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Banking and Insurance
Notes 2. Transfer of a negotiable instrument to another person by signing on it, is known as
.......................................
3. In a promissory note, the person who makes the promise to pay is called ...........................
4. The person who endorses the promissory note in favour of another is known as
...................................
5. A promissory note must be signed as per ....................................... Act.
8.4 Endorsement of Cheque
Negotiable instruments may be endorsed in various ways, and some negotiable instruments do
not require any endorsement. If a negotiable instrument is a bearer instrument, then it may be
negotiated by simply delivering it from one person to another with no endorsement required.
Such negotiable instruments typically have a blank endorsement consisting of a person's name
only. If the negotiable instrument is an order instrument, then the payee must first endorse it
and deliver it before negotiation is complete. For example, if the instrument says, "Pay to the
order of Jane Smith," then it is an order instrument and Jane Smith must endorse it and then
deliver it to the payer or drawee.
Endorsements such as "Pay to the order of Jane Smith" are known as special endorsements and
have the effect of making the instrument an order instrument rather than a bearer instrument.
Restrictive endorsements ("Pay to Jane Smith only") and qualified endorsements ("Pay without
recourse to the order of Jane Smith") also have the effect of requiring the payee to endorse the
negotiable instrument. Qualified endorsements also affect the nature of implied warranties
associated with endorsement.
Under the UCC, an unqualified endorser who receives payment or consideration for a negotiable
instrument provides a series of implied warranties to the transferee and any subsequent holder
in due course. An unqualified endorser warranties that he or she has good title to the instrument
or represents a person with title, and that the transfer is otherwise rightful. The endorser also
warranties that all signatures are genuine or authorized, that the instrument has not been
materially altered, that no defense of any prior party is good against the endorser, and that the
endorser has no knowledge of any insolvency proceeding involving the payer.
Other issues concerning negotiable instruments are also covered in Article 3 of the UCC. In the
case of a forgery, the negotiable instrument becomes inoperative. Antedated or past-dated
instruments are not invalid, provided the dating was not done for fraudulent or illegal purposes.
Negotiable instruments that have been materially altered without the permission of all parties
involved are void. But a holder in due course who is not party to the material alteration can
enforce payment according to the instrument's original terms. Also covered in Article 3 are
interpretations of contradictions that may appear from time to time in negotiable instruments.
8.5 Payment and Collection
8.5.1 Endorsement
The word 'endorsement' in its literal sense means, writing on the back of an instrument. But
under the Negotiable Instruments Act it means, the writing of one's name on the back of the
instrument or any paper attached to it with the intention of transferring the rights therein. Thus,
endorsement is signing a negotiable instrument for the purpose of negotiation. The person who
effects an endorsement is called an 'endorser', and the person to whom negotiable instrument is
transferred by endorsement is called the 'endorsee'.
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