Negotiable Instrument Act 1881

Introduction
The negotiable instruments act deals with the
promissory note, bill of exchange and cheque.
Definition:
The word negotiable means transferable by delivery
and the word instrument means a written
document which creates a right in favour of some
person. Negotiable instrument is a piece of paper
which entitles a person to a sum of money
mentioned in it and which is freely transferable
from one person to another. (Sec 13)
Promissory Note
A promissory note is an instrument in writing
containing an unconditional undertaking, signed by
the maker 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 to
the bearer of the instrument. (Sec 4)
The person who promises to pay is called maker
(i.e., debtor). The person to whom payment is to be
made is called payee (i.e., creditor).

Specimen of a promissory note
Essentials of a 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 any
paper or book. E.g., Mr. A signs the instrument, I
promise to pay B or order Rs. 20,000/-. It is a valid
promissory note.
2-Promise to pay
There must be a promise or written undertaking to pay. A
mere acknowledgement of debt without a clear promise
to pay is not a promissory note. E.g.,
I am liable to pay Rs. 5,000/- to B orI am accountable
to B, Rs. 5,000/- are not valid notes.
Essentials of a promissory note (Cont..)
3-Unconditional promise
It must contain unconditional promise to pay. The promise
must not depend upon the happening of some event. It must
be absolute. If it contains a conditional promise, it is not a
valid promissory note. E.g., I promise to pay B Rs. 7,000/- as
soon as I can. or I promise to pay B Rs. 5,000/- on Ds death
provided D leaves enough to pay that sum are not valid
promissory notes.
4-Signed by the maker
It is necessary that the maker must sign the promissory note.
The signature may be in any part of the instrument and not
necessarily at the bottom. When the maker is illiterate, his
thumb impression is sufficient.
Essentials of a promissory note (Cont..)
5-Certain maker
The instrument must indicate who is liable to pay.
6-Certain payee
The payee of a promissory note must be a certain person. The
payees name can be indicated by his official designation. It
may be made payable to two or more payees jointly. E.g., A
promissory note payable to the manager of bank or the
principal of a college is regarded as payable to a certain
person.
7-Certain sum
It is necessary that the sum of money promised to be payable
must be certain and definite. E.g., I promise to pay B Rs. 500/-
and all the expenses of transportation.
Essentials of a promissory note (Cont..)
8-Pakistani currency
A promissory note containing a promise to pay a certain
amount in foreign currency is not a valid promissory note.
9-Other formalities.
The place should be mentioned where it is made.
The date should be mentioned on which it is made.
The promise to pay must be for lawful consideration.
It must be properly stamped under the stamp act.
It is necessary to cancel all the stamps affixed on the
note.
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 to the bearer of the instrument. (Sec 5)
The person who makes the bill is called the drawer.
The person who is directed to pay is called the
drawee. The person to whom the payment is made
is called the payee.
Specimen of a bill of exchange
Essentials of bill of exchange
1. In writing
2. Unconditional Order
3. Signed by drawer
4. Acceptance by drawee
5. Certain drawee
6. Certain payee
7. Certain sum
8. Pakistani currency
9. other formalities
Cheque
A cheque is a bill of exchange drawn on a
specified bank and not expressed to be payable
otherwise than on demand.
The person who draws the cheque is called
drawer. The bank on which the cheque is drawn
is called drawee. The person to whom the
cheque is made payable is called payee.

Specimen of cheque
Essentials of a cheque
In writing
Unconditional order
Signed by drawer
Payable on demand
Certain sum
Payable to bearer or order
Reasons for Dishonour of cheque
Cutting and overwriting
Post dated cheque
Stale cheque
Signatures vary with the specimen
Insufficient funds
Dormant account / Inactive account
Frozen account
Notice of the death of account holder
Stop payment by account holder
Mutilated cheque / Torn cheque
Cheque filled with pencil / red ink