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Negotiable Instruments

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Negotiable Instruments

shape Introduction

Negotiable means anything that is easily transferable from one person to another in return for consideration and instrument means, a written document by virtue of which a right is created in favor of some person. A negotiable instrument is a document consisting of a contract, guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payer named on the document. Negotiable Instruments Act, 1881 defines Negotiable Instrument to mean a promissory note, bill of exchange or cheque payable either to order or to bearer.

shape Key Terms

Promissory Note : It is 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.

Bill of Exchange :

  • It 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 an order made by one person to another to pay money to a third person.


It has 3 parties : the drawer, the drawee, and the payee.

a) Drawer is the person or party who draws the bill i.e. gives the order to pay money to the third party.

b) Drawee is a person or party upon whom the bill is drawn i.e. who is ordered to pay.

c) Payee is the person or party who is finally payable under the bill i.e. the party in whose favor the bill is drawn.

Cheque :

It is a bill of exchange with two additional qualifications, namely :

a) it is always drawn on a banker, and

b) it is always payable on demand.

  • It is the only instrument that can be payable to bearer on demand


Demand Drafts :

It is a bill drawn either on demand or otherwise by one bank on another in favour of a third party or by one branch of a bank on another branch of the same bank or by the head office on a branch or vice versa.

ENDORSEMENT OF NEGOTIABLE INSTRUMENTS :

  • When the maker or holder of a negotiable instrument signs the instrument, otherwise thanas such maker, but for the purpose of negotiation, either on the back or face thereof for the same purpose signs a stamped paper intended to be completed as a negotiable instrument, it is said to indorse the negotiable instrument.

  • Such maker or holder is called the endorser.

  • An Indorsement can be of two types: Indorsement in Blank and Indorsement in Full.


Indorsement in Blank :

An indorsement is said to be in blank if while indorsing the instrument, the indorser signs only his name on the negotiable instrument.

Indorsement in Full :

  • For an indorsement to be in full, while indorsing the instrument, the indorser also has to add a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person.

  • The person so specified in the endorsement is called the “endorsee” of the instrument.