NEGOTIABLE INSTRUMENTS. MODULE THREE. Negotiable Instruments. MEANING A written document which creates a right in favour of some person and which is freely transferable. Negotiable instrument means a promissory note, a bill of exchange or a cheque.
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A negotiable instrument is one, the legal title of which can be transferred by mere delivery or endorsement and delivery.
Transfer free from defects (title):it confers an absolute and good title on the transferee. Even if the transferor has a bad title to the instrument, he can still pass on a good title to any holder who takes it in good faith and without negligence and for valuable consideration
Right to sue (recovery): it confers a right on the holder to sue in his own name, in case of need.
An instrument in writing 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.
The sum does not become indefinite merely because of the following reason:
I shall be highly obliged if you make it convenient to pay Rs. 1000 to suresh.
In case of bill its secondary and conditional.
Maker’s position: In promissory note maker stands in an immediate relationship with a payee, whereas in a bill of exchange the maker stands in immediate relationship with the acceptor and not the payee.
‘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.’
Cheque is payable on demand without any days of grace but in the case of a time bill of exchange three days of grace are allowed from the due date .
Indorser: when the holder transfers or indorses the instrument to any one else, the holder becomes the indorser.
Drawee in case of need: when in the bill or in any endorsement the name of any person is given, in addition to the drawee, to be resorted to in case of need, such a person is called ‘drawee in case of need’.
It implies that the bill has been accepted by a third party, who is not having any obligation thereon, to save the honour of drawer or endorser.
The endorser signs his name only. He does not specify the name of endorsee. The effect is that, the Instrument becomes payable to bearer.
Signature + direction to pay the amount to, or to the order of specified person.
For ex. A cheque is endorsed in blank by X and delivered to Y. Y, may convert the endorsement in blank into an endorsement in full by writing above X’s signature “pay to Z or order”
The endorsement may by express words, restrict or exclude the right to negotiate OR may merely constitute the endorsee an agent OR to receive payment for endorser or for some other specified person.
Pat the contents to C only
Pay C for my use
Pay C or Order for the account of B
Conditional endorsement: If any condition is added while endorsing the instrument, it is called conditional endorsement or qualified endorsement.
Endorsement ‘Sans Recourse’: an endorser of the negotiable instrument may, by express words in the endorsement, exclude his own liability thereon(sec52)
Facultative Endorsement: generally the endorsee must give notice of dishonour of the instrument to the endorser.
In this type of endorsement, the liability of the endorser depends upon the happening of an event. If the event does not take place, the liability of the endorser does not arise.
For example, if Mr. A makes an endorsement as “Pay Mr. B on his arrival”
Drawing of two parallel lines on the face of the cheque is not essential in case of special crossing. In case of general crossing it is a must.
A cheque crossed ‘Not Negotiable’ can be transferred like any other cheque, but the transferee cannot obtain a better title than that of the transferor.
The object of this type of crossing is to give protection to the true owner of the cheque by preserving his right against any subsequent holder.