CLASS NOTES: NEGOTIABLE INSTRUMENTS
1. Definition of Negotiable Instruments
A negotiable instrument is a written document that promises or orders the payment of a fixed
amount of money, either on demand or at a future date, and is transferable by endorsement or
delivery, allowing the transferee to claim the amount in their own name.
Key characteristics:
Must be in writing
Must contain an unconditional promise or order to pay
Must be signed by the maker or drawer
Must be payable on demand or at a future date
Must be payable to order or bearer
2. Types of Negotiable Instruments
There are three main types:
a) Promissory Note
A written promise by one party (maker) to pay a certain sum of money to another (payee) or
bearer either on demand or at a future date.
b) Bill of Exchange
A written order by one party (drawer) to another party (drawee) to pay a fixed amount to a
third party (payee) on demand or at a fixed date.
c) Cheque
A special type of bill of exchange drawn on a bank, payable on demand.
3. Types of Cheques
a) Bearer Cheque
Payable to the person holding (bearing) the cheque.
Transferable by simple delivery.
b) Order Cheque
Payable to a specific person or order.
Requires endorsement for transfer.
c) Crossed Cheque
Cannot be encashed over the counter.
Must be deposited into a bank account.
Two types:
o General Crossing (e.g., two parallel lines)
o Special Crossing (bank name between the lines)
d) Post-Dated Cheque
Dated for a future day.
Cannot be cashed before the specified date.
e) Stale Cheque
Presented after its validity period (usually 6 months from the date of issue).
f) Open Cheque (Uncrossed Cheque)
Can be cashed over the counter.
g) Blank Cheque
Signed by the drawer with no specified amount; amount to be filled in later.
4. Parties to a Cheque
1. Drawer
o The person who writes the cheque (account holder).
o Orders the bank to pay a specified sum.
2. Drawee
o The bank upon which the cheque is drawn.
o Pays the specified amount to the payee.
3. Payee
o The person to whom the cheque is payable.
o Can also be the drawer (self-cheque).
Note: In some cases, the drawer and payee can be the same (e.g., "Pay myself").
5. Reasons That Can Lead to the Dishonour of a Cheque
A cheque is dishonoured when the bank refuses to make payment upon presentation. Common
reasons include:
a) Insufficient Funds
The account lacks enough money to cover the cheque.
b) Signature Mismatch
The drawer’s signature differs from the bank’s records.
c) Stale Cheque
Cheque presented after 6 months from the issue date.
d) Post-Dated Cheque Presented Early
Presented before the date written on the cheque.
e) Material Alteration
Changes made to the cheque (e.g., date or amount) without authentication.
f) Account Closed
The drawer has closed the bank account.
g) Stop Payment Instruction
Drawer instructs the bank not to honour the cheque.
h) Banking Irregularities
Errors like missing signature, damaged cheque, or overwriting.
i) Forgery or Fraud
If the cheque is forged or suspected to be fraudulent