NEGOTIABLE INSTRUMENTS- MEANING & TYPES
Negotiable Instrument
These are simply any written document which is transferrable on delivery. According to Sec.13 of the Negotiable Instrument Act, Negotiable Instrument means a “promissory note, bills of exchange or cheque payable either to order or to bearer”. The owner is the “bonafide holder for value”.
Bill of Exchange
- It must be in writing and duly signed by its drawer.
- It should contain an order to pay and the parties to the transaction must be certain.
- A bill of exchange is used in transactions pertaining to goods as well as services.
- It is signed by a party who owes money (i.e., payer) and given to a party entitled to receive money (i.e., payee or seller), and thus, this could be used for fulfilling the contract for payment.
Promissory Note
- A promissory note is an unconditional commitment made in writing and signed by a debtor to make payment to a specified person or to the order within a specified period.
- It is always in writing and, no verbal promise is accepted.
- It is drawn for specified duration for specified sum of money.
Cheque
- It contains an unconditional order to pay a certain sum of money.
- It contains instructions in writing given by the account holder to his bank for payment of money from his account.
- There is a statutory obligation on the part of a banker to make payment if, it is drawn by the drawer, it is drawn upon a specified banker. It is payable on demand to a specific person or his order or to the bearer of the instrument.
- Cheque should be properly dated and should be signed by the maker or drawer.
- There are three parties in the cheque transaction: Drawer, Drawee, Payee. If it is self-cheque, payee will be the drawer only.
- The cheque may be:
Order cheque: A cheque payable to a particular person or his order.
Bearer cheque: A cheque payable to a person who so ever bears.
Blank cheque: Except signature, all other columns are blank.
Drawer, Drawee and Payee?
Drawer is the person (account holder) who makes or write the cheque hence also called Maker, the person who bears the cheque is called payee whereas, the Drawee is the party or entity or bank that has been directed to pay a certain sum of money to the payee or pays the owner of a cheque or draft.
For example, if Ramesh is an account holder of the bank SBI who make a cheque to Suresh for certain sum of money. Here Ramesh is called as Drawer and Suresh is payee whereas, the bank i.e., SBI is called as Drawee.
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