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Negotiable Instrument Act, 1881

Submitted to: Mansoor Ali Shahani

Negotiable means transferable.

The negotiation that goes on refers to the

transfer of the instrument between two

people, or from one bank to another or even

from one country to another.

Negotiable Instrument Act 1881

What is an instrument?

In the broadest sense, almost any agreed upon medium

of exchange could be considered a negotiable instrument.

In day to day banking, a negotiable instrument usually

refers to checks, drafts, bills of exchange, and some

types of promissory notes.

Definition and Meaning

•Be in writing

•Be signed by the maker or drawer

•Be an unconditional promise or order to pay

•State a fixed amount of money

•Be freely transferable from one to another person

•Be payable on demand or at a definite time

•Be payable to order or to bearer.

Nature of negotiable instrument

are:

Types of Negotiable

Instruments There are 3 main types of negotiable

instruments. They are as follows:

1. Promissory Notes

2. Bill of Exchange

3. Cheque

Promissory Notes

Section 4 of the Act defines, “A promissory note is

an instrument in writing (note being a bank-note

or a currency note) containing an unconditional

undertaking, signed by the maker, to pay a

certain sum of money to or to the order of a

certain person, or to the bearer of the

instruments.” An instrument to be a promissory

note must possess the following elements.

It must be in writing

It must understand promise or clear

understanding to pay

Promise to pay must be unconditional

Bill of Exchange Section 5 of the Act defines, “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”

(1) It must be in writing.

(2) It must be signed by the drawer.

(3) The drawer, drawee and payee must be certain.

(4) The sum payable must also be certain.

(5) It should be properly stamped.

(6) It must contain an express order to pay money and money alone.

Classification of Bills 1. Inland and foreign bills.

(2) Time and demand bills.

(3) Trade and accommodation bills.

Cheque Section 6 of the Act defines “A cheque is a bill of

exchange drawn on a specified banker, and not

expressed to be payable otherwise than on

demand”.

A cheque is bill of exchange with two more

qualifications, namely,

It is always drawn on a specified banker, and

It is always payable on demand

Distinction between Bills of Exchange and

Cheque

Dishonor of Cheque What is a cheque?

A cheque is one form of a bill of exchange.

However, all bills of exchange are not cheques. A

cheque is always drawn on a bank or a banker.

What do we mean by dishonor of cheque?

CASES Case number one: When any cheque, drawn by

a person for the discharge of any liability is

returned by the bank unpaid, because of

insufficiency of the amount of money, the cheque

is said to have been dishonored

Case number two: The cheque amount exceeds

the amount that can be paid by the bank under an

arrangement entered into between the bank and

the drawer of the cheque

Compensation payable in case of

dishonour.

Certain rules must be followed in case of dishonour

of promissory note, bill of exchange or cheque.

○The holder is entitled to the amount due upon the

instrument together with the expenses properly

incurred in presenting, noting and protesting it.

Continued…○ Receive the sum at current rate of exchange

between the twomplaces.

○An endorser who has paid the amount is entitled

to that amount plus interest on that amount at a

particular percent per annum until realization is

made.

○ A bill by the party dishonoured might be drawn

on the party liable to compensate him inclusive of

all taxes and expenses incurred during the whole

process.

Punishment on Bouncing of Cheques

A dishonored cheque is one, which when presented is

refused payment by the bank because of insufficient

funds or because it is not in order, dishonestly issuing

a cheque is a criminal offence in Pakistan.

489-F Dishonestly issuing a cheque: Whoever

dishonestly issues a cheque towards re-payment of a

loan or fulfillment of an obligation which is dishonored

on presentation shall be punishable with

imprisonment which may extend to three years and

with fine unless he can establish, for which the burden

of proof shall rest on him, that he had made

arrangements with his bank to ensure that the cheque

would be honored and that the bank was at fault in

not honoring the cheque.

Types of Cheque FraudThere are Four main types of cheque fraud:

Counterfeit – cheques not written or authorized by legitimate account holder.

Forged – Stolen cheque not signed by account holder.

Altered – an item that has been properly issued by the account holder but has been intercepted and the payee and/or the amount of the item have been altered.

Dishonestly issuing a cheque. (Section 489F of Pakistan Penal Code)– Whoever dishonestly issues a cheque towards re-payment of a loan or fulfillment of an obligation which is dishonored on presentation, shall be punishable with imprisonment which may extend to three years, or with fine, or with both.

Continued...

The offence under this section is cognizable by

police, non-bailable and compoundable.

“ Whoever dishonestly issues a cheque towards

re-payment of a finance or fulfillment of an

obligation which is dishonored on presentation,

shall be punishable with imprisonment which may

extend to one year, or with fine or with both,

unless he can establish, for which the burden of

proof shall rest on him, that he had made

arrangements with his bank to ensure that the

cheque would be honored and that the bank was

at fault in not honoring the cheque”.

And…

Issuance of cheque dishonestly is an offence

under the statute both civil and criminal remedies

could be availed simultaneously in such matters.

You can lodge First Information Report against

the signatory and at the same time can also file a

civil suit, there is no legal bar if criminal and civil

proceedings continue simultaneously. Before

lodging F.I.R. notice of dishonur of cheque should

also be given.

Case Study Case

By means of fall preference A has obtain from B a

cheque crossed “not negotiable” he took that

cheque to a bank (other than drawee bank) which

paid it. B sues the bank for conversion.

Has A committed any offence or irregularity.

Under the negotiable instrument act.

Is B entitled to get any relief?

How will you decide the case

Answer The given case is under the chapter of negotiable

instrument which means promissory notes, bills of exchange or cheque payable either to order or to bearer.

In this set case because of fall preference A obtain a cheque from B a crossed cheque saying not negotiable. He took the cheque to bank (collecting banker) which paid it. Here the not negotiable word came on crossing because of this crossing the cheque becomes made available to pay to bearer that is to anyone who holds it therefore here A did a lawful negotiation as he got a cheque and went to the collecting banker who collects the cross checks on behalf of their customer, Because of not negotiable tittle bank paying in good faith and without negligence to their regular customer to ensure the interest of customers.

Judgement Here the cheque is crossed with the the label “not

negotiable” which means the transferee cannot get a better title than that of transferor. It also means that it can be paid only to a certain person. A negotiable cheque is one which is made payable to bearer that is to anyone who “holds it. Here because of fall preference A has obtain a cheque because of that “not negotiable” cross cheque gives authority to receive the payment of check therefore A followed the rules and regulations covered under negotiable instrument hence A the did not committed any offence or irregularity under the Negotiation instrument.

Here because of fall preference A obtain a cheque from B with the cross cheque “not negotiable” because of this crossing the cheque becomes made available to pay to bearer that is to anyone who holds it. Hence here B will not get any relif as the transaction is lawful under the negotiable instrument act, 1881.

Thank You