Negotiable instruments are some of the most common modes of carrying out business transactions these days. Previously, all business transactions made use of just cash for commerce. With the advent of modern business practices, several new instruments have gained prominence. A classification of negotiable instruments based on Negotiable Instruments Act is important to understand them in detail.
Negotiable Instruments Act
The main characteristics of negotiable instruments are their financial worth and transferability. As long as an instrument contains these features, it can be a negotiable instrument.
There are several customary payment modes that resemble negotiable instruments. For example, the traditional ‘Hundi‘ system of India resembles negotiable instruments but is not legally recognized as such.
The Negotiable Instruments Act, 1881 is responsible for governing such instruments in India. This law, however, deals only with cheques, bills of exchange and promissory notes.
However, this does not mean that only negotiable instruments of these three types get recognition under the law. A study of the classification of negotiable instruments below will show how diverse they can be.
Browse more Topics under Negotiable Instruments Act
- Definition of Negotiable Instrument
- Promissory Notes
- Bills of Exchange
- Parties of a Cheque and Essentials
- Crossing and Types of Cheque Crossing
- Liability of Parties – Cheque
- Endorsement of Instruments
- Presentment for Acceptance
- Notice of Dishonor
- NEFT and RTGS
Classification of Negotiable Instruments
We can study negotiable instruments under the following broad classifications. These classifications depend on various features like transferability, negotiability, rights of holders, etc.
1. Bearer Instruments
There are two important conditions for negotiable instruments to become payable to bearers. Firstly, parties to the transactions must express it to be so payable. Secondly, the only endorsement for it should be an endorsement in blank.
These two requirements basically imply that any holder of such instruments can obtain payment for them. For example, a bill of exchange is payable to any person who holds it. These bearer instruments include cheques, bills of exchange and promissory notes.
2. Order Instruments
Negotiable instruments can often be payable to order in certain cases. They are payable when the instruments expressly state them to be so. Furthermore, they may be payable to order only to a specific person. The only requirement is that there should be no prohibition on their transferability.
3. Inland Instruments
Section 11 of the NI Act deals with inland instruments. This provision basically regulates instruments that are drawn and made payable in India. Alternatively, they may be payable outside India but only if they are drawn upon by an Indian resident.
4. Foreign Instruments
Every instrument that is not inland automatically becomes a foreign instrument. These instruments are drawn in a foreign country but may be payable within or outside India. They may even originate in India but only for payment to a person who resides abroad.
5. Demand Instruments
Sometimes, an instrument may not specify a time period during which it remains payable. Such instruments are generally payable whenever the bearer demands. Examples of such instruments include promissory notes and bills of exchange.
6. Time Instruments
Unlike demand instruments, time instruments carry a fixed future date for payment. For example, a promissory note may carry a maturity date arising after 24 months of its issue. Such instruments may even become payable upon the happening of a specific future event.
7. Ambiguous Instruments
An ambiguous instrument is basically 0ne that may be either a bill or a note for its holder. Such situations arise in peculiar circumstances only. For example, sometimes the drawee may be a fictitious person or he may be incompetent to contract.
Under such circumstances, the holder of such instruments may treat them either as bills of exchange or as promissory notes. Section 17 of the Negotiable Instruments Act deals with such situations.
8. Incomplete instruments
Incomplete instruments lack certain essential requirements of typical negotiable instruments. In such cases, the holder of the instrument has the authority to complete it up to the amount mentioned therein. This, in turn, results in the creation of legally binding negotiable instrument payable by law. Not only the first holder but also any subsequent holder who procures such instruments can complete them.
Solved examples on Negotiable Instruments Act
Question: Mention the missing words in the following statements.
(1) Classification of negotiable instruments depends upon their __________, __________, etc.
(2) __________ instruments do not carry a fixed date for payment.
(3) Any person who holds __________ instruments can demand their payment.
(4) __________ may be either a bill or a note.
Answers: (1) transferability, negotiability (2) demand (3) bearer (4) ambiguous