NEGOTIABLE INSTRUMENTS e 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. e 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 them. Essential features of Negotiable Instruments Essential elements (features) of Negotiable Instruments 1 2 3 Nowa It must be in Writing. it must be Signed by the maker or drawer. There must be an unconditional Promise or order to pay. Payment of certain sum of money only. Instrument must be payable at a time. The drawee must be named. in case of transfer, transferee receives Negotiable Instruments in good faith & for value.Types of Negotiable instruments 1. Promissory Notes e A promissory note is a financial instrument that contains a written promise by one party (the note's issuer or maker) to pay another party (the note's payee) a definite sum of money, either on demand or at a specified future date. ESSENTIALS OR CHARACTERISTICS OF A PROMISSORY NOTE (1) In writing :- A promissory note must be in writing. Writing includes print and typewriting. (2) Promise to pay - It must contain an undertaking or promise to pay. Thus, a mere acknowledgement of indebtedness is not sufficient. Notice that the use of the word ‘promise’ is not essential to constitute an instrument as promissory note. (3) Unconditional - The promise to pay must not be conditional. Thus, instruments payable onperformance or non-performance of a particular act or on the happening or non-happening of an event are not promissory notes. (4) Signed by the Maker - The promissory note must be signed by the maker, otherwise it is of no effect. (5) Certain Parties - The instrument must point out with certainty the maker and the payee of the promissory note Parties to a Promissory note e Drawer: the person who makes a promissory note. He is also called the promisor, the maker, the payor, the debtor. e Drawee: the person in whose favor the promissory note is drawn and who is meant to receive the payment. He is also called the promisee, the payee, the creditor. e Bearer: the person who holds a promissory note. He is also called the holder. The bearer and the payee is usually the same person, but they can be different.e Endorser: the person who endorses a promissory note. e Endorsee: the person in whose favor the promissory note is endorsed and who receives it after endorsement. He becomes the new bearer and payee after endorsement 2. Bill of exchange A bill of exchange is a binding agreement by one party to pay a fixed amount of cash to another party as of a predetermined date or on demand. Bill of exchanges are primarily used in international trade. Definition According to negotiable instrument act 1881, sec 5, Bill of exchange is defined as an instrument in writing, containing an unconditional order, signed by the maker, directing to a certain person, to pay a certain sum of money, only to or to the order of certain person, or to the bearer of the instrument. Features— Bill of exchange must be in writing. — Bill of exchanges are not a request to pay an order to pay. — The order must be signed by the maker or seller. — The order must be for the payment of money only. — The money payable not vague and must be certain. — It must be payable to a certain person mentioned in the instrument or to his order or to the bearer of the document. — The order must be unconditional. = It facilitates credit sales and credit purchases. — It must be stamped as per the requirement of law. — Delivery of document is essential Parties to bill of exchange [Link] The maker of a bill of exchange is called the drawer. [Link] The person who is directed to pay is called drawee. [Link] The person who will receive the money is called the payee.|A bill contains an unconditional order to pay|A Promissory Note contains only a promise to ja certain sum of money only There are generally 3 parties involved in a_ [There are 2 parties in a promissory note - Bill of Exchange - Drawer, Drawee and Maker (promissor) and Payee [A Bill of Exchange needs Accepctance [A promissory Note doesnot need accepctance [A Bill is drawn by Creditor (Seller) [A Promissory Note is made by Debtor (Buyer) In a Bill of Exchane, notice of dishonor must |Notice of dishonor is not required in case of be given Promissory Note 3. CHEQUE Meaning * cheque is a Written order issued by a depositor to his bank to pay a specified sum to the holder or named person or company on demand. Essentials of a Cheque (DIt is always drawn on a banker. (2)It is always payable on demand. (3) It does not require acceptance. There is, however, a custom among banks to mark cheques as good for purposes of clearance. (4) A cheque can be drawn on bank where the drawer has an account. (5) Cheques may be payable to the drawer himself. It may be made payable to bearer on demand unlike a bill or a note. (6) The banker is liable only to the drawer. A holder -has no remedy against the banker if a cheque is dishonoured. (7) A cheque is usually valid for fix months. However, it is not invalid jf it is post dated or ante- dated. (8) No Stamp is required to be affixed on cheques.Difference between cheque & Bill of exchange [Link] drawn on bank 1. Usually drawn on person or firm 2. Always pay on demand 2.11 may be pay on demand or expiry period 3.1t dosen't require stampe 3.1 must require stamped 4.1 can be crossed 4.1t can’t be crossed $.Notice of dishonor is not require 5. Notice of dishonor is require [Link] banker can be drawee 6. Any one can be drawee include banker Types of Cheque Bearer Cheque e This cheque is paid to the bearer of the cheque or whose name the cheque carries in the column meant for the name of the drawee. Order Cheque e Inthis cheque, the printed word “bearer” is cancelled thereby making it payable only to the person whose name is written in the place ofdrawee. Crossed Cheque In a crossed cheque, the drawer makes two parallel transverse lines at the top of the corner of the cheque with or without writing “a/c payee”. This makes sure that no matter who presents the cheque to the drawer's bank, the transaction is made into the account of the person named in the cheque only. The advantage of crossed cheque is that it reduces the risk of money being given to an unauthorized person This type of cheque can only be cashed by the drawee's bank. Open Cheque Open cheque is also called uncrossed cheque sometimes.e Any cheque that is not crossed comes under open cheque category. e This cheque can be presented to the drawee’s bank and is payable to the person presenting it. e This can be encashed over the bank counter Post-Dated Cheque e Acheque bearing a later date than the one on which it is actually issued, is called a post-dated cheque. e The payee can present the cheque after the date mentioned on the cheque. Ante dated Cheque This is a cheque in which the drawer mentions the date earlier to the date of presenting it for payment. For example, a cheque issued on May 20, 2007 may bear a date May 5, 2007. Stale Chequee Astale cheque is one which is past its validity period and can no longer be encashed. e Initially, this period was six months from the date of issue. e Now this period has been reduced to three months. Traveller's Cheque e This is an instrument issued by the bank itself to make payments from one place to another. e There is no expiry date of a traveller's cheque and this it can be used during your next travel as well e You also have the option to encash it once you are back from your trip. Account Payee Cheque An Account Payee Cheque is a highly secured typeof cheque as the amount can only be deposited in the account of payee. in case of an account payee cheque, the payment will be made only by depositing it to the payee’s account. Self Cheque If the drawer wishes cash for himself he can issue a cheque where in place of the Payee's name he can write "SELF" and get encashment from the branch where he owns an account. . For example: If a person wants Rs. 1,00,000/- MUTILATED CHEQUE In this type of cheque, the cheque is torn into two or more pieces such cheque is Mutilated Cheque. if it is presented for payment, such a cheque the bank will not make payment against such a cheque without getting confirmation of the drawer.