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.