Class on 15 Dec 2021

Banking Law and Practice Hand out No 13 Pages 1/10

BA/BSc (Hons.) BAF Year IV, Sem.VII (Sep21 – Jan 22), Session 2021-2022

Do you want success in Life?

Begin with a List.
The basic tool of time management is a list, organized by priority, and used as a
constant tool for personal management. The fact is that you can't manage time; you
can only manage yourself. That is why time management requires self-discipline, self-
control, and self-mastery. Time management requires that you make the best choices
and decisions necessary to enhance the quality of your life and work. Then you follow
through on your decisions.
“We need to be aware of the “opportunity cost” of time not utilized in a productive
manner. Always carry a book or a newspaper with you, so that any time that you get
free, can be utilized in enhancing your knowledge rather than spending that spare time
in just looking around”. Remember Time is Money.

Negotiable Instruments
13.1. Background

The Indian negotiable Instruments Act, 1881 and its British counterpart, the Bills of Exchange Act,
1882 codify the English Common Law of negotiable instruments. There is much in common between
the Indian Act and the corresponding English Act. It follows therefore, that the reported cases of the
superior courts of England are still referred to with advantage for illustrating and explaining
analogous propositions arising under Indian and Pakistani Law as well.

13.2. Definition.
“A negotiable instrument is one the property in which is acquired by anyone who takes it bona fide
and for value, notwithstanding any defect of title in the person from whom he took it”

It follows that an instrument cannot be “a negotiable instrument” unless it is in such a state that the
true owner could transfer the contract or engagement contained therein by delivery if “bearer” and
by endorsement and delivery if “order instrument”.

It may be laid down as a safe rule that where an instrument is by the custom of trade, transferable,
like cash, by delivery and is also capable of being sued upon by the person who is “A HOLDER IN
DUE COURSE” then it is entitled to the name of a “negotiable instrument” and the property in it
passes to a bona fide transferee for the value even though the transferor may not have any title.

If the transferee receives a negotiable instrument for VALUE, bonafide, i.e. in good faith, after giving
consideration , he gets a good title in the property even if there is any defect in the title of the
transferor.

13.3. Negotiable Instruments Act, 1881.

This Act includes three instruments within its meaning viz.

1) Promissory Note,
2) Bill of Exchange and
3) Cheque.
These have been defined in relevant Sections of the Act as follows:
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BA/BSc (Hons.) BAF Year IV, Sem.VII (Sep21 – Jan 22), Session 2021-2022
13.3.1. Promissory Note.
Section 4 of the Act defines a Promissory Note.

“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”.
Its components therefore are:

1. Unconditional undertaking to pay

2. The sum should be a sum of money and should be certain
3. The payment should be to or to the order of a person who is certain or to the bearer of the
instrument and
4. The maker should sign it.

The essential feature of a promissory note is that it is a clearly expressed, unconditional written
promise to pay and it is not enough that the substantial effect of the instrument should be to make the
executants liable to pay a sum of money. An instrument containing words, “I am liable to pay”
without any undertaking, is not a promissory note. An instrument only ‘undertaking to pay interest,
there being no unconditional undertaking to pay the principal amount, is not a promissory-note.

Sometimes the abbreviation ‘pro-note’ is used in place of promissory note.

The basic tests of a promissory note are that the sum of money should be certain as also the payee or
promisee. If the rate of interest is specified in the document the certainty to the sum payable is in no
way affected as it may be merely a matter of calculation to arrive at the sum payable. Similarly, the
payee or bearer must be certain. Where the name of the payee is not given in the body of the
document but he has been described as “you,” it cannot be held that the person who advanced the
money is a person certain, therefore, it cannot be held that the document is a promissory note.

If a pro-note does not specify any place where payment is to be made, the presumption is that
payment should be made at the place of residence or business of the creditor. As for the Promissory
Note being payable otherwise on demand, it should be presented for payment on due date calculated
on the basis of the stipulated period or the specified date for payment.
Illustrations
The promissory note has to be in writing, without any condition attached, bearing the signature of the
promisor (i.e. the person who makes it) promising to pay a definite amount of money, to the person
named therein or to his order or to the bearer of the note, either on demand or at a future fixed date
or a date that can be determined.

Thus the following do not fall within the scope of this definition even though signed by “A”.

i) Mr. B. — I.O.U. Rs. 1,000/-

ii) I promise to pay “B” Rs. 500,000/-or to deliver to him my Toyota Corolla Car on 1st January next.
iii) I promise to pay “B” Rs. 500/- seven days after my marriage with “C”. (Pl note the date of
payment is not final.zzzzzzzzzz

However, the under noted examples can be termed as Promissory Notes:

i) I acknowledge myself to be indebted to “B” in the sum of Rs. 1,000/- to be paid on demand.
ii) I undertake to pay “B” or to his order a sum of Rs. 5000/- 30 days after date.
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iii) I promise to pay the bearer 90 days after sight, a sum of Rs. 5000/-

IMPORTANT :
1. Whenever a bank grants a loan or overdraft, it obtains a Promissory Note from the borrower,
which is used as evidence of borrowing in a possible recovery suit in a court of law.
2. Days of Grace: Every Promissory Note which is not drawn on demand is given three days of
Grace in the fixation of the due date of the Pro Note.

Specimen of Promissory Note

24th December 17
On demand I promise to pay Pakistan Bank Ltd.
a sum of Rs. 8,000/- (Rupees Eight Thousand only).

Revenue Stamp
Sd- Mohammad Ali
20, Martin Road, Karachi

13.3.2. Bill of Exchange

Section 5 defines a Bill of Exchange

“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.”

The essential ingredients of this definition are that it is an order to pay, without any condition, to a
specified person or to his order or to the bearer, a definite amount of money either on demand or at a
future date which could be determined or at a fixed date in future. The instrument in order to be a
valid bill of exchange has to be signed by the maker (i.e. drawer) directing a certain person (i.e.
drawee) to pay to the person named therein (i.e. payee) or to his order or to bearer of the bill.

Bill of exchange is an instrument of trade which serves as a bridge between buyer and seller of the goods.
Whereas the seller would like to part with his goods only when he is assured that the sale proceeds are in
his hands or in the hands of a reliable intermediary, from whom he can receive the same; the buyer, on
the other hand is anxious to pay for the goods only when these are in his possession or in the hands of a
certain reliable agency (or through documents of title to goods) from where he can obtain delivery
thereof.

The seller of the goods will, therefore, draw a ‘bill of exchange’ upon the buyer for the proceeds directing
him to pay the same to his banker to whom he sends the documents of title to goods sold. The bank is
instructed to deliver the documents of title to the buyer only when the buyer makes payment as per the bill
of exchange. The buyer makes payment to the bank in his own city and country and in exchange receives
the title documents to the goods. This is how the gap of trust between the two parties {i.e., importer(buyer)
and exporter(seller)} is bridged by a bill of exchange.

In this explanation the Drawer will be the seller of good.

The Drawee will be the buyer of goods in another city or another country.
The PAYEE will be a Bank in the city and country of the buyer.
The seller will send the goods by truck or ship to the buyer.
Seller will obtain Truck Receipt or Bill of Lading of shipment.
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Seller’s bank will send the Bill of Exhange and Truck Receipt to the buyers bank with instructions that
Bill of Exchange should be presented to the buyer and if he makes the payment to the bank in the buyer’s
city the proof of shipment truck receipt or Bill of Lading should be delivered to the buyer and amount
paid by the buyer is remitted to the bank in home country for payment to the seller.

1. Specimen of Bill of Exchange

From (DRAWER)
A. B. Corporation. 20th December 2017
2, Apex Court,
Karachi. Rs. 50,000/-

Thirty days after sight pay M/s Excellent Traders(PAYEE) or order a sum of Rupees Fifty
Thousand only for the value received.

To (DRAWEE) For A. B.
Corporation.
M/s Fairdeal Traders, Sd- A. Rahim
37-Jail Road Proprietor
Lahore (DRAWER SIGNATURE)

Days of Grace: Every Bill of exchange which is not drawn on demand is given three days of Grace in
the fixation of the due date of the bill.

13.3. 3. Differences between a Bill of Exchange and a Promissory Note:

1) A promissory note has two parties; a bill of exchange has three parties;
2) A promissory note is an “unconditional promise or undertaking to pay” whereas a bill
of exchange is an “unconditional order or direction to pay”;
3) A promissory note is written by the borrower whereas a bill of exchange is prepared and issued
by the lender;
4) A promissory note is mainly used in domestic business whereas a bill of exchange is mainly
used in international trade;
5) Whenever a bank grants a loan or overdraft, it obtains a promissory note from the borrower of
funds. The promissory note is used as evidence in case of a recovery suit in a court of law.
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13.4. Bankers Draft;

A demand draft is also a bill of exchange. It is an order to pay money drawn by one office of a bank
upon another office of the same bank or upon an office of a different bank. It is covered under Sec. 85
(a) of the Negotiable Instruments Act.

Specimen of Bank Draft

No. BD-00XXX Pakistan Bank Ltd. 20th Dec. 2017.

51, Martin Road, Karachi
(Protectographed) Not over Rs. 25,000/-
Rs. 25,000/-
On demand pay to Mohammad & Bros. or order a sum of Rupees twenty five
thousand only, for value received.

Drawn On
Pakistan Bank Ltd. For Pakistan Bank Ltd.
5, Site Ram Road, Karachi Sd- Officer
Lahore Sd)- Manager

A draft is a bill drawn by one bank on another bank or on its own branch. It is a bill of exchange and
a negotiable instrument (AIR 1962 KAR 210). The relationship between the holder of DD and the
bank issuing a demand draft is that of creditor and debtor (PLD 1952 Dacca)

13.5. A cheque;
The cheque has been defined in Sec 6 of the Negotiable Instruments Act, 1881. A cheque is also a bill
of exchange which is drawn on a banker and expressed to be not payable other than on demand. The
differences between a cheque and a bill of exchange are:

1. A cheque is always drawn on a banker while a bill of exchange may be drawn on any person
(including a bank);
2. A cheque is always payable on demand while a bill of exchange may be usance also i.e. it can
be payable at a given future date or a determinable future date;
3. A cheque does not need acceptance while a bill of exchange drawn payable after a period
would require acceptance by the drawee;
4. A cheque is presented for payment only while a bill of exchange may be presented for
acceptance if it is a usance bill;
5. Grace period:
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There is no grace period in a cheque.
Three grace days are allowed in calculating the maturity date of the usance bill of exchange.

GRACE PERIOD IN FIXING DUE DATE ON NEGOTIABLE INSTRUMENTS.

PROMISSORY NOTE AND BILL OF EXCHANGE

ON USANCE INSTRUMENTS A GRACE PERIOD OF 3 DAYS IS ALLOWED WHILE
FIXING THE DATE OF PAYMENT.

CHEQUES
CHEQUES ARE PAYABLE ON DEMAND AND THERE IS NO CONCEPT OF GRACE
PERIOD IN CHEQUES.

(Important Note: The following stipulations regarding dishonor, noting, protesting, DO NOT APPLY
TO CHEQUES DRAWN ON BANKS. These stipulations apply to Bills of Exchange and also apply
to the Promissory Notes)

13.6. Dishonor of a Bill of Exchange or Promissory Note. [PLEASE READ THE ABOVE NOTE]
One of the essential features of a bill of exchange is that the bill payable on a fixed or determinable
future date must be presented to the drawee for acceptance first and then presented for payment on
determined due date. If a bill is accepted by drawee, it is an expression of his intention to pay by
signing the bill with due date. If, however, the drawee declines to accept, the bill will be treated as
dishonored by non-acceptance. A bill will be considered to have been dishonored by non-payment if its
payment is not made on due date after acceptance. In these cases, the legal requirement is that the
unaccepted or unpaid bill should be handed to a ‘Notary Public’ for noting and protesting, which will
be the legal proof of the drawee having refused to accept or pay the bill and this noting and protesting
will enable future legal action against the drawee.

Both in case of dishonor by non-acceptance and dishonor by non-payment, the holder of the
dishonored instrument must give notice of dishonor to all the parties whom the holder seeks to make
severally liable thereon. If the holder seeks to make several parties jointly liable, notice to some of
them will be sufficient. It will also suffice if the notice is given by some party who remains liable on the
instrument, and not by the holder.
(Severally= separately: Tenants are jointly and severally liable for payment of the rent.)

13.8. Notary Public

It includes a person appointed by the Central Government to perform the functions of a notary public
under Negotiable Instruments Act, 1881 (Section 2(g)) and a notary appointed under Notaries
Ordinance, 1961 (XIX of 1961).

13.9. Noting;
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(Important: - There is no requirement of ‘noting’ or ‘protesting’ when a cheque has
been dishonored.)

Section 99 of the Negotiable Instruments Act, 1881 provides: “When a Promissory Note or a Bill of
Exchange has been dishonored by non-acceptance or non-payment, the holder requests the official
notary public to make a note about the dishonor on the instrument. The notary public or his clerk
proceeds to make a formal demand upon the drawee or acceptor for acceptance or payment, as the
case may be and on refusal ‘notes’ the bill. Noting means noting on the bill itself or on a paper
attached with it that acceptance or payment has been refused. ”

Such note must be made within a reasonable time after dishonor and must specify the date of
dishonor, the reason, if any, assigned for such dishonor or if the instrument has not been expressly
dishonored, the reason why the holder treats it as dishonored and the notary’s charges.

13.10. Protest; (Protesting has a special meaning in respect of negotiable instruments.)

Section 100 deals with the “Protest”. It says, “When a promissory note or a bill of exchange has been
dishonored by non-acceptance or non-payment, the holder may, within a reasonable time, cause such
dishonor to be noted and certified by a notary public. Such a certificate providing formal evidence of
dishonor of a bill of exchange is called “protest.”
The following particulars should appear on the Protest (Certificate of Noting)
1) The fact of dishonor
2) The date of dishonor
3) The reasons, if any, assigned for such dishonor
4) If the instrument has not been expressly dishonored, the reasons why the holder treats it as
dishonored. and
5) The Notary’s charges.

When the acceptor of a bill of exchange has become insolvent, or his credit has been publicly
impeached, before the maturity of the bill, the holder may, within a reasonable time, cause a notary
public to demand better security of the acceptor, and on its being refused may, within a reasonable
time, cause such facts to be noted and certified as aforesaid. Such certificate is called a protest for
better security.

13.11. Drawer, Drawee and a Drawee-in-case of Need. (Section 7)

13.11.1. Drawer
A Drawer is the maker of the bill;

13.11.2. Drawee
A Drawee is the person on whom the bill of exchange is drawn and is directed to pay.

13.11.3. Drawee-in-case of Need

When in the bill or in any indorsement thereon, the name of any person is given in addition to the
drawee, to be resorted to in case of need, such a person is called ‘drawee in case of need’. (in case of
need = e.g. if the bill is returned unaccepted or unpaid.)

13.12. Acceptor;
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“After the drawee of a bill of exchange has signed his assent upon the bill and delivered the same or
given notice of such signing to the holder or to some person on his behalf, he is called Acceptor”.

13.13. Acceptor for Honor;

“When a bill has been noted or protested for non-acceptance or for better security and any stranger
person accepts it supra protest for honor of the drawee or for any one of the endorsers or for the
drawer, such a person is called Acceptor for Honor”.
(‘Supra protest’, an acceptance of a bill by a third person after protest for nonacceptance by the
drawee.)

It may be mentioned that a drawer is primarily liable to the holder of bill of exchange
until it is accepted. Once a bill is accepted the Acceptor becomes primarily liable. A
secondary liability of the drawer still exists. On due date the holder must present it to
the acceptor for payment. If the acceptor does not pay the holder should immediately
give dishonor notice to the drawer to make him responsible for payment to the holder.

13.14. Payee;
The person named in the instrument to whom or to whose order the money is payable is called
‘Payee’.

13.15. Holder in due course;

It has been defined in Section 9 of the Negotiable Instruments Act1881, that “Holder in due course
means any person who “for consideration” becomes the possessor of a promissory note, bill of
exchange or a cheque, if payable to bearer or endorsee thereof, if payable to order, without notice that
the title of the person from whom he derived his title was defective.”
{What is the meaning of ‘for consideration’=when something is obtained in return for something or some
benefit given}
In regard to the defective title the law further clarifies in Section 58 of the Negotiable Instruments Act
1881, which says “ when a promissory note, bill of exchange or cheque has been lost or has been
obtained from any maker, drawer, acceptor or holder thereof by means of an offence or fraud, or for
an unlawful consideration, neither the person who finds or so obtains the instrument nor any
possessor or endorsee who claims through such person is entitled to receive the amount due thereon
from such maker, drawer or acceptor unless such possessor or endorsee is, or some person through
whom he claims, was a “holder thereof in due course.”

The following points emerge from these two sections of the Negotiable Instrument Act:

a) Unless a person proves that he is a holder in due course within the meaning of Sec. 9 he cannot have
a better title than that of the intermediate holders themselves.

b) It is only a person who comes into possession of a negotiable instrument having obtained “for
consideration” and being a bona fide transferee that can be a holder in due course within the meaning
of section 9.

13.16. Presentment for acceptance;

Promissory notes, bills of exchange and cheques must be presented for payment to the maker,
acceptor or drawee thereof respectively, by or on behalf of the holder. In default of such presentment,
the other parties thereto are not liable thereon to such holder.
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13.17. Difference in words and figures;
Section 18 states that if the amount undertaken or ordered to be paid is stated differently in figures
and in words, the amount stated in words shall be the amount undertaken or ordered to be paid,
provided that if the words are ambiguous or uncertain the amount may be ascertained by referring to
the figures.

However in practice based on the plea of “good faith and without negligence”, the banks usually
return such an instrument with the remarks “amount in words and figures differs”;

13.18. Inchoate stamped instrument;

(Meaning of Inchoate: just beginning to form and therefore not clear or developed:
inchoate ideas = incomplete ideas)

Section 20 states that where one person signs and delivers to another a paper stamped in accordance
with the law relating to stamp duty chargeable on negotiable instruments, either wholly blank or
having written thereon an incomplete negotiable instrument, in order that it may be made, or
completed into a negotiable instrument he thereby gives prima facie authority to the person who
receives that paper to make or complete it as the case may be into a negotiable instrument for the
amount if any specified thereon or where no amount is specified for any amount not exceeding in
either case, the amount covered by the stamps affixed on the document.

Thus a negotiable instrument though inchoate but properly stamped does not lose its validity and
enforceability merely because it was not wholly or partially filled in at time of execution and delivery
thereof. (inchoate = being formed, not complete)

Most Important feature of a Negotiable Instrument Restated (From Internet)

“The holder in Due Course of a Negotiable Instrument can get a better title than the
transferor.”
Explanation of the Concept.
The most remarkable feature of a negotiable instrument is that if it is negotiated to a
person who acquires the instrument
i) In good faith
ii) For value
iii) Without notice of any defects in its title

then, the transferee is a holder in due course and can enforce the instrument without
being subject to defenses which the maker of the instrument would be able to assert
against the original payee, except for certain real defenses which are rarely applicable.

The holder in due course rule is what makes the free transfer of negotiable instruments
feasible in the modern industrial economy: a person or company who purchases such
an instrument in the ordinary course of business can reasonably expect that it will be
paid when presented to the maker, without involving itself in a dispute between the
maker and the person to whom the instrument was first issued.
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The foregoing is the theory and the letter of the law: of course, in reality the issuer of
an instrument who feels he has been defrauded or otherwise rawly dealt with by the
payee may nonetheless refuse to pay the holder in due course, requiring the latter to
resort to litigation to recover on the instrument.

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