Lec negotiable instruments

Negotiable
Instruments
By
Abdul Qadir Bhamani

What is Negotiable Instruments?
 The term negotiable instruments means a written
document which entitles a person to a sum of money.
 A negotiable instruments is transferable by delivery or by
endorsement and delivery.
 The transfer entitles a person to the sum of money
mentioned therein.
 “Thus the negotiable instrument is a document
which is legally recognized by custom of trade or
law, transferable by delivery or by delivery and
endorsement”.

How many negotiable instruments we
have?
 We have three main negotiable instruments.
 1. Promissory note
 2. Bill of Exchange
 3. Cheque

What is Negotiation?
 When a Promissory note, Bill of exchange or cheque
is transferred to any person, to make that person the
owner of the negotiable instruments, then the
instrument is said to be negotiated.

Characteristics of the Negotiability
 An instrument is negotiable by virtue of the
following features,
 1. Transferable by delivery
 2. Entitled to receive money
 3. Filing a suit

 1. Transferable by delivery:
 The instrument is transferable by delivery or by
endorsement and delivery.
2. Entitled to receive money:
 The legal holder of the instrument is entitled to
receive money mentioned in it.

3. Filing a suit:
 The holder of a negotiable instrument has the right
to file a suit in his name for payment from all or any
of the concerned parties.

What is Promissory note?
 A Promissory note is the simplest and earliest kind
of credit instrument.
 “It is an unconditional written promise by
one person to another in which the maker
(payer) promise to pay on demand or at a
fixed or determinable date in the future, a
stated sum of money to or to the order of a
specified person or the bearer of the
instrument”.

Essential feature of the Promissory note
 The following are the essential features of a
Promissory note,
 1. The promise to pay must be in writing.
 2. The promise to pay must be signed by the maker or
payer.
 3. The promise to pay must be unconditional.
 An instrument containing a promise to pay a sum after
deducting necessary expenses or imposing any other
condition is not a promissory note.
 I promise to pay asad or order RS5000 is promissory note.
 I promise to pay asad RS 5000 seven days after yasir arrival
to Karachi.

 4. The amount to be paid must be definite in terms of
money.
 5. The Promissory note must be payable on demand or at a
fixed or determinable future date.
 6. The Promissory note must be payable to a definite
person. The Payee must be certain.
 7. It must bear stamp at the rate prescribed by law of a
country.
 8. There are two parties a promissory note.
 (i) Maker
 (ii) Payee

 (i) Maker:
 He is the person who draws and signs the Promissory note
and promise to pay the amount.
 In the specimen of Promissory note Rafiq Ahmad is the
maker.
 (ii) Payee:
 He is the person to whom the amount of the promissory
note is payable.
 In specimen Akram Khan is promised to payment. He is
thus Payee.

Specimen of a Promissory Note
 RS5,000 Karachi
FEB 10, 2017
Sixty days after for value received, I promise to
pay, Akram khan or order the sum of Rupees Five
Thousand only.
Rafiq Ahmad Signature (Stamp)

Bill of Exchange
 A bill of exchange is playing an important part in the
commercial life of the country. The need for it arises
where the buyer of goods needs a period of credit
before paying it.
 It is drawn by the creditors and is accepted by
debtor.

What is Bill of Exchange?
 According to Muller, A bill of exchange is an
unconditional order in writing addressed
by one person to another, signed by the
person giving it, requiring the person to
whom it is addressed to pay on demand or
at a fixed or determinable future time, a
sum certain in money to or to the order of a
certain person or to bearer.

Defination of Bill of Exchange
 According to sec 5 of NI Act 1881
 “An instrument in writing containing an
unconditional order, signed by the maker, directing a
certain person to pay on demand or at a fixed or
determine future date, a certain sum of money only
to, or to the order of a certain person or to the bearer
of the instrument.

Features or Characteristics of the bill
 The main characteristics or features of a
bill of exchange are as follow:
 A Bill of Exchange must be in writing.
 It must contain in order to pay.
 The order to pay must be unconditional. If it is
subject to the happening of some events, it will not
be a bill of exchange.
 It must be signed by the drawer and properly
stamped.

Features or Characteristics of the bill
 The parties to the bill, the drawer, the drawee, and
payee must be certain and definite individuals.
 The amount payable must be certain.
 The payment must be made in money.
 The bill payable may be either on demand or after
a specified period.
 The bill may be payable either to the bearer or to
the order of payee.

Parties to the Bill of Exchange
 According to the definition there are three
parties involved to a bill of exchange.
 Drawer
 Drawee
 Payee

Drawer is the maker of the bill of exchange. A
seller/creditor who is entitled to receive money from the
debtor can draw a bill of exchange upon the buyer/debtor.
The drawer after writing the bill of exchange has to sign it as
maker of the bill. (In the specimen of the bill Hamid is
drawer of the bill)
Drawee is the person upon whom the bill of exchange is
drawn. Drawee is purchaser of the goods upon whom
the bill of exchange is drawn. The dawee has to write the
word “accepted” if he accepts to make the payment
given in the bill on the due date and has to put his
signatures on it. After the drawee of a bill has signed his
assent on the face of the bill, he is called the acceptor
and this process is called acceptance. (In the specimen
of bill Rashid Ahmad is the drawee of bill).

(iii) Payee:
 He is the person to whom money is directed to be
paid. He gets the payments of the bill. (In the
specimen of bill Kamal Akmal is the Payee of bill).

Specimen of a Bill of Exchange
 RS8,000 Karachi
FEB 17, 2017
Two months after date pay to Mr Kamal or his
order the sum of Rupees Eight Thousand only, for
value received.
To
Rashid Ahmad
Lahore Hamid Zafar
Pakistan Signature
(Stamp)

Bill of Exchange
Types of Bills
Bills may be the following types:-
(1) Sent bills or bill for collection:-when bills are
handed over to a banker by his customer in order
that they may be collected when due & the proceeds
credited to the customer’s A/C they are called “bills
for collection.

Bill of Exchange
(2) Bills Negotiated or Bills Discounted:-Are those
bills for which the banker has given value at once,
without waiting for the proceeds after collection.

Bill of Exchange
(3) Bills Retired:-When a bill withdraw from circulation
or taken up before it is due, it is said to be “Retired”.
Sometimes the acceptor of a bill of exchange desires to
meet the bill before its maturity if he has sufficient
funds. The holder generally allows the acceptor a rebate
or discount for the unexpired period of the bill.

Other aspects OF Negoiable Instruments
 Rebate:- rebate given to accpeter who retire the bill
before it due
 Sight and usance bill of exchange:- when bill of
exchange or promessiory note paid on demand or on
presentation it called sight bill and when bill paid on
maturity or other wise the on demand its called usance
bill
 3 day grace period will be given in case of usance
 Meturity:- meturity is the date on which premessiory
note or bill of exchange is due.
 When day of meturity is holiday proceeding working day
will be consider as due date.

Other aspects OF Negoiable Instruments
 If the month in which period whould terminate has no
correspoding day bill will terminated on last day of
such month for example if BOE or PN is drawn on 31st
JAN will be termenated on 3 rd march (FEB 28 + 3
grace days)
 If BOE or PN is payble for certain no days time of
payment will be determine by computing the no of
days for example BOE or PN drawan on Jan 24for 20
days it is due on 16 FEB (FEB 13+ 3 days grace)

Person reciving the payment
 Holder :- According to section 8 of the Act holder
of a negotiable instrument means any person (a) who
is entitled in his own name to the possession of the
negotiable instrument and (b) who has also the right
to receive or recover the amount due thereon from
the parties thereto.

Eligibility to be Holder
Possession of instrument:-
 The person must be a de jure (original/real)holder.
He must be entitled to possess the instrument in his
own name. his possession must be under some legal
and valid title. A thief or any person who finds the
instrument or an endorsee under a forged
endorsement though in possession of the negotiable
instrument, is not a holder in the absence of a legal
title to it. Even an agent holding a negotiable
instrument for his principal is also not a holder
though he has a right to receive the payment.

 Entitled to receive the amount:-
 The person must be entitled to receive the
amount of the instrument and give a valid discharge
to the buyer. A person may be the bearer of an
instrument or payee or endorses of an instrument
but he may not be called a holder of instrument if he
is prohibited by law from receiving the amount due
on the instrument.

 Eligibility
a. A principal whose name appears on an instrument as the holder
though it executed in the name of his agent for him
b. Where a negotiable instrument is a bearer one, any person who is
in the possession of such instrument is the holder.
c. Where a negotiable instrument is in the name of a partner of a
firm, it naturally becomes a holder as it is not a separate entity
from the partner.
d. The endorsee of a cheque is called a holder.
e. If a holder of a negotiable instrument is dead, the heirs of the
deceased holder between the holders.
f. A principal on whose behalf a pronote is endorsed in blank and
is delivered to his agent, he is a holder of the instrument though
his name does not appear on the instrument though is name does
not appear on the instrument

No eligibility of Holders
 A thief or a finder of an instrument is not a holder
though he is in possession of an instrument.
 The word ‘entitled’ used in the definition of a
holder shows that the title of the person who
claims to be the holder must be acquired in a
lawful manner. A person obtaining the instrument
under forgery is not a holder.
 When the endorsement of a bill is ‘for collection
only’ the endorsee cannot be a holder

HOLDER IN DUE COURSE
 Holder in due course’ means any person who for the
consideration becomes the possessor of a promissory
note, a bill of exchange or a cheque if payable to
bearer, or the payee or endorsee thereof, if payable to
order, before the amount mentioned in it becomes
payable and without having sufficient cause to
believe that any defect existed in the title of the
person from whom he derived his title (section 9) .

Holder in due Course
 According to Sec 58 NI ACT 1881
“when promissiory note , bill of exchange or cheque
has been lost or has been obtain from any
maker,drawer,acceptor or holder therof by mean of
an offence or fraud or for an unlawful
considration,neirther the person who finds or
obtained the instrument nor any posesser or
indorser who claim through such person is entitled
to recive the amount due thereon form such
maker,drawer,acceptor or holder, unless such
possessor or indorseee is , or some person trough
whome he claims was a holder in due course.”

Characteristics of holder in due
course
He must be a holder:
 A holder to be a holder in due course must be entitled to the
possession of the instrument in his name under a legal title and he
must also be entitled to recover the amount of the instrument from
the parties liable thereto.
He must be a holder for valuable consideration
 To be a holder in due course, a person must be a holder for
valuable consideration and the consideration must not be illegal or
void. However, consideration may be past, present adequate or
inadequate.
 A donee acquiring title to the instrument by way of a gift is not a
holder in due course because there is no consideration to the contract
and therefore he cannot maintain any suit against the donor in the
court of law. The house hired for illegal purposes and money due on a
promissory note, deposited for the security cannot be recovered by a
suit.

Characteristics of holder in due course
 He must become a holder of the negotiable
instrument before the date of maturity.
 If the negotiable instrument is taken after it
becomes due, the person taking it gets the rights of his
immediate transferor against the other parties and
therefore, a person who takes a negotiable instrument
on the day on which it becomes payable cannot claim
rights of a holder in due course.

Difference between Promissory Note and
Bills of Exchange
Points of differ Promissory note Bills of Exchange
No. of parties Two parties; maker & payee Three parties ; Drawer,
Drawee & Payee
Promise or Order Promise to pay Order to pay
Prior acceptance Not necessary Acceptance by Drawee
Liability (maker) Absolute and primary Secondary and conditional
Relation The maker of the promissory
note stands in immediate
relation with the payee
The maker or drawer of an
accepted bill stands in
immediate relations with
the acceptor and not the
payee.
Notice of dishonor To the maker; not necessary To be given by the holder to
all the liable persona.
Payable to bearer Cannot be drawn Can be done; but in case of
‘payable of bearer on
demand’ , it is not drawn.

Difference between Promissory Note and
Bills of Exchange
Protest Not necessary in case of
dishonour of note
Foreign bill of exchange
must be protested for
dishonour when such
protest is required to be
made by the law of the
country where they are
drawn
Copies Not at all drawn Yes , it can be drawn
Provisions of
acceptance
Not applicable Provisions like presenting
for acceptance,
acceptance for honour are
applicable

Cheques
 We alredy study in detail regarding Cheques

DISHONOUR OF NEGOTIABLE
INSTRUMENT
 Promissory notes, cheques and bills of exchange are
covered by this Act. Of these negotiable instruments,
promissory notes and cheques may be dishonoured by
non payment only while bills of exchange may be
dishonoured by non payment or by non-acceptance as
they require acceptance from drawees. Section 93 of
the Act states that when a promissory note or a bill of
exchange or cheque is dishonoured by non-acceptance
or non-payment the holder thereof, or some party
thereto who remains liable thereon, must give notice
that the instrument has been so honored to all other
parties whom the holder seeks to make severally liable
thereon, and to some one of several parties whom he
seeks to make jointly liable thereon

DISHONOUR OF NEGOTIABLE INSTRUMENT
 Dishonour by non-payment:
 A negotiable instrument i.e. a bill, a cheque or a promissory note is
said to be. Dishonoured by non-payment when the maker of the
promissory note, acceptor of the bill of exchange or drawee of the
cheque makes default in payment upon being duly required to pay
the same. [section 2]. A bill or a promissory note is also said to be
dishonoured by non-payment when presentment for the payment is
excused expressly by the maker of the note or the acceptor of the bill
and the note or bill remains unpaid or at after maturity [section 76]
 If the bill is dishonoured either by non-acceptance or non-
payment, the drawer and all endorsers of the bill are held liable to
the holder provided that a notice of such dishonour is given by the
holder. If the bill is dishonoured by non-payment, the drawee is
held liable.

NOTING AND PROTEST
 Noting:
 As mentioned above, when a negotiable instrument
within the meaning of this Act is dishonoured, the
holder of the instrument, after giving notice of the
same, can sue any or all the prior parties liable thereon.
But before he does so, he can get the fact of the
dishonour of the instrument authenticated by noting
by a notary public. Noting is the authentic and official
proof of presentment and dishonour of the instrument.
 Noting means nothing but the recording of the fact of
dishonor of the instrument by a notary public within a
reasonable time after dishonour. Of course, nothing is
not compulsory neither it affects the rights of the
holder thereon,

NOTING AND PROTEST
 Noting contains the following particulars.
 a) The fact and the date of dishonour of the
instrument
 b) The reason or reasons if any, assigned for such
dishonour.
 c) The rotary charges incurred.
 d) If the instrument has not been expressly
dishonoured, the reason as to why the holder wants
to treat the same as dishonoured.

NOTING AND PROTEST
 Protest:
 According to section 100 of this Act, when a promissory
note or a bill of exchange has been dishonoured by non-
acceptance or non-payment, the holder may, within a
reasonable time, cause such dishonour to be noted and
certified by a notary public. Such certificate is called a
protest.
 Thus protest is a formal certificate of dishonour of an
instrument issued by the notary public. Of Course, it is
issued to the holder of the instrument on his demand
only.

NOTING AND PROTEST
 Contents of protest:
 1.Either the instrument itself, or a literal transcript of the instrument and
of every thing written or printed thereupon;
 2.The name of the person for whom and against whom the instrument
has been protested;
 3. A statement that payment or acceptance, or better security, as the case
may be, has been demanded of such person by the notary public; the
terms of his answer. If any, or a statement that he gave no answer, or
that he could not be found;
 4. When the note or bill has been dishonoured, the place and time of
dishonour, and when better security has been refused, the place and time
of refusal;
 5. The subscription of the notary public making the protest;
 6 . In the event of an acceptance for honour or of a payment for honour,
the name of the person by whom, of the person for whom, and the
manner in which, such acceptance or payment was offered and effected.
 7. The signature of the notary public.

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