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.
– In day-to-day banking, a negotiable instrument usually
refers to checks, drafts, bills of exchange, and some types
of promissory notes.
SECTION 13(1):

“A negotiable instrument means a promissory note,

bill of exchange or cheque payable either to order
or bearer”

Justice Willis:

“A negotiable instrument is one, the property in

which is acquired by anyone who takes it bonafide,
and for value not withstanding any defect of title in
the person from whom he took it”
Characteristics of the Negotiability
An instrument is negotiable by virtue of the
following features :

• Transferable by delivery
• Entitled to receive money
• Filing a suit
• Transferable by delivery:
The instrument is transferable by delivery or by
endorsement and delivery.

• Entitled to receive money:

The legal holder of the instrument is entitled to
receive money mentioned in it.
• 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.
 We have three main negotiable instruments.

 Promissory note
 Bill of Exchange
 Check
 Promissory Note
• Section (4) defines a promissory note as an
“instrument in writing containing unconditional
undertaking, signed by the maker to pay a certain
sum of money only to or to order of a certain person,
or to the order of a certain person or to the bearer of
the instrument.”

• There are basically two parties-

Maker & Payee
 Essential Features of the
Promissory Note
• The promise to pay must be in writing.
• The promise to pay must be signed by the maker or
payer.
• 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 $500 is promissory
note.
• I promise to pay asad $500 seven days after yasir
arrival to Kabul.
• The amount to be paid must be definite in terms of
money.
• The Promissory note must be payable on demand or
at a fixed or determinable future date.
• The Promissory note must be payable to a definite
person. The Payee must be certain.
• It must bear stamp at the rate prescribed by law of a
country.
• There are two parties a promissory note.
Maker
Payee
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.

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
 Bills 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.
• According to 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.”
Sec. (1)(4)(a) of IT act is not applicable to Bills
of exchange, so Bills of exchange cannot be
made by electric means.
 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.
• 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.
Specimen of a Bill of Exchange
 CHEQUE
• What is a Cheque?
• A cheque may be defined as written order of a
depositor upon a bank to pay to or to the
order of a designated party or to the bearer, a
specified sum of money on demand.
• The person who draws the cheque is called
drawer, the bank on which the cheque is
drawn is called drawee, and the person to
whom payment is to be made is called Payee.
• A “ cheque” is a bill of exchange drawn on a
specified banker and not expressed to be
payable otherwise than on demand. ‘Cheque’
includes electronic image of a truncated
cheque and a cheque in a electronic form (sec
6). It is addressed to the Bank and payable on
demand. It cannot be pay after the expiry
date.
 Types of Cheque
• Open cheque.

• Crossed cheque.

• Bearer cheque.

• Order cheque