Negotiable instrument is a document which guarantees
the payment of a specific amount of money, either on demand, or at a
set time, with the payer named on the document. A negotiable instrument
can be transferred from one person to another.
Negotiable Instruments Act, 1881 is an Act to define
and Law relating to negotiable instruments. The act gives the
definitions of all the related terms. The act also deals with the
offence pertaining to dishonor of cheque on account of insufficiency of
funds in the drawer’s account.
According to Section 13 of the Negotiable Instruments Act, 1881, “A Negotiable Instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.”
A “promissory note” is an instrument in writing that
promises to pay a definite sum of money from one party to another party
either on demand or at a specified future date. The person who makes
the Promissory Note and promises to pay is called the drawer or maker
and the person to whom the payment is to be done is called the drawee or
payee. So there are two parties in a promissory note.
- It bears the sign of the drawer.
- It contains a date
- It contains a definite amount plus the rate of interest and this total sum will be paid to the payee.
- It contains the required stamp.
- The promise to pay should be unconditional. For e.g. if I have written in the promissory note that it will be payable after my marriage, then addition of this condition does not make it a promissory note.
- It should be returned back to drawer after the payment.
An example of promissory note:
A “bill of exchange” is an instrument in writing
that contains an order to pay a definite sum of money from one party to
another party either on demand or at a specified future date with an
intermediary to pay the sum. So there are three parties in a bill of
exchange. But all may not be distinct persons as a drawer may pay on
himself payable to his own order.
- It is primarily used in international trade.
- It bears the sign of the drawer.
- The order to pay should be unconditional.
- It contains a date
- It contains a definite amount that is to be paid unlike in promissory note which contains rate of interest also.
- It contains the required stamp.
- In case of dishonor, a notice is sent to the drawer which is in contrast with promissory note.
An example of bill of exchange:
A “cheque” is bill of exchange drawn on a specified
banker and not expressed to be payable otherwise than on demand and
cheque also includes the electronic image of a truncated cheque and a
cheque in the electronic form.
- ‘a cheque in the electronic form’ means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature and asymmetric crypto system.
- ‘a truncated cheque’ means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment. After the generation of an electronic image for transmission, the image substitutes the physical movement of the cheque in writing.
An example of cheque:
The government has notified the Negotiable Instruments (Amendment)
Bill, 2015 which allows filing cheque bounce cases in a court at a place
where the cheque was presented for clearance and not the place of issue
so that there is a fast prosecution of offenders.