Classification of Negotiable Instruments

The negotiable instruments are used in daily business and trade and they are transferred from one person to another person in return for a consideration. There are many negotiable instruments divided under two main heads namely; negotiable instruments by the statue and negotiable instruments by usage. Also, these negotiable instruments are classified into several types. Hereunder let us analyze all those instruments in detail.

Bearer Instrument and Order Instrument

Bearer Instrument

Negotiable instruments are payable to bearer i.e. the person who is legally possessing the instrument can become a payee. However, the instrument would become a bearer instrument only in these cases; when the expression, payable, is on the instrument and when the last indorsement is an indorsement in blank.

A bill of exchange and promissory note cannot be paid on demand and further, a promissory note cannot be payable to the bearer as per the rules framed by the apex bank in India.

Order Instrument

A negotiable instrument can have the expression, payable to order. It means the order of the payee has to be honored as specified. Also, it is only when the instrument has got no prohibiting clauses the payable to order is possible.

Inland Instrument and Foreign Instrument

Inland Instrument

When the negotiable instrument is drawn in India and is payable in India then it becomes an inland instrument and in the same way, when drawn by a resident and payable to the resident in India, it would be called an Inland Instrument.

Foreign Instrument

When the negotiable instrument is not an inland instrument, it is obvious, that would become a foreign instrument.

What is Usance?

It is the time fixed for the payment of the instrument. It is drawn in one country and payment shall be made in another country. This is normally fixed by the customs of the country and that same is different from place to place.

Instrument payable on demand

The cheque is a negotiable instrument by statute. The cheque is always payable only on demand. The other negotiable instruments, promissory note or a bill of exchange can also be payable on demand only and only when no time for payment is mentioned on them and also payable on demand when such expression was made available on the instrument.

Time Instrument

The negotiable instrument, promissory note or bill of exchange can be considered as time instruments when they are payable after a fixed period of time or on a specified date as mentioned in the instruments or on happening of an event which is definitely bound to happen.

Accommodation Bill

When a bill of exchange is drawn and the same was accepted and maybe or not indorsed for consideration then such bill of exchange is called a genuine trade bill. When the bill of exchange was drawn and accepted but indorsed without any consideration then the bill is said to be an accommodation bill.

  • Example: A needs money, he needs Rs 1000. He approaches his friend B for the same. B doesn't have the money to lend. B advises A to draw a bill on him i.e. on B, which he would accept. Later, A can discount the bill with his banker, only if his credit is good, and then later the A would pay B the sum of money aforesaid. B would eventually meet the sum of money as specified on the bill. This is called an accommodation bill. In this example, A is the accommodated person and B is the accommodating person.

Fictitious Bill

The bill would be fictitious when the names of both the drawer and the payee on the bill are fictitious. In this case, if the bill is accepted then the acceptor shall be bound to make payment to the holder in due course. The payment is made only when the holder in due course was able to prove the signature of the drawer and payee is one and the same.

Ambiguous Instrument

When the negotiable instrument is interpreted either as a bill of exchange or as a promissory note due to the faulty drafting, such an instrument is called an ambiguous instrument. The instrument can be a promissory note or a bill of exchange as decided by the holder and that chance would be only once.

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