What is a negotiable instrument?

Section 13 of Negotiable instrument Acts 1881 defines negotiable instrument as under.

A “negotiable instrument” means a promissory note, bill of exchange or cheque payable either to order or to bearer.

An instrument is said to be negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery. Thus, any instrument that has the following characteristics is deemed to be a negotiable instrument.

(i)  Title passes on mere delivery, or endorsement and delivery

(ii) The holder may sue in his own name

(iii) No notice of assignment need to be given

(iv) The holder takes the instrument in good faith, has given value, and he has no notice of defection in the title of the transferor.

The principal advantages of negotiable instruments are that they pass through operation of law to a bona fide transferee for value by mere delivery or by endorsement and delivery. The negotiable instrument can be transferred in the name of another person without the necessity of the complex procedure of executing the deed of assignment. A promissory note or bill of exchange or cheque payables either to the order or bearer are deemed as the instruments under negotiable instrument acts of 1881. A demand draft issued by the bank is a bill of exchange, therefore, it is also a negotiable instrument.  There are other kind instruments like dividend warrants, railway receipts, and delivery orders etc., which are by usage recognized as negotiable instruments.

CLICK here to know ‘10 parties’ to a negotiable instrument viz. maker/drawer, drawee, payee, holder, holder in due course, endorser, endorsee, endorsement, drawee in the case of need, Acceptor for honour.