Page 109 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Corporate Legal Framework

Notes The term ‘instrument’ means ‘any written document by which a right is created in favour of some
person’. The word ‘negotiable’ has a technical meaning whereby rights in an instrument can be
transferred by one person to another.

6.1 Negotiable Instrument

An ‘Instrument’ as referred to in the Act is a legally recognised written document, whereby
rights are created in favour of one and obligations are created on the part of another. The
word ‘negotiable’ means transferable from one person to another either by mere delivery or by
endorsement and delivery, to enable the transferee to get a title in the instrument. An instrument
may possess the characteristics of negotiability either by statute or by usage. Promissory note,
bill of exchange and cheque are negotiable instruments by statute as they are so recognised by
Sec.13. There are certain instruments which are recognised as negotiable instruments by usage.
Thus, bank notes, bank drafts, share warrants, bearer debentures, dividend warrants, scripts
and treasury bills are negotiable by usage. An instrument is called ‘negotiable’ if it possesses the
following features:
1. Freely transferable. Transferability may be by (a) delivery, or (b) by endorsement and
delivery.

2. Holder’s title free from defects. The term ‘negotiability’ means that not only is the instrument
transferable by endorsement and/or delivery, but that its holder in due course acquires a
good title notwithstanding any defects in a previous holder’s title. A holder in due course
is one who receives the instrument for value and without any notice as to the defect in the
title of the transferor.

3. The holder can sue in his own name. Another feature of a negotiable instrument is that its
holder in due course can sue on the instrument in his own name.
4. A negotiable instrument can be transferred infinitum, i.e., can be transferred any number

of times, till its maturity.
5. A negotiable instrument is subject to certain presumptions. An instrument, which does
not have these characteristics, is not negotiable, but is assignable, i.e., the transferee takes it
subject to all equities and liabilities of the transferor.

6.2 Important Terms and Essential of Negotiable Instrument

Ambiguous Instrument (Sec.17)

An ambiguous instrument is one which may be construed either as a promissory note or as a bill
of exchange. Regarding such instruments, Sec.17 provides that the holder may, at this election
treat it as either and the instrument shall be thenceforward treated accordingly. Thus, a bill of
exchange drawn by a person upon himself may be construed as a promissory note.

Inchoate Stamped Instruments (Sec.20)

An inchoate instrument means an instrument that is incomplete in certain respects. Where one
person signs and delivers to another a paper stamped in accordance with the law relating to
negotiable instruments then in force in India and either wholly blank or having written thereon
an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof
to make or complete, as the case may be, upon it a negotiable instrument, for any amount specifi ed
therein but not exceeding the amount covered by the stamp.

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