Negotiable

Instruments

What is Negotiable
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

instruments we have?
We have three main negotiable
instruments.
1. Promissory note
2. Bill of Exchange
3. Check

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
Negotiability
An instrument is negotiable by virtue
of the following features,
1. Transferable by delivery
2. Entitled to receive money
3. Filing a suit

Characteristics of the
Negotiability
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.

Characteristics of the
Negotiability
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?

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

Promissory 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.

Essential feature of the

Promissory note
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

Essential feature of the

Promissory note
(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
Note

$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 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?

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
Characteristics 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
Characteristics 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

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

Parties to the Bill of

Exchange
(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).

Parties to the Bill of

Exchange
(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
Exchange

$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

CHECK
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
of 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 Check
How many types of checks we
have?
We have two types of checks;
Open Check
Crossed 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 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 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 Crossing
How many kinds of crossing we
have?
Legally there are two kinds of
crossing;
General crossing
Special crossing

Kinds 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 payees account only.

Kinds 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 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.