...Bill of Exchange 8 G LEARNING OBJECTIVES After studying this chapter, you will be able to : • state the meaning of bill of exchange and a promissory note; • distinguish between a bill of exchange and a promissory note; • state the advantages of bill of exchange; • explain the meaning of different terms involved in the bill transaction, • record bill of exchange transactions in journal; • record transactions relating to dishonour, retirement and renewal of bill; • describe the uses of bill receivable and bill payable book; • state the meaning and use of accommodation bill. oods can be sold or bought for cash or on credit. When goods are sold or bought for cash, payment is received immediately. On the other hand, when goods are sold/bought on credit the payment is deferred to a future date. In such a situation, normally the firm relies on the party to make payment on the due date. But in some cases, to avoid any possibility of delay or default, an instrument of credit is used through which the buyer assures the seller that the payment shall be made according to the agreed conditions. In India, instruments of credit have been in use since time immemorial and are popularly known as Hundies. The hundies are written in Indian languages and have a large variety (refer box1). Box 1 Hundies and its Types There are a variety of hundies used in our country. Let us discuss some of the most common ones. Shahjog Hundi: This is drawn by one merchant on another, asking the latter...
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...| | | | | Definition | | | | A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. Under section 13 of the Negotiable Instruments Act, “a negotiable instrument” means a promissory note, bills of exchange or chequ payable either to order or to bearer”. According to Judge Willis: “A negotiable instrument is one the property in which is acquired by every person who takes it bonafide and for value, not withstanding any defect of title in the person from whom he took it.” 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”). Types of Negotiable instruments a) Promissory note: A written, dated and signed two-party instrument containing an unconditional promise by the maker to pay a definite sum of money to a payee on demand or at specified future date. b) Bill of exchange: Bills of exchange are financial documents that require the...
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...NEGOTIABLE INSTRUMENTS ACT,1881 Definition of a Negotiable Instrument. The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881. It is an Act to define and amend the law relating to promissory notes, bills of exchange and cheques. The Act does not affect the custom or local usage relating to an instrument in oriental language i.e., a Hundi. The term "negotiable instrument" means a document transferable from one person to another. However the Act has not defined the term. It merely says that "A .negotiable instrument" means a promissory note, bill of exchange or cheque payab1e either to order or to bearer. [Section 13(1)] A negotiable instrument may be defined as "an instrument, the. property in which is acquired by anyone who takes it bona fide, and for value, notwithstan~ing any defect of title in the person from whom he took it, from which it follo~s that an instrument cannot be negotiable unless it is such and in such a state that the true owner could transfer the contract or engagement contained therein by simple delivery of instrument" (Willis- The Law of Negotiable Securities, Page 6). According to this definition the following are the conditions of negotiability: (i) The instrument should be freely transferable. An instrument cannot be negotiable unless it is such and in such state that the true owner could transfer by simple delivery or endorsement and delivery. (ii) The person who takes it for value...
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...advantage or protection of the obligor; or (d) Gives the holder an election to require something to be done in lieu of payment of money. But nothing in this section shall validate any provision or stipulation otherwise illegal. Acts in addition to payment of money A negotiable instrument must be payable in “a sum certain in money.” (1) General Rule. – As a general rule, the instrument is non-negotiable if it contains a promise or order to do any act in addition to the payment of money. (par. 1.) The prohibition is based on the fact that while one could be indorsed, the other would have to be assigned. (see Sec. 30) EXAMPLES: “I promise to pay or order P1,000.00 and to deliver a horse.” (2) Exceptions. – The law, however, gives exceptions (Sec. 5 [a to d.] to the general rule. a. Sale of collateral securities. EXAMPLE: “I promise to pay P or order the sum of P10,000.00 on November 25,2004 secured by a ring I delivered to him by way of pledge and which he could seek should I fail to pay him at maturity.” Here, the additional act is to be performed after the date of maturity when the instrument is no longer negotiable in the full commercial sense. (see Sec. 2[e].) Until the date of maturity, the promise is to pay money only. b. Confession of judgement. – It is a...
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...THE NEGOTIABLE INSTRUMENTS ACT AND THE NEGOTIABLE INSTRUMENTS (AMENDMENT AND MISCELLANEOUS PROVISIONS) ACT, 2002 Negotiable instruments are of great importance in the business world and by extension in banking. They are instruments for making payments and discharging business obligations What is a Negotiable Instrument? The Negotiable Instruments Act does not define a negotiable instrument but merely states, “ a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or bearer.” (Section 13). This section does not prohibit any other instrument that satisfies the essential features of portability. Justice K. C. Willis defines these as, “ one the property in which is acquired by anyone who takes it bonafide and for value notwithstanding any defect in title in the person from whom he took it.” Thomas defines it in his book “Commerce, Its theory and Practice “A negotiable instrument is one which is, by a legally recognized custom of trade or by law, transferable by delivery in such circumstances that (a) the holder of it for the time being may sue on it in his own name and (b) the property in it passes, free from equities, to a bona-fide transferee for value, notwithstanding any defect in the title of the transferor.” It : (1) entitles a person to a sum of money (2) is transferable (by customs of trade) by delivery, like cash, or by Endorsement and delivery and delivery, and (3) ...
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...Subject: Principles of Insurance and Banking Course Code: FM-306 Lesson: 1 Author: Dr. S.S. Kundu Vetter: Dr. B.S. Bodla NEGOTIABLE INSTRUMENTS ACT, 1881 STRUCTURE 1.0 1.1 1.2 1.3 1.4 1.5 Objectives Introduction Meaning of Negotiable Instruments Characteristics of a negotiable instrument Presumptions as to negotiable instrument Types of negotiable Instrument 1.5.1 Promissory notes 1.5.2 Bill of exchange 1.5.3 Cheques 1.5.4 Hundis 1.6 Parties to negotiable instruments 1.6.1 Parties to Bill of Exchange 1.6.2 Parties to a Promissory Note 1.6.3 Parties to a Cheque 1.7 1.8 Negotiation 1.7.1 Modes of negotiation Assignment 1.8.1 Negotiation and Assignment Distinguished 1.8.2 Importance of delivery in negotiation 1.9 Endorsement 1.10 Instruments without Consideration 1.11 Holder in Due Course 1.12 Dishonour of a Negotiable instrument 1.13 Noting and protesting 1.14 Summary 1.15 Keywords 1.16 Self Assessment Questions 1.17 References/Suggested readings 1.0 OBJECTIVES After reading this lesson, you should be able to• • • • Understand meaning, essential characteristics and types of negotiable instruments; Describe the meaning and marketing of cheques, crossing of cheques and cancellation of crossing of a cheque; Explain capacity and liability parties to a negotiable instruments; and Understand various provisions of negotiable instrument Act, 1881 regarding negotiation, assignment, endorsement, acceptance, etc. of negotiable instruments. 1.1 INTRODUCTION The Negotiable Instruments...
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...TYPES OF NEGOTIABLE INSTRUMENTS n Draft: An unconditional order to pay by which the party creating the draft (the drawer) orders another party (the drawee), typically a bank, to pay money to a third party (the payee) -- e.g., a check. n n n n Check: A draft ordering a drawee bank and payable on demand. Time Draft: A draft payable at a time certain. Sight Draft: A draft payable on presentment. Trade Acceptance: A draft that is drawn by a seller of goods ordering the buyer to pay a specified sum of money to the seller, usually at a specified future time. The buyer accepts the draft by signing and returning it to the seller. n Promissory Note: A written promise made by one person (the maker) to pay a fixed sum of money to another person (the payee) on demand or at a specified future time. Certificate of Deposit: A note by which a bank or similar financial institution acknowledges the receipt of money from a party and promises to repay the money, plus interest, to the party on a certain date. 1 n NEGOTIABLE INSTRUMENTS: AN OVERVIEW n A Negotiable Instrument is a: (1) written instrument, (2) signed by the maker or drawer of the instrument, (3) that contains an unconditional promise or order to pay (4) an exact sum of money (with or without interest in a specified amount or at a specified rate) (5) on demand or at an exact future time (6) to a specific person, or to order, or to its bearer. 2 NEGOTIABILITY: SIGNATURES n For an instrument to be negotiable, it...
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...pay a fixed sum of money on demand or at a certain time. Promissory notes, bills of exchange, checks, drafts, and certificates of deposit are all examples of negotiable instruments. Negotiable instruments may be transferred from one person to another, who is known as a holder in due course. Upon transfer, also called negotiation of the instrument, the holder in due course obtains full legal title to the instrument. Negotiable instruments may be transferred by delivery or by endorsement and delivery. One type of negotiable instrument, called a promissory note, involves only two parties, the maker of the note and the payee, or the party to whom the note is payable. With a promissory note, the maker promises to pay a certain amount to the payee. Another type of negotiable instrument, called a bill of exchange, involves three parties. The party who drafts the bill of exchange is known as the drawer. The party who is called on to make payment is known as the drawee, and the party to whom payment is to be made is known as the payee. A check is an example of a bill of exchange, where the individual or business writing the check is the drawer, the bank is the drawee, and the person or business to whom the check is made out is the payee. To be valid a negotiable instrument must meet four requirements. First, it must be in writing and signed by the maker or drawee. Second, it must contain an unconditional promise (promissory note) or order (bill of exchange) to pay a certain sum of money and...
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...2003). The provisions of all the Amendment Acts have been incorporated at relevant places in Part IV of this book. The Negotiable Instruments Act, 1881, as amended up-to-date, deals with three kinds of negotiable instruments, i.e., Promissory Notes, Bills of Exchange and Cheques. Definition: The word negotiable means ‘transferable by delivery,’ and the word instrument means ‘a written document by which a right is created in favour of some person.’ Thus, the term “negotiable instrument” literally means ‘a written document transferable by delivery.’ 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.” “A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees” [Section 13(2)]. The Act, thus, mentions three kinds of negotiable instruments, namely notes, bills and cheques and declares that to be negotiable they must be made payable in any of the following forms: (a) Payable to order: A note, bill or cheque is payable to order which is expressed to be ‘payable to a particular person or his order.’ For example, (i) Pay A, (ii) Pay A or order,...
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...Zapalski There are many different types of negotiations. I will be discussing what type of negotiation instrument is demonstrated with the following example. This involves Bob’s Auto Emporium. You are interested in buying a new car and Bob let’s you use one of his cars off his lot for a week. Once your week is up, you return the car to Bob and he gives you a document stating the following: May 1, 2015, I promise to pay to the order of Bob's Auto Emporium $20,000 (Twenty thousand dollars) with interest at the rate of 7% per annum. What type of negotiation instrument does this represent? I believe that this is an example of a promissory note. A promissory note is a written promise by one party to pay another party a specified sum. By Bob giving the note that states a promise is what makes this negotiation a promissory note. This is a negotiable instrument because it has all of the following. The document is in writing, an unconditional promise or order to pay, and states a fixed amount of money. I assume that the maker of this document (Bob) has signed it before giving to you to sign it as well. Once you put your signature on this paper you are going to be held accountable in a court of law. This negotiation does meet some of the requirements of the UCC, but not all of them. However, this does not affect the fact that it is a promissory...
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... which may be paid either on demand or at a future date. The term can have different meanings, depending on what law is being applied and what country it is used in and what context it is used in. Examples of negotiable instruments include promissory notes, bills of exchange, banknotes, and cheques. Because money is promised to be paid, the instrument itself can be used by the holder in due course as a store of value. The instrument may be transferred to a third party; it is the holder of the instrument who will ultimately get paid by the payer on the instrument. Transfers can happen at less than the face value of the instrument and this is known as discounting; this may happen for example if there is doubt about the payer's ability to pay. Common prototypes of bills of exchanges and promissory notes originated in China. There, in the 8th century during the reign of the Tang Dynasty they used special instruments called feitsyan for the safe transfer of money over long distances.[1] Later such document for money transfer used by Arab merchants, who had used the prototypes of bills of exchange – suftadja and hawala in 10–13th centuries, then such prototypes had been used by Italian merchants in the 12th century. In Italy in the 13–15th centuries, bills of exchange and promissory notes obtain their main features, while further phases of their development have been associated with France (16–18th centuries, where the endorsement had appeared) and Germany (19th century, formalization...
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...1. Scope It is now fairly well-settled that no person can sue on a negotiable instrument unless he is named therein as the payee or unless he becomes entitled to it as indorsee or becomes the bearer of an instrument payable to bearer. In the Full Bench case reported in Subba Narayana Vathiyar v. Ramaswami Aiyar,1 it has been held that in a suit on a negotiable instrument by the payee or indorsee, it is not open to the defendant to plead that the plaintiff is a mere benamidar not entitled to payment with a view to show that the note has been discharged by payment to real owner. Again in the Full Bench decision of the Patna High Court in Bacha Prasad v. Janaki,2 it has been held that a person who is not a holder of a negotiable instrument cannot maintain a suit for recovery of money due under it even though holder is admittedly the benamidar and is impleaded in the suit. In the said decision, it has also been held that "a beneficiary cannot be called a holder of the instrument and payment to him cannot discharge the maker thereof unless the case falls under section 82(c) of the Act". So also, it has been held in the decision reported in Subharaya v. Abiram,3 that a beneficiary does not become a holder of the instrument even upon getting a declaration that he is the beneficial owner and the payee is only a benamidar. In this connection it has to be noted that Allahabad and Rajasthan High Courts have taken a slightly different view and held that in certain cases a beneficiary may...
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...Types of Commercial Paper The UCC identifies four basic kinds of commercial paper: promissory notes, drafts, checks, and certificates of deposit. The most fundamental type of commercial paper is a promissory note, a written pledge to pay money. A promissory note is a two-party paper. The maker is the individual who promises to pay while the payee or holder is the person to whom payment is promised. The payee can be either a specifically named individual or merely the bearer of the instrument who has it in his or her physical possession when he or she seeks to be paid according to its terms. A note payable to "bearer" can be paid to the person who presents it for remuneration. Such an instrument is said to be bearer paper. A promissory note that is payable on demand can be redeemed by the payee at any time, whereas a time note has a date for payment on its face that establishes the date when the holder will have an enforceable right to receive payment under it. There is no obligation to pay a time note until the date designated on its face. The ordinary purpose of a promissory note is to borrow money. Promissory notes should not be confused with credit or loan agreements, which are separate instruments that are usually signed at the same time as promissory notes, but which merely describe the terms of the transactions. A promissory note serves as documentary evidence of a debt. It can be endorsed and sold at a discount to other parties, and each subsequent endorser becomes...
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...NOTES RECEIVABLE HANDLED BY A COMPANY Notes receivable is a bookkeeping account used to track debt and payments from borrowers. When a small business lends money, goods or merchandise to an individual, it expects repayment. For many types of loans, the business will record the transaction under accounts receivable. In specific situations, however, in which the company receives a signed promissory note guaranteeing repayment, the transaction is recorded under notes receivable. Companies that use notes receivable in their bookkeeping follow the accrual method of accounting. Promissory Notes and Notes Receivable In order to use the notes receivable account, the company must have a signed promissory note to back each borrower account. A promissory note stipulates the amount of debt owed by the borrower, the interest rate, if any, and the terms of payment. The note can be formal or it can be handwritten, dated and signed by the borrower. As long as there is a promissory note, the company should record the amount owed in the notes receivable account in the general journal. Any company, a sole proprietorship, a partnership or a large corporation can issue promissory notes and record the transaction in a notes receivable account. Companies that make Employee Advances If a company makes it a practice to advance wages to an employee, that company might ask for a signed promissory note that details how the employee will repay the advance. The amount of money the employee now owes qualifies...
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...pen May 1, 201x I promise to pay to the order of Bob's Auto Emporium $20,000 (Twenty thousand dollars) with interest at the rate of 7% per annum. What type of instrument is this? Does this instrument meet the requirements for negotiability under the UCC? INDIVIDUAL WORK The above example is a partial Promissory Note. The reason that it is a partial promissory note is because the document is missing key values to become a full legal document. The above example does not state all the requirements that need to be meant as the payments are being made. It also does not have the time frame for which the payments are to be received and the time frame to pay the balance in full. The example does not meet the requirements of the UCC due to it does not list what will happen if the payments are not made. The documents also does not state how the payments are to be made and how the payments will be broken down with the interest that is going to be paid for the purchase. The document also does not have the full date that the documents was created. The document would also need to be signed by the owner of the car company which will state that he agrees with the term of the promissory note. The way that the document is worded there is no negotiating of the amount for the car or for how the car will be paid for, from the way that the documents is worded the owner of the car is expecting that the full price of the car plus 7% interest is due at the time of...
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