Negotiable Instruments (Part I) PDF

Banking and Insurance Dr. Ruchi Jain Week 4_V1 Week 4 : Video...

Banking and Insurance Dr. Ruchi Jain Week 4_V1 Week 4 : Video 1 Negotiable Instruments (Part I) Dear Learners, Namaskar, Till now, We've covered the important functions of banks, comprising the acceptance of deposits, provision of loans, and various other commercial banking operations. Within these operations, the majority of transactions are facilitated through negotiable instruments and other financial tools. So you must be thinking what is Negotiable Instruments? Let's discuss these. The ability to transfer a title in an instrument from one person to another, either by delivery or by endorsement and delivery, is referred to as 'negotiable'. According to the Negotiable Instruments Act, an 'instrument' is a legal document that grants one person rights and responsibilities to another. Negotiable instruments are credit instruments that can be negotiated. Credit implies the ability to buy now and pay later, implying borrowing money with the intent of repaying. In business, negotiable instruments are commonly used as credit instruments. The legal framework in India concerning negotiable instruments is governed by the Negotiable Instruments Act of 1881. This act primarily deals with promissory notes, bills of exchange, and cheques. It applies to all individuals residing in India, irrespective of whether they are Indian residents or foreigners. Additionally, the provisions of the act extend to instruments such as Hundis, Treasury Bills, Bearer Debentures, and other similar financial instruments. These instruments are essential for trade and commerce because they make money transfers simple. The legislation was passed in order to legitimize credit instruments and make them easily convertible into cash. Trade and commerce would be difficult without such instruments because carrying large amounts of physical currency would be impractical. In a broader sense, negotiable instruments are signed documents that promise payment to whoever holds them, allowing for transferability and granting the new owner full legal title, which includes essential information like the principal amount, interest rate, date, and payer's © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 1  Banking and Insurance Dr. Ruchi Jain Week 4_V1 signature. In contrast, non-negotiable instruments such as postal orders, bills of lading, deposit receipts, and money orders, do not qualify as negotiable instruments because they lack the capacity to confer a superior title to the transferee compared to what the transferor possesses. Let's see the definition of the Negotiable Instruments Act Definition:According to Section 13 of the Negotiable Instruments Act, "a negotiable instrument means a promissory note, bill of exchange, or cheque payable either to order or to bearer." Even Though Section 13 mentions only these three negotiable instruments, it doesn't disqualify other documents that meet the essential features of negotiability from being treated as negotiable instruments. They are dividend warrants, debentures payable to the bearer, share warrants payable to the bearer, and treasury bills. Now, let's look at the parts of a Negotiable Instrument mentioned in its definition. These parts determine if they can be payable to the order or bearer. Payable to Bearer: The instrument is payable to anyone who has it in their possession. It must be stated on the instrument, or the last endorsement should be left blank. Payable to Order: Without any prohibitive language, the instrument is payable to a specific person or their order. However, there is an exception in favor of a check that a cheque marked "Account Payee Only" can be negotiated. Features of Negotiable Instruments: After examining the definition, let's explore the features of negotiable instruments. 1. The first feature is Negotiability, It refers to the ability to transfer a title in an instrument from one person to another, either by delivery or by endorsement and delivery with ease. While all transferable instruments are negotiable, not all negotiable instruments are transferable. A cheque, for example, is both negotiable and transferable, whereas limited company shares are transferable but not negotiable. 2. The second feature is transferability, There are no formalities to be followed when transferring Ownership of a negotiable instrument. It is very simple to transfer from one person to another, either by delivery alone for the bearer instrument or by © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 2  Banking and Insurance Dr. Ruchi Jain Week 4_V1 endorsement and delivery for the order instrument. This transfer shifts ownership from the transferor to the transferee without additional documents or notice of transfer. A bearer cheque, for example, can simply be handed over, whereas order cheques require endorsement and delivery and it can be restricted by crossing it as 'Account Payee.' 3. The third unique characteristic of a negotiable instrument is the Valid title. It grants the transferee an absolute and good title. Even if the transferor does not have a good title to the instrument, he can still pass it on to any holder who accepts it in good faith, without negligence, and for valuable consideration. As a result, it disables the instrument's previous counterclaims. 4. The next feature is legal redressal or Right to sue. It grants the holder the right to sue in his or her name to recover the amount from the party liable to pay. The instrument itself carries a right of action. Negotiable instruments grant the creditor the right to recover from the debtor by representing a debt or an actionable claim. The creditor can either personally recover the amount or transfer this right to another person. In the event of dishonor, the transferee may sue in their name without notifying the debtor. 5. Another feature is Presumptions. Sections 118 and 119 of the NI Act deal with certain presumptions that apply only to negotiable instruments which reduces the burden of proof. For example, it is assumed that the instrument has always been obtained for consideration. Other assumptions include the: Date on the Negotiable Instrument: It is presumed that the instrument has been made or drawn on the stated date. Time of Acceptance and Transfer: It is presumed that the negotiable instrument is accepted within a reasonable time after the issue and transferred before maturity, respectively. Order of Endorsements: The order of endorsements is presumed to be in the sequence in which they appear. Stamp: If the instrument requires a stamp, it is presumed to have one. Holder to be a Holder in Due Course: A holder is presumed to be a holder in due course if they have paid consideration for it and have taken it in good faith. © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 3  Banking and Insurance Dr. Ruchi Jain Week 4_V1 These presumptions help establish a framework for the functioning and interpretation of negotiable instruments. 6. The next feature is the Credit of the party. In this context, the instrument is pledged with the credit of the party who signs it. As a result, such an instrument will never normally be dishonored. 7. The next feature states that A genuine/bonafide transferee of a negotiable instrument who becomes the holder in due course receives a better title than the transferor. This is a fundamental feature of negotiability and an exception to the general rule that no one can give a better title than he has. Key Requirements: There are several key requirements that must be met by a negotiable instrument. To begin, it must be in writing and include a specific promise to pay a specific sum of money on a specific date, whether on demand, on a fixed date, or under specified conditions. The payee must be explicitly identified, and the instrument must bear the drawer's or promissor's signature. Furthermore, stamping in accordance with the Indian Stamp Act 1899 is required, as unstamped documents are not admissible in court. Furthermore, after being drawn and signed, the instrument must be delivered to the intended recipient. Notably, amendments made in 2006 allow unstamped documents, such as bills of exchange and promissory notes, to be revalidated upon payment of the required stamp duty and fees. Difference between Transferability and Negotiability: Moving forward, Let's see the difference between Transferability and negotiability. Generally speaking, about Transferability, the transferor cannot pass a better title than what they already have when transferring goods. For example, if 'A' purchases a laptop from 'B, which B has stolen from C'. Therefore, 'A' must, upon discovery of the theft, return the laptop to 'C,' who is the rightful owner. This is because 'A's title is not regarded as superior to 'B's, which lacked a title. © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 4  Banking and Insurance Dr. Ruchi Jain Week 4_V1 In the context of Negotiability, however, A negotiable instrument is an exception. Suppose in the above example,'A' receives a stolen cheque from B, who has stolen it from C. In this case, A gets a good title and is not required to give it back to 'C,' the rightful owner. © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 5  Banking and Insurance Dr. Ruchi Jain Week 4_V1 One important distinction between transferable items and negotiable instruments is that the holder of a negotiable instrument, such as 'A,' has a right against the thief, 'B'. hence, The holder of a negotiable instrument in due course, highlights the key difference between transferable items and negotiable instruments. Dear learners in this video we examined the concept, definition, and features of Negotiable Instruments, In the next video we will discuss different types of Negotiable Instruments. Till then Happy learning. © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 6