Meaning and Characteristics of Negotiable Instrument

 

 INTRODUCTION

Negotiable Instruments have great significance in the modern business world. The chief characteristic of a negotiable instrument is its negotiability. i.e., it can be negotiated from one person to another. It is a transferable document that satisfies certain conditions. These instruments pass freely from hand to hand and thus form an integral part of the modern business mechanism. These instruments have gained prominence as the principal instruments for making payments and discharging business obligations. The Negotiable Instruments Act, 1881 is the legislative enactment of the law relating to three classes of negotiable instruments namely Promissory Notes, Bills of Exchange, and Cheque which are in common use in monetary transactions. The Act operates subject to the provisions of Sections 31 and 32 of the Reserve Bank of India Act, 1934. The effect or the consequences of these provisions are: 1. A promissory note cannot be made payable to the bearer, no matter whether it is payable on demand or after a certain time. 2. A bill of exchange cannot be made payable to the bearer on demand though it can be made payable to the bearer after a certain time. 3. But a cheque {though a bill of exchange} payable to bearer or demand can be drawn on a person’s account with a banker.

Definition of negotiable instrument

The term ‘negotiable instrument’ means a written document which creates a right in favor of some person and which is freely transferable.

Examples- Bill of Exchange, Promissory Note, cheques etc.

The principal parts of the negotiable instruments are:

1.      The Date

2.      The Amount

3.      Time for Payment

4.      Place of payment

5.      Stamp

 Essential characteristics of negotiable instruments:

1. Easy negotiability: The property in a negotiable instrument is freely transferable. It can be transferable from hand to hand by way of negotiation. In the case of order instruments, it is transferable by endorsement and delivery. In the case of bearer instruments, it is transferable by mere delivery.
2. Title: The ‘holder in due course’ is not in any way affected by the defective title of the transfer of any party. The term holder in due course means a a holder who has accepted a negotiable instrument for value, in good faith and before maturity.
3. Recovery: The holder in due course is entitled to sue upon the instrument in his own name. Thus, he can recover the amount of the instrument from the party liable for payment on the instrument.
4. Presumptions: A negotiable instrument is always subject to certain presumptions. Those will be applicable unless contrary is proved.

PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENT 

Sections 118 and 119 of the Negotiable Instrument Act lay down certain presumptions that the court presumes in regard to negotiable instruments. Until the contrary is proved the following presumptions shall be made in case of all negotiable instruments: 

1. Consideration:

It shall be presumed that every negotiable instrument was made drawn, accepted or endorsed for consideration. It is presumed that consideration is present in every negotiable instrument until the contrary is presumed. The presumption of consideration, however, may be rebutted by proof that the instrument had been obtained from, its lawful owner by means of fraud or undue influence. 

2. Date: 

Where a negotiable instrument is dated, the presumption is that it has been made or drawn on such date unless the the contrary is proved. 

3. Time of acceptance: 

Unless the contrary is proved, every accepted bill of exchange is presumed to have been accepted within a a reasonable time after its issue and before its maturity. This presumption only applies when the acceptance is not dated; if the acceptance bears a date, it will prima facie be taken as evidence of the date on which it was made. 

4. Time of transfer: 

Unless the contrary is presumed it shall be presumed that every transfer of a negotiable instrument was made before its maturity. 

5. Order of endorsement: 

Until the contrary is proved it shall be presumed that the endorsements appearing upon a negotiable instrument was made in the order in which they appear thereon. 

6. Stamp: 

Unless the contrary is proved, it shall be presumed that a lost promissory note, bill of exchange or cheque was duly stamped.

7. Holder in due course: 

Until the contrary is proved, it shall be presumed that the holder of a negotiable instrument is the holder in due course. Every holder of a negotiable instrument is presumed to have paid consideration for it and to have taken it in good faith. But if the instrument was obtained from its lawful owner by means of an offence or fraud, the holder has to prove that he is a holder in due course