What is Negotiable Instrument?
Meaning of Negotiable Instrument: – A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. A negotiable instrument is generally a signed document which is freely transferable in nature, and once it is transferred, a transferee or the holder of an instrument will have a legal right to use it, as he deems fit.
A negotiable instrument is a signed document promising the amount of payment to a specified person or assignee. In other words, it is a formal type of IOU (I owe you) a transferable, signed document that promises to pay the bearer an amount at a future date or on demand. A payee is a person who is receiving the payment, and his name should be on the instrument.
These instruments are transferable signed documents promising to pay the amount to the holder on demand or at any time in future. As mentioned above, these documents are transferable. The final holder takes the funds and can use them as per his/her requirements. This means that, once an instrument is transferred, the holder of such instrument gets full legal rights to such instrument.
Under section 13 of Negotiable Instruments Act three kinds of negotiable tools; Bills of Exchange, Promissory Notes and Cheques.
Meaning of bills of exchange: – A bill of exchange is a written order binding one party to pay a fixed sum of money to another party on demand or at some point in the future. A bill of exchange often includes three parties—the drawee is the party that pays the sum, the payee receives that sum, and the drawer is the one that obliges the drawee to pay the payee.
Meaning of Promissory Notes: – 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.
Meaning of cheque: – A cheque is a document that orders a bank to pay a specific amount of money from a person’s account to the person in whose name the cheque has been issued. The person writing the cheque, known as the drawer, has a transaction banking account (often called a current, cheque, chequing or checking account) where their money is held.
Definition of the negotiable instrument
As per section 13 of the Negotiable Instruments Act, “A negotiable instrument means a promissory note, bill of exchange or check payable either to the order or to the bearer.”
The term “negotiable” in a negotiable instrument refers to the fact that they are transferable to different parties. If it is transferred, the new holder receives full legal title to it.
The negotiable instrument enables its holders to either take money in cash or transfer it to another person. The exact amount the payer is promising to pay is indicated on the negotiable instrument and must be paid on demand or on the specified date. Like contracts, negotiable instruments are signed by the issuer of the document.
Types of Negotiable Instruments
- Promissory Note: – Promissory notes are documents that contain a written promise between the parties – one party (payer) promising to pay the other party (payee) a specified amount at a specified date in the future. Like other negotiable instruments, promissory notes contain all relevant information to the promise, such as the specified principal amount, interest rate, length of term, date of issue and the signature of the payer. A promissory note primarily enables individuals or corporations to obtain financing from a source other than a bank or financial institution. The people who issue the promissory note become the lenders. For example: – You lend your friend $1,000 and he agrees to pay you back by December 1. The full amount is due on that date, and there is no payment schedule involved.
- Bill of exchange: – Bills of exchange refer to a legally binding, written document that instructs one party to pay a predetermined amount to (the other) party. Some bills may state that money is due at a specified date in the future, or they may state that payment is due on demand. Bills of exchange are used in transactions relating to goods as well as services. It is signed by a party who pays the money (called the payer) and delivered to the party entitled to receive the money (called the payee), and thus, is used to make a contract of payment. However, a seller may also endorse a bill of exchange and pass it on to someone else, thus making such payment to another party.It should be noted that when a bill of exchange is issued by financial institutions, it is commonly known as a bank draft. And if it is issued by an individual, it is commonly known as Trade Draft. For example: – Mr. ‘M’ issues a bill of exchange for Mr. ‘B’, who has purchased goods worth $100,000 from Mr. ‘M’. The Bill has been issued on 05.10.2017. This is the same date when the goods are bought on credit. But Mr. ‘B’ did not accept the bill on the same date. Rather he accepted the bill on 10.10.2017. During these five days till October 10, 2017, we cannot call the bill issued by Mr. ‘M’ as bill of exchange. Rather, we can only call it a draft. But when Mr. ‘B’ accepted the bill i.e. on 10.10.2017, on that date, we will call the bill as bill of exchange.
- Personal Cheque: – Personal Cheques are signed and authorized by someone who deposits money in a bank and specifies the amount required to be paid as well as the name of the holder (recipient) of the check. While technology has increased the popularity of online banking, cheques are still used to pay a variety of bills. However, a limitation of using a personal cheque is that it is a relatively slow form of payment, and cheques take a long time to process compared to other methods.
- Traveler’s Cheques: – Traveler’s check is another type of negotiable instrument used as a form of payment by people on vacation abroad as an alternative to foreign currency. Traveler’s cheques are issued by financial institutions in fixed quantities with serial numbers and prepaid. They work using a double-signature system, which requires the buyer of the check to sign the check once before using it and a second time during the transaction. As long as the two signatures match, the financial institution issuing the cheque will guarantee unconditional payment to the payee. With travelers’ cheques, buyers don’t have to worry about carrying large amounts of foreign currency while on vacation, and banks offer protection for lost or stolen checks. With technological advancements over the past few decades, traveler’s cheques have declined in use as more convenient methods of making payments abroad have been introduced. There are also security concerns associated with traveler’s cheques, as signatures can be forged, and the cheque itself can be counterfeit. Today, many retailers and banks do not accept traveler’s cheques, as the transaction is inconvenient and banks are charged for cashing them. Instead, traveler’s cheques have mostly been replaced by debit and credit cards as methods of payment.
- Money order: – Money orders are like cheques in that they promise to pay an amount to the holder of the order. Issued by financial institutions and governments, money orders are widely available, but differ from checks because there is usually a limit to the amount of the order – usually $1,000. Entities that require more than $1,000 need to have multiple buy orders. After purchasing a money order, the buyer fills in the details of the recipient and amount and sends the order to that person. Money orders contain relatively little personal information compared to cheques that contain only the names and addresses of senders and recipients and no personal account information. International money orders are also a popular way to send money overseas nowadays because money orders do not require cash in the issuing country. As such, they enable a simple and quick way of transferring money.