Business Law and Taxation

NEGOTIABLE INSTRUMENTS

• Presented By:
• Barkat Ali
• Advocate District Courts & High Court

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation
NEGOTIABLE INSTRUMENTS
Contents:

• Introduction
• Definition
• Characteristics Of Negotiable Instruments
• Definition Of Cheque
• Essentials Of Cheque
• Types Of Cheque

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation
INTRODUCTION

The law relating to Negotiable Instruments is contained in the Negotiable

Instruments Act 1881. It deals with the promissory notes, bill of exchange and
cheques. It extends to the whole of Pakistan. It came into force on 1st March 1882.
This act does not affect the provisions of section 24, 33 and 35 of the State Bank of
Pakistan Act, 1956. Moreover, no usage or custom shall apply to such
instrument. [Section1(a)]

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation
DEFINATION

The word negotiable means transferable by delivery and the word instrument
means a written document which creates a right in favor of some person. Thus,
the term negotiable instrument means a written promise or order to pay money.
Its ownership can be freely transferred by one person to another.

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation
CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS

1. FREELY TRANSFERABLE:
They are transferable from one person to another. The right of ownership in these instruments can
be transferred from one person to another easily. If the instruments is payable to bearer, the
property transfers to the transferee by mere delivery. But, if instruments is instruments is payable
to order, the property can be transferred to the other person by endorsement and delivery.

2. RIGHTS OF THE HOLDER:

A note, bill of exchange or a cheque gives the right to the creditor to recover something from
debtor. The creditor can recover this amount himself or can transfer this right to another person.
When he transfers his right, the transferee of the negotiable instrument can sue the debtor in his
own name in case of dishonour. A negotiable instrument can be transferred number of times
before its maturity. The holder of the instrument need not give notice of transfer to the party liabel
on the instrument to pay.

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation
CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS

3. BETTER TITLE:
When a person gets the negotiable instrument in good faith, without negligence and for
consideration trusting it bonafide, he becomes holder in due course.
It means he gets the instrument free from all defects. He is not affected by any defect of title of the
transferor or any prior party.

4. PROMISE OR ORDER:
A negotiable instrument contains an unconditional promise or order to pay. In case of promissory
note, the debtor promises to pay a certain sum of money to the holder of the instrument. In case of
bill of exchange and cheque, the creditor orders his debtor to pay a certain sum of money to the
holder of the instruments.

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation
CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS

5. CERTAIN AMOUNT:
In the negotiable instruments, the promise or order is made for the payment of certain amount.
The drawee of the instrument must pay certain amount of money and nothing else. E.g., goods,
shares, etc.

6. PRESUMPTIONS:
Certain presumptions apply to all negotiable instruments unless contrary is proved. There
presumptions are regarding consideration, date, time of acceptance, stamp and holder in due
course. (Section 118 to 119)

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation

DEFINITION OF CHEQUE
Section 6 provides that:
“A Cheque is a bill of exchange draws on a specified banker & 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.

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation
ESSENTIALS OF CHEQUE
1. IN WRITING:
The cheque must be in writing. Writing includes print, handwriting with blue &
black pen/pointer/ etc, a cheque made out on a typewriter would be also a
valid.

Example:
Ateeq draws a cheque in the following terms:
1. Pay Jabbar or bearer Rs. 500.
2. Pay Shokat Rs. 500.
3. The above cheques are valid.

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation
ESSENTIALS OF CHEQUE
2. UNCONDITIONAL ORDER:
The language used in a cheque should convey an order to pay unconditionally. If
the banker is ordered to pay upon the condition of payee’s signing the receipt,
then the instrument is a conditional order and thus not a cheque. The banker
should make sure that the order to pay by the drawer is unconditional.
Example:
Aniq draws a cheque in the following terms:
1. Pay Danish Rs. 500.
It is a valid cheque
2. Pay Shamil Rs. 500, “if you can”
It is not a valid cheque as it is conditional.
From the desk of Accounting and Finance Faculty –
(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation
ESSENTIALS OF CHEQUE
3. SIGNED BY DRAWER:
A cheque will be valid only if it is signed by the account holder or by someone
who is authorized to sign on his behalf.

Example:
Arshad draws a cheque as under but does not sign thereon.
Pay Malik, Rs. 500.
It is a not a valid cheque

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation
ESSENTIALS OF CHEQUE
4. PAYABLE ON DEMAND:
A cheque is always drawn payable on demand. The demand should be made
within a reasonable time. In Pakistan, the cheque must be presented within six
month from the date of issue.

Example:
Yawar draws a cheque on 1st June 2019 Pay Aysha, Rs. 500.

It is a valid cheque for six months w.e.f 1st June 2019.

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation
ESSENTIALS OF CHEQUE
5. CERTAIN SUM:
The amount mentioned in a cheque should be certain. There should be
absence of all elements of doubt. In practice, banker return the cheque if
the amount in words and figures differs are differ.

Example:
Yasir draws a cheque as under:
Pay Navid Rs 500 and some amount according to his needs.
It is not a valid cheque.

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation
ESSENTIALS OF CHEQUE
6. PAYABLE TO BEARER OR ORDER:
The drawer of a cheque can make it payable to the bearer or any
specified person. If the customer marks cheque “Pay cash or order” the
banker may treat it valid and payable to bearer.
Example:
Nawaz draws a cheque as under:
Pay Rao Rs 500
Pay Ramish or bearer Rs 500
Above all cheques are valid cheques.

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation

1. OPEN CHEQUE:
TYPES OF CHEQUE
An open cheque is payable at the counter of the bank on the presentation of the cheque. It need
not be presented through a bank account.
It has two kinds.

i. BEARER CHEQUE:
In case of a bearer cheque the paying banker does not need to see the authenticity of the holder
of a cheque. In fact, there is a great risk involved in this case. If this cheque goes to a wrong
hands who may get the payment from the bank unless its payment has already been stopped.

ii. ORDER CHEQUE:

It is also payable at the counter of the bank. It is paid by the banker after getting satisfaction
about true identity of the holder of the cheque. There is great risk involved in open cheque when
such a cheque is in circulation.
From the desk of Accounting and Finance Faculty –
(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation

2. CROSSED CHEQUE:
TYPES OF CHEQUE
It is not payable at the counter. Its payment is made only through the collecting banker of a
customer. The collecting bank credits the proceeds to the account of the payee of the cheque. The
crossing provides protection to the holder of the cheque.

A cheque is said to be crossed when two parallel transverse lines, with or without any words, are
drawn across the face of a cheque. They may be drawn anywhere on the face of the cheque but
usually they are drawn on the left hand top corner of the cheque.

The purpose of the crossing is to give a direction to the banker not to pay the
cheque across the counter but to pay it only to a banker.

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team – Mr. Barkat Ali)
 Business Law and Taxation

THANK YOU

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team – Mr. Barkat Ali)