ASSINGMENT 2

By
S/NO. NAME REG. #.
1. Ahsan Irshad 62858

THE NEGOTIABLE INSTRUMENTS ACT, 1881

Business Law
PAF KIET, City Campus

NEGOTIABLE INSTRUMENTS

Introduction (THE NEGOTIABLE INSTRUMENTS ACT, 1881)

  Origin 1881
 Scope
It extends to the whole of Pakistan, but nothing herein contained affects [the provisions
of Sections 24 and 35 of the State Bank of Pakistan Act, 1956]; and it shall come into
force on the first day of March, 1882.
 Applicability
Every negotiable instrument shall be governed by the provisions of this Act, and no usage
or custom at variance with any such provision shall apply to any such instrument. Three
specific instruments promissory note, bill of exchange and cheque.

Meaning
There are certain documents which are freely used in commercial transactions and monetary dealings.
These documents, if they satisfy certain conditions are known as “Negotiable Instruments.”

Negotiable instrument is a method of transferring a debt from one person to another.

Kinds of negotiable instrument

Negotiable Instrument by
STATUTE
Promissory Note
Bill of exchange
Cheque
Negotiable Instrument by
CUSTOM & USAGE
Bank draft
Pay Order
Hundies
Delivery Orders

Characteristics of negotiable instrument

FREELY TRANSFERABLE

The property in a negotiable, instrument passes from one person to another by a simple
process. i.e by mere delivery if it payable to bearer, and by endorsement and delivery if it is payable to
order

Ahsan Irshad Page 2

HOLDER’S TITLE FREE FROM ALL DEFECTS

The holder in due course (one who acquires the instrument in good faith and for consideration)
gets it free from all defects.

Promissory notes
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 a certain sum of money only to, or to the order
of, a certain person. This definition given by law means that when a person gives a promise in writing to
pay a certain sum of money unconditionally to another person (named) or according to his instructions,
the document is a promissory note.

The essentials are:

(1) It must be in writing.

(2) It must contain a clear promise to pay. Mere acknowledgment of debt is not a promise.

(3) The promise to pay must be unconditional. “I promise to pay Rs 5,000 as soon as I can” is not an
unconditional promise.

(4) The promisor or maker must sign the promissory note.

(5) The maker must be a certain person.

(6) The payee (the person to whom payment is promised) must also be certain.

(7) The sum payable must be certain and must not be capable of contingent additions or subtractions.

“I promise to pay Rs 5,000 plus all fines” is not certain.

(8) Payment must be in legal tender money only. “I promise to pay B Rs 3,000 and one quintal of paddy,”
is not a promissory note.

(9) It should not be made payable to bearer, Under the Reserve Bank of India Act, a promissory note
payable to bearer is illegal.

(10) It should be properly stamped.

The following is a specimen of promissory note:

Ahsan Irshad Page 3

BILLS OF EXCHANGE
The legal definition is “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.” It means that if an order is made in writing by one
person on another directing him to pay a certain sum of money unconditionally to a certain person or
according to his instructions or to the bearer, and if that order is accepted by the person on whom the
order was made, the document is a bill of exchange.

The following is a specimen of bill of exchange:

Cheques are also included among negotiable instruments. In the specimen bill of exchange shown
above, M/s Lakhmi Chand & Sons are the drawers as well as the payees of the bill of exchange. M/s

Ahsan Irshad Page 4

Aggarwal Stores are the drawees and the acceptors of the negotiable instrument. The drawees become
habile to pay for the bill of exchange only after they have accepted it. Before acceptance, a bill of
exchange is known as a draft.

Advantages of Bills:

The following are the advantages of bills:

(i) Presumption of consideration:

In a bill, consideration is presumed. In other words the Court presumes that the acceptor of the bills of
exchange or maker of the promissory note is indebted to the drawer of the bill or payee of the
promissory note. It is a big advantage. In the absence of the bill, the seller of goods and services or the
lender of the money has to prove the indebtedness of the purchaser or borrower in case of a default.

(ii) No locking of money:

A bill provides the payee an option either to wait for money till the date of maturity of the bill or to get
cash at any time by getting the bill discounted with the bank at a reasonable rate of interest. The bill can
also be used to discharge the liability to a creditor by endorsing the bill in the creditor’s favour. Thus, the
seller need not keep the money locked up for the period of credit allowed by him to the customer.

(iii) Source of finance:

Accommodation bills enable the businessmen to obtain funds at a low rate of interest to meet their
temporary financial requirements.

(iv) Safe and convenient means of transmitting money:

Bill is a safe and convenient means of transmitting money by one person to the other; one can avoid the
risk of carrying currency by using a bill.

(v) Planning by creditors:

A bill fixes the exact date of payment. The creditor knows when he is required to make payment and can
make arrangements accordingly.

Negotiability:

Ahsan Irshad Page 5

Promissory notes, bills of exchange and cheques are negotiable instruments. This means that the holder
can claim payment on them.However, this is subject to the conditions that the holder takes them:

(1) Without notice of defect in the title of the transferor, i.e., in good faith

(2) For consideration

(3) Before maturity. If these conditions are fulfilled, it does not matter if the title of the transferor was
defective.

Thus, if A steals a bill of exchange and passes it on to B who is not aware of A s mode of acquiring the bill
and who takes it for value and before the due date of the bill, B will be entitled to get payment on the
bill. Here B is a holder in due course. A holder in due course always gets good title except in case of
forgery. Moreover, whoever gets the bill (or promissory note) after the holder in due course, will also
get a good title to it; it has been purged of all defects

The instrument is passed on from one person to another by endorsement and delivery. Endorsements
on bills of exchange and promissory notes are done in exactly the same manner as those on cheques.
The liability of the endorser to subsequent parties is also the same. Thus, if a bill of exchange is dis-
honoured, that is, if payment is not made on the due date by the promisor (drawer in case of bill of
exchange), money can be claimed from any of the previous endorsers, the payee and the maker of the
instrument.

Negotiability plus this liability of the endorsers make a bill of exchange or promissory note an excellent
security. Bills of exchange or promissory notes are, therefore, quite willingly purchased by banks. The
bank is sure that within a short time the money advanced on the bill will be returned. Bills of exchange
are, therefore, excellent ways of granting or receiving credit. A purchaser of goods may not be able to
pay immediately, but the seller may not be able to wait.

A bill of exchange or a promissory note will admirably solve the difficulty. The purchaser promises, in
writing, to pay the seller or his order the sum due and hands it over to the seller. The seller goes to die
bank and gets the note discounted. The seller thus gets the payment immediately, while the purchaser is
not compelled to find money immediately. Bills of exchange or promissory notes, therefore, are
excellent lubricating oils to the wheel of commerce.

Although a bill of exchange or a promissory note really amounts to nothing more than a promise that
the money will be paid on such and such date or on demand, the willingness of banks to advance money
(technically called discounting) makes it a special type of asset only one degree removed from balance
at bank, Hence, in business houses, a person is deemed to have cleared his debt when a bill of exchange
(duly accepted) or a promissory notes is received from him.

The person who gives a bill of exchange or a promissory note considers that the money due has been
paid and debits the creditor’s account accordingly. A person who receives a bill of exchange or
promissory note can adopt any one of the three courses.

Ahsan Irshad Page 6

 He can:

(1) Keep it till the date of maturity

(2) Pass it on to one of his creditors

(3) Get it discounted with a bank

Date of Maturity is always calculated by adding three days of grace. Thus, if a bill, dated 8th January is
for 2 months after date, the date of maturity will be 11th March. If the due date falls on a holiday, the
due date will be the previous day. A bill falling due for payment on August 15 will have to be paid on
August 14.

BASIS CHEQUE BILL OF EXCHANGE

Banker Cheque is always drawn on a banker While a bill may be drawn on any one,

Ahsan Irshad Page 7

 including a banker

Payment The cheque can only be drawn and payable on A bill may be drawn payable on demand, or
demand. on the expiry of a certain period after or sight

Acceptance A cheque does not require acceptance and is A bill must be accepted before payment can
intended for immediate payment be demanded

Grace period No grace period is allowed in case of cheque A grace of 3 days is allowed in the case of
payment time bills.

Dischargement of drawer Drawer of a cheque is discharged only if he The drawer of a bill is discharged, if it is not
suffers any damage by delay in presentment presented for payment.
for payment.

Notice of dishonour No notice of dishonour of cheque But notice of dishonour of a bill is necessary.

Revocable A cheque being a revocable mandate, the But this is not so in the case of a bill
authority may be revoked by countermanding
payment and is determined by notice of the
customer’s death or insolvency.

Crossing The cheque may be crossed But the bill cannot be crossed.

BASIS CHEQUE PROMISSORY NOTE

Order and promise It contains an order to pay A promissory note contains promise to pay

Ahsan Irshad Page 8

Number of parties In case of cheque may be three parties, the In case of promissory note are only two parties,
drawer, drawee and payee the maker and the payee.

Object Cheque is used because it is a simple and easy It is used for receiving and giving credit
medium of exchange and serving of metallic
money

Crossing A cheque may be crossed A pro-note cannot be crossed

Payable to bearer A cheque is often drawn as payable to bearer A pro-note cannot be drawn payable to bearer

Stop payment Its payment can be stopped by giving the notice A pro-note payment cannot be stopped if once
to the bank issued

Liability nature In case of cheque when it is dishonored, the In case of promissory note liability is primary
drawer is liable

Use of form It is drawn on a printed form issued by a Promissory note may be drawn on any paper
particular bank and there is no need of any particular form

Drawee A cheque is always drawn to a particular bank A promissory note can be drawn on any person
were account is available

Drawer and payee In case of cheque drawee and payee can be the In case of pre-note there are two parties and
same person maker cannot be the payee.

Ahsan Irshad Page 9