Negotiable Instruments

Negotiable Instruments

• What is negotiable?• Negotiable means transferable.• The negotiation that goes on refers to the transfer of the

instrument between two people, or from one bank to another, or even from one country to another.

• What is an instrument?• In the broadest sense, almost any agreed-upon medium

of exchange could be considered a negotiable instrument.

Forms of Negotiable Instruments• A negotiable instrument is a written order promising to pay a sum of money.

• A document becomes negotiable when it contains an unconditional promise to pay money and is payable to a bearer or payable on demand.

Nature of the negotiable instrument are:

Be in writingBe signed by the maker or drawerBe an unconditional promise or order to payState a fixed amount of moneyBe freely transferable from one to another personBe payable on demand or at a definite timeBe payable to order or to bearer

Types of negotiable instrument

Cheque

Bill of exchange

Promissory note

ChequeDefinition: (Section 6)

“A" cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand”.

NATURE1. Always drawn on specified bank,2. Always payable on demand.3. Unconditional order4. Certain sum of money5. Signed 6. Banker name7. Codes8. Writing etc.

• Open cheque: • A cheque is called ‘Open’ when it is possible to get cash

over the counter at the bank. The holder of an open cheque can do the following:

• 1. Receive its payment over the counter at the bank.• 2. Deposit the cheque in his own account.• 3. Pass it to some one else by signing on the back of a

cheque.

• Bearer cheque:• A cheque which is payable to any person who presents it

for payment at the bank counter is called ‘Bearer cheque’.

Types of Cheque

• Order cheque:• An order cheque is one which is payable to a particular

person. In such a cheque the word ‘bearer’ may be cut out or cancelled and the word ‘order’ may be written.

• Crossed cheque: • Since open cheque is subject to risk of theft, it is dangerous

to issue such cheques. This risk can be avoided by issuing another types of cheque called ‘Crossed cheque’. The payment of such cheque is not made over the counter at the bank. It is only credited to the bank account of the payee. A cheque can be crossed by drawing two transverse parallel lines across the cheque, with or without the writing ‘Account payee’ or ‘Not Negotiable’.

Parties of Cheque

Drawer : who makes cheque.

Drawee : Always banker.

Payee : whom the amount payable

Standard Features of a Cheque

Pay ……………………………………………………………………………………………………………......

……………………………………………………………………………………………………. Or Bearer

Rupees ……………………………………………………………………………………………………………

…………………………………………………………………………………………… Rs.

A/c No.

“ΙΙ473792ΙΙ” 000240000 000000 10

AKASH IJAZSignaturePlease sign above

D D M M Y Y Y Y

Promissory Note Legal definition: (Section 4)

"A" promissory note" is an instrument in writing 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, or to the bearer of the instrument.

Illustrations :• A signs instruments in the following terms• (a) " I promise to pay B or order Rs. 500." • (b)  I promise to pay B Rs. 500 which shall be due to him.“• (c) " I promise to pay B Rs. 500 seven days after my marriage with C."

Parties Of Promissory Note

Maker : who makes PN.

Payee : whom the amount payable

Essentials Of Valid Promissory Note

Must be in writing Must be unconditional Must express promise to pay Must in term of money only Must pay in certain amount of money Must contain certain parties Must be signed by maker Other formalities like date, consideration etc.

Standard Features of a Promissory Note

Rs. 10,000LucknowApril 10, 2013

Three months after date, I promise to pay Ali Asgar (Payee) or to his order the sum of Rupees Ten Thousand, for value received.

To,Ali Asgar,B-20, Minto Park,Lahore.

(Maker)

Stamp

Sd/-Ram

Bill of exchange Legal definition: (Section 5)

“ A" bill of exchange" is an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.”

Parties Of Bill of Exchange :- Drawer : who makes BE Drawee : Always ACCEPTOR. Payee : whom the amount payable

CLASSIFICATION OF BILL OF EXCHANGE

• Inland and Foreign Bills [Section 11 and 12]

• Inland Bill:• It is drawn in Pakistan on a person residing in Pakistan whether payable

in or outside Pakistan; or• It is drawn in Pakistan on a person residing outside Pakistan but payable

in Pakistan.

• Foreign Bill:• A bill drawn in Pakistan on a person residing outside Pakistan and made

payable outside Pakistan.• Drawn upon a person who is the resident of a foreign country.

Essentials Of Valid Bill Of Exchange Must be in writing Must be unconditional Must express order to pay Must in term of money only Must pay in certain amount of money Must contain certain parties Must be signed by drawer Other formalities like date, consideration, attestation etc.

Standard Features of a Bill Of Exchange

OTHER TYPES

Inland instrument Foreign instrument Bearer instrument Order instrument Instrument payable on demand Time instrument