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CAF-04-Business Law > Chapter 14: Negotiable Instruments-Theory > Flashcards

Chapter 14: Negotiable Instruments-Theory Flashcards

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1
Q

Define negotiable instrument.

A

Negotiable instrument means a written document that gives right of its holder to receive money, and which is transferable from one person to another.
Negotiable instruments include from Promissory note, Bill of exchange, and Cheque.

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2
Q

List down characteristics of negotiable instruments. (4)

A
  1. Instrument can be of various types.
  2. Easily transferable.
  3. Title of Holder in due course is free from all defects.
  4. Transferee can sue in its own name.
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3
Q

Under characteristics of negotiable instruments, describe,
1. Instrument can be of various types.

A
  • Bearer or Order.
  • Demand or time.
  • Inland or foreign.
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4
Q

Under characteristics of negotiable instruments, describe,
2. Easily transferable.

A

Negotiable instruments are easily transferable from one person to another.
- By mere delivery (if bearer instrument e.g. bearer cheque)
- By endorsement and delivery (if order instrument).

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5
Q

Under characteristics of negotiable instruments, describe,
3. Title of Holder in due course is free from all defects.

A

If a person receives negotiable instrument in good faith for consideration, he gets good title (even if person giving it had defective title).

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6
Q

Under characteristics of negotiable instruments, describe,
4. Transferee can sue in its own name.

A

No explanation in book.

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7
Q

What are the types of negotiable instruments? (3)

A
  1. Bearer instrument and order instrument.
  2. Demand instrument and time instrument.
  3. Inland instrument and foreign instrument.
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8
Q

Under types of negotiable instruments, describe:
1. Bearer instrument (4)

A

An instrument is payable to bearer if:
1. Expressed to be so payable.
2. Last endorsement is blank.
3. It can be transferred by mere delivery.
4. Includes words “Pay bearer” or “Pay A or bearer”.

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9
Q

Under types of negotiable instruments, describe:
1. Order instrument. (4)

A

An instrument is payable to order if:
1. Which is expressed to be so payable or
2. Which is expressed to be payable to a particular person
3. Does not contain words:
(i) which prohibit transfer or
(ii) indicate an intention that it shall not be transferable
4. It can be negotiated by endorsement and delivery.

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10
Q

Under types of negotiable instruments, describe:
2. Demand instrument (4)

A

A negotiable instrument:
1. Which is expressed to be payable on demand/sight/presentment or
2. For which no time for payment is specified in it, or
3. Which is accepted or endorsed after it is overdue (as regards person accepting or endorsing it).
4. Is payable immediately.

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11
Q

Under types of negotiable instruments, describe:
2. Time instrument. (5)

A

A negotiable instrument which is payable:
- On a specified day or
- After a specified period or
- On a certain date after sight or
- On or after happening of a certain event e.g. death of a person.

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12
Q

Under types of negotiable instruments, describe:
3. Inland instrument.

A

Negotiable instrument which is:
1. Drawn and payable in Pakistan or
2. Drawn in Pakistan on a person resident in Pakistan (even if it is payable in foreign country).

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13
Q

Under types of negotiable instruments, describe:
3. Foreign instrument.

A

An instrument which is not an inland instrument is a foreign instrument.

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14
Q

Define negotiation (of an instrument).

A

An instrument is negotiated when it is transferred by one person to another to make him holder of instrument.
- If instrument is bearer, it can be negotiated by mere delivery.
- If instrument is order, it can be negotiated by endorsement and delivery.

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15
Q

Define endorsement.

A

When a holder of an instrument signs it (on face, on back, or on attached slip of paper) for the purpose of negotiation, it is called endorsement.
Endorsement can be either blank (holder only signs) or Full (holder signs and writes name of endorsee).

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16
Q

Write down essentials of a valid endorsement. (5 points)

A
  1. It must be on instrument itself. If no space is left on instrument, it must be on separate slip of paper attached to the instrument called “Allonge”.
  2. It must be signed by endorser for the purpose of negotiation. No additional words are necessary for endorsement.
  3. Endorsement must be for the entire instrument. Endorsement for part of the amount is invalid.
  4. Endorsement must be for single endorsee. Endorsement for two or more endorsees is invalid.
  5. It must be completed by the delivery of the instrument.
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17
Q

What is the liability of endorser?

A

If an instrument is dishonored, every endorser is liable to pay subsequent endorser or direct to holder.

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18
Q

Define the term “holder” with examples. (2) (3)

A

Holder of negotiable instrument means a person:
- Who is in possession of the instrument in his own name (but does not include an owner claiming through a Benamidar) and
- Who is entitled to receive the amount due on instrument.
Examples:
- In a bearer instrument, bearer is the holder.
- In an order instrument, payee or endorsee is the holder.
- If a negotiable instrument is destroyed or lost, it’s bearer at the time of destruction or loss shall be deemed to continue its holder.

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19
Q

Define the term “holder in due course” (4)

A

Holder in due course” means a person who becomes possessor of an instrument:
- For adequate consideration
- Before its maturity (in case of demand instrument, it must be obtained within reasonable time of its issue).
- In good faith (i.e. without notice or suspicion, that the title of the person transferring it was defective).
- That is complete and regular (i.e it should be properly signed, stamped, and there should be no unauthorized material alteration).

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20
Q

Difference between holder and holder in due course. (Book Page 228)
1. Holder
2. Holder in due course.

A
  • Consideration:
    1. Not necessary.
    2. Necessary.
  • Holding of instrument:
    1. Holds instrument before or after maturity.
    2. Holds instrument before maturity.
  • Received in good faith:
    1. Not necessary.
    2. Necessary.
  • Title:
    1. Does not get free from defective title.
    2. Gets free from defective title.
  • Right to Sue:
    1. May not sue prior parties
    2. Can sue all prior parties.
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21
Q

List down examples when persons are not holder in due course. (General knowledge only)

A
  • A person who received instrument one day after its maturity (i.e. after it becomes overdue).
  • A person who received instrument as gift, or.
  • A person who stole/found instrument or who knew that instrument is stolen/lost.
  • A person having instrument of Rs. 150,000 with stamps covering Rs. 100,000. (Such person is holder in due course for Rs. 100,000 only).
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22
Q

Define the term “payment in due course”. (4)

A

Payment in due course means payment of a negotiable instrument which fulfills following conditions:
1. Payment to a person who is in possession of the negotiable instrument.
2. Payment in good faith and without negligence.
Payer must honestly believe that person demanding the payment is legally entitled to it.
There must be no suspicion about his title.
3. Payment in accordance with apparent tenure of the instrument.
Payment must be made on or after maturity. Payment made before maturity is not a payment in due course.
4. Payment in money only.

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23
Q

Write down examples when payments are not made in due course.(For knowledge only).

A
  1. Payment of a post-dated cheque by a bank (i.e. before date mentioned on the cheque).
  2. Payment of a cheque with forged signature of drawer.
  3. Payment of a bill of exchange without making inquiry as to payee.
24
Q

What is the effect of payment in due course?

A

If a person makes a payment in due course, his liability is discharged.
However, if a person makes payment out of due course, he is liable to compensate true owner.

25
Q

What are the parties to negotiable instruments? (Promissory note, bill of exchange and cheque) (Names only)

A
  • Promissory Note:
    1. Maker
    2. Payee
  • Bill of Exchange
    1. Drawer
    2. Drawee & Acceptor
    3. Payee
  • Cheque:
    1. Drawer
    2. Drawee
    3. Payee.
    If a negotiable instrument is endorsed, then there will be another party “endorsee”.
26
Q

List down “Parties to a promissory note”. With detail.

A
  1. Maker (The person who makes i.e. promises to pay a promissory note).
  2. Payee (The person, named in the instrument, to whom money is to be paid).
27
Q

List down “Parties to a bill of exchange”. With detail.

A
  1. Drawer (the person who writes i.e. orders to pay a bill of exchange).
  2. Drawee & Acceptor
    (a) A person named in instrument, who is directed to pay is called Drawee.
    (b) When Drawee agrees to pay the bill and signs on it, he becomes acceptor.
  3. Payee (the person, named in instrument, to whom money is to be paid).
28
Q

List down “Parties to a Cheque”. With detail.

A
  1. Drawer (the person who writes the cheque).
  2. Drawee (the bank, named in the instrument, who is directed to pay).
  3. Payee (the person, named in instrument, to whom money is to be paid).
    For knowledge:
    Cheque does not need acceptance and is always payable on demand.
29
Q

Define “Promissory Note”.

A

It is a written unconditional promise signed by maker to pay certain sum of money to a specified person or his order.

30
Q

Make specimen of Promissory Note.

A

Book Page no 230

31
Q

List down essential elements of Promissory note. (8 Headings)

A
  1. It must be in writing.
  2. Promise to pay.
  3. Definite and unconditional.
  4. Signed by the maker.
  5. Certain sum of money.
  6. Certain parties.
  7. Promise to pay legal tender.
  8. Not payable to bearer.
32
Q

Under essential elements of Promissory note, elaborate.
1. It must be in writing.

A

A verbal promise to pay is not enough. Writing includes manual writing, typewriting and printing.

33
Q

Under essential elements of Promissory note, elaborate.
2. Promise to pay.

A

It must contain a clear commitment by maker to pay the amount. A mere acknowledgement of debt is not a promise to pay.

34
Q

Under essential elements of Promissory note, elaborate.
3. Definite and unconditional.

A

Promise must be unconditional.
- An instrument payable after specified time at a particular place or on death of a person is valid.
- An instrument payable on happening of some uncertain event is void (e.g. on marriage of a person).

35
Q

Under essential elements of Promissory note, elaborate.
4. Signed by the maker

A

Promissory note must be signed by the maker. If maker is illiterate, he can put his thumb impression on it.

36
Q

Under essential elements of Promissory note, elaborate.
5. Certain sum of money.

A

Sum payable must be certain and definite.
Amount must not include a contingent addition or contingent subtraction.
However, it may include specific interest.

37
Q

Under essential elements of Promissory note, elaborate.
6. Certain parties.

A

Promissory note must clearly mention as to who is the maker and who is the payee.

38
Q

Under essential elements of Promissory note, elaborate.
7. Promise to pay legal tender.

A

Payment to be made must be in money of Pakistan.
A promissory note is void if it is promises to:
- Pay foreign currency or
- Deliver something other than money.

39
Q

Under essential elements of Promissory note, elaborate.
8. Not payable to bearer.

A

A promissory note cannot be payable to bearer.

40
Q

What are the Liabilities of maker of promissory note?.

A

Maker is liable to pay the amount according to the tenor of promissory note. Incase of default, he is liable to compensate party to the note for loss sustained because of his default.

41
Q

Exam Tip.

A

A promissory note payable to maker is void. However, it will become valid if endorsed by the maker to some other person.

42
Q

Define Bill of exchange.

A

It is a written unconditional order signed by drawer and drawee to pay certain sum of money to certain party.

43
Q

Make specimen of bill of exchange.

A

Book page no 233

44
Q

List down essential elements of a bill of exchange. (8 Headings)

A
  1. It must be in writing.
  2. Order to pay.
  3. Definite and unconditional.
  4. Signed by drawer and drawee.
  5. Certain sum of money.
  6. Certain parties.
  7. Order to pay money only.
  8. Not payable to bearer on demand.
45
Q

Under essential elements of bill of exchange, elaborate.
1. It must be in writing.

A

It must be in writing. Writing includes manual writing, typewriting and printing. A verbal promise to pay is not enough.

46
Q

Under essential elements of bill of exchange, elaborate.
2. Order to pay.

A

A bill of exchange is an order to pay (not a promise). Words “Pay” or “Please Pay” or “oblige me by paying” are very polite but constitute an order.

47
Q

Under essential elements of bill of exchange, elaborate.
3. Definite and unconditional.

A

Promise must be unconditional.
- An instrument payable after specified time at a particular place or on death of a person is valid.
- An instrument payable on happening of some uncertain event is void (e.g. on marriage of a person).

48
Q

Under essential elements of bill of exchange, elaborate.
4. Signed by drawer and drawee.

A

Bill of exchange is required to be signed by both, the drawer and drawee.

49
Q

Under essential elements of bill of exchange, elaborate.
5. Certain sum of money.

A

Sum payable must be certain and definite. Amount must not include a contingent addition or contingent subtraction. However, it may include payment of interest if rate of interest is specified.

50
Q

Under essential elements of bill of exchange, elaborate.
6. Certain parties.

A

Bill of exchange must clearly mention as to who is the drawer, who is the drawee and who is the payee. If payee is fictitious or non-existent person, bill may be treated as payable to bearer.

51
Q

Under essential elements of bill of exchange, elaborate.
7. Order to pay money only.

A

Payment to be made must be in legal tender money of Pakistan. If instrument contains an order to pay foreign currency or something other than money, it is not a valid bill of exchange.

52
Q

Under essential elements of bill of exchange, elaborate.
8. Not payable to bearer on demand.

A

A bill of exchange cannot be payable on demand to bearer.

53
Q

Liabilities of Parties on a bill of exchange:
1. Before Acceptance

A

Drawer is liable as principal debtor.

54
Q

Liabilities of Parties on a bill of exchange:
2. After Acceptance

A

Drawee is liable to pay on demand on maturity.

55
Q

What are differences between Promissory Note and Bill of Exchange?

A

Book Page No 235

CAF-04-Business Law (18 decks)

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