Definition
The term “Not Negotiable” refers to the status of a bill of exchange, indicating that it ceases to be a negotiable instrument. This means that while the instrument can still be transferred, any subsequent holder cannot obtain a better title than the person from whom it was received. This notation is often a safeguard in case the instrument is stolen or fraudulently transferred.
In practice, a cheque can be marked as “Not Negotiable” by crossing it with these words. For other forms of financial instruments like promissory notes or drafts, the term must be inscribed directly on their faces to enforce the same precautionary measures.
Examples
- Cheque: A business issues a cheque to a vendor with the words “Not Negotiable” crossed on it. The cheque can still be endorsed by the vendor, but any further holder cannot claim better rights to it in the event it was stolen or obtained by fraud from the vendor.
- Promissory Note: A borrower issues a promissory note marked “Not Negotiable.” If a lender sells this note to another party, the subsequent holder cannot claim more rights than the original lender, especially if the note was transferred illicitly.
Frequently Asked Questions (FAQs)
Q1: What happens if a negotiable instrument is marked as ‘Not Negotiable’? A1: When a negotiable instrument is marked as “Not Negotiable,” it can still be transferred, but any subsequent holder cannot obtain a better title than the original holder. This acts as a safeguard in case the instrument is stolen or transferred fraudulently.
Q2: Can all forms of bills of exchange be marked as ‘Not Negotiable’? A2: No, only cheques can be crossed ‘Not Negotiable.’ For other types of bills of exchange, the term must be inscribed directly on the face of the instrument.
Q3: How does marking a cheque as ‘Not Negotiable’ affect its cashability? A3: Marking a cheque as ‘Not Negotiable’ does not affect its cashability. The cheque can still be cashed by the payee and any subsequent holders, but it provides a safeguard against the transfer of ownership in case of theft or fraud.
Q4: Can an instrument be both ‘Not Negotiable’ and ‘Account Payee Only’? A4: Yes, a cheque can be marked as both ‘Not Negotiable’ and ‘Account Payee Only.’ This further restricts the handling of the cheque to only being deposited in the account of the stated payee, providing an additional level of security.
Related Terms
- Bill of Exchange: A written order binding one party to pay a fixed sum of money to another party at a predetermined future date or on demand.
- Negotiable Instrument: A document guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payer named on the document.
- Cheque: A written order directing a bank to pay money as instructed from the customer’s account.
- Safeguard Clause: Provisions added to financial instruments to protect the holder from loss due to specific contingencies.
Online Resources
- Investopedia: Bill of Exchange
- Economics Online: Negotiable Instruments
- Federal Reserve: Understanding Check Writing
Suggested Books for Further Studies
- “Principles of Accounts” by David Cox - A comprehensive guide that covers various aspects of financial accounting, including negotiable instruments.
- “Accounting: Tools for Business Decision Making” by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso - Discusses practical applications and decision-making tools in accounting.
- “Financial Accounting” by Walter T. Harrison Jr., Charles T. Horngren, C. William Thomas - Provides detailed explanations on financial accounting subjects, including checks and other forms of negotiable instruments.