The Negotiable Instruments Act, 1881 provides a legal framework for negotiable instruments such as promissory notes, bills of exchange, and cheques. A key feature of these instruments is that they can be transferred from one party to another. This transfer may take place either through Negotiation or Assignment.
Meaning of Negotiation
Negotiation refers to the transfer of a negotiable instrument in such a way that the transferee (the person receiving it) becomes the holder of the instrument with the right to receive payment.
Key Points:
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It results in the transferee becoming a holder in due course if certain conditions are met.
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The transferee obtains a better title than the transferor.
Modes of Negotiation:
Negotiation can occur in two ways:
1. By Delivery (Section 47):
Applicable when the instrument is payable to bearer.
Example:
If A holds a bearer cheque and hands it over to B, the cheque is negotiated by delivery.
2. By Endorsement and Delivery (Section 48):
Applicable when the instrument is payable to order.
Example:
If A holds a cheque payable to A or order, A must endorse (sign) the cheque and deliver it to B to complete the negotiation.
Holder and Holder in Due Course
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A holder is a person entitled to possess and receive payment.
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A holder in due course is someone who receives the instrument:
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For value
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In good faith
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Before maturity
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Without any defect in title
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Importance:
A holder in due course has special rights and protections under the Act, such as immunity from prior defects in title.
Meaning of Assignment
Assignment is the transfer of rights under a negotiable instrument through a written document, governed by the Transfer of Property Act, 1882.
Key Points:
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Must be in writing.
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Requires proper stamping and registration (if applicable).
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The assignee does not become a holder in due course.
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The assignee gets only the rights possessed by the assignor.
Example:
If A executes a written deed assigning a promissory note to B, B becomes the assignee. If A’s title is defective, B’s rights will also be affected.
Negotiation vs. Assignment
| Basis | Negotiation | Assignment |
|---|---|---|
| Law Governing | Negotiable Instruments Act, 1881 | Transfer of Property Act, 1882 |
| Mode of Transfer | Delivery or endorsement + delivery | Written document |
| Title Transferred | Better title (for holder in due course) | Same title as assignor |
| Notice to Debtor | Not necessary | Necessary to bind the debtor |
| Legal Status | Transferee becomes holder | Assignee does not become holder |
Practical Implications
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Negotiation is widely used in commerce for its simplicity and legal benefits.
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Assignment is more formal and generally used when negotiation is not possible (e.g., after maturity or with non-negotiable instruments).
Conclusion
In summary, Negotiation and Assignment are two distinct methods of transferring negotiable instruments. While negotiation offers legal advantages and ease of use in business transactions, assignment involves a formal process under a different law.