Negotiable Instruments
The Negotiable Instruments Act,
1881
Definition of Negotiable instrument(NI).
2. Elements of NI
3. Definition and essential elements of Promissory notes, bill of
exchange and cheque.
4. Differences among Promissory notes, bill of exchange and cheque.
5. Under what conditions when a cheque is not honoured by bankers.
1.
DEFINITION OF A NEGOTIABLE INSTRUMENT
The word 'negotiable' means transferable from one person to
another, and the term 'instrument' means 'any written document by
which a right is created in favor of some person.' Thus, the negotiable
instrument is a document by which rights vested in a person can be
transferred to another person in accordance with the provisions of the
Negotiable Instruments Act, 1881.
Elements/Characteristics
The characteristics of negotiable instruments are as follows:
1. Negotiability/Freely Transferable: The right of ownership in these
instruments can be transferred from one person to another easily. If
the instrument is payable to bearer, the property in negotiable
instrument is transferred to the transferee by delivery. If instrument is
payable to order, the property in negotiable instruments transfer by
endorsement and delivery.
2. Property- The possessor of negotiable instrument is presumed to be
the owner of the property contained there in.
3. Equivalent to cash- Even though is a document it is as good as cash.
Elements/Characteristics
4. Rights of holder: A holder of negotiable instrument has a right to recover
the money from the person liable on the instrument. The holder can recover
this amount himself or transfer his right to another person.
5. Promise or Order: A negotiable instrument contains an unconditional
promise or order to pay. In case of promissory note the debtor promises to
pay a certain sum of money to the holder of the instrument, In case of bill of
exchange and cheque the creditors order his debtor to pay a certain sum of
money to the holder of the instruments.
6. Certainty of person: “Where the person intended can reasonably be
ascertained from the promissory note or the bill of exchange, he is a “certain
person” within the meaning of section 4, although he is misnamed or
designated by description only” (section 5).
Elements/Characteristics
7. Certain Amount:
In the negotiable instruments, the promise or
order is made for the payment of certain amount. The person liable to
pay on the instrument must pay certain amount of money and not
anything else.
8. In writing: A negotiable instrument must be in writing. An oral
promise or order to pay money cannot be called Negotiable
Instrument. (the form is determined by the commercial practice)
9. Must contain the signature of the maker or the drawer. (Thumb
mark if illiterate)
10. Must properly be stamped (Articles 13, 49 of Sch I of the Stamp Act
1899)
Kinds of Negotiable Instruments
• There are three kinds of Negotiable Instruments
• Promissory Note
• Bill of Exchange
• Cheque
(There may be customs of accepting other instruments as negotiable,
and those are not under the purview of this Act)
Promissory Note:
• Definition: “A promissory note is an instrument in writing (not being a bank note
or a currency note) containing an unconditional undertaking, signed by the
maker, to pay on demand or at fixed or determinable future time a certain sum
of money to a certain person or to the bearer of the instrument.” (Section 4)
• The person who promises to pay is called maker, the person to whom payment is
to be made is called payee.
Examples of Promissory Notes
• I promise to pay B on order Tk 5000.
• I acknowledge myself to be indebted to B for Tk 8000 to be paid on demand.
• I promise to pay “B” Tk 5000.
• Mr. B, I.O.U. (I owe you) Tk. 1000."
Specimen of a promissory note
TK 5000
Dhaka
Date 01.01.2016
On demand , I promise to pay Mr Rajib or order , the sum of Tk 5000(Taka Five
Thousand only) with interest at 8% per annum.
To
Rajib
(Address)
Sd/- Stamp
Babu
Parties
Two parties:
⚫ The person who makes the promissory note and promises to pay is
called the maker.
⚫ The person to whom the payment is to be made is called the payee.
⚫ e.g. I promise to pay A or order Tk 500.
Essentials of Promissory Note:
• 1. In Writing: A promissory note must be in writing. A verbal promise
to pay is not a promissory note. The writing may be on paper, it may
be hand written or printed.
• 2. Promise to Pay: There must be a promise or undertaking to pay. A
mere acknowledgement of debt without clear promise to pay is not a
promissory note.
• Example: I promise to pay B Tk. 500.
Essentials of Promissory Note:
• 3. Unconditional Promise: It must contain unconditional promise to
pay. The promise must not depend upon the happening of some
uncertain event.
• Example: The following note is not valid promissory note: “A” promise to pay
“B” Tk. 500 seven days after his marriage.
• 4. Signed by maker: It is necessary that the maker must sign the
promissory note. The signature may be in any part of the instrument
and necessarily at the bottom. When the maker is illiterate, his thumb
impression is sufficient.
• Example: “A” writes the instrument but does not sign thereon: I promise to pay
“B” Tk 5000”, The note is not a valid promissory note until it is signed.
Essentials of Promissory Note:
Certain Maker: The instrument must indicate who is liable to pay.
Certain Payee: The payee of a promissory note must be a certain person.
The payee’s name can be indicated by his official designation.
7. Certain Sum: It is necessary that the sum of money promised to be
payable must be certain and clearly mentioned. If the amount is to be
paid is uncertain , the instruments will be not a valid promissory note.
9. Other Formalities:
a. The place should be mentioned where it is made.
b. The date should be mentioned on which it is made.
c. The promise to pay must be legal consideration.
d. It must be properly stamped.
5.
6.
Bill of Exchange:
“A bill of exchange is 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 determinable future time a certain sum
of money only to, or to the order of, a certain person or the holder of
the instrument”.
The person who makes the bill is called the drawer. The person who is
directed to pay is called drawee. The person to whom the payment is
made called payee.
Parties to a Bill of Exchange
Three parties:
1.The maker of bill of exchange is called the drawer.
2.The person who is directed to pay is called the drawee.
3.The person who will receive the money is called the payee
Specimen of Bill of Exchange
• Tk 5000
Place:
Date:
On demand pay to Rajib or order, the sum of Tk 5000/- (Taka Five
thousand only) for value received.
To Aziz
(Address)
Here• Babu is the drawer
• Aziz is the drawee (Acceptor)
• Rajib is the payee
SdBabu
Essentials of Bill of Exchange:
• The following are the essentials of a bill of exchange
• 1. In writing: A bill of exchange must be in writing. A verbal order to
pay cannot be called bill of exchange.
• Example: “A” draws a bill on “B” as: “Pay Tk.5000 to X “
• 2. Unconditional Order: The language used in a bill of exchange
should convey an order to pay. The order to pay must not depend
upon the happening of an event. It must be unconditional.
• Example: A draws a bill on B, as “Pay Tk.5000 to C as early as possible”; it is
not a valid bill.
• A draws a bill on B, as “pay Tk. 5000 to C”; it’s a valid bill as it is unconditional.
Essentials of Bill of Exchange
• 3. Signed by Drawer: It must be signed by the drawer. The signature
may be in any part of the instrument. If the drawer is illiterate his
thumb impression is sufficient.
• Example: A draws a bill on “B” “ Pay Tk.10000 to X” but does not sign
thereon. It is not a valid
• 4. Certain Drawee: The drawee of a bill of exchange must be a certain
person. The name of drawee must be mentioned in the bill. If the bill
does not mentioned the name of the drawee it is not a valid bill.
• 5. Certain Sum: It is also essential that the sum payable must be
certain and definite. If the amount ordered to be paid is uncertain,
the instrument cannot be called a valid bill of exchange.
Essentials of Bill of Exchange
• 6. Certain Payee: The payee of the bill must also be certain person.
The payee’s name can be indicated by his official designation as well.
A bill may be made payable to two or more payees jointly or it may
be made payable in the alternative to one of two, or one or some of
several.
• Example: “A” draws a bill as under• Pay Tk. 50000 to Head of Department of Business Administration.
• Pay Tk.50000 to X or Y.
• Pay Tk. 50000 to M and N.
Differences between promissory note and bill of exchange
1.
2.
3.
4.
5.
6.
Two parties
Unconditional promise to pay
Maker of a note is the drawer & he
himself undertakes to pay
Liability of maker is primary.
A promissory note cannot be made
payable to the maker himself.
A note requires no acceptance
1.
2.
3.
4.
5.
6.
Three parties
Unconditional order to pay
The drawer of a bill is the creditor who
directs the drawee to pay
Liability of maker or drawer is
secondary.
Drawer and payee may be same.
It must be accepted by drawee
CHEQUE
“A cheque is a bill of exchange drawn on a specified bank and not expressed to
be payable otherwise than on demand.” (section 6)
The person who draws the cheque is called drawer. The bank on which the
cheque is drawn is called drawee. The person to whom cheque is made payable
is called payee. (Section 7)
Rules
1. All cheques are bill of exchange but all bill of exchanges are not cheques.
2. Usually banks provide their customers with printed cheque forms which are
filled up and signed by the drawer.
3. The signatures must tally with specimen signature of the drawer kept in the
bank.
4. A cheque must be dated.
5. A cheque becomes due for payment on the date specified in it.
6. A cheque drawn on a future date is valid but it is payable on and after the date
specified. Such cheques are called post dated cheques.
Specimen of a cheque
Essentials of Cheque:
The following are essentials of a cheque.
1. In writing: The cheque must be in writing. Cheque which are
printed or made out on a typewriter are also valid.
2. Unconditional Order: It must contain to pay unconditionally. If the
bank is ordered pay upon the condition of payee’s signing the
receipt, then the instrument is a conditional order thus not a
cheque.
3. Signed by drawer: A cheque will be valid only if it is signed by the
account holder or by some who is authorized to sign on his behalf.
Essentials of Cheque:
• 4. Payable on Demand: A cheque is always drawn payable on demand.
The demand should be made within reasonable time. In Pakistan the
cheque must be presented within six month from date of issue.
• Example:A draws a cheque on 1st June 2014, it is valid till six months.
• 5. Certain Sum: The amount mentioned in the cheque should be certain
amount. There should be no element of doubt. In practice, banks
return the cheque if the amount in words and figure differ.
Difference between bill of exchange and cheque
Bill of Exchange
Cheque
1. A bill of exchange may be drawn 1. But a cheque is always drawn
on any person
on a bank
2. A bill must be accepted by the
drawee before making payment
upon it
2. But a cheque does not require
acceptance
3. A bill is entitled to 3 days of
grace
3. A cheque is not entitled to any
days of grace
Difference between bill of exchange and cheque
4. A bill may be payable on demand
or after the expiry of a certain
period
5. No need to crossed
6. A bill must be stamped
7. A payment of a bill cannot be
revoked
4. But a cheque is always payable
on demand.
5. A cheque may be crossed
6. A cheque does not require any
stamp
7. Payment may be countermanded
by the drawer
Dishonour of Cheque (s. 138) of NI Act
• Where any cheque drawn by a person on an account maintained by him with a banker for
payment of any amount of money to another person from out of that account is returned by the
bank unpaid, either because of the amount of money standing to the
credit of that account is insufficient to honour the cheque or that it
exceeds the amount arranged to be paid from that account by an
agreement made with that bank, such person shall be deemed to
have committed an offence.
• Punishment: … [S]hall, without prejudice to any other provision of this Act, be punished
with imprisonment for a term which may extend to one year, or with
fine which may extend to [thrice] the amount of the cheque, or with
both.
Action in Criminal Court (S.141)
• Notwithstanding anything contained in the Code of Criminal
Procedure, 1898 (Act V of 1898),• (a) no court shall take cognizance of any offence punishable under
section 138 except upon a complaint, in writing, made by the payee
or, as the case may be, the holder in due course of the cheque;
• (b) such complaint is made within one month of the date on which
the cause of action arises under clause (c) of the proviso to section
138;
• 2[ (c) no court inferior to that of a Court of Sessions shall try any
offence punishable under section 138.]]