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Classification of Negotiable Instruments

May 29th, 2019 in Finance & Accounts

Nowadays negotiable instruments are probably the most widely recognized methods of carrying out a business transaction. Already, all business exchanges use cash for trade. A few new negotiable instruments have gained a lot of popularity with the appearance of present-day business activities. The negotiable instruments classification depends on Negotiable Instruments Act that will help us to comprehend them in detail.

Negotiable Instruments Classification

The negotiable instruments can be classified in the following groups or classes. These groupings rely upon different characteristics like transferability, holder’s right, negotiability and so forth.

  • Bearer Instruments

To become payable to the bearer there are two significant conditions for negotiable instruments. Right off the bat, parties involved in such transaction should express such instruments to be so payable. Besides this, the bearer name shall be written clearly in the endorsement blank.

When these two pre-conditions are satisfied then this infers that any holder of such instruments can get paid for them. For instance, a bill of exchange is payable to any individual who holds it. These instruments incorporate checks, bills of exchange and promissory notes.

  • Order Instruments

In some specific cases, negotiable instruments can regularly be payable to order. And it will be payable when the instruments explicitly declare them to be so. Moreover, they might be payable to order to a particular individual. The main necessity is that there ought to be no forbiddance on their transferability.

  • Inland Instruments

Negotiable Instrument Act Section 11 talks about inland instruments. The provisions of Section 11 of NI’s Act basically takes care of the instruments that are created and are payable in India. Alternately, if these instruments are drawn upon an India citizen they might be payable outside India.

  • Foreign Instruments

Any negotiable instrument that is not an inland instrument is a foreign instrument. These negotiable instruments are made in a foreign nation, howsoever, they can be payable within India too. Moreover, foreign negotiable can be created in India to make the payment to the citizen residing abroad.

  • Demand Instruments

Demand instruments are those negotiable instruments that are payable when the bearers demand it. Generally, demand instruments do not carry any due date or maturity period. Some of the common examples of demand instruments are bills of exchange and promissory notes.

  • Time Instruments

Time instruments are those negotiable instruments that have fixed due date or maturity period. Once it achieves maturity period it becomes payable. Moreover, they can also be payable once a specific future event happens. One of the common examples of time instrument is promissory note having the maturity period of twenty-four months from the date of issue.

  • Ambiguous Instruments

An ambiguous instrument is those negotiable instruments that can be either a bill or a note for its holder. Such circumstances emerge in unconventional conditions such as when the drawee of a negotiable instrument is a fictitious person or incompetent to contract.

The holder of such instruments may treat them either as bills of exchange or as promissory notes under such scenarios. Negotiable Instruments Act section 17 manages such kind of scenarios.

  • Incomplete instruments

The incomplete instrument is those instruments that miss out some of the basic prerequisites of typical negotiable instruments. Moreover, the holders of such incomplete instrument can complete it to the extent mentioned therein. In addition to this, the principal holder, as well as any resulting holder who obtains such instruments, can finish them. This, thus, results in the making of lawfully restricting negotiable instrument that is payable by law.