In the world of business and finance, negotiable instruments are a very important tool. They provide the parties with an ease of doing business. And they can also be a source of finance when in need of funds. Let us learn more about negotiable instruments and their advantages.
What are Negotiable Instruments?
A negotiable instrument is actually a written document. This document specifies payment to a specific person or the bearer of the instrument at a specific date. So we can define a bill of exchange as “a document signifying an unconditional promise signed by the person giving the promise, requiring the person to whom it is addressed to pay on demand, or at a fixed date or time”.
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Features of Negotiable Instruments
- Easily Transferable: A negotiable instrument is easily and freely transferable. There are no formalities or much paperwork involved in such a transfer. The ownership of an instrument can transfer simply by delivery or by a valid endorsement.
- Must be in Writing: All negotiable instruments must be in writing. This includes handwritten notes, printed, engraved, typed, etc.
- Time of Payment must be Certain: If the order is to pay when convenient then such an order is not a negotiable instrument. Here the time period has to be certain even if it is not a specific date. For example, it is acceptable if the time of payment is linked with the death of a specific individual. As death is a certain event.
- Payee also must be certain: The person to whom the payment is to be made must be a specific person or persons. Also, there can be more than one payee for a negotiable instrument. And “person” includes artificial persons as well, like body corporates, trade unions, chairman, secretary etc.
Types of Negotiable Instruments
Let us take a look at some of the most common types of negotiable instruments.
- Promissory Note: In this case, the debtor is the one who makes the instrument. And he promises unconditionally to the creditor (or the bearer of the document) a certain sum of money on a specific date.
- Bills of Exchange: This is an order from the creditor to the debtor. This instrument instructs the drawee (debtor) to pay the payee a certain amount of money. The bill will be made by the drawer (creditor)
- Cheque: This is just another form of a bill of exchange. Here the drawer is a bank. And such a cheque is only payable on demand. It is basically the depositor instructing the bank to pay a certain amount of money to the payee or the bearer of the cheque.
- Other Negotiable Instruments Examples: There are other instruments such as government promissory notes, railway receipts, delivery orders, etc. These can be negotiable instruments by custom or practice of the trade.
Learn more about Effect of Negotiability here in detail.
Solved Question on Negotiable Instruments
Q: What are some of the advantages of a negotiable instrument?
Ans: Advantages of Negotiable Instrument
- One of the biggest advantages of bills of exchange is that the consideration between the debtor and the creditor is presumed. So we will assume that the purchaser is in debt of the seller, the seller need not prove this fact. Since, the bill has been accepted by the debtor the court will assume that such debt legitimately exists.
- The creditor does not have to wait for the maturity period to get the money. He can immediately opt for bill discounting. Or he can endorse the bill to a creditor of his. So, his money does not get locked in.
- Accommodation bills enable the businessmen to obtain funds at a low rate of interest to meet any temporary financial shortfalls that may arise from time in business.