Negotiable Instruments

NEGOTIABLE INSTRUMENTS

The law relating to negotiable instruments one is embodied in the negotiable instrument Act 1881, as amended from time to time.

Negotiable instrument is one, the property in which is acquired by any one takes it bonafide and for value, notwithstanding any defect of title in the person from whom he took it.; under section 13 of the negotiable instrument 1881 a negotiable instrument means.

a.         Promissory Note

b.            Bill of Exchange

c.         Cheque/Bank Draft

CHARACTERISTIC

It can be transferred by deliver)' either with or without endorsement according as to whether the instruments in favour of order or bearer, with this transfer the rights which it embodies are also transferred by one person to another so as to constitute the other transferee, the owner of that instrument, it is said to been negotiated.

The holder of an instrument is one who is entitled in his own name to the possession of the instrument and to recover the amount thereon from the parties liable on it.

Manner in instrument is negotiated

i)         Instrument payable to bearer is negotiated by mere deliver}' of the instrument.

ii)        Instrument payable to order can be negotiated by endorsement followed by delivery.

iii)    The person who gets by negotiation apparently a regular negotiable instrument, which is current, in good faith and for value obtains a good title to it, even though the person from whom he look it had a defective title or not title at all. A thief or a finder or a person who obtain a negotiable instrument by fraud does not acquire a good title to it. but if he negotiates it to an innocent third party, who takes in good faith an for value, that party will acquire a perfect title to it. Provided the instrument is current and it appears to be regular but not when essential signature on the instrument has been forged.

ENDORSEMENT OF NEGITIABLE INSTRUMENTS

The signature of the payee or endorsee on the back of a negotiable instrument is called the endorsement.

Section 15 of Negotiable Instrument Act states.

When the maker or holder a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or 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".

An endorsement is usually written on the back of the document.

a)  Must be written on the bill itself or along.

b)  Must be signed by the endorser. A simple signature is sufficient.

LEGAL ASPECTS OF AN ENDORSEMENT

The endorsement of a bill, with deliver)- intended to pass the title in the instrument to the endorser has four legal aspects.

a.            It pass the property in the bill;

b.            It gives the right to sue the acceptor of the bill or the maker of a note for the recovery of the amount due;

c.            It gives the right to further negotiation of the bill after possession of the instrument as holder. Every endorser after dishonour is liable as upon as instrument payable on demand.

The endorser of a bill and cheque enter into two contracts: -

a)     A contract of transfer entered into with the immediate endorsee.

b)     An implied promise, which goes with even' bill the endorser, undertakes as a surety the due performance of the contract made by the maker or acceptor or other parties to the instruments.

ESSENTIAL OF A VALID ENDORSEMENT

a)     Must be written on the bill and signed by endorser.

b)     Must be endorsement of entire bill; a partial endorsement, i.e. an endorsement which purports the transfer to the endorsee a part of the amount payable or which transfers the bill to two or more endorsees, severally does not operate as negotiation of the bill.

c)      When a bill is payable to the order of two or more payees who are not partners, all must endorse, unless one has authority to endorse for others.

d)     When the payee or endorsee of a bill payable to order is wrongly described or his name is mid-spelt, he may endorse the bill as described, adding if he thinks fit his proper signature.

e)     When there are two or more endorsements on a bill each endorsement is presumed to have been made in the order in which it appears on the bill until contrary is proved.

SIGNIFICANCE OF AN ENDORSEMENT

The payee must indorse cheque payable to order before it can transfer to another person.

That transferor by his act of endorsing the cheque warrants to that immediate transferee that he had good title to it and it was genuine one at the time of his endorsement and that any endorsement on it previous to his own was also genuine. The endorser further engages himself to compensate a holder of the cheque should it be dishonoured. Provided the procedure necessary on hour is followed?

A cheque payable to bearer is negotiated by delivery.

A cheque payable to order is negotiated by endorsement and deliver}'.

A cheque needs no attention so far as the endorsement is concerned.

It does not lose its characteristics notwithstanding any endorsements are in order.If a cheque is drawn to order the banker must see that all the endorsements are in order. The payee must endorse such cheque. Interest free system was introduced in the following financial institution with a success fro July 179.

1.  Investment Corporation of Pakistan.

2.  National Investment Trust.

3.  House Building Finance Corporation.

As from 1^st January 1981 new system for interest free banking was accordingly introduced. Many commercial banks in Pakistan are successfully operating interest banking for their customers.

SALIENT FEATURES OF THE NEW SYSTEM

The salient features of this new system as given by the banking council are.

1.      The rules, regulations and from relating to interest-free banking system can be had from any branch of the nationalized banks. The pages that follow contain salient features and basic points of the new system and are intended to give a general idea to the common reader.

2.      The basic mechanism of the new system is practicable as well as equitable. The rules and regulations formulated under the new systems are equally simple and easy to understand.

3.      All PLS deposits and accounts shall be kept absolutely separate from interest bearing accounts. Similarly, for PLS Accounts separate stationer)' like Account opening forms and pay-in-slips etc. have been designed and the words "profit & Loss sharing" or similar references have been prominently super scribed over them.

4.Under the interest-free system, only PLS saving Accounts land PLS term deposits shall be accepted on Profit and Loss sharing basis.

PROMISSORY NOTE

According to section 4 of Negotiable instruments Act.

"a promissory note is an instrument in writing (not being a currency note or bank note) containing an unconditional undertaking, signed by the maker, to pay (on demand or at a fix 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".

ESSENTIAL REQUISITES.

Following are the essential requisites of a promissory note:;

i.        It must be in writing (not oral). The writing may be in pencil or ink and includes printing photography etc.

ii.      It must contain an undertaking to pay. It is express promise to pay.

iii.    It contains promise to pay unconditionally. No conditions or contingencies are attached for making payment. A promise to pay is not ”conditional” if it depends upon an even, which is certain to happen, though the time of happening may be uncertain.

iv.     The maker must sign it.

v.       Its maker must be certain. It should show with certainly who engages or undertakes to pay.

vi.     The sum payable must be certain.

vii.   The payee must certain. It must point out with certainty the party who is to receive the money.

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BILLS OF EXCHANGE

According to section 5 of negotiable instrument act 1881. “A bill of exchange is an instrument in writing containing an unconditional order sighed 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 if a certain person or to the bearer of the instrument”.

ESSENTIAL REQUISITES OF A BILL OF EXCHANGE.

i.    It must be in writing.

ii.   It must contain an order to pay.

iii.  The order contained in it should be unconditional.

iv.  The maker must sign it.

v.   Its drawer must be certain.

vi.  The drawee must be certain.

vii. The sum expressed to be payable by the instrument must be certain.

viii.            Order to pay must be for money and money only.

ix.  It must state with certainty the person to whom payment is to be made (payee).

KINDS OF PRESENTMENT OF BILL OF EXCHANGE

Two kinds of presentments have mentioned in the negotiable instrument act:-

i.   For acceptance.

ii. For payment.

For Acceptance:

The presentment for acceptance must be made during business hours and on a business day be some person entitled to demand acceptance to:-

1.      The drawer or to his duly authorized agent.

2.      Where there are several drawees, who are no partners, presentment must be made to all of them, unless one drawee has authority to accept for all. in which case presentment may be made to him only.

3.      In case of the death of the drawee the bill should be presented to his legal representative.

4.      In case the drawee is bankrupt it must be presented to his assignee.

ALL BILLS MUST BE PRESENTED BEFORE (THEY ARE DUE) FOLLOWING RULES MUST BE OBSERVED

i.        If a period for presentment is specified in a bill it must be presented within the specified period

ii.      If presentment for acceptance is optional and even then presented for acceptance it should be presented at any time before payment.

iii.    If a bill is payable after sight: be presented within reasonable time after it is drawn.

IN FOLLOWING CASES PRESENTMENT FOR ACCEPTANCE IS EXCUSED FOR BILLS WHERE PRESENTMENT FOR ACCEPTANCE IS NECESSARY.

i.        Where the drawer is fictitious person or one incapable of contracting.

ii.      Where after search, drawee cannot be found.

iii.    Where acceptance has been refused on some other ground than irregular presentment.

iv.     Where drawee is dead or has become bankrupt.

v.               If required to be presented at a particular place it must be presented at that place.

PRESENTMENT FOR PAYMENT

The holder must present the not bill of exchange and cheques for payment to the banker, acceptor or drawee thereof respectively. If he fails to present, the other parties thereto are not liable thereon to such holder, exception is where promissory note is payable on demand and not payable at a special place. The presentment for payment of instrument payable after date must be made after maturity. A promissory note or bill of exchange made, drawn or accepted payable at a specified place must, in order to change the maker or drawee be presented for payment at that place.