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A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer. So, there are just three types of negotiable instruments such as promissory note, bill of exchange and cheque. Cheque also includes Demand Draft [Section 85A]. More specifically, it is a document contemplated by a contract, which (1) warrants the payment of money, the promise of or order for conveyance of which is unconditional; (2) specifies or describes the payee, who is designated on and memorialized by the instrument; and (3) is capable of change through transfer by valid negotiation of the instrument. As payment of money is promised subsequently, the instrument itself can be used by the holder in due course as a store of value; although, instruments can be transferred for amounts in contractual exchange that are less than the instrument s face value (known as discounting ). [edit] The holder in due course The rights of a holder in due course of a negotiable instrument are qualitatively, as matters of law, superior to those provided by ordinary species of contracts:
The rights to payment are not subject to set-off, and do not rely on the validity of the underlying contract giving rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer is still liable on the cheque) No notice need be given to any party liable on the instrument for transfer of the rights under the instrument by negotiation. However, payment by the party liable to the person previously entitled to enforce the instrument "counts" as payment on the note until adequate notice has been received by the liable party that a different party is to receive payments from then on. [U.C.C. 3-602(b)] Transfer free of equities the holder in due course can hold better title than the party he obtains it from (as in the instance of negotiation of the instrument from a mere holder to a holder in due course) Negotiation often enables the transferee to become the party to the contract through a contract assignment (provided for explicitly or by operation of law) and to enforce the contract in the transferee-assignees own name. Negotiation can be effected by endorsement and delivery (order instruments), or by delivery alone (bearer instruments). In addition, the rights and obligations accruing to the transferee can be affected by the rule of derivative title, which does not allow a property owner to transfer rights in a piece of property greater than his own.
it is a written and signed acknowledgement of debt and affords conclusive proof of indebtedness. A debtor is free from worries and enjoys full period of credit, as he can never be called upon to pay the amount of the bill before the due to date. A creditor can convert the bill into cash by getting it discounted with the bank.
PROMISSORY NOTEA promissory note 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.
What are the essentials of a promissory note?
An instrument to be a promissory note must fulfill the following essentials:
It must be in writing. The promise to pay must be expressed. A mere acknowledgment of debt without express promise to pay is not promissory note. The promise to pay must be unconditional. A promise to pay 'when able' or 'as soon as I possibly can' is conditional. It must be signed by the maker. The maker must be certain. Promise must be to pay a certain sum.
What are the difference between bill of exchange and promissory note?
The following are the points of distinction between a promissory note and a bill of exchange: There are three parties to a bill of exchange, namely, the drawer, the drawee and the payee, while in a promissory note there are only two parties - maker and payee. In a bill of exchange there is an unconditional order to pay, while in a promissory note there is an unconditional promise to pay. A bill of exchange requires an acceptance of the drawee before it is presented for payment, while a promissory note does not require any acceptance since it is signed by the person who is liable to pay. The liability of a maker of a bill of exchange is primary and while the liability of a drawer of a bill of exchange is secondary and conditional. It arises only when the drawee fails to pay that the drawer would be liable as a surety.
What do you mean by Accommodation bills? Such bills are drawn to help the other party or for mutual benefit. They are not received in lieu of value received by the other party. Cash is received by discounting the bill from the bank and funds are used by the one or all the parties
WHAT DO YOU MEAN BY TRADE BILLWhere a bill of exchange is drawn and accepted for a trade transaction, it is called a trade bill.
What are the difference between Trade Bill and Accommodation Bill?
Following is the distinction between trade and accommodation bill:
Trade Bill: There are drawn for trade purposes. These are drawn against proper consideration. These bills are proof of debt. For obtaining the debt from drawee, drawee can resort to legal action. Accommodation Bill: These are drawn and accepted for financial assistance. These are drawn in the absence of any consideration. These bills are not a proof of debt. Legal action cannot be resorted the recovery of amount against these bills by the immediate parties.
WHAT DO YOU MEAN BY ENDORSEMENT OF BILLEndorsement means transfer of bill of exchange or promissory note to another person.the person receiving the bills of exchange or promissory note becomes authorized to receive the payment. The person who transfer the bill
of exchange or promissory note in favour of other person is called endorser. The person to whom the bill of exchange or promissory note is endorsed is called the endorsee. DISCOUNTING OF BILLWhen the holder of the bill takes the amount from a bank against the bill before the due date, it is known as discounting of the bill. The bank charges an amount termed as discounting charges. The charges depend upon the rate of interest and the period of maturity. RETIRING OF BILL under a rebateIf the drawer or the acceptor wishes to pay the amount of bill before the date of maturity, it is called retiring the bill. Usually the holder, in such a cae, would be willing to allow a deduction because of interest involved. Such a reduction is called rebate.