Negotiable instruments act 1881 Cheques and their payments

Negotiable instruments act 1881 • Parties to financial transactions use instruments to settle their claims on each other. These instruments have their own features and operations which are quite different from the mercantile practices of respective business communities. • Therefore, Negotiable Instruments Act, 1881, brings out uniformity in the instruments and enforces a legal system. • It has 139 sections covered under 17 chapters.

Negotiable instruments act 1881 • This is a very important law for banks as well as bank functionaries because it defines all the negotiable instruments, parties to these instruments and their obligations and their rights towards each other and also protections available to both bankers and customers.

Negotiable instruments • A written instrument that is signed by the maker or drawer, includes an unconditional promise or order to pay a specified sum of money that is payable on demand or at a definite time and is payable to order or to bearer.

Types of negotiable instruments • Promissory notes • Bill of exchange • cheque

Promissory note • A “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.

Bill of exchange • A 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.

Difference between promissory note and bill of exchange • A bill of exchange (BE) differs from a promissory note (PN) on the following points: • It is promise to pay (PN); It is an order to pay(BE) • There are only two parties the drawer, and the payee(PN); There are three parties, the drawer, the drawee, and the payee (BE) • There is no necessity of acceptance (PN); It must be accepted (BE)

Cheques • According to section 6 of the negotiable instruments act 1881 “cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand”. • An unconditional order in writing drawn on a specified banker, signed by the drawer, requiring the banker to pay on demand a sum certain in money to, or to the order of, a specified person or to the bearer, and which does not order any act to be done in addition to the payment of money.

Parties to a cheque • The drawer – The maker of the cheque is called drawer. – He must be an account holder. – In order to make the instrument a valid cheque the drawer must sign it exactly in accordance with the specimen signature supplied to the banker beforehand.

Parties to a cheque • The drawee – The person directed to pay is called the drawee. – In case of a cheque it is always a banker with whom the drawer maintains an account so as to constitute him the customer. • The payee – Payee is the person named in the cheque to whom or to whose order payment is to be made.

Requisites of a cheque • It should be in writing. • The unconditional order. – The drawer of a cheque must not put any condition for the payment of the cheque. For instance if the signing and dating a receipt of payment is desired before payment. • Drawn on a specified banker only. – a cheque can be drawn only on banker and none else.

Requisites of a cheque – The name of the banker must be specified so that there may be no mistake in demanding payment from the drawee banker. – Bankers in Pakistan supply printed cheque forms to the account holders wherein the name of the drawee branch of the banker is printed or stamped specifically.

Requisites of a cheque • Payment on demand – A cheque is payable only on demand this demand can be lodged during a reasonable period which is 6 months from the date of its issue. – After this period the cheque becomes “stale”. • Sum certain in money – The cheque must contain the order for the payment of a certain money only which means the amount referred to in the order must not be ambiguous or disputable.

Requisites of a cheque – The cheques forms issued by the banker always contain spaces for writing the sum of money in words and figures both. – If they both differ then according to section 18 of the negotiable instruments act 1881 authorizes the bank to take the amount in words as ordered or intended.

Requisites of a cheque • Payable to a specified person. – The cheque should be payable to or to the order of a certain person or bearer of an instrument. – According to law a ‘person’ may not necessarily be a human being. A person can as well be one of the corporate bodies. • Signed by the drawer.