Negot|ab|e Instruments

Lxchange of goods and serv|ces |s the bas|s of every bus|ness act|v|ty Goods are bought and
so|d for cash as we|| as on cred|t A|| these transact|ons requ|re f|ow of cash e|ther |mmed|ate|y or
after a certa|n t|me In modern bus|ness |arge number of transact|ons |nvo|v|ng huge sums of
money take p|ace everyday It |s qu|te |nconven|ent as we|| as r|sky for e|ther party to make and
rece|ve payments |n cash 1herefore |t |s a common pract|ce for bus|nessmen to make use of
certa|n documents as means of mak|ng payment Some of these documents are ca||ed negot|ab|e
|nstruments In th|s |esson |et us |earn about these documents
171 Cb[ect|ves
After study|ng th|s |esson you w||| be ab|e to
z exp|a|n the mean|ng of negot|ab|e |nstruments
z |dent|fy the var|ous features of negot|ab|e |nstruments
z descr|be the var|ous types of negot|ab|e |nstruments and
z d|fferent|ate between b|||s of exchange prom|ssory notes and cheques
172 Mean|ng of Negot|ab|e Instruments
1o understand the mean|ng of negot|ab|e |nstruments |et us take a few examp|es of daytoday
bus|ness transact|ons
Suppose |tamber a book pub||sher has so|d books to rashant for ks 10000] on three months


cred|t 1o be sure that rashant w||| pay the money after three months |tamber may wr|te an
order addressed to rashant that he |s to pay after three months for va|ue of goods rece|ved by
h|m ks10000] to |tamber or anyone ho|d|ng the order and present|ng |t before h|m (rashant)
for payment 1h|s wr|tten document has to be s|gned by rashant to show h|s acceptance of the
order Now |tamber can ho|d the document w|th h|m for three months and on the due date can
co||ect the money from rashant ne can a|so use |t for meet|ng d|fferent bus|ness transact|ons
Ior |nstance after a month |f requ|red he can borrow money from Sun|| for a per|od of two
months and pass on th|s document to Sun|| ne has to wr|te on the back of the document an
|nstruct|on to rashant to pay money to Sun|| and s|gn |t Now Sun|| becomes the owner of th|s
document and he can c|a|m money from rashant on the due date Sun|| |f requ|red can further
pass on the document to Am|t after |nstruct|ng and s|gn|ng on the back of the document 1h|s
pass|ng on process may cont|nue further t||| the f|na| payment |s made
In the above examp|e rashant who has bought books worth ks 10000] can a|so g|ve an
undertak|ng stat|ng that after three month he w||| pay the amount to |tamber Now |tamber can
reta|n that document w|th h|mse|f t||| the end of three months or pass |t on to others for meet|ng
certa|n bus|ness ob||gat|on (||ke w|th sun|| as d|scussed above) before the exp|ry of that three
months t|me per|od
ou must have heard about a cheque What |s |t? It |s a document |ssued to a bank that ent|t|es
the person whose name |t bears to c|a|m the amount ment|oned |n the cheque If he wants he can
transfer |t |n favour of another person Ior examp|e |f Akash |ssues a cheque worth ks S000]
|n favour of 8|dhan then 8|dhan can c|a|m ks S000] from the bank or he can transfer |t to
Chander to meet any bus|ness ob||gat|on ||ke pay|ng back a |oan that he m|ght have taken from
Chander Cnce he does |t Chander gets a r|ght to ks S000] and he can transfer |t to Dayanand
|f requ|red Such transfers may cont|nue t||| the payment |s f|na||y made to somebody
In the above examp|es we f|nd that there are certa|n documents used for payment |n bus|ness
transact|ons and are transferred free|y from one person to another Such documents are ca||ed
Negot|ab|e Instruments 1hus we can say negot|ab|e |nstrument |s a transferab|e document
where negot|ab|e means transferab|e and |nstrument means document 1o e|aborate |t further an
|nstrument as ment|oned here |s a document used as a means for mak|ng some payment and |t
|s negot|ab|e |e |ts ownersh|p can be eas||y transferred
1hus negot|ab|e |nstruments are documents meant for mak|ng payments the ownersh|p of wh|ch
can be transferred from one person to another many t|mes before the f|na| payment |s made
Def|n|t|on of Negot|ab|e Instrument
Accord|ng to sect|on 13 of the Negot|ab|e Instruments Act 1881 a negot|ab|e |nstrument means
#prom|ssory note b||| of exchange or cheque payab|e e|ther to order or to bearer"
173 1ypes of Negot|ab|e Instruments
Accord|ng to the Negot|ab|e Instruments Act 1881 there are [ust three types of negot|ab|e
|nstruments |e prom|ssory note b||| of exchange and cheque nowever many other documents
are a|so recogn|zed as negot|ab|e |nstruments on the bas|s of custom and usage ||ke hund|s

treasury b|||s share warrants etc prov|ded they possess the features of negot|ab|||ty In the
fo||ow|ng sect|ons we sha|| study about rom|ssory Notes (popu|ar|y ca||ed pronotes) 8|||s of
Lxchange (popu|ar|y ca||ed b|||s) Cheques and nund|s (a popu|ar |nd|genous document preva|ent
|n Ind|a) |n deta||
1ypes of Negot|ab|e Instruments
1) rom|ssory Note
2)8||| of Lxchange
3)Cheques
4)nund|s


What |s a Cheque ? Mean|ng

Cheque ls an lmporLanL negoLlable lnsLrumenL whlch can be Lransferred by mere hand dellvery
Cheque ls used Lo make safe and convenlenL paymenL lL ls less rlsky and Lhe danger of loss ls
mlnlmlsed
Def|n|t|on of a Cheque

Cheque ls an lnsLrumenL ln wrlLlng conLalnlng an uncondlLlonal order addressed Lo a banker slgn
by Lhe person who has deposlLed money wlLh Lhe banker requlrlng hlm Lo pay on demand a cerLaln
sum of money only Lo or Lo Lhe order of cerLaln person or Lo Lhe bearer of lnsLrumenL


D|st|nct|on between a Cheque and a 8||| of Lxchange
Cheque 8||| of Lxchange
lL ls drawn only on a banker lL can be drawn on any body
lncludlng a banker
21he amounL ls always payable 2 1he amounL ls payable on demand
on demand or afLer a speclfled
perlod

3lL can be crossed Lo end lLs 3 lL can noL be crossed
negoLlablllLy
4AccepLance ls noL requlred 4 AccepLance ls a musL