Endorsement of Negotiable Instruments
Endorsement is a method of transferring and assigning negotiable instruments by writing a statement accompanied by a signature, or by affixing a signature alone, on the back of the instrument. In commercial law, this act is known as endorsement. Endorsement greatly facilitates the transfer of negotiable instruments, and, in modern practice, it is an essential feature of commerce and obtaining credit.
Endorsement is regarded as an assignment of the instrument. Through endorsement and delivery, all rights attached to the instrument are transferred to the holder. As provided under Article 245 of the Iranian Commercial Code, a bill of exchange is transferred by endorsement.
Validity Requirements for Endorsement in Negotiable Instruments
Types of Endorsement
Endorsement may be made for three principal purposes: transfer, collection, or security or collateral.
Endorsement for Transfer
The first part of Article 247 of the Iranian Commercial Code expressly states that endorsement indicates the transfer of a bill of exchange.
Accordingly, endorsement constitutes the legal method for transferring rights embodied in a bill of exchange and other negotiable instruments, without being subject to the formalities governing assignment of claims under civil law. This mechanism enables repeated transfers of negotiable instruments and does not require additional justification beyond endorsement and delivery.
Endorsement for Collection
Endorsement as agency, also referred to as endorsement for collection, occurs when the holder appoints another person to collect the amount due at maturity without transferring ownership of the instrument. This is typically done by inserting phrases such as “value for collection,” “for receipt of payment,” “by way of agency,” or any wording that clearly reflects an agency relationship.
Under Article 247 of the Iranian Commercial Code, agency endorsement is recognized as a form of endorsement and remains widely used in practice. To establish this type of endorsement, it is sufficient for the holder to grant authority to collect the amount to an agent. Iranian commercial law treats the agent as the holder of the instrument for procedural purposes and provides that, upon non-payment, the holder may take the necessary steps to issue a protest.
In current banking practice, banks often act as representatives or agents of holders of negotiable instruments. Upon successful collection, banks credit the collected amount to the holder’s account. Where collection is unsuccessful, the matter may proceed to protest or related formal steps.
Endorsement as Security
The third type is endorsement as security. In this form, the endorser writes wording such as “value for security,” “value as collateral,” or any expression that clearly indicates a guarantee or collateral purpose. In effect, the holder uses the negotiable instrument as security.
In many lending arrangements, banks traditionally rely on immovable property as collateral. However, such collateral is often incompatible with the speed and nature of commercial transactions. Pledging immovable property generally involves extensive formalities, can be impracticable in many cases, and frequently entails high costs.
By contrast, using a negotiable instrument as collateral through endorsement generally requires fewer formalities. It is typically sufficient for the holder to include wording on the back of the instrument indicating a collateral purpose, and retaining a single instrument is administratively simple. The practical reliability of such collateral, however, depends on broader economic stability and the creditworthiness of the signatories. In many cases, banks may still prefer immovable collateral to control non-performing exposures, notwithstanding its limitations in commercial practice.
With regard to endorsement, the following points are noteworthy:
- A partial endorsement of a bill of exchange is invalid.
- Endorsement in favor of the drawee may operate as a receipt of payment.
- An endorsement may be made to the bearer, known as a blank endorsement.
Blank Endorsement
Endorsement must bear the signature of the endorser. In an endorsement, the date and the name of the transferee may be stated. This is reflected in Articles 246 and 309 of the Iranian Commercial Code. A blank endorsement, sometimes described as endorsement in blank, is possible in promissory notes in the same manner as in bills of exchange.
Frequently Asked Questions About Endorsement of Negotiable Instruments
Endorsement is the transfer and assignment of negotiable instruments, such as bills of exchange or promissory notes, by writing a statement with a signature, or by signing alone, on the back of the instrument. Through endorsement and delivery, the rights attached to the instrument are transferred to the new holder.
Endorsement is generally divided into three types: (1) endorsement for transfer, (2) endorsement for collection (as agency), and (3) endorsement as security or collateral.
Endorsement for transfer results in the transfer of ownership and the rights embodied in the negotiable instrument to a new holder. It facilitates repeated transfers of negotiable instruments without being subject to the formalities of assignment of claims under civil law.
In endorsement for collection, the holder appoints another person to collect payment at maturity without transferring ownership of the instrument. The agent is authorized to pursue collection and, in the event of non payment, may proceed with the necessary steps for protest in accordance with applicable commercial rules.
Endorsement as security allows the holder to use the negotiable instrument as collateral to secure an obligation or obtain financing. Compared to immovable collateral, it is generally simpler, less costly, and faster to implement, as it often requires only an appropriate notation and signature on the instrument.
A blank endorsement is an endorsement made without specifying the name of the transferee, and it becomes effective by the endorser’s signature alone. This form of endorsement may be used in bills of exchange and promissory notes under commercial law rules. What is endorsement of negotiable instruments?
What are the types of endorsement?
What is the purpose of endorsement for transfer?
What is endorsement for collection or endorsement as agency?
What is endorsement as security or collateral used for?
What is a blank endorsement?
