banking laws pakistan negotiable instruments
TRANSCRIPT
BANKING LAWS PAKISTAN
NEGOTIABLE INSTRUMENTS
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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.• Unconditional promise• 2 parties maker & payee• Made by the debtor.• Liability of maker is
primary & absolute.
• Bill of Exchange.• Unconditional order.• 3 parties,drawer, drawee
& payee.• Drawn by the creditor• 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• Drawn on a banker.• Payable on demand.• Can be crossed.• Acceptance is not
required.• Not subject to stamp
duty.
• Bill of Exchange• Can be drawn on any
body including banker.• Payable on demand or
after specified period.• It can not be crossed.• Subject to stamp duty if
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 form02- 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 law05- 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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Cheque crossed account payee
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 coursesection-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.