Page 99 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes transfers his right to receive the payment of a debt that is called “assignment of the debt”.
Where, for example, the holder of a life insurance policy takes a loan from a bank, he transfers
the right to receive the payment under the policy to the bank, that is an assignment. Where the
holder of a note, bill or cheque transfers the same to another, he in essence, gives his right to
receive the payment of the instrument to the transferee. Thus, both the assignment and negotiation
involve the transfer of the right to receive the payment of debt. However, the rights, which the
transferee of an instrument by negotiation acquires are substantially superior to those of an
assignee. When an instrument is negotiated, its transferee gets good title irrespective of the
defective title, if any, of the transferor. On the other hand, when transfer is made by assignment,
the assignee has only those rights, which the assignor possessed.
A negotiable instrument may be transferred by negotiation or assignment. When a negotiable
instrument is transferred by negotiation, its transferee, if a holder in due course, gets a better
title than its transferor. On the other hand, when the transfer is made by way of assignment, the
assignee has only those rights which the assignor possesses. Thus, although law does not prohibit
transfer of negotiable instruments by means other than negotiation, transfer by negotiation has
certain advantages.
Negotiation by mere delivery: Section 47 provides that a bill or cheque payable to bearer is
negotiated by mere delivery of the instrument.
Payable to bearer: An instrument is payable to bearer (1) where it is made so payable, or (2)
where it is originally made payable to order but the only or the last indorsement is in blank. A
cheque which is originally drawn payable to bearer remains bearer even though it is subsequently
endorsed in full. The rule is once a bearer cheque always a bearer cheque, or (3) where the payee
is a fictitious person.
In case of negotiation by mere delivery, the transferor incurs no obligation to any party other
than the immediate transferee. The transferee becomes the holder of the instrument within the
meaning of s.8. The importance of delivery of the instrument cannot be overemphasised; as
without it the transferee does not become a holder thereof. Thus, a thief or finder of an instrument
cannot be termed as holder. However, if the thief or the finder negotiates the same to another
person, then that other person does become the holder of the instrument.
“Subject to the provisions of s.58 a promissory note, bill of exchange or cheque payable to bearer
is negotiable by delivery thereof.”

Exception: A promissory note, bill of exchange or cheque delivered on condition that it is not to
take effect except in a certain event is not negotiable (except in the hands of a holder for value
without notice of the conditions) unless such event happens.

Examples:
1. A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to
keep for B. The instrument has been negotiated.

2. A, the holder of a negotiable instrument payable to bearer, which is in the hands of
A’s bankers, who is at the time the banker of B, directs the bankers to transfer the
instrument to B’s credit in B’s account with the bank. The banker does so and
accordingly now possesses the instrument as B’s agent. The instrument has been
negotiated and B has become the holder of it.
Negotiation by Endorsement and Delivery: Instruments payable to a specified person or to the
order of a specified person can be negotiated only by endorsement and delivery. If an instrument
payable to order is transferred without endorsement, it is merely assigned and not negotiated
and the holder thereof shall not be entitled to the rights of a holder in due course.

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