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Parties to Negotiable Instruments, Negotiation

The parties to a negotiable instrument (bill of exchange, promissory note and a Cheques) are discussed in detail :

Parties to a bill of exchange

  1. The Drawer: The person who draws a bill of exchange is called the drawer.
  2. The Drawee: The party on whom such bill of exchange is drawn and who is directed to pay is called the drawee.
  3. The Acceptor: The person who accepts the bill is known as the acceptor. Normally the drawee is the acceptor. But a stranger can also accept a bill on behalf of the drawee.
  4. The Payee: The person to whom the amount of the bill is payable is called the payee.
  5. The Endorser: When the holder transfers or endorses the instrument to any other person the holder becomes the Endorser.
  6. The Endorsee: The person to whom the bill is endorsed is called the endorsee.
  7. The Holder: Holder of bill of exchange means any person who is legally entitled to the possession of it and to receive or recover the amount due thereon form the parties. He is either the payee or the endorsee. The finder of a lost bill payable to bearer or a person in wrongful possession of such instrument is not a holder.
  8. Drawee in case of need: The drawer of a bill or even an endorser may write in the instrument the name of a person directing the holder to resort to such person in case of need. Such a person is called a drawee in case of need. He is merely in the position of a drawee who has not accepted the bill. The bill cannot be presented to him for acceptance but only for payment.

Where a drawee in case of need is mentioned in the bill such a bill is not dishonored until it has been dishonored by such a drawee in case of need. The effect of this provision is to make the presentment to the drawee in case of need obligatory on the part of the holder.

  1. Acceptor for Honour: Any person may voluntarily become a party to a bill as an acceptor by accepting it for the honour of the drawer or of any person. When the original drawee refuses to accept or refuses to furnish better security when demanded by a notary, any person may step in to safeguard the honor of the drawer or any endorser and bind himself by an acceptance. The effect of such acceptance is that the bill is treated as alive and is not considered to be dishonored till it is dishonored by the acceptor for honor.

Parties to a promissory note

  1. The Maker: He is the person who promises to pay the amount stated in the promissory note.
  2. The Payee: The person named in the promissory note to whom the money is payable.
  3. The Holder: He may be either the payee or someone else to whom the promissory note has been endorsed.
  4. The Endorser: When the holder transfers or endorses the instrument to any other person the holder becomes the Endorser.
  5. The Endorse: The person to whom the bill is endorsed is called the endorsee.

Parties to a cheque

  1. The Drawee: He is the person who draws the cheque.
  2. The Drawee: The banker on whom the cheque is drawn.
  3. The Payee: The person to whom the amount of the bill is payable is called the payee.
  4. The Holder: Holder of bill of exchange means any person who is legally entitled to the possession of it and to receive or recover the amount due thereon form the parties. He is either the payee or the endorsee. The finder of a lost bill payable to bearer or a person in wrongful possession of such instrument is not a holder.
  5. The Endorser: When the holder transfers or endorses the instrument to any other person the holder becomes the Endorser.
  6. The Endorsee: The person to whom the bill is endorsed is called the endorsee.

Negotiation

When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute the person the holder thereof, the instrument is said to be negotiated.

Section 46 of Negotiable Instruments Act 1881: “Delivery”

The making, acceptance or indorsement of a promissory note, bill of exchange or cheque is completed by delivery, actual or constructive.

As between parties standing in immediate relation, delivery to be effectual must be made by the party making, accepting or indorsing the instrument, or by a person authorized by him in that behalf.

As between such parties and any holder of the instrument other than a holder in due course, it may be shown that the instrument was delivered conditionally or for a special purpose only, and not for the purpose of transferring absolutely the property therein.

A promissory note, bill of exchange or cheque payable to bearer is negotiable by the delivery thereof.

A promissory note, bill of exchange or cheque payable to order is negotiable by the holder by indorsement and delivery thereof.

Section 47 of Negotiable Instruments Act 1881: “Negotiation by delivery”

Subject to the provisions of section 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 condition) unless such event happens.

Illustrations

(a) 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.

(b) A, the holder of a negotiable instrument payable to bearer, which is in the hands of A’s banker, who is at the time the banker of B, directs the banker to transfer the instrument to B’s credit in the banker’s account with B. 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.

Section 48 of Negotiable Instruments Act 1881: “Negotiation by indorsement”

Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to order, is negotiable by the holder by indorsement and delivery thereof.

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