Chapter 11: Negotiable Instrument Flashcards
Define and Characteristics of negotiable instruments:?
Definition:
A written document giving right to receive money, and
is transferable. It includes Promissory Note, Bill of
Exchange and Cheque.
Characteristics of negotiable instruments:
- Payable to Bearer or Order:
- Easily transferable:
- Title of holder in due course is free from all defects:
- Transferee can sue in its own name.
Parties to different Negotiable Instruments?
Parties to a Promissory Note:
- Maker (the person who makes the instrument)
- Payee (the person named on instrument to whom money is t be paid)
Parties to a Bill of Exchange:
1. Drawer ((the person who makes the instrument)
2. Drawee & Acceptor
> a person named on instrument who is directed to pay money is called drawer
> when drawee agrees to pay and signs on it iscalled acceptor
3. Payee (the person named on instrument to whom money is t be paid
Parties to a Cheque:
- Drawer (the person who makes the instrument)
- Drawee (the bank ,namedon instrument and is directed to pay)
- Payee (the person named on instrument to whom money is t be paid)
Endorsee: To whom instrument
is endorsed
Who is holder and holder in due course?
Holder:
> who is in possession in his own name, and
> who is entitled to receive the amount
Holder in due course:
Person who is in possession,
> for adequate consideration,
> before its maturity (in case of demand instrument it must be obtained in resoanable time
>in good faith (without notice or suspicious that tittle of person transferring is defective)
> complete and regular instrument (it should be properly signed, stamped and there is no material alteration)
Examples when persons does NOT
become “Holder in due course?
Examples when persons does NOT
become “Holder in due course”:
1. After maturity.
2. person who found Gift.
3. a person who stole or someone who that instrument is stolen
4. aperson who found someone else Lost instrument or someone who khow that instrument is lost.
5. Insufficient Stamp (instrument of 150000 and stamp of 100000)
Difference between Holder and Holder in
due course?
Difference between Holder and Holder in due course: 1. Consideration = necessary 2. Holding of instrument 3. Received in good faith 4. Title 5. Right to sue =can sue to all prior parties =may not sue parties
What is Payment in due course?
Payment in due course
> Payment in accordance with apparent tenure.
> Payment in accordance with apparent tenure (payer must honestly believe that person demanding amount is legally entitled to it.
> Payment to a person who is in possession
> Payment in money only
Examples when payments are NOT in due course?
Examples when payments are NOT in due course:
1. Payment of Post-dated or Stale cheque.
2. Payment of cheque with forged signature of drawer.
3. Payment of a bill of exchange without making inquiry as
to payee
if bank make payment in due course he is discharged from his liablity.
Bearer Instrument and Order Instrument:?
Bearer Instrument:
instrument which is expressed to be payable to BEARER or instrument o which last endorsement is blank
Payable to anyone who holds it e.g. “Pay
bearer” or “Pay A or bearer”
it is negotiated by mere delivery
Order Instrument;
instrument payable to particular named person or his order it is called order instrument
Payable to a particular named person
e.g. “Pay A” or “Pay A or order” NOT include words ‘PAY A ONLY”
it is negotiated by endorsement and delivery
Inland instrument and Foreign Instrument?
Inland instrument
An instrument which is:
> Drawn and payable in Pakistan, or
> Drawn in Pakistan on a person resident in
Pakistan (even if payable in foreign country)
Foreign Instrument
> An instrument which is not inland instrument
define negotiatin and endorsement?
Negotiation
Transfer of instrument from one person to another.
> Bearer Instrument –> negotiated by delivery.
> Order Instrument –> negotiated by endorsement and delivery.
Endorsement:
Definition:
> holder sign it (on the face,on the back or on attached slip )for purpose of endorsement .
> It can be Blank (holder only signs) or Full (holder signs and
writes name of endorsee).
what is Essentials of a valid endorsement and Liability of Endorser ?
Essentials of a valid endorsement:
- On Instrument.
- Signed.
- Entire instrument.
- Single endorsee.
- must be delivered with intention of passing the property
Liability of Endorser:
> If instrument is dishonoured,Every endorser is liable to pay to any of subsequent party or direct to its hold
define and give essentials of promissory note?
Definition of Promissory Note:
It is a written, unconditional promise signed by maker to
pay certain sum of money to a specified person or his order.
Essential Elements of a Promissory Note:
1. It must be in Writing (verbal promise is not enough writing include manual writing, typewriting and printing).
2. Promise to Pay (Not just acknowledgement of debt).
3. Definite and Unconditional (payable on/after death is
valid).
4. Signed by the maker.
5. Certain Sum of Money (No contingent addition or
contingent subtraction).
6. Certain Parties.
7. Promise to pay legal tender .i.e. money only (no shares, furniture etc).
8. Not payable to bearer.
Liabilities of maker in promiisory note?
Liabilities of maker
> To pay the amount.
> If default, he will also pay damages
Define and Essential Elements of a Bill of Exchange?
Definition of Bill of Exchange
It is a written, unconditional order signed by drawer and drawee
to pay certain sum of money to certain party.
Essential Elements of a Bill of Exchange:
- It must be in Writing (verbol order is not enough writing include manual writing , typewriting, and pinting)
- Order to pay.
- Definite and Unconditional (payable on/after death is valid).
- Signed by drawer and drawee.
- Certain Sum of Money.
- Certain Parties.
- Order to pay money only. (no shares, furniture etc.)
- Not Payable to bearer on demand.
Liabilities of Parties in bill?
Liabilities of Parties:
> Liabilities of Drawer: Liable until drawee accepts
> Liabilities of Drawee: Liable after acceptance
Difference between promissory note and bill
of exchange?
Difference between promissory note and bill
of exchange:
1. Number of Parties
2. Nature
3. Acceptance =not required =required
4. Nature of liability =primary liablity of maker =secondary and conditional liablity of drawee
5. Payable to
6. Maker as payee
7. Notice of dishonor
Define and give essentials of cheques?
Definition of Cheque:
A “cheque” is a bill of exchange drawn on a specified
banker and payable only on demand
Essential characteristics of a cheque:
1. It must be in writing.
2. It is an order, not request to pay (please Vs. please +
oblige + convenient).
3. It must be definite and unconditional.
4. It must be signed by drawer.
5. Parties must be certain.
6. Amount should be certain.
7. Money only. (no shares, furniture etc.)
8. It is always drawn on a specified banker.
9. It is always payable on demand only
define and give effects of; general crossing restrictive crossing special crossing Not negotioable crossing?
General Crossing:
> How: Two parallel lines on top left corner and words (co or and co)
> Effect: credited in a bank account only and not paid in cash
Restrictive Crossing:
> How: When in genera crossing add words “A/C Payee” or “A/C Payee only” written.
> Effect: Payable to payee only + Not-Negotiable when name of payee is written
Special Crossing
> How: add Name of a Bank written
> Effect: Only named Bank (or his agent) can collect
Adding words “Not Negotiable”:
> Cheque is still transferable/negotiable
> Holder of defective title cannot transfer a good title.
> objective is to give protection agianst misscariage or dishonesty
Crossing by Holder:?
Crossing by Holder:
> If uncrossed –> General Crossing.
> If generally crossed –> Special Crossing
> If generally/specially crossed –> Add words “not negotiable”
Crossing by Banker?
Crossing by Banker
> Special Crossing.
> if cheque is Special Crossed bank may cross it again (to agent for collection)
Protection to a Collecting Banker:?
Protection to a Collecting Banker:
Not liable to true owner if it collected on behalf of a person with
defective title, provided
> Bank acted in good faith and without negligence
> Bank received payment on behalf of customer and not in his own account.
> cheque was already crossed before coming in his hand
If bank credited customer account provisionally, protection is still
available
Protection to a Collecting Banker in case of Account Payee cheque: ?
Protection to a Collecting Banker in case of Account Payee cheque:
Bank not liable if “account payee” cheque is:
> altered cleverly that it donot look like account payee, and
> bank paid in good faith without negligence. (collecting bank cllect in good faith and credit customer account)
when bank refuse payment and LIST Revocation of Banker’s Authority?
Payment of cheque crossed specially more than once:
bank shall refuse the payment if chqeue is specially crossed more than once
Revocation of Banker’s Authority:
1. Countermand of payment (i.e. customer stop to make payment).
2. Notice of customer’s death.(irrespective of actual date of death/cheque)
3. Notice of customer’s insolvency (on revieving notice of adjudgment of customer as insolvent)
(irrespective of actual date of insolvency/cheque)
Bank Draft and Difference between Cheque and Bank Draft?
What is a Bank Draft:
Order issued by one bank to another bank, to
pay specified money to a specified person.
Difference between Cheque and Bank Draft
> always issued by bank
> it cannot be payable bearer
> it cannot be dishonoured due to insolvency
> its payment cannot be easily stopped
