Definition, Features, Types Recognition of Negotiable Instruments

 Types of Negotiable Instruments

Negotiable instruments are written documents guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payer named on the document. Here are the main types:

• Promissory Note:
  • Definition: A written promise by the maker (debtor) to pay a specific sum of money to the payee (creditor or bearer) on a specific date or on demand.
  • Key Features:
    • Unconditional promise to pay.
    • Specific sum of money.
    • Payable either on demand or at a fixed or determinable future time.
• Bills of Exchange:
  • Definition: A written order from the drawer (creditor) to the drawee (debtor) directing the drawee to pay a certain sum of money to the payee.
  • Key Features:
    • Unconditional order.
    • Drawn by one person (drawer) on another (drawee).
    • Payable on demand or at a future date.
    • Accepted by the drawee.
• Cheque:
  • Definition: A type of bill of exchange drawn on a bank and payable on demand.
  • Key Features:
    • Always drawn on a bank.
    • Payable on demand.
    • Used for easy transfer of money.
• Other Negotiable Instruments:
  • Examples: Government promissory notes, railway receipts, delivery orders, etc.
  • Key Features:
    • These can be negotiable by custom or practice of trade.
    • Treated similarly under law to promissory notes, bills of exchange, and cheques.

Holder and Holder in Due Course

Understanding the distinctions between a holder and a holder in due course (HDC) is essential for grasping the legal implications in the context of negotiable instruments.

Holder

• Definition: A person entitled in his own name to the possession of a negotiable instrument and to receive or recover the amount due thereon.
• Key Characteristics:
  • Entitlement: Entitled to possess the instrument in his name.
  • Consideration: No consideration necessary; the instrument can be obtained by gift or donation.
  • Maturity: Can acquire the instrument either before or after its maturity.
  • Title: Acquires no better title than that of the transferor.
  • Right to Recover: Can recover the amount due from the transferor (the immediate party).
  • Notice of Defect: May have notice of defect in the title but is not liable unless involved in the defect, fraud, or forgery.
  • Privileges: Fewer privileges compared to a holder in due course.

Holder in Due Course (HDC)

• Definition: A person who acquires the instrument for consideration, in good faith, and before it is overdue.
• Key Characteristics:
  • Entitlement: Entitled to possess the instrument and receive payment.
  • Consideration: Must acquire the instrument for valuable consideration.
  • Maturity: Must acquire the instrument before its maturity.
  • Title: Acquires a better title than that of the transferor, free from prior defects.
  • Right to Recover: Can recover the amount from any of the prior parties until the instrument is discharged.
  • Notice of Defect: Must acquire the instrument without any notice of defects in the title.
  • Privileges: More privileges, such as protection against prior defenses and claims.

Comparison Table

Basis for Comparison	Holder	Holder in Due Course (HDC)
Meaning	Person entitled to possess and receive payment of a negotiable instrument in their name.	Person who acquires the instrument bona fide for some consideration, with payment still due.
Consideration	Not necessary	Necessary
Right to Sue	Can sue only the transferor (immediate party)	Can sue all prior parties
Good Faith	May or may not obtain in good faith	Must obtain in good faith
Privileges	Comparatively fewer	More
Maturity	Can acquire the instrument before or after maturity	Must acquire the instrument before maturity

Additional Information

• Endorsement: Negotiable instruments can be transferred to another party by endorsement, which can convert a holder into a holder in due course if the instrument is endorsed before its maturity and for consideration.
• Defenses against HDC: The HDC holds the instrument free from many defenses that could be raised against the original parties, enhancing their security in holding the instrument.
• Legal Protection: Laws provide significant protection to HDCs to encourage the smooth transfer of negotiable instruments, facilitating commerce and finance.