Negotiable Instruments6

Negotiable Negotiable InstrumentsInstruments

What is Negotiable What is Negotiable Instruments?Instruments?

• The term negotiable instruments means a written document which entitles a person to a sum of money.

• A negotiable instruments is transferable by delivery or by endorsement and delivery.

• The transfer entitles a person to the sum of money mentioned therein.

• “Thus the negotiable instrument is a document which is legally recognized by custom of trade or law, transferable by delivery or by delivery and endorsement”.

How many negotiable How many negotiable instruments we have?instruments we have?

• We have three main negotiable instruments.

• 1. Promissory note • 2. Bill of Exchange • 3. Check

What is Negotiation?What is Negotiation?• When a Promissory note, Bill of

exchange or check is transferred to any person, to make that person the owner of the negotiable instruments, then the instrument is said to be negotiated.

Characteristics of the Characteristics of the NegotiabilityNegotiability

• An instrument is negotiable by virtue of the following features,

• 1. Transferable by delivery • 2. Entitled to receive money• 3. Filing a suit


•1. Transferable by delivery:• The instrument is transferable by delivery

or by endorsement and delivery.

•2. Entitled to receive money:

• The legal holder of the instrument is entitled to receive money mentioned in it.


•3. Filing a suit:• The holder of a negotiable

instrument has the right to file a suit in his name for payment from all or any of the concerned parties.

What is Promissory note?What is Promissory note?• A Promissory note is the simplest and

earliest kind of credit instrument.• “It is an unconditional written

promise by one person to another in which the maker (payer) promise to pay on demand or at a fixed or determinable date in the future, a stated sum of money to or to the order of a specified person or the bearer of the instrument”.

Essential feature of the Essential feature of the Promissory notePromissory note

• The following are the essential features of a Promissory note,

• 1. The promise to pay must be in writing.• 2. The promise to pay must be signed by the

maker or payer.• 3. The promise to pay must be unconditional.• An instrument containing a promise to pay a sum

after deducting necessary expenses or imposing any other condition is not a promissory note.

• I promise to pay asad or order $500 is promissory note.

• I promise to pay asad $500 seven days after yasir arrival to Kabul.


• 4. The amount to be paid must be definite in terms of money.

• 5. The Promissory note must be payable on demand or at a fixed or determinable future date.

• 6. The Promissory note must be payable to a definite person. The Payee must be certain.

• 7. It must bear stamp at the rate prescribed by law of a country.

• 8. There are two parties a promissory note.• (i) Maker • (ii) Payee


• (i) Maker:• He is the person who draws and signs the

Promissory note and promise to pay the amount.• In the specimen of Promissory note Rafiq Ahmad

is the maker.

• (ii) Payee:• He is the person to whom the amount of the

promissory note is payable.• In specimen Akram Khan is promised to payment.

He is thus Payee.

Specimen of a Promissory Specimen of a Promissory NoteNote

• $5,000 Kabul May 10, 2008 Stamp Sixty days after for value received, I

promise to pay, Akram khan or order the sum of Dollar 5,000 only.

Akram Khan Shehre new Rafiq Ahmad Kabul Signature

Bill of ExchangeBill of Exchange• A bill of exchange is playing an

important part in the commercial life of the country. The need for it arises where the buyer of goods needs a period of credit before paying it.

• It is drawn by the creditors and is accepted by debtor.

What is Bill of Exchange?What is Bill of Exchange?• According to Muller, A bill of

exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time, a sum certain in money to or to the order of a certain person or to bearer.

Features or Features or Characteristics of the billCharacteristics of the bill• The main characteristics or features

of a bill of exchange are as follow:• A Bill of Exchange must be in writing.• It must contain in order to pay.• The order to pay must be unconditional. If

it is subject to the happening of some events, it will not be a bill of exchange.

• It must be signed by the drawer and properly stamped.

Features or Features or Characteristics of the billCharacteristics of the bill• The parties to the bill, the drawer, the

drawee, and payee must be certain and definite individuals.

• The amount payable must be certain.• The payment must be made in money.• The bill payable may be either on demand

or after a specified period.• The bill may be payable either to the

bearer or to the order of payee.

Parties to the Bill of Parties to the Bill of ExchangeExchange

• According to the definition there are three parties involved to a bill of exchange.– Drawer– Drawee– Payee


• (i) Drawer:• The drawer is the person who draws the

bill. He is the person who orders to pay a certain sum of money (In the specimen of the bill Hamid is drawer of the bill)

• (ii) Drawee:• He is the person on whom the bill is

drawn. He is the person who is ordered to make payment of the bill (In the specimen of bill Rashid Ahmad is the drawee of bill).


•(iii) Payee:• He is the person to whom money is

directed to be paid. He gets the payments of the bill. (In the specimen of bill Kamal Akmal is the Payee of bill).

Specimen of a Bill of Specimen of a Bill of ExchangeExchange

• $8,000 Kabul May 17, 2008 Stamp Two months after date pay to Mr Kamal

or his order the sum of Dollar 8,000 only, for value received.

To Rashid Ahmad Jalal Abad Hamid Zafar Afghanistan Signature

CHECKCHECK•What is a Check?• A check may be defined as written order of

a depositor upon a bank to pay to or to the order of a designated party or to the bearer, a specified sum of money on demand.

• The person who draws the check is called drawer, the bank on which the check is drawn is called drawee, and the person to whom payment is to be made is called Payee.

Features or Characteristics Features or Characteristics of the Checkof the Check

• The main characteristics or features of a Check are as follow:– It is an order of the customer without

condition.– It is drawn upon a certain bank in writing.– The bank has always to pay it on demand.– It is payable to a certain person or to his

nominee or to the bearer of the instrument.

Types of CheckTypes of Check• How many types of checks we

have?• We have two types of checks;

– Open Check– Crossed check

What is open check?What is open check?

•Open Check:• Open checks are those checks which

are paid across the counter of the bank.

• Open checks has further two types– Bearer check– Order check

Types of Open checkTypes of Open check– Bearer check:– If a drawer orders the bank to pay a stated sum of

money to the bearer, it is called a bearer check.– Any person who lawfully possesses a bearer check is

entitled to receive payment of that check.

– Order check:– If the check is to the order of a person in whose favour

the check is drawn, it is called order check.– The order check is paid by the bank only when the bank

is satisfied about the identity of the payee.

Crossed checkCrossed check• What is Crossed check?• If a check is crossed by drawing two

parallel lines across the face of the check, with or with out the words & Co or A/c payee only, it is called a Crossed check.

• The crossed check cannot be paid on the counter of the drawee bank. It will be deposited in the account of a person in whose order or favor it is drawn.

Kinds of CrossingKinds of Crossing• How many kinds of crossing we

have?• Legally there are two kinds of

crossing;– General crossing– Special crossing

Kinds of CrossingKinds of Crossing•General crossing:• The drawing up of two parallel lines on the

face of the check at the top left hand corner with or without the words & Co not negotiable or Account payee only is known as a General Crossing.

• The effect of general crossing is that the crossed check cannot be paid at the counter of the bank.

• Its payment can only be deposited into the payee’s account only.

Kinds of CrossingKinds of Crossing

•Special crossing:• A check is deemed to be crossed

specially when it bears across its face the name of the banker either with or without the words not negotiable.

• In case of special crossing the payment can only be made to the bank named therein the check.

Objectives of CrossingObjectives of Crossing• The check is crossed to achieve the

following objectives;– It prevent the payment of the check to a

wrongful holder– It ensure safe payment to the concerned

receiver– It facilitate in tracing the recipient of the

payment if the check is wrongfully crossed– Further it is a guard against any cheating or

theft.

Negotiable Instruments6

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