Business Regultory Framework - Nov '2011 (Solved)

Negotiable Instrument
The term ‘negotiable’ means transferable and the word ‘document’ means ‘in writing’. Therefore, negotiable means a written promise or order to pay money which may be transferred from one person to another.
Section 13 of the Negotiable Instruments Act, 1881 states – “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.
Characteristics of a Negotiable Instruments:
a)      Witting and Signature according to the rules: A Negotiable Instrument must be in writing and signed by the parties according to the rules relating to (a) promissory notes, (b) Bills of Exchange and (c) Cheques.

b)      Payable by Money:  Negotiable Instruments are payable by the legal tender money of India.

c)       Unconditional Promise:  If the instrument is a promissory note, it must contain an unconditional promise to pay. If the instrument is a bill or cheque, it must be an unconditional order to pay money.

d)      Freely transferable:  A negotiable instrument is transferable from one person to another by delivery or by endorsement and delivery.

e)      Acquisition of Property:  Any person who possesses a negotiable instruments, becomes its owner and entitled to the sum of money, mentioned on the face of the instrument.

f)       Acquisition of Good Title: The holder in due course, i.e. the transferee of a negotiable instrument in good faith and for value, acquires a good title to the instrument even if the title of the transferor is defective. Further his title will not be affected, by any defect in the title of the transferor.

g)      No Need of Giving Notice:  There is no need of giving a notice of transfer of a negotiable instrument to the party liable to pay the money.

h)      Right of the Holder in Due Course:  The holder in the due course remains unaffected by certain defences, which might be available against previous holders, as for example , fraud, to which he is not a party.

Promissory Note
A promissory note is 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..” [Section 4]
A signs instruments in the following terms:
(a) "I promise to Pay B or order Rs.500".
(b) "I acknowledge myself to be indebted to B in Rs.1,000, to be paid on demand, for value received”.
(c) “I promise to pay B Rs.500/- on 01-10-2005. etc are promissory notes”.

Bills of Exchange
As per Section 5 a “bill of exchange” is “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.”

Difference Between Bill of Exchange and Promisory Note.
Bill of Exchange
Promissory Note
There are 3 parties – drawee, drawer and payee.
There are 2 parties – maker or promisor and payee or promisee.
It is drawn by the creditor
It is drawn by the debtor
Order or Promise
It contains an order to make payment. There can be three parties to it, viz. the drawer, the Drawee and the payee.
It contains a promise to make payment. There are only two parties to it, viz. the drawer and the payee.
It requires acceptance by the Drawee or someone else on his behalf.
It does not require any acceptance.
Drawer and payee can be the same party
Drawer cannot be the payee of it
A bill of exchange can be drawn in sets.
Promissory note cannot be drawn in sets.

The maker of the bill of exchange is  secondarily and conditionally liable to payee. He becomes liable to pay only when the drawee refuses to honour the bill. Drawer stands in immediate relation to the drawee or acceptor and not the payee.
The maker of the Promissory note is primarily and absolutely liable to payee. Promisor stands in the immediate relation to the payee.
In case of its dishonour due notice of dishonour is to be given by the holder to the drawer
No notice needs to be given in case of its dishonour