MODULE: 5

Negotiable Instruments: A Brief Overview

Negotiable instruments are legal documents that can be
transferred from one person to another by endorsement or
delivery. This means that the rights and obligations
associated with the instrument can be passed from the
original holder to a new holder.
Key Characteristics of Negotiable Instruments:
 Transferability: They can be freely transferred from one
person to another.
 Negotiability: The transfer does not affect the original
maker's liability.
 Bearer or Order Form: They are typically payable to the
bearer (anyone in possession) or to a specific person
(the order).
Types of Negotiable Instruments:
 Promissory Notes: Written promises to pay a specific
sum of money on a certain date or upon demand.
 Bills of Exchange: Orders from one person (the drawer)
to another (the drawee) to pay a specific sum of money
to a third party (the payee).
 Checks: Bills of exchange drawn on a bank.
 Bank Drafts: Checks drawn by a bank on itself.
  Certified Checks: Checks that have been guaranteed by
the bank.
Negotiation Process:
 Endorsement: The holder of the instrument signs the
back to transfer ownership.
 Delivery: The instrument is physically transferred to the
new holder.
Legal Implications:
 Holder in Due Course: A holder who acquires the
instrument in good faith and for value is generally
protected against certain defenses that the original
maker might have.
 Forged Instruments: If an instrument is forged, the
original maker is not liable to a subsequent holder in due
course.
Importance of Negotiable Instruments:
 Facilitates Trade: Negotiable instruments make it easier
to conduct business transactions by providing a
convenient and secure means of payment.
 Financial Markets: They are essential components of
financial markets, such as the money market and the
bond market.
 Legal Framework: The law governing negotiable
instruments provides a clear framework for their
transfer and enforcement.
In conclusion, negotiable instruments are valuable tools for
commerce and finance, offering a convenient and secure way
to transfer funds and obligations. Understanding the key
characteristics and legal implications of negotiable
instruments is essential for anyone involved in business or
financial transactions.

Types of Negotiable Instruments:

Negotiable instruments are legal documents that can be
transferred from one person to another by endorsement or
delivery. This means that the rights and obligations
associated with the instrument can be passed from the
original holder to a new holder.
Promissory Notes: A Brief Overview
Promissory notes are legal documents that represent a debt
owed by one party (the maker) to another party (the payee).
They are essentially written promises to pay a specific sum of
money on a certain date or upon demand.
Key Elements of a Promissory Note:
 Maker: The person or entity that promises to pay the
debt.
 Payee: The person or entity to whom the debt is owed.
 Principal Amount: The sum of money that is promised
to be paid.
 Interest Rate: The percentage charged on the principal
amount.
  Due Date: The date on which the principal and interest
are due for payment.
 Terms and Conditions: Additional provisions, such as
prepayment penalties or late payment fees.
Types of Promissory Notes:
 Negotiable Promissory Notes: These notes can be
transferred to a third party, allowing for flexibility in the
financial market.
 Non-Negotiable Promissory Notes: These notes cannot
be transferred to a third party.
 Demand Notes: These notes are payable on demand,
meaning the payee can request payment at any time.
 Time Notes: These notes are payable on a specific date
or after a certain period of time.
Uses of Promissory Notes:
 Personal Loans: Individuals may use promissory notes to
borrow money from friends or family.
 Business Transactions: Businesses can use promissory
notes to extend credit to customers or suppliers.
 Investment Instruments: Promissory notes can be used
as investment vehicles, particularly in the corporate
bond market.
Legal Implications:
  Default: If the maker fails to pay the debt on the due
date, the payee can take legal action to recover the
funds.
 Negotiability: Negotiable promissory notes are
governed by specific legal rules that determine their
transferability and enforceability.
In conclusion, promissory notes are versatile legal
instruments that can be used in various financial transactions.
Understanding the key elements and types of promissory
notes is essential for anyone involved in borrowing or
lending.

Bills of Exchange:
 Definition: An order from one person (the drawer) to
another (the drawee) to pay a specific sum of money to
a third party (the payee).
 Parties: The drawer, the drawee, and the payee.
 Types:
o Sight Bills: Payable on presentation.
o Time Bills: Payable on a specific date.
o Trade Bills: Used in international trade.
o Bank Bills: Drawn by a bank on itself.
3. Checks:
 Definition: Bills of exchange drawn on a bank.
  Types:
o Ordinary Checks: Issued by individuals or
businesses.
o Cashier's Checks: Issued by a bank and guaranteed
by the bank.
o Certified Checks: Ordinary checks that have been
guaranteed by the bank.
o Traveler's Checks: Pre-printed checks issued by a
bank or financial institution.
4. Bank Drafts:
 Definition: Checks drawn by a bank on itself.
 Uses: Commonly used for international payments or
when a high level of security is required.
5. Certificates of Deposit (CDs):
 Definition: Time deposits with a fixed interest rate and
maturity date.
 Negotiability: While CDs are not technically negotiable
instruments, they can be transferred under certain
conditions.
Key Characteristics of Negotiable Instruments:
 Transferability: They can be freely transferred from one
person to another.
 Negotiability: The transfer does not affect the original
maker's liability.
  Bearer or Order Form: They are typically payable to the
bearer (anyone in possession) or to a specific person
(the order).
Understanding the different types of negotiable instruments
is essential for anyone involved in business or financial
transactions, as they provide a convenient and secure way to
transfer funds and obligations.

Negotiable Instruments: Definitions and Features

Crossing
 Definition: A mark made on a check to restrict its
payment to a specific bank or banker.
 Types:
o General Crossing: Indicated by two parallel lines
drawn across the face of the check.
o Special Crossing: Indicates a specific bank or banker
where the check should be paid.
Endorsements
 Definition: The signature of the holder on the back of a
negotiable instrument, transferring ownership.
 Types:
o Blank Endorsement: Only the signature is written,
making the instrument payable to bearer.
o Special Endorsement: The payee endorses to a
specific person or entity.
 o Conditional Endorsement: The payment is subject
to a condition.
o Restrictive Endorsement: Limits the transferability
or negotiability of the instrument.
Material Alterations
 Definition: Changes made to a negotiable instrument
that affect its legal effect.
 Examples: Changes to the date, amount, payee's name,
or signature.
 Consequences: If a material alteration is made without
the consent of all parties, the instrument may be
rendered void.
Paying Banker
 Definition: The bank on which a check is drawn.
 Duties:
o Pay the check if properly presented and endorsed.
o Refuse payment if the check is forged, materially
altered, or otherwise defective.
o Exercise reasonable care in detecting forgeries and
other irregularities.
Rights and Duties of Holders
 Rights:
o Right to present the instrument for payment.
 o Right to sue the drawer, acceptor, or endorser if the
instrument is dishonored.
 Duties:
o Present the instrument within a reasonable time.
o Give notice of dishonor to the drawer and
endorsers.
Statutory Protection
 Negotiable Instruments Act: Provides legal framework
for negotiable instruments in India.
 Holder in Due Course: A holder who acquires the
instrument in good faith and for value is generally
protected against certain defenses.
Dishonor of Cheques
 Definition: When a bank refuses to pay a check due to
insufficient funds or other reasons.
 Consequences:
o The payee may sue the drawer for the amount of
the check.
o The drawer may be subject to penalties or
restrictions on their bank account.
These are some of the key concepts related to negotiable
instruments. The specific laws and regulations governing
negotiable instruments may vary from jurisdiction to
jurisdiction.
The Role of a Collecting Banker
A collecting banker is a bank that collects funds on behalf of
its customer from another bank or individual. This role is
crucial in the modern financial system, facilitating the
movement of funds between different parties.
Key Roles and Responsibilities:
 Presentation of Cheques: The collecting banker presents
checks drawn on other banks to the drawee banks for
payment.
 Endorsement: The collecting banker endorses the check,
transferring ownership and accepting liability for the
genuineness of the endorsement.
 Clearing Process: The collecting banker participates in
the clearing process, where checks are exchanged
between banks to settle debts.
 Crediting Customer's Account: Once the check is
cleared, the collecting banker credits the funds to the
customer's account.
 Handling Dishonored Cheques: If a check is dishonored
(not paid), the collecting banker notifies the customer
and may charge fees for the return.
  Providing Customer Service: The collecting banker
provides customer service related to check collection,
including answering inquiries and resolving disputes.
Benefits of Using a Collecting Banker:
 Convenience: Customers can deposit checks without
having to visit the drawee bank.
 Speed: The clearing process is efficient, allowing for
timely crediting of funds.
 Risk Mitigation: The collecting banker assumes the risk
of non-payment and provides protection against forged
or fraudulent checks.
 Regulatory Compliance: Collecting bankers are subject
to regulations that ensure the integrity of the clearing
system.
In conclusion, collecting bankers play a vital role in the
financial system by facilitating the collection and clearing of
checks. Their services offer convenience, efficiency, and risk
mitigation for customers.