Banking & Finance

(new improved Latest edition)

Prof. Waseem Subhani

Negotiable
Instruments

Prof. Waseem Subhani [IBA],

University of the Punjab

Defining Negotiable Instrument

Negotiable

It means transfer from one person to

another. The consideration is essential for
transferability.

Instrument

It means a written document by which

right is created in favour of some person. .
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Characteristics of Negotiable Instrument

Freely Transferable

Title Free of all Defects

Entitled to Receive Money

Recovery

Unconditional

Prof. Waseem Subhani [IBA], University of the Punjab

Freely Transferable
The ownership of negotiable instrument
is transferable by delivery if it is
payable to bearer, otherwise ownership
passes from endorsement and delivery.
Title Free of all Defects
The holder in due course of such
instrument is free of all kinds of defects
in the act of the transfer.

Entitled to Receive Money

The holder of the negotiable instrument is
entitled to receive money mentioned on it.
Recovery
The holder in due course of negotiable
instruments can sue defaulting parties, in
his own name without giving any intimation
to the drawers of his becoming holder.
Unconditional
The NI must be unconditional. The
instrument should not state any other
undertaking or instructions by the person
promising to do any act in addition to the
payment of money.

Negotiable Instrument contd

Conclusion

So negotiable instrument are

bills of exchange, promissory
note, cheque and these documents
are called negotiable instruments
just because the Negotiable
Instruments Act defines them so
and further they are:
(contd)

Prof. Waseem Subhani [IBA], University of the Punjab

Conclusion contd

freely transferable.
ownership passes on with delivery or with
endorsement and delivery.
holder in due course is entitled to receive
payment.
and holder in due course can sue in his
own name to all concerned parties.

Prof. Waseem Subhani [IBA], University of the Punjab

Promissory Note

Promissory Note
Definition:
A promissory note is an instrument in
writing (not being a bank note or currency
note) 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 instruments.
Prof. Waseem Subhani [IBA], University of the Punjab

Parties to a Promissory Note

(i) Maker: {Debtor}
(ii) Payee: {Creditor}

Terms of a Promissory Note:

(i) the principal amount,
(ii)the interest rate if any,
(iii) the maturity date
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Essentials of a Promissory Note

In Writing
Clear Promise
Definite Promise
Signature of Maker
Certain Maker
Certain Payee
Certain Amount
Promise to Pay Money
(contd)

Prof. Waseem Subhani [IBA], University of the Punjab

In Writing
The PN must be in proper writing. A
verbal agreement or promise to pay any
amount can not be treated as PN.
Clear Promise
The note must contain clearly a promise
to pay. The word promise must be used in
it.
Definite Promise
The promise to pay must be definite and
unconditional. In case any condition or
terms are attached to the promise then it
will not a valid PN.

Signature of Maker
The maker of note must signs it. If the
maker does not sign it then it will not be
a valid PN.
Certain Maker
The must be certain and definite person.
There must a clear statement that who is
the maker or payer.
Certain Payee
Like maker the payee must be certain
and definite person. PN must clearly
stats that who is the promissory or
payee.

Certain Amount
The amount to be paid must be in a
written in a definite way. If there is an
element of estimation than this will not
be a valid PN.
Promise to Pay Money
In PN there must be a promise to pay
money only. If a person writes a PN in
the following way, I promise to pay you
Rs. 7000 and one car then this is not a
valid PN.

Essentials of a Promissory Note contd

Miscellaneous:
Legal matters that are essential for other legal
documents also apply to the promissory note
such as it shall be:
properly and clearly written,
date should be mentioned,
amount should be stated in both words and
figures and
it should be properly stamped.
Prof. Waseem Subhani [IBA], University of the Punjab

Bill of Exchange
Definition:

A bill of exchange is a document in writing

containing an unconditional order, signed by the
maker, directing a certain person for paying a
certain sum of money only to or to the order of a
certain person, or to the bearer of instrument.

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Parties to a Bill of Exchange

1. Drawer:
The person who makes the bill is called
Drawer of the bill.
2. Drawee:
The person on whom the bill is drawn is called
the drawee.
3. Payee:
The person to whom payment is made is called
payee.
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Essentials of Bill of Exchange

1. It must be in writing and properly worded.
2. It contains an order to pay.
3. The order to pay must be unconditional.
4. It must be signed by the drawer.
5. The drawee must be a certain and definite person.
6. The payee must be a certain and definite person.
7. The amount payable should be stated clearly.
8. The order is to pay money only. (Not any other
commodity or any asset)
9. It must fulfil other legal requirements such as
mentioning of date, signature, stamp etc.

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Acceptance of Bill of Exchange

If the drawee refuses to accept the bill then
the bill of exchange has no value. For the
purpose of acceptance it is compulsory that the
drawee puts his signature on the face of the bill
and write the word ACCEPTED.

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Advantages of Bill of Exchange

Option of Discount
Credit Flexibility
Ease of Business
Promoting Foreign Trade
Documentation

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Option of Discount
Credit Flexibility

Types of Bill of Exchange

Accommodation Bills
Clean Bill
Documentary Bill
Fictitious Bill
Bill in Sets

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Dishonor of Bill of Exchange

Dishonor by Non-Acceptance:

When it is duly presented for acceptance and

such acceptance as prescribed by the Act is
refused or cannot be obtained.

When on presentation, acceptance is excused

and the bill is not accepted, the holder is entitled
to have an unqualified acceptance and if he does
not get such an acceptance, he may treat the bill
as dishonored by non-acceptance and an
immediate right of recourse against the drawer
or endorsers accrues to the holder and no
presentment for payment is necessary.
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Dishonor by Non-Acceptance contd

Noting:

When a bill is dishonored by non-acceptance

or by non-payment, it is sometimes necessary to
obtain formal proof that it has been duly
presented and dishonored. The first step to this
end is known as noting the bill and the second
step is known as protesting it.

The notary public notes the:

(a) Date of dishonour
(b) Reasons for dishonour, if any, and
(c) Other relevant facts.

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Cheque
A cheque is a bill of exchange drawn on a
specified banker and not expressed to be payable
otherwise then on demand.

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Parties to a Cheque
1. Drawer:
He is the person who draws or writes the
cheque.

2. Drawee:
The bank on which cheque is drawn is called
drawee.

3. Payee:
The person who is entitled to receive payment
on a cheque is called payee.

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Types of Cheque
1.
2.
3.
4.
5.
6.
7.
8.
9.

Open Cheque
Crossed Cheques
Bearer Cheque
Order Cheque
Blank Cheque
Post-dated Cheque
Mutilated Cheque
Stale Cheque
Anti Dated Cheque

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Crossing of the Cheque

Types of Crossing
General Crossing
In general crossing two parallel transverse lines are
drawn on cheque and
1. These may be left blank or
2. The words & Co. , Not negotiable or
any abbreviation can be written in
between
these lines.

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Special Crossing
Special Crossing:
Meanings:
Under special crossing the name of a particular
bank is mentioned on the cheque either with or
without the words Not Negotiable.
Effects:
In case of special crossing the paying bank shall
make payment only to the bank whose name is
written on cheque.

22

Endorsement
The writing of a persons name either on the
back or on the face of instrument followed by ones
signature for the purpose of negotiation is called
endorsement.

Endorser:
The person who made the endorsement, by
writing and signing, is called endorser.

Endorsee:
The person to whom endorsement is made is
called endorsee.

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Kind of Endorsement
(a)

Blank or General Endorsement:

The blank or general endorsement is the type of

endorsement in which the holder only puts his
signature and deliver it to the endorsee.

(b) Full Endorsement:

The cheque contains not only the signature of
the holder / endorser but also specifies the
endorsee. For example
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Kind of Endorsement contd

(c)

Conditional Endorsement:

Contains an order to pay only when a laid down

condition by the endorser is fulfilled.

(d)

Sans Recourse Endorsement:

In this type of endorsement, the endorser refuses

to accept any liability on the instrument to any
subsequent party in case of dishonor.

(e)

Facultative Endorsement:

In such endorsement the endorser refers to the

waiver of some right at the time of endorsement.

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Essentials of a valid Endorsement

It must be on the back or face of the instrument
or on extra slip of paper called allonge
annexed thereto.
It must be made by the maker or holder of a
negotiable instrument payable to order.
It must be signed by the payee or the endorsee.
It must be made with the intention of
transferring the instrument to a third person so
as to entitle the transferee the right to recover the
money due under it.
It must be completed by delivery of the
instrument with the intention of passing the
property in the instrument.

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Bank Draft
A bank draft is an order given by one branch of
the bank to another branch of the same bank to
pay a sum of money to a certain person named
there-in, on demand.

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Features of Bank Draft

1. No stamp is needed.
2. It has unique serial number.
3. It is stamped by a responsible bank officer on
behalf of the bank.
4. It is payable on demand.
5. The amount payable and the person to whom it is
payable, both are specified clearly in draft.
6. It is an unconditional order for payment.

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thank U
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