Credit Instruments 5.

Endorser: When a payee or a holder signs his

name on the back of an instrument for the purpose
Definition of transferring it to another person, he is called an
endorser. He is liable to his subsequent endorser, his
A credit instrument is a written or printed paper by
endorsee or any subsequent holder of the
means of which funds are transferred from one
instrument.
person to another.
6. Endorsee: An endorsee is the person to whom an
Credit instruments most commonly used in instrument is endorsed. He is the holder of an
international payments and settlements are bills of instrument, which has been transferred by the
exchange, promissory notes and checks. They are endorser.
also known as negotiable instruments. Credit
instruments may also take such forms as traveler’s 7. Guarantor: A guarantor is the person who
cheques, certificates of deposit, treasury bills, guarantees the acceptance and payment of a bill of
treasury bonds, etc. exchange, though he is not a party liable thereto.
The obligations of the guarantor are the same as
What is a negotiable instrument? those of the guaranteed.
Bills of exchange, checks, promissory notes,
dividend warrants, bearer bonds, bearer scrips, 8. Holder: A holder is the possessor of an instrument,
debentures payable to bearer, share warrants namely the payee, the endorsee or bearer. He may
payable to bearer, Treasury Bills, certificates of sue, if needed , on the instrument in his own name.
deposit are all negotiable instruments, providing
they are in a deliverable state, i.e. in favor of “the 9. Holder for value: A holder for value is the person
bearer”. who possesses an instrument for which value has
been given by himself or by some other person.
D. Richardson defines a negotiable instrument as:
“A negotiable instrument is a chose in action（依法 10. Holder in due course: The person who is in
判得但未实际占有的动产）, the full and legal title to possession of an instrument that is
which is transferable by delivery of the instrument
(1) complete and regular on its face,
(possibly with the transferor’s endorsement) with
the result that complete ownership of the instrument (2) taken before maturity without notice of its
and all the property it represents passes free from previous dishonor
equities to the transferee, providing the latter takes
the instrument in good faith（善意持有）and for (3) taken in good faith and for value and
value（付了对价）.”
(4) taken without notice of any infirmity in the
Functions of a negotiable instrument instrument or defect in the title of the person
(a) As a means of payment negotiating it. He is also called a bona fide holder,
who may claim payment from all parties liable on
(b) As a credit instrument the instrument.

(c) As a negotiable instrument Essentials of a negotiable instrument

1. An unconditional order or promise in writing to
Parties to a negotiable instrument
pay a sum certain in money;
1. Drawer : A drawer is the person who draws a bill
of exchange or a check upon the drawee for the 2. Addressed by one person to another;
payment of a certain amount of money.
3. Payable to bearer or to order;
2. Drawee : A drawee is the person upon whom a bill
of exchange or a check is drawn. He is also known 4. Payable on demand or at a definite future time.
as the addressee of a draft.
Bill of Exchange (Draft) What is a bill of exchange?
3. Payee: A payee is the person to whose order the - A bill of exchange is an unconditional order① in
drawee is to make payment or to whom the money writing⑥, addressed by one person (the Drawer)
is to be paid. ②to another (the Drawee)③, signed by the person
giving it④, requiring the person to whom it is
4. Acceptor: If and when the drawee agrees and addressed (the Drawee, who when he signs
assents to the order in writing addressed to him on becomes the Acceptor) ⑤ to pay on demand, or at
a bill of exchange by signing his name on its face, a fixed or determinable future time⑦, a sum
indicating that he will pay on due date, the drawee certain in money⑧, to or to the order of a specified
will become an acceptor.
person, or to bearer (the payee)⑨. (Bills of (2) must be made for the whole of the draft.
Exchange Act, 1882 of the United Kingdom)
Four kinds of endorsements
EXHIBIT-1 1. Blank endorsement

An endorsement in blank is one that shows an

endorser’s signature only and specifies no endorsee.
It is also called a general endorsement. A draft so
endorsed becomes payable to bearer.

2. Special endorsement
A special endorsement is one that specifies an
endorsee to whom or to whose order the draft is to
be paid, in addition to the signature of an endorser.
For example:“Pay John Smiths”.

3. Restrictive endorsement
An endorsement is restrictive when it prohibits
further transfer of the draft. For example:“Pay John
Smiths only”.

4. Conditional endorsement
A conditional endorsement is a special endorsement
adding some words thereto that create a condition
bound to be met before the special endorsee is
entitled to receive payment. The endorser is liable
only if the condition is fulfilled. For example: “Pay to
John Smith upon his delivery of warehouse receipt
of 100 cases of corn”.

b) Presentment- a draft must be duly presented for

Essentials of a bill of exchange
payment if it is a sight bill or duly presented for
In conformity with the Bills of Exchange Act 1882 of
acceptance first and then presented for payment at
the United Kingdom and the Uniform Law on Bills of
maturity if it is a time bill.
Exchange and Promissory Notes 1930 of Geneva, a
bill of exchange must fulfill the following c) Acceptance- Acceptance of a draft is a
requirements: signification by the drawee of his assent to the order
given by the drawer. He engages, by signing his
KEY ELEMENT
name across the face of the bill that he will pay
(a)The word “Exchange” when it falls due. So presentment for acceptance is
(b)An unconditional order in writing legally necessary to fix the maturity date of a draft
(c)Name and address of the drawee payable after sight. Valid acceptance requires:
(d)Drawer’s signature(s)
(1) the word “accepted” must be written on
(e) Date and place of issue
the bill to be followed by the signature of the
(f) Name or business entity of the payee
acceptor and the date of acceptance. A mere
(g) Tenor
signature of the acceptor without additional words is
(h) Place of payment
also justified.
(i) Amount
(2) It ought not be expressed that the
drawee will carry out his promise by any other
Acts of bill of exchange ( draft )
means than the payment of money.
Issuance: to issue a draft comprises two acts to be
performed by the drawer. One is to draw and sign a d) Payment- Act of payment is performed when a
draft; the other is to deliver it to the payee. bill of exchange is paid. A bill is discharged by
payment in due course only when such payment is
3 Acts of bill of exchange ( draft )
made by or on behalf of the drawee or the acceptor.
Endorsement: It is an act of negotiation.
Prerequisites for a valid endorsement: e) Dishonor- Act of dishonor is a failure or refusal to
make acceptance on or payment of a draft when
(1) should be normally effected on the back of a
presented.
draft and signed by the endorser.
f) Notice of dishonor- A notice on which default of
acceptance or of payment by the drawee or the (a) According to the drawer
acceptor is advised, to be given by holder of a draft
to the drawer and all the endorsers whom he seeks - Banker’s draft or bank draft: It is a draft
to hold liable for payment. drawn by a bank on another bank.

- A notice of dishonor must be given by or on behalf - Trade bill: It is a bill issued by a trader on
of the holder or an endorsee on the next business another trader or on a bank
day after the dishonor of the draft.
(b) According to the acceptor
g) Protest- A written statement under seal drawn up (1) Trader’s acceptance billIt is a time bill drawn on
and signed by a Notary Public or other authorized a trader and has been accepted and signed by him
person for the purpose of giving evidence that a bill for payment at maturity.
of exchange has been presented by him for (2) Banker’s acceptance bill: It is a time bill drawn
acceptance or for payment but dishonored. on a bank and accepted and signed by this bank for
payment at maturity. This kind of bill is more
h) Right of recourse- In the event of a draft being preferable and negotiable than the trader’s
dishonored, the holder has a right of recourse acceptance bill and more acceptable in the discount
against the other thereto, that is, a right to claim market.
compensation from the drawer or any endorser.
(c) According to the tenor
k) Guarantee- Act of guarantee is performed by a (1) Sight bill: It is a bill payable on demand or at
third party called guarantor, who engages that the sight or on presentation.
bill will be paid on presentation if it is a sight bill or
accepted on presentation and paid at maturity if it (2) Time bill or Usance bill: It is a bill payable at a
is a time bill. fixed or determinable future time.

l) Discounting- Discounting a bill of exchange is to (d) According to whether commercial documents

sell a time bill already accepted by the drawee but are attached thereto
not yet fallen due to a financial institution at a price (1) Clean bill: It is a bill without shipping
less than its face value. documents attached thereto.

Illustration of procedures (2) Documentary bill: It is a bill with shipping

documents attached thereto.

Promissory Note

- A promissory note is an unconditional

promise① in writing⑦ made by one person
(the maker) ② to another (the payee or the
holder) ③ signed by the maker④ engaging
to pay ⑤on demand or at a fixed or
determinable future time⑧ a sum certain in
money⑥ to or to the order of a specified
- For examplesuppose an accepted bill for USD50, person or bearer.
000 falls due on June 30, the exporter takes it to a
discount bank on April 6. If the discount rate is 10%,
the discount interest is calculated as follows: D = V x
T x R / 360, where

D = discount interest
V = face value of the bill
T = tenor (days)
R=discount rate (n%p.a.)

Hence: D = 50,000 x 85 x 10% / 360 = 1180The

amount the exporter can get is:50, = USD 48,820

Classification of a bill of exchange Characteristics of a promissory note

(a) It is an unconditional promise in writing.
(b) The basic parties to a promissory note are the
maker and the payee. The maker corresponds to the
drawer as well as the drawee of a bill of exchange.

(c) There is no need to accept the instrument if it is

payable at a fixed or determinable future time. In all
cases the maker is the primarily liable party.

(d) Promissory notes other than those issued by -

banks are not very widely used in modern
commercial transactions. Bearer promissory notes
Essentials to a check
payable on demand and issued by banks are
equivalent to bank notes of large denomination, (a) The word “check” clearly indicated.
which may cause inflation and are prohibited by the (b) An unconditional order in writing.
government in many countries. (c) Name of the paying bank.
(d) Drawer’s signature.
Essentials to a promissory note (e) Place and date of issue.
(a) The words “promissory note” clearly indicated. (f) Address of the paying bank.
(b) An unconditional promise to pay. (g) A sum certain in money.
(c) Name of the payee or his order. (h) Name of the payee.
(d) Maker’s signature.
(e) Place and date of issue.
(f) Period of payment. Features of a check
(g) A certain amount of money.
(h) Place of payment. (a) A check must be unconditional.
(b) A check must be drawn on a bank.
(c) A sum certain in money must be written on a
Difference between a promissory note and a bill of check, which should be signed by or per
exchange procurement for the drawer.
(a)A promissory note is a promise to pay, whereas a (d)The date of a check is not essential in that it can
bill of exchange is an order to pay. be antedated, post-dated or dated on a non-
business day.
(b)There are only two parties to a promissory note, (e)The payee may be bearer, a specified person or
namely the maker and the payee (or the holder in his order.
the case of a bearer note), whereas there are three
parties to a bill of exchange, namely the drawer, the
drawee and the payee; Parties to a check

(c)The maker is primarily liable on a promissory (a) Drawer: The customer who writes the check
note, whereas the drawer is primarily liable, if it is a (b) Drawee: The banker on whom the check is
sight bill, and the acceptor becomes primarily liable, drawn and to whom the order to pay is given.
if it is a time bill; (c) Payee: The person to whom a check is stated to
be payable
(d)When issued, a promissory note has an original
A banker’s duty to honor checks
note only, whereas a bill of exchange may be either
- The banker is obliged to honor a customer’s checks
a sole bill or a bill in a set, i.e. a bill drawn with
up to the amount of his credit balance or available
second of exchange and third of exchange in
overdraft limit. The banker’s duty to honor the check
addition to the original one.
ends on
Check
1. Countermanding of payment by the
- A check is an unconditional order① in customer—commonly known as “stop”;
writing② addressed by the customer③ (the
2. Receiving notice that the customer has
drawer) to a bank (the drawee) ⑤ signed
died or dissolved;
by that customer④ authorizing the bank to
- receiving notice of bankruptcy or liquidation
pay on demand⑥ a specified sum of
of the customer;
money⑦ to or to the order of a named
person or to bearer (the payee) ⑧. - receiving order that is made against the
customer;
 - receiving notice of mental disorder of the - the bank who accepts a check for credit into
customer; an account of his customer. To carry out the
- receiving a garnishee against the customer’s role of collecting bank, it is important that all
account; the checks accepted for deposit should be
- receiving a court order freezing the carefully scrutinized. The points to be
customer’s account. checked:

Countermand of payment a. Date

- Countermand of payment denotes the
cancellation by the customer (the drawer) of his 1. Out of date: A check is valid for six months
mandate to the drawee bank or paying bank of the from the date of issue, unless a shorter
check, but in order to be effective the countermand period is written on the face of the check. For
must actually come to that bank’s notice. example, if a check dated 8th March 2001 is
presented on 10th September the same year,
- Mere constructive countermand, such as the it would be out of date.
bank is supposed to be in a position to learn
of the stop payment, is not enough. 2. Post date: This means that the check is
dated later than the day on which it is
- The drawer is the only person who can presented, in the above example, if the
instruct the drawee bank to stop payment check was presented on any day before 8th
on a particular check. March 2001, it would be “post-dated”.

Position when a banker wrongfully pays a check. 3. Undated: If a check is presented undated,
- If a banker pays a check without authority, if the the payee can insert a date and should be
customer’s signature is forged, or the check is void asked to do so by the bank cashier. If any
because of material alteration, prima facie(at first undated checks are mistakenly accepted,
sight; before closer inspection) the banker cannot the date stamp can be used to insert it.
debit its customer’s account. But: However, once a date is entered on a check,
it cannot be altered by the payee.
i. The customer must bear any loss caused
by breaching his duty to carefully draw a b. Payee and Words and figures
check in such a way that no alteration - The payee’s name should be the same
could have been made. as the one shown on the account that the
check is being paid into. If the name is
ii. Sometimes the customer is estopped〖 different, an endorsement is required.
禁止翻供〗, for example, if the banker - Both words and figures should be
suffers detriment损失 from the written and should agree. If they
customer’s failure to notify him promptly disagree, the check should be returned
after discovering that his signature has to the drawer for amendment or for a
been forged. new check to be issued.

Check clearing c. Signature, Endorsement and Crossing

- The process of obtaining payment for his - Signature: The check must be examined
customers for checks that are paid into the to see if it is signed. A check without a
branch from customers of other branches. signature written in is not an effective
check.
- a system of sending these items from one
bank to another. - Endorsement: If a check is transferred to
a third party, it should be endorsed by
- When a customer pays a check into his
the payee, and if it is transferred for
branch that is drawn on another branch or
more than once, the endorsement should
bank, he is asking his branch to obtain
agree and be consistent.
payment on his behalf and to have his
account credited. - Crossing: When a check is crossed, it
must be paid into a bank account and
- This process identifies two key roles that
cannot be cashed over the counter.
banks have to play in the check clearing
system. These are the roles of collecting bank d. Paying bank: the bank who effects
and paying bank. payment of the check drawn by his
customer.
Collecting bank
The points worthy of attention either with or without the words “not
negotiable”, that addition constitutes a
• the check is drawn on the paying bank and crossing, and the check is crossed
its branch; generally.
• the check has the correct date;
• the words and figures agree; - The effect of a general crossing is to
• the signature complies with the authority; make the check payable only through
• the check must be complete and regular; another banker (it must be deposited
• there is no material alteration into a bank account for clearing).
• the check is payable to a specified person or
bearer;
• there is no countermand of payment;
• there is sufficient funds;
• there is no legal bar.

Process of Check Clearing

1. The payee presents the check to his own bank and
requests the bank to collect it.

[Link] collecting bank examines the check to insure

that it is in order.
- Special crossing: Where a check bears
across its face an addition of the name of
a bank, either with or without the two
parallel transverse lines, that addition
constitutes a special crossing. If a check
is crossed specially, only the bank
mentioned in the check can receive
payment from the drawee bank.

3. The collecting bank presents the check to the

paying bank.

[Link] paying bank pays the collecting bank when it

is satisfied that the check is properly drawn and
there are sufficient funds or overdraft balance in the
drawer’s account

5. The collecting bank credits the payee’s account

when he receives the funds from the paying bank.
Aim of crossing a check
Crossed checks
- Principally, crossing a check is aimed at
- A crossing is in effect an instruction to making it more certain for the right
the paying bank from the drawer or holder to obtain its payment, and more
holder to pay the fund to a bank only. difficult for a wrongful holder to negotiate
Hence, such checks will not be paid over it or obtain the sum stated in the check.
the counter of the paying bank and must
be presented for payment by a collecting - The holder of a crossed check cannot
bank. encash it at the drawee bank and must
either deposit it in the drawee bank
- General crossing: Where a check bears crediting his account or have the drawee
across its face an addition of: bank pay the sum to another bank
crediting his account through the local
(a) the words “and company”, or any
clearing.
abbreviation thereof, between two
parallel transverse lines, either with or 'Not transferable' and 'account payee only'
without the words “not negotiable”; or
(b) two parallel transverse lines simply, - Crossing a cheque with 'not
transferable', 'account payee' or 'a/c
 payee' means that the cheque cannot be - Unless a bill is payable on demand, it is
used by someone else. A cheque marked usually accepted, whereupon the
as 'account payee' can only be paid into acceptor is the primarily liable party. A
the bank account in the same name of check need not be accepted for it is
the person it is made out to. Some payable only on demand and the drawer
people write 'only' after a/c payee. This is the party primarily liable.
makes it clearer to the person receiving
the cheque but it is not necessary to add - A bill must be presented for payment
only. when due, or else the drawer will be
discharged.
- This will help reduce cheque fraud, as
anyone using the cheque can only put it - A check must be presented for payment
into the account named on the cheque. within a reasonable time or within a
But because only the person named on certain time, such as 30 days according
the cheque can bank it, it is very to the regulations of the country
important that the name is correct. concerned.

Not negotiable cheques - The drawer of a check is not discharged

even though it has not been presented
- This is not the same as 'non- for payment within the stipulated time
transferable'. A cheque marked 'not or unless the delay in presentation incurs
non- negotiable' can be transferred to losses to the drawer.
someone other than the person it is
made out to. But it still has to be paid
into a bank account.

- Do not accept a 'not transferable' or

'account payee' cheque if it has been
transferred to you. Only accept it if it has
been made out to you in the first place.
Make sure your name is written
correctly, as it must be the same name
as your bank account.

- eg, imagine you were selling your car

over the weekend. The buyer didn't have
enough cash but offered you their pay
cheque. If it's 'non transferable' your
bank could decline to take it. Then you'd
have to track down the buyer and get
them to pay you again.

Cash cheques

- Writing a cheque out to 'cash' means

that anyone can cash it for the sum it is
written out for. It does not have to be
paid into a bank account. This can be
done for someone who may not have a
bank account so don't also cross the
cheque with 'non transferable' or 'a/c
payee'.

- But also be aware that if a cash cheque

is lost, anyone could bank it.

Difference between a check and a bill of exchange

- A bill of exchange may be drawn upon

any person, whereas a check must be
drawn upon a banker.