F-204 Law and Practice of Banking

Topic 05
Negotiable Instruments

Course Instructors:
Md. Uzzal Hossain
Sumaiya Jahan
 Definition of Negotiable Instruments

• A negotiable instrument is a transferable

document which pass freely from hand
to hand and thus form an integral part of
the modern business mechanism.

• [Link]
 Definition of Negotiable Instruments

• A negotiable instrument is a transferable

document containing unconditional
promise that guarantees payment of
certain amount of money on spot or a
later set date.
Drafts

Negotiable
Instrument

Notes
 Definition of Negotiable Instruments
• The law relating to negotiable instruments is
contained in the Negotiable Instrument Act, 1881.

• Negotiable Instrument Act merely states that a

negotiable instrument means a promissory note,
bill of exchange or cheque.

• Section 13 does not prohibit any other instrument

which satisfies the essential features of negotiability.
 Essential Features of Negotiable Instruments

• The negotiable instruments are easily

transferable from person to person.
• A negotiable instrument confers absolute and
good title on the transferee, who takes it in good
faith.
• Such holder of negotiable instrument, possesses
the right to sue upon the instrument in his own
name and can recover the amount from the party
liable to pay thereon.
 Negotiable Instruments
(a) “Banker” means a person transacting the business of
accepting, for the purpose of lending or investment, of deposits
of money from the public, repayable on demand or otherwise
and withdrawable by cheque, draft, order or otherwise, and
includes any Post Office Savings Bank;
(b) “Bearer” means a person who by negotiation comes into
possession of a negotiable instrument, which is payable to
bearer;
 Negotiable Instruments
(c) “delivery” means transfer of possession, actual or
constructive, from one person to another;
(d) “issue” means the first delivery of a promissory note, bill of
exchange or cheque complete in form to a person who takes it as
a holder;
(e) “material alteration” in relation to a promissory note, bill of
exchange or cheque includes any alteration of the date, the sum
payable, the time of payment, the place of payment, and, where
any such instrument has been accepted generally, the addition
of a place of payment without the acceptor's assent; and
 Types of Negotiable Instruments
Negotiable instruments fall under two categories
▪ Negotiable instruments by statute
▪ Promissory notes
▪ Bill of exchange
▪ Cheque
▪ Negotiable instruments by custom or usage
▪ Government promissory notes
▪ Delivery orders
▪ Railway receipts
 Exceptional cases of Negotiable Instruments

• If a cheque is payable to a specified person

only and not to his order or the bearer, it can’t
be transferred to any other person and hence
it losses its negotiability.
• If a cheque is crossed ‘Not Negotiable’ it can’t
be transferred.
 Promissory Note

• Promissory note: A promissory note is an

instrument in writing containing an
unconditional undertaking, signed by the
maker, to pay a certain sum of money only to,
or to the order of certain person, or to the
bearer of the instrument.
• Drawn and signed by the debtor.
 Promissory Note
Date: 10th November 2025
Place: Dhaka
Amount: ৳100,000

I, Fred, promise to pay John or order the sum of Taka One Lakh
(৳100,000) only on 10th February 2026 (90 days from date) for
value received.
Promisor (Drawer) Drawee
Signature: Signature:
__________________ __________________
Name: Fred Name: John
Address: 22, Green Road, Address: 45, Park Street,
Dhaka. Dhaka.
 Promissory Note
Examples:
Mr. A signs instruments in the following terms:
(a) “I promise to pay B or order Taka 500.”
(b) “I acknowledge myself to be indebted to B in Taka 1,000 to
be paid on demand, for value received.”
(c) “Mr. B, I O U Taka 1,000.”
(d) “I promise to pay B Taka 500 and all other sums which shall
be due to him.”
(e) “I promise to pay B Taka 500, first deducting thereout any
money which he may owe me.”
(f) “I promise to pay B Taka 500 seven days after my marriage
with C.”
(g) “I promise to pay B Taka 500 on D's death, provided D leaves
me enough to pay that sum.”
 Promissory Note
Examples:
Mr. A signs instruments in the following terms:
(a) “I promise to pay B or order Taka 500.”
(b) “I acknowledge myself to be indebted to B in Taka
1,000 to be paid on demand, for value received.”
 Bill of Exchange
• Bill of exchange: 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 order
of, a certain person or to the bearer of
the instrument.
Bill of Exchange
 Bill of Exchange

Kinds of Bill of Exchange

• Inland and Foreign Bills
• Time and Demand Bills
• Trade Bills and Accommodation Bills
• Clean Bills and Documentary Bills
 Cheque
A cheque is
• A bill of exchange drawn on a specified banker
and
• not expressed to be payable otherwise than on
demand
 Parties of Negotiable Instrument

• The maker of a bill of exchange or cheque is called the

“drawer;” the person thereby directed to pay is called
the “drawee.”
• When in the bill or in any endorsement thereon the
name of any person is given in additional to the
drawee to be resorted to in case of need, such person
is called a “drawee in case of need.”
• After the drawee of a bill has signed his assent upon
the bill, or, if there are more parts thereof than one,
upon one of such parts, and delivered the same, or
given notice of such signing to the holder or to some
person on his behalf, he is called the “acceptor”.
 Parties of Negotiable Instrument

• When a bill of exchange has been noted or protested

for non-acceptance or for better security, and any
person accepts it for honour of the drawer or of any
one of the endorsers’, such person is called an
“acceptor for honour.”
• The person named in the instrument, to whom the
money is by the instrument directed to be paid, is
called the “payee”.
Features of Promissory note, Bill of Exchange, Cheque
Feature Explanation Example
A written cheque or
1. Instrument in Writing Must be written
promissory note
2. Unconditional “I promise to pay Tk.
No conditions attached
Order/Promise 5,000”
Person or bank ordered to
3. Drawee Bank in a cheque
pay
3. Amount Certain Must specify fixed amount Tk. 10,000
3. Payable to Order or Must specify “order” or
“Pay Rahim or order”
Bearer “bearer”
4. Payee Certain Payee must be identifiable Rahim
Can pay two or more
5. More than One Payee “Pay Rahim and Karim”
persons
6. Time of Payment Fixed or determinable “Pay after 3 months”
Drawer/promisor must
7. Signature Signature on cheque
sign
Must be delivered to
8. Delivery BoE handed to Karim
payee
 Concepts

• Endorsement
• Order Instrument
• Bearer Instrument
 Holder
Holder:
Holder of a promissory note, bill of exchange or
cheque means
• any person entitles in his own name
• to the possession thereof and
• to receive or recover the amount due thereon
• from the parties thereto.

[Where the note, bill or cheque is lost and not found again, or is
destroyed, the person in possession of it or the bearer thereof
at the time of such loss or destruction shall be deemed to
continue to be its holder.]
 Holder
Conditions for being the holder:

1. Entitled to the possession of the

instrument in his own name and
under a legal title.

2. Entitled to receive or recover the

amount in his own name
 Holder
Conditions for being the holder:
• Entitled to the possession of the instrument in his own name
and under a legal title.
• actual possession of the instrument is not essential (must
have legal right to possess)
• meaning the title to the instrument is acquired lawfully. (×
theft, fraud, forgery etc.)
• Entitled to receive or recover the amount in his own name
• Essential that the name of the holder appears on the
document as its
• payee or endorsee if order instrument
• bearer instrument ≠ essential
• At loss or destruction = current holder will continue to be
regarded as holder.
• Finder does not become its holder
 Holder in due course
• The person who acquires the negotiable instrument bona
fide and for value, the right to possess good title to the
instrument is called holder in due course. (HDC)
• Holder in due course means
o any person who, for consideration became the possessor
of a promissory note, bill of exchange or cheque
o if payable to bearer or the payee or endorsee thereof if
payable to order
o before the amount mentioned in it became payable,
o and without having sufficient cause to believe that defect
existed in the title of the person from whom he derived
his title
 HOLDER IN DUE COURSE
Five conditions for being the holder in due course:

1. Must have possession of instrument

o order instrument = payee or endorsee
o name must appear on the instrument

2. Regular and complete in all respects

o Incomplete document holder ≠ HDC
o Alterations = confirmed by signature
o Properly delivered
o Order cheque = endorsement needed
o Post-dated cheque ≠ irregular
3. Must be obtained for valuable consideration (full value)
o Cheque received as gift ≠ HDC
o Consideration must be legal and adequate (× gamble)
o Value of consideration falls short = HDC up to extent of that
value.
 HOLDER IN DUE COURSE

4. Without knowledge about defective title

o Title is defective if acquired by unfair means
o HDC should not have notice of any defect
o HDC should exercise great care and take all necessary
precautions to find out defect
o Showing negligence ≠ HDC

5. Obtained before the amount became payable

o Applicable to documents payable otherwise than on
demand
o Not applicable to cheques (payable on demand)
 HOLDER & HOLDER IN DUE COURSE
Every holder in due course must be a holder but every
holder is not a holder in due course.
HOLDER HDC

[Link] Not essential Essential (Gift vs. School fee)

[Link] No time limit Before amount became
payable
3. Title in case of No good title Good title (without
defect knowledge of defect)
4. Recovery Maker and transferor All prior parties
5. Presumption Not all are HDC All are holder
6. Privileges No such facilities Special privileges
 Holder & Holder in Due Course
Rights of a holder

The holder of a negotiable instruments enjoys the

following rights:
• Claim payment and sue in his name
• Convert open endorsement into full endorsement
• Convert blank cheque into full crossing
o generally or specifically
o using words NOT NEGOTIABLE
• Negotiate a cheque to a third party (if not
prohibited)
• Obtain duplicate copy of a lost cheque
 Privileges of a Holder in Due Course
The HDC of a negotiable instrument enjoys the following
privileges:
1. Better title free from defects.
2. Liability of prior parties.
3. Right in case of incomplete instrument.
4. Right in case of fictitious bills.
5. Right if obtained by unlawful means or consideration.
6. Estoppel against denying original validity of the
instrument.
7. Estoppel against denying capacity of payee to
endorse.
8. Estoppel against denying signature or capacity of
prior party.
 Privileges of a Holder in Due Course
Possesses better title free from defects
Better title than that of his transferor or any previous parties
Can give subsequent parties the good title he possesses
Liability of prior parties to holder in due course
Can recover the amount from any or all previous parties.
Right of the HDC in case of incomplete instrument
An original incomplete instrument can be completed by
subsequent transferor for a sum greater than what was the
intention of the maker.
The right of an HDC to recover the money of the instrument is
not at all affected
Abrar buys goods of BDT 4250 and gives Bodrul a blank
cheque; Bodrul writes BDT nd endorses it to Charles who
becomes HDC. Charles is ent5000 aitled to get BDT 5000 from
Bodrul.
 Privileges of a Holder in Due Course
Right in case of fictitious bills
If drawn on behalf of a fictitious person the acceptor is not relieved of
his liability to the HDC, because of this fictitious name.
However, the HDC must prove:
Document bears the signature of the drawer (same handwriting)
Seems to be made by the drawer
Abrar sells goods of BDT 4250 and draws a bill on Bodrul but signs in
the fictitious name of Abul; The bill is payable on the order of Abul;
Abrar endorses it to Charles who becomes HDC. Charles is entitled to
get BDT 4250 from Bodrul who cannot deny payment.
The signature of Abul as drawer and endorser must match.
(handwriting)
Right if obtained by unlawful means or consideration
A person liable cannot defend himself against a HDC on ground of
fraud, lost, offence or unlawful consideration.
Abrar → loses gamble → bill → Bodrul → Charles (H) → Bodrul is liable
+ cannot deny
 Privileges of a Holder in Due Course
Estoppel against denying original validity of the instrument
• No maker of a promissory note
• No drawer of a bill of exchange/cheque
• No acceptor of a BoE for the honor of the drawer
• be permitted to deny the validity of the instrument as
originally made or drawn.
Estoppel against denying capacity of payee to endorse
• No maker of a promissory note
• No acceptor of a BoE to order
• be permitted to deny the payees capacity at the date of
note or bill
Estoppel against denying signature or capacity of prior party
• No endorser of a negotiable instrument shall be permitted
to deny
• Abrar → endorse → Babu (minor) → Bodrul → Charles
(HDC) → Bodrul cannot deny
 Payment in Due Course

“Payment in due course” means payment in

accordance with the apparent tenor of the
instrument in good faith and without negligence
to any person in possession thereof under
circumstances which do not afford a reasonable
ground for believing that he is not entitled to
receive payment of the amount therein
mentioned.
 Payment in Due Course
• The payment should be done to the right
person by the paying banker or the acceptor of
the bill.
• Otherwise, paying banker / acceptor =
responsible
• The Negotiable Instrument Act provides
protection to the paying banker or the drawee
of a bill provided the payment is made as
required in the Act; called payment in due
course.
 Payment in Due Course
The essential features of a payment in due
course are as follows:

1. Payment should be made in accordance with the

apparent tenor of the instrument
• Cash or through clearing house or by a draft
• Banker making payment of post-dated cheque =
not considered as payment in due course because
it's against the true intention of the drawer
 Payment in Due Course
2. Payment should be made in good faith and without
negligence
• Made in good faith without negligence, fraudulent
• Banker suspects of fraud but does not check = not deemed
to be made in good faith.
• Per pro endorsement = bank must check if signatory has
proper authorization on behalf of payee
• Pay forged cheque = bank bears the burden.

3. Payment must be made to the person in possession of the

instrument
• Which do not arouse suspicion about his title to possess
the instrument and receive payment
• Payment must be made to the right person with proper
identification.
 Endorsements
• An instrument may be negotiated in any of the following
two ways:
▪ By Delivery
▪ By Endorsement and Delivery
• Definition of Endorsement: When the maker or holder of
a negotiable instrument signs the same, otherwise than as
such maker, for the purpose of negotiation, on the back or
face thereof or on a slip of paper annexed thereto or so
signs for the same purpose a stamped paper intended to
be completed as a negotiable instrument.
• Endorser and Endorsee
Requirements for a Valid Endorsement of Instruments

For a valid endorsement of instruments few points are

required, these are:
1. The endorsement of instruments should be on either
the back or front of the instrument.
2. The creator or holder of the instrument must execute
it.
3. The endorser must sign the endorsement correctly.
4. The endorsement should pertain to the entire
Negotiable Instrument.
5. The specific wording is not mandated for a valid
endorsement.
 Effects of Endorsement of Instruments

• Transfer of ownership in the instrument occurs

from the endorser to the endorsee.
• The endorsee acquires the privilege to engage
in further negotiations of the instrument.
• The endorsee gains the authority to initiate
legal action in their own name against all other
involved parties.
 Kinds or types of Endorsement

1. Endorsement in Blank: A negotiable instrument

that has been endorsed in blank becomes
payable to bearer, even if it was originally
payable to a specific person (“to order”).

In simple terms: if someone signs the back without

naming a new payee, anyone holding it can claim
the amount.
 Kinds or types of Endorsement
2. Endorsement in Full: Endorsement in full (also called
special endorsement) is when the endorser writes the
name of a specific person on the negotiable instrument
while signing it. For example: “Pay to Rahul —
(signature).”
• By naming a particular person, the endorser transfers
the right to receive payment only to that person. This
makes the instrument safer because it cannot be
claimed by anyone else except the named individual or
someone who legally gets it from them.
• In essence, endorsement in full clearly identifies the
next rightful holder and helps maintain a proper chain
of ownership.
 Kinds or types of Endorsement
3. Conditional Endorsement
• The endorser attaches a condition that must be
fulfilled before payment can be claimed.
• Example: “Pay X if he completes the project.”
• The liability and transfer depend on the fulfillment
of the stated condition.

4. Restrictive Endorsement
• This endorsement limits the further negotiation of
the instrument.
• Example: “Pay X only,” meaning X cannot transfer it
further.
• It assigns rights but restricts free transferability.
 Kinds or types of Endorsement
5. Endorsement ‘Sans Recourse’
• The endorser signs but denies liability in case the
instrument is dishonored.
• Example: “Pay X sans recourse,” meaning X cannot
hold the endorser responsible.
• It transfers title without creating endorser liability.

6. Facultative Endorsement
• The endorser waives some right or increases his
liability voluntarily.
• Example: “Notice of dishonor waived.”
• It provides additional protection to the holder by
relaxing certain legal requirements.
 Kinds or types of Endorsement
Type of Endorsement Definition / Key Feature Example Effect / Notes
Only signature, no payee Anyone holding it can claim
Endorsement in Blank named; becomes bearer “(Signature)” the amount; flexible but
instrument risky
Safer, only named person
Endorsement in Full Signature with specific “Pay Rahul —
can claim; maintains chain
(Special) payee named (Signature)”
of ownership
Liability and transfer
Conditional Payment depends on “Pay X if he completes depend on condition; used
Endorsement fulfillment of a condition the project” for performance-based
payments
Rights assigned but cannot
Limits further
Restrictive Endorsement “Pay X only” be transferred further;
negotiation
secure for specific recipient

Transfers title without

Sans Recourse Endorser denies liability
“Pay X sans recourse” endorser liability; used to
Endorsement in case of dishonour
transfer risk

Endorser voluntarily Provides extra protection

Facultative “Notice of dishonour
waives some rights or to holder; modifies
Endorsement waived”
increases liability obligations for security
 Dishonor of Negotiable Instruments
Dishonor by Non-Acceptance
• Occurs when the drawee refuses to accept the bill
• Also occurs when acceptance is qualified or conditional
• Applies only to bills of exchange
• Dishonor may arise if the drawee is incompetent or cannot be found

Dishonor by Non-Payment
• Occurs when the maker, acceptor, or drawee fails to pay at maturity
• Applies to promissory notes, bills of exchange, and cheques
• Dishonor arises when payment is refused or cannot be obtained
• Proper presentment for payment is essential
• Covered under Section 92 of the Negotiable Instruments Act
Thank You ☺