Negotiable Instruments

Topics: Negotiable instrument, Cheque, Promissory note Pages: 15 (4619 words) Published: October 2, 2011

Although every business uses negotiable instrument in one way or other but very few individual understand the overall scope and facts about these instruments. Negotiable instrument is an unconditional order or promise to pay an amount of money, easily transferable from one person to another. Negotiable Instruments have their origin in centuries past where they were developed as an alternative to the risk of carrying gold or money from market town to market town. Hence we have decided to write all the relevant material and information from various sources and rewrite according to need of the readers. So we all may be able to understand the meaning of negotiable instruments; identify the various features of negotiable instruments; describe the various types of negotiable instruments; and differentiate between bills of exchange, promissory notes, and cheques.

Law of Negotiable Instruments 1881

1. Introduction:
Exchange of goods and services is the basis of every business activity. Goods are bought and sold for cash as well as on credit. All these transactions require flow of cash either immediately or after a certain time. In modern business, large number of transactions involving huge sums of money takes place everyday.

It is quite inconvenient as well as risky for either party to make and receive payments in cash. Therefore, it is a common practice for businessmen to make use of certain documents as means of making payment. Some of these documents are called negotiable instruments.

According to section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument means “promissory note, bill of exchange, or cheque, payable either to order or to bearer”.

A NEGOTIABLE INSTRUMENT is a document that meets the requirements for circulation without reference to other sources. The amount must be clearly specified or capable of being calculated.

➢ Therefore Negotiable Instrument Act, 1881 or Law of Negotiable Instrument, 1881 has been constituted to help individual in their daily business activity.

➢ The main object of the Negotiable Instruments Act is to legalize the system by which instruments contemplated by it could pass from hand to hand by negotiation like any other goods.

➢ The purpose of the Act was to present an orderly and authoritative statement of leading rules of law relating to the negotiable instruments.

➢ To achieve the objective of the Act, the Legislature thought it proper to make provision in the Act for conferring certain privileges to the business instruments contemplated under it and provide special procedure in case the obligation under the instrument was not discharged.

2. Meaning of Negotiable Instruments
To understand the meaning of negotiable instruments let us take a few examples of day-to-day business transactions.

Suppose Ali a distributor has sold chemicals to Ahmed for Rs 65,000/ on three months credit. To be sure that Ahmed will pay the money after three months, Ali may write an order addressed to Ahmed that he is to pay after three months, for value of goods received by him, Rs.65,000/ to Ali or anyone holding the order and presenting it before Ahmed for payment. This written document has to be signed by Ahmed to show his acceptance of the order. Now, Ali can hold the document with him for three months and on the due date can collect the money from Ahmed. He can also use it for meeting different business transactions. For instance, after a month, if required, he can borrow money from Tariq for a period of two months and pass on this document to Tariq. He has to write on the back of the document an instruction to Ahmed to pay money to Tariq, and sign it. Now Tariq becomes the owner of this document and he can claim money from Ahmed on the due date. Tariq, if required, can further pass on the document to Malik after instructing and signing on the back of the document. This passing on process may continue further till the final payment...
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