BANKING LAWS PAKISTAN

NEGOTIABLE INSTRUMENTS
 Meaning of Negotiable
Instrument.
• Goods / services are bought or sold for
cash as well as on credit.
• Common practice of business people to to
use certain documents as means of
payment.
• Some of these documents are called
Negotiable Instruments

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NEGOTIABLE INSTRUMENTS.
• Negotiable means transferable.
• Instrument means document.
• Negotiable instruments are document for
making payments, the ownership of which
can be transferred from one person to
another many times before the final
payment is made.

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 DEFINITION.
• According to section-13 of the Negotiable
Instrument Act,1881, a Negotiable Instrument
means PROMISSORY NOTE, BILL OF
EXCHANGE or CHEQUE, payable either to
order or to bearer.
• NIA-1881 codifies the law relating to negotiable
instruments viz Bill of Exchange, Promissory
Note and Cheque.

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 Promissory Note,Section -4
• Promissory Note is an Instrument in
writing { not being a bank note or a
currency note }, containing an
unconditional undertaking, signed by
the maker to pay on demand or at a fixed
or determinable future time , a certain
sum of money only to, or to the order of a
certain person or to the bearer of the
instrument.

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 Salient features of P.Note
• Must be in writing duly signed by the maker and
properly stamped as per stamp Act.
• Must contain an undertaking or promise to pay
& not acknowledgement of indebtedness.
• Promise to pay not conditional.
• Maker and payee must be certain.
• Payable on demand or on future date.
• Promise to pay money only.
• Sum payable must be certain.

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 EXERCISE- Promissory Note
• Mr. A has signed the following instruments
, please identify the correct instruments.
• 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.
• Mr. B I.O.U Rs. 1,000/=

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 Exercise contd.
• 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.
• I promise to pay B Rs. 500/= seven days after
my marriage with C.
• I promise to pay B Rs. 500/= on D’s death,
provided D leaves me enough to pay that sum.
• I promise to pay B Rs. 500/= and to deliver to
him my black horse on 1st January next.

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 BILL OF EXCHANGE, Section
-5
• Bill of exchange is an instrument in
writing , containing an unconditional
order, signed by the maker , directing a
certain person to pay on demand or at a
fixed or determinable future time , a
certain sum of money only to ,or to the
order of a certain person, or to the bearer
of the instrument.

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 Salient features of Bill of
Exchange.
• B/E contains three parties.
• B/E must be in writing
• B/E must contain an order to pay.
• Order must be unconditional.
• Order must be to pay money only.
• The sum payable must be certain.
• The parties involved must be certain.
• Subject to stamp duty if drawn under usance.

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 Types of Bills of Exchange.
• Demand B/E- sight or DP collection.
• Usance B/E- term or DA collection.
• Noting & protesting of B/E if dishonored
on presentation or maturity.

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 CHEQUE- Section, 6
• Cheque is a Bill of Exchange drawn on a
specified banker and not expressed to be
payable otherwise than on demand.
• Parties in a cheque are,
• Drawer.
• Drawee.
• Payee.

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 Salient features of a Cheque.
• Cheque must be in writing and duly signed by
the drawer.
• It contains unconditional order.
• It is issued on a specified banker.
• Amount is always certain and mentioned in
figures & words.
• Payee is certain.
• Always payable on demand.
• Cheque must bear a date.

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 Distinction between Bill of
Exchange & Promissory Note.
• Promissory Note. • Bill of Exchange.
• Unconditional promise • Unconditional order.
• 2 parties maker & payee • 3 parties,drawer, drawee
• Made by the debtor. & payee.
• Liability of maker is • Drawn by the creditor
primary & absolute. • Liability of drawer is
secondary & conditional
if drawee fails to pay

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 Essentials of a valid cheque.
• The cheque must be payable on
demand. A cheque is payable on
demand when it is expressed to payable
on demand, or at sight or on presentation
or when no time for payment is
expressed.
• Cheque must be an order to pay money
and it must be for the payment of money
only.

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• The amount must be a sum certain not subject
to contingent or indefinites conditions. E.g. an
instrument for the sum of Rs. 1000/= and all
other sums which may be due, would not be a
valid cheque, since the sum payable is not
certain.
• A cheque must be payable to or to the order of
a specified person or bearer. Hence where the
cheque is not made payable to bearer, the
payee must be named or otherwise indicated
with reasonable certainty.

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• A cheque must be signed by the person
giving the order. If the order is not signed
by him, it is not a valid bill. Hence where
the signature of the drawer is forged or
where it is signed on behalf of the drawer
or by a person having no authority, it will
not be considered signed by the drawer.

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• The cheque must be in writing which include
print. Legally a cheque may be drawn in pencil
but in view of the ease with which alteration
could be made, a banker would be justified in
returning such a document.
• The cheque must be an order i.e. imperative in
terms and not a mere request.
• The cheque must be an unconditional order i.e.
the order to pay must not be subject to any
condition.

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 Distinction- Cheque & B/E
• Cheque • Bill of Exchange
• Drawn on a banker. • Can be drawn on any
• Payable on demand. body including banker.
• Can be crossed. • Payable on demand or
• after specified period.
Acceptance is not
required. • It can not be crossed.
• Not subject to stamp • Subject to stamp duty if
duty. usance.
• Acceptance is must in
case of usance.

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 Types of a Cheque.
• OPEN cheque.
• CROSSED cheque.
• BEARER cheque.
• ORDER cheque.

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 Sections dealing with Cheque
payment.
• Section -10 Payment in due course.
• Section -85 Cheque payable to order.
• Section 85 {1}protection against forged
endorsement to paying banker.
• Section 85 {2} payment of bearer cheque.
• Section 128 payment of a crossed
cheque.

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 Scrutiny of cheque.
• Cheques to be paid with the following conditions.
01-cheque should be drawn in proper form
02- the drawer has not stopped payment of cheque.
03- the banker has not received the notice of the
customer’s death.
04- customer has not been adjudicated as insolvent
by a competent court of law
05- the banker has not received the Garnishee
order against that account.

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 Open cheque presented on
counter.
• Drawn on the branch.
• Open or crossed.
• Serial Number–
01- any alteration in the printed number.
02-belongs to the series of current cheque
book of that customer, if not make sure
that cheque or cheque book previously
reported lost/ stolen ?

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 Scrutiny of cheque.
03- Do not persume that a new chequebook has been issued
without proper checking.
04- If from current series , see whether it is out of sequence?
Check serial number Any unusual gap ? Enquire.
05- Cheque serial number ,branch code , bank code {017}
are properly mentioned in the micro encoding of NIFT.
In most of the cheques ,serial number is printed by using ,
letterpress printing process as a result of which one can
feel depressed surface from front and embossed from
the back.

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 Scrutiny of Cheque.
• Date.
• Payee’s name.if cheque is payable to order then payee
must be named and if endorsed, endorsement in order.
• Amount. words and figures to match, in case of
discrepancy amount in words is legally payable but it is
the practice of the bankers to return unpaid.
• Sufficient balance, properly applicable and within the
limit if finance account.
• Account number ,correct and no evidence of
tempering.

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 Scrutiny of Cheque contd.
• Signature of the Drawer. cheque should
bear signature as per the specimen
provided by the drawer.
• In case of any variation, return the cheque
with remarks , SIGNATURE DIFFERS and
inform the drawer.

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 Scrutiny of Cheques.
• Material Alteration, all material alterations
render cheque void, so all the alterations
must bear full signature of the drawer in
authentication.
• Section 3 {f} Material Alteration is related
to promissory note , bill of exchange or
cheque includes an alteration of the date
,the sum payable, time of payment , the
place of payment.

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 Scrutiny of Cheque contd.
• Authenticating signature may be easily forged
from specimen already on the cheque, hence
assess nature of alteration.
• In case of more than one signatory , all should
authenticate alteration.
• May alter bearer to order without authentication
but order to bearer requires authentication.

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 Scrutiny contd.
• Mutilation
it may be an indication that the drawer
intended its destruction. In all such cases
the cheque should be returned with
remarks , cheque mutilated unless the
cheque is torn in error and bears the
signature of the collecting bank in respect
of mutilation.

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Crossing.

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 Crossing ,purpose and impact.
• Simple/ general crossing- Sec.123
• Special crossing. Sec. 124
• Account Payee’s only crossing.Sec.123A
• Not Negotiable Crossing-130
• Who can cross a cheque.
• Who can cancel the crossing.

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Cheque crossed generally. 123
• When a cheque bears across its face an
addition of the words- and company- or
any abbreviation thereof , between two
parallel transverse lines or of two parallel
transverse lines simply, either with or
without the words ,not negotiable that
addition shall be deemed a crossing and
the cheque shall be deemed to be
crossed generally. NIA-Sec. 123.

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 NIA -123-A
• Where a cheque crossed generally bears
across its face an addition of the
words ,account payee, between the two
parallel transverse lines constituting the
general crossing , the cheque besides
being crossed generally is said to be
crossed ACCOUNT PAYEE,

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 Account payee crossing.
• It shall cease to be negotiable.
• It shall be the duty of the banker
collecting payment of the cheque to
credit the proceeds thereof only to the
account of the payee named in the
cheque.

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 Cheque crossed specially-124.
• Where a cheque bears across its face an
addition of the name of a banker, either
with or without the words , not negotiable,
that addition shall be deemed to be
crossed specially and to be crossed to
that banker. NIA-124

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 Not negotiable crossing.130
• A person taking a cheque crossed
generally or specially bearing in either
case the words , not negotiable shall
not have and shall not be capable of
giving better title to the cheque than that
which the person from whom he took it
had. NIA- 130.

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 Negotiation Section-14
• WHEN A PROMISSORY NOTE,BILL OF
EXCHANGE OR CHEQUE IS
TRANSFERRED TO ANY PERSON, SO
AS TO CONSTITUTE THAT PERSON
THE HOLDER, THE INSTRUMENT IS
SAID TO BE NEGOTIATED.

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 Section 14 contd.
• Negotiation means the transfer of an
instrument in such a form that the
transferee becomes a legal holder of it.
• If the instrument is payable to order it is
negotiated by endorsement and delivery, if
payable to bearer it is negotiated by mere
delivery.

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 When cheque ceases to be
negotiable.
• When it contains words prohibiting the transfer or
indicates the intention that it is not transferable.
{section-13}
• When crossed ,Account Payee’s only {section -123-A}
• When it contains restrictive endorsement {section-50}
• When it is overdue {section 21-A}
• When it has been previously dishonored {section-59}
• When an order cheque bears forged endorsement
{section -29B}

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 Difference between ‘Defective
Title’ (Section 58) and ‘No Title’
Section 29 B
Defective Title Section 58
• A person is said to have the defective title
if he has found a cheque lost by some one
else, or has obtained a cheque or draft by
means of an offence or a fraud for some
unlawful consideration.

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 No Title Section 29-B
• Whereas a person is said to have ‘no title’
when he is in possession of a cheques or
draft on which the drawer’s or endorser’s
signature has been forged. For a forged or
unauthorized endorsement is wholly
inoperative and no one can get any rights
through or under a forged signature.

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 Defective / No titles
• The important distinction between
defective title and no title is that the former
can be cured through the process of
negotiation i.e. where an innocent
transferee honestly takes a cheques or
draft under strict conditions such a
transferee gets paramount rights and is
known as holder in due course.

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• Where as forgery breaks the golden chain
of negotiation and where the drawer’s
signature is forged or an endorsement
on an order cheque is forged, the
possessor has no rights at all on the
instrument.

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Holder in due course. Section-9
• Holder in due course means any person
who for consideration becomes the
possessor of a promissory note, bill of
exchange or cheque if payable to bearer
or the payee or endorser thereof, if
payable to order, before it becomes
overdue without notice that the title of the
person from whom he derived his own
title was defective.

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 payment in due course
section-10
• 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.

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 Check List for Holder in Due
Course.
• Examine the instrument to ensure that it is in
negotiable form I,e. it does not contain words
prohibiting transfer or indicating the intention
that it is not transferable.
• Not crossed , Account Payee.
• Not restrictively endorsed.
• Not over due / stale.
• No evidence of previous dishonor.
• Not tainted by forgery.

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 The transferee to examine
following conditions.
• to accept the instrument in good faith.
• For value/ consideration.
• Without notice of any defect in the title of
the transferor.

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 Holder in Due Course.
• The highest type of holder is the holder in due
course., who has paramount right over a bill. To
qualify as holder in due course , the holder must
take possession of a cheque under strict
conditions:
• The cheque must be complete and regular on
the face of it. Thus a person when taking an
‘order’ cheque from a payee without the payee’s
endorsement could not be holder in due course.

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 Contd.
• The cheque when negotiated must not be
overdue. Which means it must not have been in
circulation for an unreasonable length of time.
• The holder must take it without notice of
previous dishonor, if any.
• He must be a holder for some consideration, i.e.
he must give value for the instrument.

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 Contd.
• A holder in due course must take a
cheque without notice of any defect in
the title of the person from whom he took
it.
• It must be noticed that in case the
instrument is tainted with forgery, there
cannot be holder in due course of such
an instrument ( 29 B )

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 Contd.
• The holder in due course has first of all the usual
rights of holder as mentioned in section 57 B:
• To receive payment in due course.
• To negotiate the instrument further if he so
desires, unless further negotiation is restricted.
• To sue in his own name to recover payment, if
the instrument is dishonored.
• In addition, he acquires the following rights as
mentioned in section 53 A

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 Contd.

• He holds the instrument free from any

defect of title of previous parties and free
from any defenses available to the prior
parties amongst themselves.
• He may enforce payment of the full
amount of the instrument against all the
parties liable thereon.

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 ENDORSEMENT. Section- 15.
• 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 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, he is said
to endorse the same and is called the endorser.

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 Essentials of a valid
endorsement
• It must be on the instrument ,{ back or face } or
on allonge.
• It must be made by the drawer, payee or
endorsee.
• It must be signed.
• It must contain mere singatures or with
instructions.
• It must be completed by delivery of the
instrument.

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 Contd.
• The Endorser:
• The payee when he negotiates an order
cheque becomes the endorser.
• Duties & Responsibilities:
• He undertakes that if the cheque is dishonored
and he is given notice of dishonor, he will
compensate the holder or subsequent
endorsees who is compelled to pay.

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 Rights of an Endorser

• He has a right to expect that it will be presented

within reasonable time and if dishonored, notice
of dishonor will be given to him failing which he
will be discharge of his liability to the holder.
• If compelled to compensate the holder, he has
the right to recover from the drawer

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 Types of endorsement.
• Blank or general.
• Full or special.
• Restrictive.
• Conditional.
• Sans recourse
• Partial.
• Facultative.

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