1. What are the functions of negotiable instruments?

 Negotiable instruments serve two different functions in commercial transactions: a

credit function and a payment function. The credit function allows negotiable
instruments to be used to obtain credit now, to be repaid out of future income.
Common examples include promissory notes, certificates of deposit, and
debentures. (US bond or secured debenture: both are secured debt instruments).
A debenture in the US is a debt instrument which may be secured or unsecured,
whereas in the UK a debenture is usually a secured debt instrument evidenced by
a document under seal (a deed) and protects the right of the debenture holder.

The payment function allows negotiable instruments to be used in lieu of cash

payments which may be inconvenient or risky to transfer directly. Common
examples are cheques and bills of exchange (US also drafts).

2. What are the characteristics of negotiable instruments?

 Property: The possessor of negotiable instrument is acknowledged to be the

owner of property contained therein. Negotiable instrument does not simply give
ownership of the instrument but right to property as well. The property in negotiable
instrument can be moved without any formality. In the case of bearer instrument,
the possessions pass by meager delivery to the transferee. In case of order
instrument, endorsement & delivery are necessary for transfer of property.
 Title: The transferee of negotiable instrument is called ‘holder in due course.’ A
genuine transferee for value is not affected by any flaw of title on the part of
transferor or of any of the previous holders of instrument.
 Rights: The transferee of negotiable instrument can take legal action in his own
name, in case of dishonour. A negotiable instrument can be reassigned any
number of times till it is attains maturity. The holder of instrument need not give
notice of transfer to the party legally responsible on the instrument to pay.
 Presumptions: Certain presumptions are applicable to all negotiable instruments
i.e., a presumption that deliberation has been paid under it. It is not essential to
write in promissory note the words ‘for value received’ or alike expressions for the
reason that the payment of consideration is acknowledged. The words are typically
included to generate additional substantiation of consideration.
 Prompt payment: A negotiable instrument facilitates the holder to anticipate
prompt payment because dishonour refers to the ruin of credit of all persons who
are parties to the instrument.

3. Define promissory note

 A promissory note is an instrument in writing (not being a bank note or a currency

note) containing an unconditional undertaking, signed by the maker, to pay a
 certain sum of money only to, or to the order of, a certain person. This definition
given by law means that when a person gives a promise in writing to pay a
certain sum of money unconditionally to another person (named) or according to
his instructions, the document is a promissory note.

4. Define bill of exchange

 A bill of exchange is a three-party instrument written and signed by the first

party (the drawer) ordering the second party (the drawee) to pay a third party
(the payee) a sum of money on demand or at a fixed or determinable future time.

5. What constitute holder in due course?

 A holder in due course is a holder who has taken the instrument under the
following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice
that it has been previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him, he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it.