signs the back of the instrument, thus transferring their rights in the
instrument to another party. This endorsement allows for the further
negotiation or assignment of the instrument.
Liabilities of the parties under Nepalese law
Under Negotiable Instrument Act 2034, the liabilities of the parties of the
Negotiable Instruments is given as follows:
Section 12 of the Act mentions that for the acts done by an agent, the
principal who has authorized him/her to do such act shall be liable.
Section 13 of the act provides that If an agent who signs his/her name to a
Negotiable Instrument without indicating thereon that he/she signs as an
agent, or he does not intend thereby to incur personal responsibility, is
liable personally to such Negotiable Instrument.
Section 15 of the Act provides that In case the Drawer has been provided
due notice of dishonour of the Bill of Exchange by the acceptor or Drawee,
it shall be the duty of the Drawer to Compensate the Holder.
Section 16 of the Act provides the liability of the bank, it mentions that
Bank having sufficient funds of the Drawer in the account, properly
applicable to the payment of the Cheque must pay the Cheque, and, in
default of such payment must compensate the Drawer or Holder in due
Course for any loss or damage caused by such default pursuant to this Act.
Section 17 of the Act provides the liability of the maker of the Promissory
note and Acceptor of Bill of exchange, it mentions that the maker of a
Promissory Note or the acceptor of Bill of Exchange is bound to pay the
amount thereof at Maturity when the Negotiable Instrument is duly
presented for the payment. In default of such payment, the maker of the
Promissory Note or the acceptor of the Bill of Exchange is bound to
compensate any party payable for any loss or damage sustained by him
and caused by such default.
Section 19 of the act mentions about the liability of the Endorser ,Any
person who indorses and deliver a Negotiable Instrument expressly limiting
or excluding his/her own liability, shall be responsible to every subsequent
Holder except otherwise a contract is made thereto.