What is a Negotiable Instrument and Types?
NEGOTIABLE INSTRUMENTS is a very interesting topic of Economic, Business and Commercial Laws, which is also included in our CS Online coaching classes. It is explained below:
What is Negotiate Instrument?
A “negotiable instrument” means a promissory note, bill of exchange or cheque payable either to the order or to the bearer.
TYPES OF NEGOTIABLE INSTRUMENTS
Negotiable Instruments recognized by statutes: The Negotiable Instruments Act mentions only three kinds of negotiable instruments (Section 13).
These are:
i. Promissory Notes
ii. Bills of Exchange, and
iii. Cheques
Negotiable instruments recognized by usage or customs of trade: There are certain other instruments which have acquired the characteristic of negotiability by the usage or custom of trade.
For example: Exchequer bills, Bank notes, Share warrants, Circular notes, Bearer debentures, Dividend warrants, Share certificates with blank transfer deeds, etc.
Visit for reading Business and Commercial Laws of Negotiable Instruments Act 1881
PROMISSORY NOTE (Pronote)
Definition: According to Section 4 of Negotiable Instruments Act, “A promissory note is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.”
Parties to a Promissory Note
There are primarily two parties involved in a promissory note. They are:
i. The Maker or Drawer: The person who makes the note and promise to pay the amount stated therein.
ii. The Payee – The person to whom the amount is payable i.e. to whom the payment is to be made is called a payee.
In course of transfer of a promissory note by payee and others, the parties involved may be –
iii. The Endorser – the person who endorses the note in favour of another person.
iv. The Endorsee – the person in whose favour the note is negotiated by endorsement.
Characteristics of Promissory Note
1. It must be in writing:
A promissory note has to be in writing.
An oral promise to pay does not become a promissory note. The writing may be on any paper or book.
Illustrations: A signs the instruments in the following terms:
“I promise to pay B or order Rs.500/-”
“I acknowledge myself to be indebted to B in Rs.1,000/- to be paid on demand, for value
received”. Both the above instruments are valid promissory notes.
2. It must contain a promise or undertaking to pay:
There must be a promise or an undertaking to pay.
The undertaking to pay may be gathered either from express words or by necessary implications.
A mere acknowledgement of indebtedness is not a promissory note, although it is valid as an agreement and may be sued upon as such.
Illustrations: A signs the instruments in the following terms:
“Mr. B I owe you Rs.1,000.”
“I am liable to pay to B Rs.500.”
The above instruments are not promissory notes as there is no undertaking or promise to pay.
There is only an acknowledgement of indebtedness where A signs the instrument in the following terms:
“I acknowledge myself to be indebted to B in Rs.1,000, to be paid on demand, for value received,” there is a valid promissory note.
3. The promise to pay must be unconditional:
A promissory note must contain an unconditional promise to pay. The promise to pay must not depend upon the happening of some uncertain event, i.e., a contingency or the fulfillment of a condition.
Illustrations: A signs the instruments in the following terms:
“I promise to pay B Rs. 500 seven days after my marriage with C” “I promise to pay B Rs. 500 as soon as I can.”
The above instruments are not valid promissory notes as the payment is made depending upon the happening of an uncertain event which may never happen and as a result the sum may never become payable.
4. It must be signed by the maker:
It is imperative that the promissory note should be duly authenticated by the ‘signature’ of the maker.
‘Signature’ means the writing or otherwise affixing a person’s name or a mark to represent his name, by himself or by his authority with the intention of authenticating a document.
5. The maker must be a certain person:
The instrument must itself indicate with certainty who is the person or are the persons engaging him or themselves to pay.
Alternative promisors are not permitted in law because of the general rule that “where liability lies no ambiguity must lie.”
6. The payee must be certain:
Like the maker the payee of a Pronote must also be certain on the face of the instrument. A note in favour of fictitious person is illegal and void.
A Pronote made payable to the maker himself is a nullity, the reason being the same person is both the promisor and the promise.
7. The undertaking must be to pay a certain and definite sum of money only.
For a valid Pronote it is also essential that the sum of money promised to be payable must be certain and definite.
The amount payable must not be capable of contingent additions or subtractions.
Illustrations: A signs the instruments in the following terms:
“I promise to pay B Rs.500 and all other sums which shall be due to him.”
“I promise to pay B Rs.500, first deducting there out any money which he may owe me.”
The above instruments are invalid as promissory notes because the exact amount to be paid by A is not certain.
8. The amount payable must be in legal tender money of India:
A document containing a promise to pay a certain amount of foreign money or to deliver a certain quantity of goods is not a Pronote. The payment must be in legal money of the country.
9. Revenue stamps or requisite value under the stamp Act of the country should be affixed.
10. Other matters of form like number, date, place, etc, are usually found given in notes, but they are not essentials in law.
11. A bank note or a currency note is not a promissory note within the meaning of this section.
12. A promissory note cannot be made payable to the bearer on demand.
Watch the video on course and updated syllabus Business Environment & Law Click below
BILL OF EXCHANGE
Section 5 of the Negotiable Instruments Act defines a Bill of Exchange as follows:
“A Bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.” It is also called as a Draft.
Illustration:
Mr. X purchased goods from Mr. Y for Rs.1000/- Mr. Y buys goods from Mr. S for Rs.1000/-
Then Mr. Y may order Mr. X to pay Rs.1000/- Mr. S which will be nothing but a bill of exchange.
Parties to a Bill of Exchange
There are three parties involved in a bill of exchange, i.e.,
i. The Drawer – The person who makes the order for making
ii. The Drawee – The person to whom the order to pay is made. He is generally a debtor of the drawer. The person directed to pay the money by the drawer is called the
iii. The Payee – The person to whom the payment is to be made. The person named in the instrument, to whom or to whose order the money is directed to be paid by the instruments is called the payee.
The drawer can also draw a bill in his own name thereby he himself becomes the payee. Here the words in the bill would be Pay to us or order. In a bill where a time period is mentioned is called a Time Bill.
But a bill may be made payable on demand also which is called a Demand Bill.
Essentials of a Bill of Exchange:
1. It must be written.
2. It must contain an order to pay. A mere request to pay on account, will not amount to an order.
3. The order to pay must be unconditional.
4. It must be signed by the drawer. The drawer, drawee and payee must be certain. A bill cannot be drawn on two or more drawers but may be made payable in the alternative to one of two or more payees.
5. The sum payable must be certain.
6. The bill must contain an order to pay money only.
7. It must comply with the formalities as regards date, consideration, stamps, etc.
CHEQUE
A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. (Sec. 6, NIA)
Related article
Important Chapters & Topics of CS Executive Costing
CS Executive June 2021 Exam Preparation Tips and Syllabus
CS Executive Tax Laws and Practice
Questions from the Blog:-
1. What are the types of Negotiable Instrument?
2. What are Promissory Notes?
3. What is the Bill of Exchange?
4. Differentiate b/w Promissory Notes & Bill of Exchange?
5. Classification of Bills of Exchange?
6. Name Parties to bills of Exchange?
7. Define Parties to Promissory Notes?
The topic Negotiable Instruments Act is an important topic of CS Executive Economic, Business and Commercial Laws (Paper – 7) and is also included in other subjects of CS like BUSINESS ENVIRONMENT & LAW
A complete explanation of the method of costing with examples is available for CS PREPARATION via our CS Online Coaching Classes.
As Takshila learning is serving CS Executive Online Classes for CS COURSE through online portal www.takshilalearning.com.
Get CS Executive Online Classes- Economic, Business and Commercial Laws – Online. Visit www.takshilalearning.com for more details.
Tag – Negotiable Instrument / Types of Negotiable Instrument / Promissory note / Economic, Business and Commercial Laws / Characteristics of Promissory Note
0 responses on "What is a Negotiable Instrument and Types? Business Environment & Law"