Negotiable

Instruments
Act -1981
The law relating to Promissory note, Bill of Exchange and Cheque is
called the negotiable instruments. It comes to force on March 1st, 1982,
and applicable to extent of whole Pakistan.

According to Section 13(1) promissory note means the bill of exchange,

promissory note and cheque , in other words it is a piece of paper
which entitles a person to the sum of money mentioned in it and which
is freely transferable from one to another person.
Concept of Negotiable
Instruments
 "Negotiable" means something that can be transferred by
delivery, while an "instrument" refers to a written document that
establishes a right for a person.

 Therefore, a "negotiable instrument" is a written document that

creates a right in favor of someone and can be freely transferred
by delivery.
 Essentially, a negotiable instrument is a paper that entitles its
holder to a specific amount of money and can be passed from
one person to another through delivery or endorsement and
delivery.
1-Free Transferability or Easy Negotiability

A negotiable instrument can be transferred freely from one person to another without any formalities.
Ownership rights in these instruments pass either through endorsement and delivery (if payable to order)
or simply by delivery (if payable to bearer), with no additional proof of transfer required.

[Link]'s Title is Free from Defects

A person who acquires a negotiable instrument in good faith and for value obtains it free from any defects
in title. The holder in due course is not affected by any defects in the title of the transferor or any previous party.
[Link]'s Right to Sue Without Notifying the Debtor

 A bill, note, or cheque signifies a debt, known as an “actionable claim,” granting

the
creditor the right to recover the owed amount from the debtor.
 The creditor can either collect this amount personally or transfer the right to
another
individual.
 When the right is transferred via a negotiable instrument, the transferee can
sue in their own name if the instrument is dishonored, without notifying the
debtor of the transfer.
 However, for the transfer or assignment of a regular “actionable claim” (such as
a book debt recorded in the creditor’s account book), the Transfer of Property
Act requires the transferee to notify the debtor to have the right to sue in their
own name.
4. Presumptions:

Certain presumptions apply universally to all negotiable instruments,

Consideration: Every negotiable instrument is presumed to have been made, drawn, accepted,
endorsed, or transferred for consideration.

Date: Any negotiable instrument with a date is presumed to have been made or drawn on that date.

Time of Acceptance: Every bill of exchange is presumed to have been accepted within a reasonable time
after its date and before its maturity.

Transfer: Every transfer of a negotiable instrument is presumed to have occurred before its maturity.
Negotiable instruments are classified into two categories:

• Those recognized by law, such as bills of exchange, cheques, and promissory notes. •

Those recognized by trade customs, including banknotes, exchequer bills, share warrants, bearer debentures,
dividend warrants, and share certificates.
Promissory
Note
Definition:
As per Section 4, a promissory
note is a written instrument
(excluding bank-notes or currency-
notes) that contains an
unconditional promise, signed by
the maker, to pay a specific
amount of money either to a
designated person, their order, or
to the bearer of the note.
 Parties Involved in Promissory
Note
Two main parties are involved in a promissory note:

[Link] or Drawer:

This is the individual who creates the note and commits to paying
the specified amount.

[Link]:

This is the person to whom the payment is made.

Essentials of Promissory Note
[Link] must be in writing:

• A promissory note has to be in writing.

• An oral promise to pay does not become a promissory note.
• The writing may be on any paper or book.

• Illustrations: A signs the instruments in the following terms:

▪ “I promise to pay B or order Rs. 500”
▪ “I acknowledge myself to be indebted to B in Rs. 1, 000 to be paid on demand,
for value received”

Both the above instruments are valid promissory notes.

[Link] must contain a promise or undertaking to pay:

• There must be a promise or an undertaking to pay

• The undertaking to pay may be gathered either from express words or by necessary implication
• A mere acknowledgement of indebtedness is not a promissory note, although it is valid as an
agreement and may be sued upon as such.

• Illustrations: A signs the instruments in the following terms:

▪“Mr. B I owe you Rs. 1,000”

▪“I am liable to pay to B Rs. 500”

The above instruments are not promissory notes as there is no undertaking or promise to pay.
There is only an acknowledgement of indebtedness.

• Where A signs the instrument in the following terms:

▪“I acknowledge myself to be indebted to B in Rs. 1, 000, to be paid on demand, for value received,”
there is a valid promissory note
[Link] promise to pay must be unconditional:
• A promissory note must contain an unconditional promise to pay
• The promise to pay must not depend upon the happening of some uncertain event,
i.e., a contingency or the fulfillment of a condition

• Illustrations: A signs the instruments in the following terms:

▪ “I promise to pay B Rs. 500 seven days after my marriage with C”
▪ “I promise to pay B Rs. 500 as soon as I can”

• The above instruments are not valid promissory notes as the payment is made depending upon
the happening of an uncertain event which may never happen and as a result the sum may never
become payable.

[Link] must be signed by the maker:

• It is imperative that the promissory note should be duly authenticated by the ‘signature’ of the maker
• ‘Signature’ means the writing or otherwise affixing a person’s name or a mark to represent his name,
by himself or by his authority with the intention of authenticating a document
[Link] maker must be a certain person:

The instrument must itself indicate with certainty who is the person or are the persons engaging
himself or themselves to pay
Alternative promisors are not permitted in law because of the general
rule that where liability lies no ambiguity must lie.

[Link] payee must be certain:

Like the maker the payee of a pronote must also be certain on the face of the instrument
A note in favour of fictitious person is illegal and void
A pronote mad epayable to the maker himself is a nullity, the reason being the same person
is both the promisor and the promisee
[Link] sum payable must be certain:

For a valid pronote it is also essential that the sum of money promised to be payable
must be certain and definite.
The amount payable must not be capable of contingent additions or subtractions.

Illustrations:
A signs the instruments in the following terms:

I promise to pay B Rs. 500 and all other sums which shall be due to him.
I promise to pay B Rs. 500, first deducting thereout any money which he may owe me.

The above instruments are invalid as promissory notes because the exact amount to be paid by A is not certain

[Link] amount payable must be in legal tender money

A document containing a promise to pay a certain amount of foreign money or to deliver a certain quantity of
goods is not a pronote.
 Bill of Exchange
•Definition:

•Negotiable Instruments Act defines a Bill of Exchange as follows:

• "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 the order of, a certain person or
to the bearer of the instrument.“

•Illustration:
•Mr. X purchases goods from Mr. Y for Rs. 1000/-
•Mr. Y buys goods from Mr. S for Rs. 1000/-
•Then Mr. Y may order Mr. X to pay Rs. 1000/- to Mr. S which will be nothing but a bill of exchange.
Specimen
of Bill
exchange
Parties involved in Bill of
Exchange
There may be three parties:

i) Drawer

ii) Drawee

iii) Payee.
 Essentials of Bill of Exchange
1. It must be in writing
2. It must contain an order to pay. A mere request to pay on account, will not amount to an order
3. The order to pay must be unconditional
4. It must be signed by the drawer
5. The drawer, drawee and payee must be certain.
A bill cannot be drawn on two or more drawees but may be made payable in the alternative
to one of two or more payees.
6. The sum payable must be certain
[Link] bill must contain an order to pay money only
[Link] must comply with the formalities as regards date, consideration, stamps, etc
Cheque

A cheque is the means by which a person who has fund in the hand of a bank withdraws
the same or some part of it.

A cheque is a kind of bill of exchange, but it has additional qualification namely-

1- it is always drawn on a specified banker and

2-it is always payable on demand without any days of grace.

Negotiation
One of the essentials feature of a negotiable instrument is its transferability.
A negotiable instrument may be transferred from one person to another in either
of the followings way-

1-By negotiation

2-By assignment
Negotiation
The transfer of an instrument by one party to another so as to constitute the transferee a holder
is called Negotiation.

Negotiation means as the process by which a third party is constituted the holder
of the instrument so as to entitle him to the possession of the same and to receive
the amount due thereon in his own name.

Modes of Negotiation

•By delivery
•Ex-A the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep it for B.
The instrument has negotiated.
•By endorsement
 Assignment
When a holder of a bill note or cheque transfer the same to another, he in fact gives his right to
receive the payment of the instrument to the transferee.

Difference between Assignment and Negotiation

•Mode of transfer:
The transfer by negotiation requires only delivery with or without endorsement
of a bearer or order instrument. Whereas the transfer by assignment requires a separate written
document such as transfer deed signed by the transferor.

•Notice of transfer:
Not required in negotiation

•Consideration:
Consideration must be proved in assignee.

•Title-
•Right to sue
 Holder and Holder in Due
Course
Holder means any person entitled in his own name to the possession a promissory note bill of exchange
or cheque and to recover or receive the amount due thereon from the parties thereon. A holder must
therefore have the possession of the instrument and also the right to recover the money in his own name.

“Holder in due course means any person who for consideration became the possessor of a promissory note,
bill of exchange or cheque, if payable to the bearer or the payee or indorsee thereof, if payable to the order
before the amount mentioned in it became payable, and without having sufficient cause to believe that any
defect existed in the title of the person from whom he derived his title.”
 Capacity of Minor :

Not having the power to contract but he may become promise.

Discharge

 “Discharge means release from obligation”.

 By Payment
 By express waiver
 By cancellation
 By material alteration or lapse of time.

Dishonour

 It may be by non acceptance or non payment

 A bill of exchange can be dishonored by non acceptance in the following ways:
 Does not accept within 48 hours from the time of presentment
 Drawee is a fictitious person
 Drawee has become insolvent or is dead
 Drawee is incompetent