Bazooka Series

139
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CHAPTER 11

Introduction
A negotiable instrument by definition is an unconditional order or promise to pay an
amount of money which is easily transferable from one person to another. It goes to
establish how much a person owes or is owed. They are instruments/dtYcuments commonly
used in banking and other financial institutions and transactions. It 'is a convenient and
safe way of carrying money with a minimum degree of risk. Examples of negotiable
instruments are:
a) Bill of exchange
b) Promissory note
c) Cheques
Characteristics (Features) ofNegotiable Instruments
I) They can be transferred: Negotiable instruments can be passed on from one person to
another without any hindrance after it has been signed or endorsed.
'
2) No notice of transfer is needed: This means that, holders of this instrument need not
give any notice to the person from whom it was collected before it can be transferred.
3) Holders/Transferees are not affected in any way by any defect on the instrument.
4) Holders of any form of negotiable instrument can sue in their own names.
5) It can be used as a consideration.

Requirements for Negotiability ofBills

Before a bill is negotiated, some basic requirements would have to be met Some of these are:
1) All negotiable instruments must be in writing and be signed.
2) It must be payable to a specified person, firm or the bearer.
3) The instrument is expected to be payable on demand or at a specified future date.
4) It is expected to contain an unconditional promise or order to pay a specific amount of
money.

Bu.•dnPfilfi/ Monnuonu,n t
 Bazooka Series
140

Types o{Negotiable Instruments

Negotiable instruments which exist by law or statute are: A bill of exchange, a promissory
note and cheques.
Another group of negotiable instruments by custom may include; share warrants, bea~er
debentures bank notes and treasury bills. It must be noted however that postal orders, bills
of lading,' money ord~rs, IOUS, share certificates . and .receipts etc, ~re not negotiable
instruments. So, the legally recognized forms of negotiable mstruments are.
a) Bill ofExchange
b) Promissory Notes
c) Cheques

Bill ofExchange
By definition, it is an "unconditional order in writing addressed by one person to another,
signed by the person giving it,- requiring the person to whom it is addressed, to pay on
de~and at a fixed or determinable future date, ·a sum of certain in money or to the order of a
specified person' or to bearer' ' This means that a bill of exchange is an order from a creditor
to a debt.or to pay the amount owed at a specified date.
Features (Characteristics) ofa bill of exchange
1) It must be an order: The language of a bill must be an order not a request coming from a
creditor to a debtor. e.g. "Pay me an amount of GH¢20.00 or to bearer before or on the
date specified."
2) Must be in writing: A bill must either be made in printing, indelible ink or in writing
3) The order must be unconditional: The language on a bill must not be subject to
conditions e.g. If you can, pay me an amount of .... .. ... on ... ... ... (date) etc. No! Such a
bill is invalid
4) The bill must come from one person i.e. the drawer to the drawee.
5) It must be signed by the drawer.
6) The bill must require a specific amount to be paid. E.g.: Not "pay me on this date an
amount of about GH¢50 etc. No!
7) It must be payable on demand or at a fixed date or at a determinable future date (time).
Note that when a bill is payable on demand, it may indicate for example "Pay Bazooka
when he demands it, or at sight or on presentation."
8) The drawee (debtor) must accept the bill by writing the word "accepted" across its face,
followed by the signature.
9) Dating a. b~/1: A ~ill that is not dated (an undated bill) is not necessarily invalid. If it is
undate?; 1! 1s possible for the h~lder to fill in the issue date or acceptance date. Any date
on a bill is presumed to be vahd unless otherwise proven. The validity of a bill is not
affected when a bill is post-dated or Ante-dated.
 --- - - - -·-- -------- ---
fa Bill of Exchange (What is the Different Between an Inland Bill a11d a Foreign
.
a) Inland bill of exchange: It is a bill drawn by a person in one country and deltvered to
another in the same country.
b Foreign bill of exchange:_ On the other hand is a bill that is drawn by a person in one
) country on another person m another country
Ways of Exchanging a Bill
This is a means by which a bill can be used to pay a debt or turned into liquid cash.
a) The drawer can wait until the payment is due from the debtor (the drawee).
b) He (the drawer) can discount it for a l_
esser value.
c) He can endorse it and use it to pay his creditor.

Parties ofa bill ofexchange

There are three main parties to a bill of exchange; these are:
a) Drawer: He is a creditor. He is the one who draws (writes) a bill and signs it; where it is
presented to the debtor to accept and pay.
b) Drawee: He is a debtor. He is the one to whom the bill is presented for payment.
c) Payee: He is the one to whom the bill is payable.

Terms Connected to a bill ofexchange

a) Accepted bill: A bill of exchange is said to be accepted when the drawee writes across the
face of it with the word accepted with date, place of payment and signature, especially if
it is not payable at sight.
b) A bill of exchange at sight: This is a type of bill which is paid as soon as it is presented.
It is the same as payable on demand.
c) A bill with a grace period: Usually, bills with a grace period carry only three (3) days
added to the payment date stated on it.
d) Dishonored bill: A bill is said to be dishonored if it is refused by the drawee or payment
could not go through when the date is due. ·
e) Honored bill: This is a bill that has been paid on the due date.
D Negotiated bill: When a bill is transferred from one person to another in such a manner
that t~e transferee becomes the owner or the holder of the bill, then it is said to be
negotiated.

g) Discounted bill: It is a bill that has been sold at a lesser value before the due date for
payment.
h) Tenure o" b1·11 Th' · ·h ·
.d
18 'J a : 1s 1s t e penod between the date of drawing a bill and the date that it
ue for payment/maturity.
· i) Renewing b ·11· Th· • .
1
payme _a • is is an act of allowmg the drawee to renegotiate a new date for
nt, smce he cannot pay on the earlier date agreed with the drawer.
 j) Retiring a bill: A bill is said to be retired when the drawee pays (honours) the bill even
before the real date fo r payment is due.

What is Endorsement?
When the signature of the holder is appended on ( or at the back of) the bill, it is described
an endorsement. To have a valid endorsement, the following rules must be observed. as

1) The endorsement has to be on the bill itself.

2) The endorsement must cover the entire bill and not a partial one, as a partial one is
invalid.
3) Assuming there are two or more names on the bill, the signatures to that effect must be in
that respective order.
4) If an agent signs for a bill, he must indicate as such else he is liable.
5) Assuming the bill is for two or more people, they are expected to endorse for each other.
Any wrongly spelt name must be cancelled and endorsed, putting the correct name into
bracket.
6) Blank or special endorsement?
i) Blank endorsement: It is an endorsement that contains only the signature of the one
who endorses (i.e. endorser). It does 1)-0t indicate the endorsee or transferee.
ii) Special endorsement: It contains the signature of the endorser and that of the person
to whom he is transferring the document.

Advantages ofa bill of exchange

a) It is used as a medium of settling debt or payment.
b) It is an evidence of someone being indebted to the one who holds it.
c) It can be discounted anytime at the banks when one needs money.
d) It facilitates payment among business persons.
e) It is a negotiable instrument.
f) It promotes both foreign and local trade.
g) Debtors who fail to honour·it can be sued.
h) It carries a feature of certainty, owing to the specific date quoted on it.
i) It can be transferred from one person to the other.
j) It reduces the risk ofcarrying large sums of money.

PROMISSORY NOTES

Th~~ is another type of negotiable instrument, by definition, it is an "unconditional promise in

wntrng 1!1ade by one-person to another signed by the maker (who is usually a debtor)
undertaking to pay on demand or at a fixed or determinable future date a certain sutrl of
 money to the order of a specific person or to the bearer. In a more simple language, it is a
promise in writing made by a debtor to pay on demand or at a fixed time a sum of money.
Tue promise can either be made by a single person or jointly.
A bill of exchange is the reverse of a promissory note. The debtor who writes a
promissory note is the MAKER, whiles the creditor to whom it is paid is the PAYEE. The
payment can be made payable to the payee's order or the bearer of the note.
Before a promissory note can take effect, it: must be endorsed by the maker. We can
have inland and foreign promissory notes. A promissory note is said to be inchoate. unless it
is delivered to .the payee or the bearer.
[!atures (Characteristics) ofa Promissory Note:
I) It is a promise to pay someone (a creditor).
2) It is always done in a written form.
3) The promise to pay must always be unconditional.
4) The maker (debtor) must always sign it.
5) It is transferrable through endorsement.
6) It does not require acceptance as in the case:ofbill of exchange.
7) It must be payable on demand or at a fixed or determinable future date:.

Distinction (Differences) Between A Bill o[Exchange and Promissory Note.

Bill of exchange Promissory note

1) It is an order to pay 1) It is a promise to pay

2) It has three parties (ie drawer, drawee: & 2) It has oply two, parties (ie maker &
payee) payee)

3) It requires acceptance 3) It does not require acceptance

4) The acceptor is liable 4) The drawer is liable
5) The drawer is a creditor 5) The drawer is a debtor

Similarities between a Bill ofExchange and A Promissory Note

Bill of exchange Promissory note

I) It is signed by the drawer (i.e. the pers~n 1) It i :;1gned by the person making it.
making it).
2) It ;, ;,ayable t0 a specific person.
2) It is payable to a specific person.
3) A .;i.xed sum of money is payable on
3) A fixed sum of money is payable on <lcma11J.
demand.
4) It is dcr e in writing.
4) It is done in writing.
5) It is in black and white.
5) It is in black and white.
c!!£QUES _ . . trument By definition, a cheque is an order i
- 1
-~ is another fonn of a negottab e msunt holder asking the bank to pay a specifi~
bank by a current accQ bearer
~,,riting made upon a d on the cheque or his order or to a .
~mount to a specific person name
Parties to a Cheque
. . cheque do exist. These are:
Three maJor parties to a h He is the one whose account is tu b
The drawer: The one who writes out the c eque. e
debited.
hi h the cheque is drawn.
The drawee: The bank on w c cJrL \ ,, .-- ·
The payee: The one to whom the cheque is made pay~ble.

Essential Features ofa Cheque .

. h st be present on a cheque before 1t can be
h
These are the necessary features w ic mu
honoured by a bank.
a) Date
b) Payee's name
c) Amount in words and in figures
d) Account number or the serial no.
e) The drawer's signature

Importance of Cheques
a) Cheques sometimes serve as a receipt
b) Cheques make payment very convenient to both drawers and customers
c) Counterfoils of cheques serve as record of payment
d) It avoids the use of (carrying) huge sums of money
e) It is a very secure means ofremitting money

Disadvantages of Using a Cheque

a) A lost cheque can pose a serious problem to the user
b) Delays at the bank can pose a problem to the user of the cheque.
c) The use of a cheque can attract high bank charges.
d) A cheque can be refused as a means of payment, since it is not a legal tender.
e) It (cheque) can be dishonoured on a number of grounds, causing embarrassment to
users
Types o[G_heques
Many types of cheques do exist. Among the prominent ones are the fo llowing.
a) Open Cheque: It is a cheque that is not crossed and can be presented at the bank and
cashed over the counter.
b) Bearer Cheque: It is a type of cheque payable to the person holding it. It does not
need endorsement
c) Order Cheque: It is a type of cheque payable to the person named on it. The named
person can also endorse it and give it to another person. It may carry instruction such
as "pay Dan-Sandy or order". This means Dan-Sandy can transfer the cheque to
another person by simply endorsing it.
d) Blank Cheque: Any cheque issued without the specified amount written on it is
referred to as a blank cheque. It may contain the date, and also signed by the drawer.
However, the payee is allowed to fill in the required amount.
e) Dishonoured Cheque: This is a cheque that has been rejected by a bank owing to one
reason or the other.
f) Post-dated Cheque: A cheque is said to be post-dated when the date stated on it is
ahead of the date it was drawn. It can't be cashed until the date written on it is due.
The banks would not honour it if it is not due.
g) Ante-dated cheque: It is a cheque that bears a date earlier than it was written or
drawn. It can be cashed without any problem provided it is not more than six months
h) Stopped or Countermand Cheque: It is a cheque that has been ordered by the owner
or the drawer for payment not to be effected. If a drawer of a cheque realizes that his
or her cheque is missing or stolen, the drawer has the right to go to the bank to stop
the said cheque. Below are the information that would be needed by the bank in
relation to the stolen cheque before it can be stopped.
i) Date of issuing the cheque
ii) Serial number
iii) Name of payee
iv) Amount on the cheque
v) Account number of the drawer
i) Stale Cheque: Any cheque that bears a date which is more than six months from the
date of issue is known as a "stale cheque"
j) Certified Cheque: It is a cheque that is approved or authorized by the bank as genuine
and that there is enough funds in the account of the drawer for payment
k) Dud Cheque: Any cheque that is written but fails to meet the amount in the account
of the drawer is a dud cheque. Eg. If Bazooka Company Ltd. wrote a cheque of
Gh¢200.00 but the account of the company has only Oh¢ 150.00 or no money in the
account, such a cheque is Described as a Dud Cheque.
l) Crossed C~eque: It is any cheque with two transverse/parallel lines drawn across its
surface. This type of cheque can only be paid into an account and cannot be cashed
over a counter. So if the payee has no account, he/she must open one.
NB: There are two types of crossing.
These are:
a) General crossing and
b) Special crossing

GENERAL CROSSING:
transverse Jines across its face with or without an ,
Here, th. e chhras earsCtwo
eque .b"& " that is (and company. ), "not nego fiable" or "AccouY of toe
tioII owmg p es, o nt Pa
only" written in the two lines. · Yee

TYPES OF GENERAL CROSSING

1/ll!I
1? "a" it is referred ~o as blank crossing. ::b::, we have wor?,s. "& ~o" put in thetwo
Imes. It is not too d1fferent from the one m .a ·. ~he word & Co ~p.hes that the cheque
may or can be paid into an account of an md1v1dual or an orgamzat10n. The payee I
transfer the cheque to another person. But this would be after he/she has endorsed it. can I
In "c", the inscription "not negotiable" indicates that it can not be transferred by th
payee to pay another person. It is an additional security to the cheque. e
In "d" we have "account payee only" which means that the cheque is only payable 1
only the account of the named payee on the cheque. It makes it impossible for anyon~
who is not a payee to get access to it. We may also have other examples as shown below
under general crossing. The implication is that, the cheque can only be paid into the
payee's account at a named bank. It also means that the cheque can not be transferred for
example by using it to pay a debt.

NB: A crossed cheque can be made open by signing against the crossing.

What are the effects of crossing a cheque?

a) It makes it impossible or difficult for thieves to steal and cash it.
. terms of secunty
b) It makes it easy for the person to whom it is paid m .
c) It can only be transferred through endorsement
d) Before it can be paid over the counter, then the crossing would have to be cancelled
and the word "pay cash" is written and it is signed.

SPECIAL CROSSING
In spec!al crossing the name of the paying bank (drawee) is written in the two
transverse Imes. We may also have the words "Not negotiable" or "Account payee onJy"
added.
Examples of a special crossing

Essential Features (Qualities) ofa Valid Cheque.

There are some basic features that must be possessed by a cheque before it can be
honoured. Some of these are:
a) It should have the correct date neatly stated on it. It should be in the order of "day,
month and year".
b) Should bear the correct name (not abbreviated) of the payee
c) Words and figures of the amount should be written. The words must tally with the
figures of course
d) It must be endorsed at the back.
e) The signature of the drawer must be borne on the cheque; and it must be same as the
specimen one at the bank.
f) All cancellations on the cheque must be signed against.
g) · All cheques must be carefully handled. It would not be entertained if it is defaced or
mutilated. ·
h) The amount written on the cheque must not be more than what the drawer has at the
bank.

How Cheque Fraud can be prevented.

1) The amount on the cheque must both be written in words and in figures.
2) The drawer's signature must be properly put on the cheque and must be the same as
the specimen provided to the bank
....... . . '
3) The date on which the cheque is issued must be correctly written on the cheque.
4) All blank spaces should be ruled with a line to prevent fraudulent insertion.
5) There must not be any alteration on the cheque. If however one appears, it must be
signed against.
 cheque.
----------
6) If possible, cheques should be crossed to prevent thieves from benefiting from stolen

7) Banks can and must confirm the identity of customers by inspecting their I.D. Card
for confinnation. s
8) Customers must make sure they keep all unused cheques under lock.
9) Cashiers at the banks must always ensure that, they check the si~natures at the back of
the cheque against the scanned one at the bank before payment 1s made.

Why Would a Cheque be Dishonoured?

(Reasons for dishonouring a cheque)
There are a number of reasons why a cheque may be dishonoured. The important ones are
as follows.
1) If the signature on the cheque differs from the specimen signature at the bank
2) If the amount on the cheque is more than that in the account of the customer at the
bank.
3) If the cheque is wrongly made out, ie if the figures on the cheque differ from the
words. ·
4) If the cheque bas no date
5) If the date on the cheque is more than six months
6) If the drawer orders the bank to stop payment.
7) If it is realized that the owner or the drawer is no more (dead)
8) If there is an alteration on the cheque that requires an authentication but has not been
done.
9) If the bank hears of the insanity or bankruptcy on the part of the account holder.
JO) If the bank receives an order from the court not to pay. (This is referred to as
Garnishee Order)
Ways by which Cheque Fraud can be Prevented
The following points can be considered if cheque fraud is to be prevented or minimized.
a) Identification cards: Banks or cashiers must do their best to always inspect the I.D.
cards of customers before paying monies to them.
b) Telephone numbers: Banks should insist the drawers of cheques write their telephone
numbers at the back of the cheques. This is to enable the banks to cross check from
the drawers if they (banks) are not sure of certain facts.
c) Verification of signatures: Signatures of the drawer must be checked by comparing it
with the scanned specimen at the bank before payment is made. .
d) Crossing a cheque also makes it possible for any fraud to be detected.
e) All unused cheques should also be put or kept under lock.
f) Missing cheque must also be reported as soon as the loss is detected.
 Other Means of Payment
Bank Draft
A bank draft is a fonn of a cheque issued and drawn by a bank at the request of a customer.
The cheque is made payable to a customer or to a ·specific person. The person to whom the
draft is negotiated will normally come to the bank that issued the draft and cash the amount.
The bankers draft is conveniently used when payment is made on behalf of a large number of
people. It avoids the insecurity associated with carrying large sums of
I
money.
Treasury Bills
These are· short tenn loans to the government and are very safe. They carry maturity days of
91 or 80. The sale and purchase of Treasury bill is a means of borrowing or lending money.
An interest is paid on the amount fuvested in the Treasury bill in the period of investment.
The principal is usually paid back to the investor on the date of maturity.
Bearer Bill I Share Warrants
These are share Certificates, which is an evidence· of ownership or part ownership of a
company. A share certificate may be issued in the name of a specific person or may be issued
to the shareholder. Bearer Bill or certificate is also known as "warrants". They are considered
as negotiable instruments because it can be transferred from one person to the other in the
settlement of debts. They can also be used to pay for goods and services.
Bearer Debenture
A debenture is any document that shows an evidence of a loan advanced to a company. It
shows how much loan i1> involved as well as the interest. It may also show the tenns of
repayment of the loan. Holders of a debenture are regarded as creditors and not shareholders.
Holders of a debenture do receive interest even before profits are declared. They are
considered as negotiable instrument because they can be transferred from one person or the
other.

QUESTIONS

I. What is a negotiable Instrument?

2. Differentiate between a bill of exchange and a promissory note.
3. (a) What is a cheque?
(b) Identify and explain the essentials of a cheque.
4. Identify five (5) reasons for dishonoring a cheque.
5. (a) Write down five features of a promissory note.
(b) Write down five (5) features of a bill of exchange.
6. Write down five similarities between a bill exchange and a promissory note.
7. Write short notes on the following:
(a) Stale cheque b) Post-dated cheque c)"Bearer Cheque
d) Order cheque e) Dishonored cheque f) Anti-dated cheque.
8. Write down five (5) ways of avoiding a cheque fraud .
9. Distinguish between the following:
a) General crossing and special crossing
b) Bearer cheque and a crossed cheque
10. Identify five advantages of a bill of exchange.