Friday, January 30, 2015

Negotiable Instruments - Part II

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(Read previous post on Negotiable Instruments first)



Promissory Notes -

It is a negotiable instrument in writing with an unconditional undertaking/promise, signed by a maker, to pay a certain amount of money to the order, or bearer of the instrument.

What we get from the definition?
  • It should be in writing
  • It is an unconditional undertaking / promise to pay
  • It should be signed by the maker / issuer. Remember it involves only 2 parties - the maker and the payee
  • Payable to both bearer and order of the instrument


Bills of Exchange -

It is a negotiable instrument in writing with an unconditional order, signed by a maker, ordering a certain person/institution, to pay a certain amount of money to the order, or bearer of the instrument.

What we get from the definition?
  • It should be in writing
  • It is an unconditional order to pay (not an undertaking) [refer previous post for the difference]
  • It should be signed by the maker / issuer. Remember it involves 3 parties -
    the maker/drawer/issuer,
    the drawee (may be a bank, or institution, or other person, whom the drawer is directing for payment to the payee) and
    the payee (whom the drawer is paying)
  • Payable to both bearer and order of the instrument


Cheques -

It is a special type of bill of exchange, which is drawn on a specified banker (i.e., drawee is always banker), and not expressed to be payable otherwise than on demand.

What we get from the definition?
  • It is a special type of Bill of Exchange, where drawee is fixed (i.e., the banker)
  • As it a Bill of exchange, it is therefore an unconditional order to pay
  • It should be signed by the maker / issuer (i.e., the account holder of a bank).
    Remember it involves 3 parties -
    the drawer (e.g. account holder),
    the drawee (always banker), and
    the payee (whom the drawer is paying)
  • It should be paid on demand (i.e., whenever the cheque is presented to the bank)
  • Payable to both bearer and order of the instrument

Example - The drawer is the individual who issues the cheque, instructing the bank (drawee) to pay the recipient (payee)

Note - In case of cheque, drawee is always a banker or bank, whereas in case of BOE, drawee could be bank or any person

Now try to clear the differences between these three -


Promissory Note

Bill of Exchange

Cheque

Nature
Unconditional undertaking, or promise to pay
Unconditional order to pay
Unconditional order to pay
Parties
2 parties – maker, payee
3 partiesdrawer, drawee, payee
3 parties – drawer, bank, payee
Liability
Liability of maker is primary
Liability of Drawer (maker) is secondary, drawee (e.g. bank) is primary
Liability of drawer (maker) is primary
Special cases
Maker and payee must be two different persons
Both drawer and payee may be the same person
Both drawer and payee may be the same person for Self-cheque
Acceptance
No need of acceptance of maker, while presenting for payment
Can be presented for payment only when it is accepted by drawee (acceptance is must, before drawee can be made liable upon it)
Does not require any acceptance
Conditions
A maker cannot put any conditions on it
Drawee can put conditions only if he accepts the bill
Can be drawn payable to bearer or on demand
Legality cases
If doesn't contain payee’s name, but state to be payable to bearer, is illegal.
When made payable to bearer, it is not considered as illegal (entitled to 3 days of grace unless it is payable on demand)
Payable immediately on demand without any days of grace
Dishonor
If dishonored, no notice required
If dishonored, a notice of dishonor is required to be given by the holder (payee) to the maker of the bill (drawer)
Notice of dishonor is not necessary. Want of assets in the hands of banker is sufficient notice



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Happy learning!


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