A negotiable instrument is a written contract that guarantees the benefit from one person to another. In other words, it is a transferable, signed document that promises the bearer a sum of money in the future when demanded. The person who receives the payment is called a payee and he must be named or otherwise indicated on the instrument.
Features of Negotiable Instruments
Easily Transferable: A negotiable instrument is easy and free to transfer. This transfer involves no formalities or much paperwork. The instrument's owner can simply transfer through delivery or through a valid endorsement.
Must be in Writing: All negotiable instruments must be in the written format that should consist of handwritten notes, printed, engraved, typed, etc.
Time of Payment Must be Certain: If the order is flexible to payment time then such an order is not considered as a negotiable instrument. There should be a certain period even if there is not a specific date. For example, If the time of payment depends on the death of a specific individual, it is considered as a negotiable instrument, as death is a specific event.
Payee also must be Certain: The person who receives the payment must be a specific person or persons. There can also be more than one payee for a negotiable instrument. “Person” in this case includes artificial persons such as body corporates, trade unions, chairman, secretary, etc.
Types of Negotiable Instruments
Promissory Note: Where, the person who makes the instrument is called a debtor. The debtor unconditionally promises the creditor (or the bearer) a certain sum of money in a specific period.
Bills of Exchange: Where the instrument instructs the drawee (the debtor) to pay the payee for a certain amount of money. The drawer (the creditor) prepares the bill.
Cheque: This is a bill of exchange where the bank is a creditor and the cheque is payable only on demand. Where the depositor instructs the bank to pay the payee or the bearer a certain amount of money denoted in the cheque.
Other Negotiable Instruments Examples: Government promissory notes, railway receipts, delivery orders, are some of the examples of other negotiable instruments. By custom or practice of the trade, these are negotiable instruments.
Advantages of Negotiable Instruments
In the Case of the Promissory Note:
It is simple and easy to understand.
It is extremely beneficial if the loan has simple payment terms.
This type of instrument is not very lengthy.
In the Bill of Exchange:
It can be transferred easily.
If the loan has simple payment methods it will be extremely beneficial.
It is not so lengthy.
They are certain of terms and conditions. It is one of the convenient means of crediting policies.
In the Case of Payment Cheque:
It is more convenient than carrying cash in hand.
The depositor can stop the payment, if necessary
It Can be post-dated
FAQs on Introduction to Negotiable Instruments
1. What is a negotiable instrument?
A negotiable instrument is a written contract that guarantees the benefit from one person to another. In other words, it is a transferable, signed document that promises the bearer a sum of money in the future when demanded. The person who receives the payment is called a payee and he must be named or otherwise indicated on the instrument.
Promissory notes, Bill of exchange, Cheque, Government promissory notes, railway receipts, delivery orders are some of the examples of negotiable instruments.
2. What is the Negotiable Instruments act?
In 1881, the Negotiable Instruments Act was introduced in India and is made official to every state of India except Jammu and Kashmir. According to this act, “Only the Bank or as expressly authorized one by this Ac by the Central Government shall draw, accept, make or issue a bill of exchange, promissory note or payment engagement of 3 money payable to the bearer on demand.”
This act consists of a set of rules, laws, and provisions relating to negotiable instruments. About this act, a person can understand the meaning of a negotiable instrument.
3. What is a negotiable Certificate of Deposit?
A negotiable certificate of deposit can be bought and sold on a secondary market and the bank issuing the original certificate decides the face amount and interest to be paid. The longer the term, the higher is the interest rate for negotiable CDs. They mature over short periods, from two weeks up to a year.
4. Why must the time and payee name be mentioned in the instrument?
Time of Payment must be Certain: If the order is flexible to payment time then such an order is not considered as a negotiable instrument. There should be a certain time period even if there is not a specific date. For example, If the time of payment depends on the death of a specific individual, it is considered as a negotiable instrument, as death is a specific event.
Payee also must be certain: The person who receives the payment must be a specific person or persons. There can also be more than one payee for a negotiable instrument. “Person” in this case includes artificial persons such as body corporates, trade unions, chairman, secretary, etc.
5. What is a cheque and what are its advantages?
This is a bill of exchange where the bank is a creditor and the cheque is payable only on demand. Where the depositor instructs the bank to pay the payee or the bearer a certain amount of money denoted in the cheque.
Following are some of the advantages of using a cheque for payment instead of carrying cash on hand
It is more convenient than carrying cash in hand.
The depositor can stop the payment, if necessary.
It Can be post-dated.
5. What is a promissory note and what are its advantages?
In the case of a bill of exchange, the person who makes the instrument is called a debtor. The debtor unconditionally promises the creditor (or the bearer)to pay a certain sum of money in a specific period of time.
Following are some of the advantages of using a promissory note
It is simple and easy to understand.
It is extremely beneficial if the loan has simple payment terms.
This type of instrument is not very long when compared to other methods.
