The advent of modern business practices contributed to the growth of newer ways of facilitating financial transactions. Previously, cash was the most usual mode of exchanging goods and services for their value. The hike of negotiable instruments, however, brought radical changes in business practices.
Negotiable instruments are critical to our economy. They allow people to do business and to be sure that they will receive money for their services or goods without the actual transfer of cash. For example, a business can write a cheque to a supplier instead of delivering large amounts of cash. On a smaller scale, the same thing happens when you pay a bill to your electric company with a cheque rather than mailing cash. Without the predictable laws in place which can protect both the payor and payee of a negotiable instrument, our economy would not be able to function the way that it currently does.
According to the Negotiable Instruments Act, 1881 Section 13(i), a negotiable instrument can be of 3 different types:
- Promissory Note
- Cheques
- Bill of Exchange
Promissory note – A promissory note stands for a written promise to its holder by an entity or an individual to pay a certain sum of money by a pre-decided date. In other words, Promissory notes reveal the amount which someone owes to you or you owe to someone together with the interest rate and also the date of payment. However, the seller isn’t bound to take the promissory note. The reputation of a buyer is of great importance to a seller in deciding whether to take the promissory note or not.
Bill of exchange – Bills of exchange refer to a legally binding, written document which directs a party to pay a predetermined sum of money to the second(another) party. Some of the bills might express that money is due on a specified date in the future, or they might express that the payment is due on demand. A bill of exchange is exercised in transactions of goods as well as services. It is signed by a party who owes money (called the payer) and given to a party entitled to acquire money (called the payee or seller), and thus, this could be used for fulfilling the contract for payment. However, a seller could also endorse a bill of exchange and give it to someone else, thus result in passing such payment to some other party. When the bill of exchange is issued by the financial institution, it’s usually known as a bank draft. And if it is issued by an individual, it is usually known as a trade draft. A bill of exchange essentially acts as a promissory note in the international trade; the exporter or seller, in the transaction addresses a bill of exchange to an importer or buyer. A third party, usually the banks, is a party to several bills of exchange playing as a guarantee for these payments. It helps in reducing any risk which is part and parcel of any transaction.
Cheque – A cheque is an instrument in writing which contains an unconditional order, addressed to a banker and is signed by a person who has deposited his money with the banker. This order needs the banker to pay a certain sum of money on demand only to the bearer of cheque (person holding the cheque) or to any other person who is to be paid as per instructions given. Cheques could be a good method of paying different kinds of bills. Although the usage of cheques is declining over the years due to online banking, individuals still use cheques for paying for loans, college fees, car EMIs, etc. Cheques are also a good method of keeping track of all the transactions on paper. On the other side, cheques are comparatively a slow way of payment and might take some time to be processed.
Apart from these, there are some other types of instruments that have occupied the negotiability character because of the usage and custom of trade. These include:
- Exchequer bills
- Circular notes
- Share warrants
- Banknotes
- Dividend warrants
- Bearer debentures
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