Types of negotiable instrument

  • Negotiable instruments can be broadly classified in two parts:
  1. Instrument negotiable by Law
  2. Instrument negotiable by custom or usage of trade.Picture1.png

Promissory note:

  • In the Sec. 4 of the negotiable instrument Act promissory notes are defined as, ‘an instrument in writing(not being a bank-note or a currency note) 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.
  • It contains a promise by the debtor to the creditor that he/she will pay a certain sum of money after a certain date.
  • Drawn by the debtor, so he is called the maker
  • It must be in writing and duly stamped

Bill of exchange:

  • “An instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument” according to section 5 of negotiable instruments act.
  • It contains an order from the creditor to the debtor, to pay a certain sum, to a certain person, after a certain period.
  • The person who draws it (creditor) is the drawer, the person who has to pay the amount (debtor) is the drawee or ‘acceptor’, and the person who will receive the is ‘payee’

Cheque

  • Originally spelt as ‘check’. Modern spelling was introduced by Gilbart in his book, “Practical treaties on Banking”. According to him the word has been derived from the French word ‘Echecs’ which means ‘chess’
  • “a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand” according to the section 6 of negotiable act
  • All cheques are bill of exchange but all bills of exchange are not cheques.
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