03/03/2022

The Negotiable
Instruments Act, 1881
Rehan Waheed

The Negotiable Instruments Act, 1881

1.1 Short title, extent and commencement [Section 1 & 1A]
• The law relating to negotiable instruments is the Negotiable Instruments Act, 1881 (the Act)
It extends to the whole of Pakistan and it is applicable since the first day of March 1882
• The Act does not affects the provisions of Section 24 and Section 35 of the State Bank of
Pakistan Act, 1956
• Every negotiable instrument shall be governed by the Act regardless of any usage or custom
that is different from the provision of the Act
1.2 Negotiable Instrument
• In simple terms, negotiable means transferable by delivery and instrument means a written
document by which a right is created in favour of some person. Thus negotiable instrument
may mean a written document transferable by delivery
• The term “delivery” means transfer of possession, actual or constructive, from one person to
another [Section 3(d)]
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The Negotiable Instruments Act, 1881

1.2 Negotiable Instrument
1.2.1 Definition of negotiable instrument [Section 13]
• A negotiable instrument means a:
• Promissory note
• Bill of exchange or
• Cheque
payable either to order or to bearer
• The above definition reveals that when a promissory note, bill of exchange and cheque is
issued it can be termed as negotiable instruments.
• The term “issue” means the first delivery of a promissory note, bill of exchange or cheque
complete in form to a person who takes it as a holder [Section 3(e)]

Rehan Waheed

The Negotiable Instruments Act, 1881

1.3 Characteristics of negotiable instrument
1.3.1 Either payable to order or bearer [Section 13]
• A negotiable instrument may either be payable to or to the bearer
• A promissory note, bill of exchange or cheque is payable to order which is expressed to be so
payable or which is expressed to be payable to a particular person, and does not contain
words prohibiting transfer or indicating an intention that it shall not be transferable is called
payable to order

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The Negotiable Instruments Act, 1881

1.3 Characteristics of negotiable instrument
1.3.1 Either payable to order or bearer [Section 13] (contd…)
Example
• The following words on a negotiable instrument are indicating that the instrument is payable
to order:
• “Pay Azam….”
• “Pay Azam or order…..”
• “Pay Azam or Babar…..”
• A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so
payable or on which the only or last indorsement is an indorsement in blank. If an instrument
is payable to any person whosoever bears it then it is called payable to bearer
• The term “bearer” means a person who by negotiation comes into possession of a negotiable
instrument, which is payable to bearer [Section 3(c)]
Rehan Waheed

The Negotiable Instruments Act, 1881

1.3 Characteristics of negotiable instrument
1.3.1 Either payable to order or bearer [Section 13] (contd…)
Example
• A bill of exchange is payable to Aslam. Aslam indorses it merely by putting his signature on
the back and delivers it to Babar with the intention of negotiating it (without making it
payable to Babar or Babar’s order). In the hands of Babar the bill is a bearer instrument
• A negotiable instrument may be made payable to two more payees jointly, or it may be made
payable in the alternative to one of two, or one or some of several payees. For example,
“Azam or Babar…..”
• The section 35 of State Bank of Pakistan Act, 1956 prohibits any person, other than a Bank or
Federal Government, to issue:
• A promissory note payable to bearer
• A bill of exchange payable to bearer on demand
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The Negotiable Instruments Act, 1881

1.3 Characteristics of negotiable instrument
1.3.2 Easy transferability [Section 13]
• They are transferable from one person to another by mere delivery if payable to bearer and
by indorsement and delivery if payable to order
Examples
• Kamran bought goods from Dawood on 15th January and paid him by a bearer cheque dated
25th January. Dawood gave the same cheque to Waqas for supply of raw materials. Waqas
may encash the cheque on or after 25th January.
• Kamal bought goods from Jamal on 15th January and made a promissory note for the amount
payable to Jamal or order. Jamal signed and indorsed (transferred) this promissory note to
Khalil to settle his dues with him. On due date, Khalil can get payment from Kamal.

Rehan Waheed

The Negotiable Instruments Act, 1881

1.3 Characteristics of negotiable instrument
1.3.3 Title of holder in due course [Section 9]
• It means that once an instrument is received in the hands of holder in due course (a holder in
good faith) it becomes free from all defects
Example
• Ajmal gave a promissory note to Bashir. Bashir lost the instrument and it was found by Habib.
Habib cannot recover the amount on the negotiable instrument as he is not the holder in due
course but if Habib transfer the instrument to Dawood and Dawood becomes holder in due
course, as he did not know that instrument was lost, he can recover the amount on the
instrument from Ajmal or all prior parties.

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The Negotiable Instruments Act, 1881

1.4 Parties to negotiable instrument
1.4.1 Primary parties [Section 7 & 3(b)]

Maker The person who makes a promissory note

Payee The person named in an instrument, to whom or to whose order money is to

be paid
Drawer The maker of a bill of exchange or cheque

Drawee The person on whom bill of exchange or cheque is drawn and who is directed
to pay the amount
Acceptor A bill of exchange (other than a cheque) must be presented to the drawee for
acceptance first, and then presented for payment on due date. Drawee
becomes acceptor when he accepts the bill duly signing it

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The Negotiable Instruments Act, 1881

1.4 Parties to negotiable instrument
1.4.1 Primary parties [Section 7 & 3(b)] (contd…)
Examples
• Anum signed a promissory note worded as “One month after date, I promise to pay Maha or
order sum of Rupees ten thousand for value received.” Here, Anum is maker and Maha is
payee.
• Maria drawn a bill of exchange on Zahra worded as “Two months after date, pay to Hussain or
order the sum of Rupees five thousand for value received.” Here, Maria is drawer, Zahra is
drawee and Hussain is payee. Once Zahra accepts this bill, she will be called acceptor.
• Saima drawn a cheque on ABC Bank, payable to Bilal or order. Here, Saima is drawer, ABC
Bank is drawee and Bilal is payee.

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The Negotiable Instruments Act, 1881

1.4 Parties to negotiable instrument
1.4.2 Holder [Section 8]
• A person is called holder of a negotiable instrument if he satisfies the following two
conditions:
• He must be entitled to the possession of the instrument in his own name (“holder” does not include
a beneficial owner claiming through a Benamidar); and
• He must be entitled to receive / recover the amount due on the instrument from the
parties liable under the instrument
• Thus a holder means the bearer of the bearer instrument and the endorsee or payee of the
order instrument
• When note, bill or cheque is lost and not found or is destroyed, the person in possession of it
or the bearer at the time of loss or destruction shall be deemed to continue to be its holder

Rehan Waheed

The Negotiable Instruments Act, 1881

1.4 Parties to negotiable instrument
1.4.3 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 endorsee
thereof, if payable to order, before it became overdue, without notice that the title of the
person from whom he derived his own title was defective
• The title of a person to a promissory note, bill of exchange or cheque is defective when he is
not entitled to receive the amount due thereon

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The Negotiable Instruments Act, 1881

1.4 Parties to negotiable instrument
1.4.3 Holder in due course [Section 9] (contd…)
• A person becomes holder in due course when he fulfils the following conditions:
Holder He must be a holder i.e. He fulfils the essentials of a holder

Holder for valuable There must be a lawful and adequate consideration

consideration
Before Maturity A person should receive instrument before its maturity. In case of instrument payable on
demand, he must have taken the instrument within a reasonable time of its issue
Complete and It is the duty of every person who takes a negotiable instrument to examine its form and contents
Regular thoroughly, for if it contains any material alteration which has not been confirmed by the drawer
through his signature or it is incomplete like drawer name is missing or not properly stamped
Holder in Good A person should take the instrument without any negligence on his part and in good faith without
Faith having any reason to believe that any defect existed in the title of the transferor. If there is any
suspicion and he takes the instrument without making proper inquiries he cannot be said to be
acting in good faith

Rehan Waheed

The Negotiable Instruments Act, 1881

Material Alteration
• The term “material alteration” in relation to a promissory note, bill of exchange or cheque
includes any alteration of that date, the sum payable, the time of payment, the place of
payment, and where any such instrument has been accepted generally the addition of a place of
payment without the acceptor’s assent. [Section 3(f)]
Examples
• Kamal transferred a bill of exchange to Jamal for goods purchased one day after its maturity. Jamal is holder but not
a holder in due course.
• Anum received a bill of exchange transferred to her by her brother as gift. She is holder but not holder in due course
as she became holder without valuable consideration.
• Kamal transferred a bill of exchange to Jamal for goods purchased a week before its maturity. Jamal knew that the
bill was stolen by Kamal. Jamal is not a holder in due course.
• Ajmal gave a promissory note to Bashir. Bashir lost the instrument and it was found by Habib. Habib cannot recover
the amount on the negotiable instrument as he is not the holder in due course but if Habib transfer the instrument to
Dawood and Dawood becomes holder in due course if he did not know that instrument was lost, he can recover the
amount on the instrument from Ajmal or all prior parties.
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The Negotiable Instruments Act, 1881

1.4 Parties to negotiable instrument
1.4.4 Difference between Holder and Holder in due course
• The following are differences between holder and holder in due course:
Difference Holder Holder in Due Course

Meaning A holder is a person who legally obtains the A holder in due course is a person who acquires the
negotiable instrument, with his name entitled on negotiable instrument bona fide for some
it, to receive the payment from the parties liable consideration, whose payment is still due
Consideration Not necessary Necessary

Right to Sue A holder may not sue all prior parties A holder in due course can sue all prior parties
Good Faith The instrument may or may not be obtained in The instrument must be obtained in good faith
good faith
Maturity A person can become holder, before or A person can become holder in due course,
after the maturity of negotiable instrument only before maturity of negotiable
instrument

Rehan Waheed

The Negotiable Instruments Act, 1881

1.5 Transfer of Negotiable Instrument
Definition: 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 of it, the instrument is said to be negotiated
• The analysis of the definition reveals that negotiation takes place when the negotiable
instrument is transferred from one person to another and the transfer is made in such a
manner so as to make the transferee the holder of the negotiable instrument and it must be
transferred free from defects

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The Negotiable Instruments Act, 1881

1.5 Transfer of Negotiable Instrument
Definition: Indorsement [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 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 indorse the same, and is called the
‘endorser’”
• The term indorsement may be defined as signing one’s name on the negotiable instrument
for the purpose of transferring it to another person

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The Negotiable Instruments Act, 1881

1.5 Transfer of Negotiable Instrument
Essentials of valid indorsement
• It must be on instrument itself, if no space is left on the back of the indorsement, further
endorsements are signed on a slip of paper attached to the instrument called ‘allonge’
• It must be signed by the endorser for the purpose of negotiation. Signature of the
endorser on the instrument without any additional words is sufficient
• No particular form of words is necessary for an indorsement
• It must be completed by the delivery of the instrument with the intention of passing the
property in it
• Negotiation by endorsement must be of the entire instrument. Indorsement for part of
the amount is invalid

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The Negotiable Instruments Act, 1881

1.5 Transfer of Negotiable Instrument (contd…)
Examples
• A bill is payable to the order of Imran. Imran signs on the back of the bill and does not specify
the name of the endorsee and delivers it to Saleem. This is a valid indorsement in blank by
Imran to Saleem
• A bill is payable to the order of Kamran. Kamran signs on the back of the bill with words “Pay
to Bilal or order” and delivers it to Bilal. This is valid indorsement by Kamran to Bilal and Bilal
is now entitled to receive the payment of the instrument and to further negotiate the
instrument by his endorsement.

Rehan Waheed

The Negotiable Instruments Act, 1881

1.6 Payment in due course [Section 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
• Apparent tenor means the period of time as expressed in the instrument, after which it is
payable and payment in due course results in discharge of a negotiable instrument
Examples
• If a banker makes payment of a post-dated cheque before the date mentioned on the
cheque, he acts against the apparent tenor of the instrument. Hence the payment will not be
treated as payment in due course.
• Bill of Exchange, if paid without enquiry as to payee or cheque with forged signature of
drawer, will amount to negligence on part of payer and the payment will not be treated as
payment in due course
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Promissory Note
2. Promissory Note
2.1 Definition of promissory note [Section 4]
• A “promissory note” is an instrument in writing (not being a bank note or 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
• The analysis of the definition shows that, a promissory note is a written and signed promise
to pay a certain sum of money to a specified person or his order

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Promissory Note
2.2 Parties to a promissory note [Section 7]
• Following are the two main parties in a promissory note:
2.2.1 Maker
• It is a person who makes the promissory note and promises to pay the money stated in it
• The maker is liable to pay according to tenor of the note and compensate any party to the
note for loss sustained because of his default
2.2.2 Payee
• It is a person to whom the amount of promissory note is payable i.e. to whom the promise to
pay is made

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Promissory Note
2.3 Specimen of a promissory note

Date: September 15, 20XX

Rs. 10,000/- only

Three months after date I promise to pay Ashraf or to his order the sum of Rupees Ten Thousand, for value received

To Sign: __________
Ashraf Zahid
Jail Road Saddar
Karachi Karachi

• In the specimen Zahid is the maker and Ashraf is the payee

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Promissory Note
2.4 Essential elements of a promissory note
• The essential elements of a promissory note are discussed below:
2.4.1 In writing [Section 4]
2.4.2 Promise to pay [Section 4]
2.4.3 Definite and unconditional [Section 4 & 5]
2.4.4 Signed by maker [Section 4]
2.4.5 Certain parties [Section 4 & 5]
2.4.6 Sum payable must be certain [Section 4 & 5]
2.4.7 Sum payable must be legal tender

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Promissory Note
2.4 Essential elements of a promissory note
2.4.1 In writing [Section 4]
• A promissory note has to be in writing. An oral promise to pay does not become a promissory
note. The writing may be on any paper, on any book
• The words used must impart a clear undertaking to pay, but it is not necessary that the word
promise should be used
Example
• Azam signs the instruments in the following terms: “I promise to pay Babar or order Rs. 500”.
This is valid promissory note.
• Asif signs the instruments in the following terms: “I acknowledge myself to be indebted to
Basit in Rs.1,000 to be paid on demand, for value received”. This is valid promissory note.
• Adeel promise to pay Behram a sum of Rs. 500 on telephone. This promise will not make a
promissory note because it is not in writing.
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Promissory Note
2.4 Essential elements of a promissory note
2.4.2 Promise to pay [Section 4]
• There must be a promise or a clear undertaking to pay
• A mere acknowledgement of indebtedness is not a promissory note, although it is valid as an
agreement and may be sued upon as such
Examples
• Azam signs the instruments in following terms: “Mr. Bilal I owe you Rs. 1,000”. The instrument
is not promissory note as there is no clear undertaking or promise to pay. There is only an
acknowledgement of indebtedness.
• Asif signs the instruments in following terms: “I am liable to pay to Baqir Rs. 500”. The
instrument is not promissory note as there is no clear undertaking or promise to pay. There is
only an acknowledgement of indebtedness.

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Promissory Note
2.4 Essential elements of a promissory note
2.4.2 Promise to pay [Section 4] (contd…)
Examples
• Adeel signs the instruments in following terms: “I have taken from Behzad Rs.2,000 and I am
accountable to him for the same with interest”. The instrument is not promissory note as
there is no clear undertaking or promise to pay. There is only an acknowledgement of
indebtedness.
• Akmal signs instrument in following terms: “I acknowledge myself to be indebted to Bano in
Rs.1,000 to be paid on demand for value received.” This is a valid promissory note.

Rehan Waheed

Promissory Note
2.4 Essential elements of a promissory note
2.4.3 Definite and unconditional [Section 4 & 5]
• The promise must not depend upon the happening of some uncertain event. i.e. a
contingency or the fulfilment of a condition
• If an instrument contains a conditional promise to pay, it is not a valid promissory note and
will not become valid and negotiable even after happening of the condition
Example
• Azam signs the instrument in the following terms: “I promise to pay Basit Rs.500 seven days
after my marriage with Shahzadi”. The instruments is not valid as the payment is made
dependent upon the happening of an uncertain event which may never happen and as a
result the sum may never become payable.

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Promissory Note
2.4 Essential elements of a promissory note
2.4.3 Definite and unconditional [Section 4 & 5]
Examples
• Asif signs the instrument in the following terms: “I promise to pay Babar Rs. 500 as soon as I
can”
• The instruments is not valid as the payment is made dependent upon the happening of an
uncertain event which may never happen and as a result the sum may never become payable
• But a promise to pay is not conditional if the amount is made payable
• at a particular place or
• after a specified time or
• on the happening of an event which must happen, although the time of its happening
may be uncertain

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Promissory Note
2.4 Essential elements of a promissory note
2.4.3 Definite and unconditional [Section 4 & 5] (contd…)
Examples
• Ajmal signs an instrument stating “I promise to Pay Babar Rs.500 seven days after Saleem’s
death”, the promissory note is valid because it is not considered to be conditional, for it is
certain that Saleem will die one day.
• Amir signs the instrument in the following terms: “I promise to pay Bilal Rs. 500 on Dawood’s
death, provided Dawood leaves me enough to pay the sum”. The instruments is not valid as
the payment is made dependent upon the happening of an uncertain event which may never
happen and as a result the sum may never become payable.

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Promissory Note
2.4 Essential elements of a promissory note
2.4.4 Signed by maker [Section 4]
• It is imperative that the promissory note should be duly authenticated by the signature of the
maker
• If the maker is illiterate he may place his thumb mark.
Example
• Asif writes the instrument but does not sign thereon: “I promise to pay Bilal Rs. 5,000”. The
note is not valid promissory note.

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Promissory Note
2.4 Essential elements of a promissory note
2.4.5 Certain parties [Section 4 & 5]
• The instrument points out with certainty as to who is the maker and who is the payee. Where
the maker and the payee cannot be identified with certainty, the instrument even if it
contains an unconditional promise to pay is not a promissory note
• Where the person intended can reasonably be ascertained from the promissory note, he is a
certain person although he may be misnamed or designated by description only
Example
• A promissory note payable to the principal of a college is regarded as payable to a certain
person. The person can be identified specifically. Hence, it will be considered a valid
promissory note.

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Promissory Note
2.4 Essential elements of a promissory note
2.4.6 Sum payable must be certain [Section 4 & 5]
• It is essential that sum of money promised to be payable must be certain and definite. The
amount payable must not be capable of contingent addition or subtraction
Example
• Azam signs instrument in following terms: “I promise to pay Bilal Rs.500,000 and all other
sums which shall be due to him”. The instrument is invalid as promissory notes because the
amount is not certain.

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Promissory Note
2.4 Essential elements of a promissory note
2.4.6 Sum payable must be certain [Section 4 & 5] (contd…)
Examples
• Amir signs an instrument in following terms: “I promise to pay Babar Rs.300,000 and all fines
according to rules”. Instrument is invalid as promissory note because amount is not certain.
• The sum payable is certain:
• when it is payable with interest (or return in any other form).; or
• When it is payable at an indicated or current rate of exchange; or
• When it is payable in instalments, with a provision that on default being made in
payment, the balance unpaid shall become due.
• A promise to pay is not ‘conditional’ nor is the sum payable ‘uncertain’ by reason of the sum
payable being subject to adjustment for profit or loss, as the case may be, of the business of
the maker.
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Promissory Note
2.4 Essential elements of a promissory note
2.4.7 Sum payable must be legal tender
• A promise to pay a certain amount of foreign currency or to deliver a certain quantity of
goods is not a promissory note
Example
• An instrument signed by Asif, “I promise to pay Kamal Rs. 50,000 and to deliver him my black
horse” is not a valid promissory note.

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Bill of Exchange
3. Bill of Exchange
3.1 Definition of bill of exchange [Section 5]
• 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
• The analysis of the definition shows that, a bill of exchange is a written and signed order
directing a person to pay a certain sum of money to the bearer of the instrument or to a
specified person or his order
• Generally, a bill of exchange is drawn by a creditor, who directs his debtor to pay the money
to the person specified in the instrument

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Bill of Exchange
3.2 Parties to a bill of exchange [Section 7]
3.2.1 Drawer
• It is a person who draws a bill of exchange. The drawer is liable on a bill of exchange as
principal debtor until the drawee accepts the bill
3.2.2 Drawee / Acceptor
• It is a person who is ordered to pay the amount of the bill of exchange (on whom the bill is
drawn). When drawee accepts the bill of exchange (when he gives consent to make the
payment) he is called the acceptor. The drawee is not liable until acceptance. On acceptance
he becomes liable as acceptor to pay holder on demand after maturity
3.2.3 Payee
• It is a person to whom the amount of bill of exchange is payable

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Bill of Exchange
3.3 Specimen of a bill of exchange
Date: September 15, 20XX
Rs. 10,000/- only

Three months after date pay to Yaseen or to his order the sum of Rupees Ten Thousand, for value
received.
Accepted
Aslam

To Sign: __________ Aslam

Mohsin Saddar
Jail Road Karachi
Karachi
• In the specimen Mohsin is the drawer, Aslam is the drawee and Yaseen is the payee

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Bill of Exchange
3.4 Essential elements of a bill of exchange
• The essential elements of a bill of exchange are shown below:
3.4.1 In writing [Section 5]
3.4.2 Order to pay [Section 5]
3.4.3 Definite and unconditional [Section 5]
3.4.4 Signed by drawer and drawee [Section 5]
3.4.5 Certain parties [Section 5]
3.4.6 Sum Payable must be certain [Section 5]
3.4.7 Sum payable must be legal tender

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Bill of Exchange
3.4 Essential elements of a bill of exchange
3.4.1 In writing [Section 5]
• A bill of exchange is required to be in writing. Like promissory note, a bill of exchange also
cannot be oral
Example
• Azam signs the instruments in the following terms: “Pay Rs. 5,000 to Azam or order”. It is a
valid bill.
• Asif orders to Behram to pay a sum of Rs. 500 on telephone. This order will not make a bill of
exchange because it is not in writing

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Bill of Exchange
3.4 Essential elements of a bill of exchange
3.4.2 Order to pay [Section 5]
• A bill of exchange contains an order to pay instead of a promise to pay like in promissory note
• This feature distinguishes it from promissory note. Further, a request to pay money is not
considered to be a bill of exchange
Examples
• The following instrument signed by Azam is valid bill of exchange as it contains an order to
pay, though the language used is very polite:
• “Babar, please pay Rs. 50,000 to Ehsaan or order.”

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Bill of Exchange
3.4 Essential elements of a bill of exchange
3.4.2 Order to pay [Section 5] (contd…)
Examples
• The following instrument signed by Adeel is valid bill of exchange as it contains an order to
pay, though the language used is very polite:
• “Bilal will much oblige me by paying to Dawood Rs. 30,000.”
• The following instrument signed by Akbar is not valid bill of exchange as it contains only a
request to pay and no order to pay:
• “Babar, please let Jazib have Rs. 50,000, and place it to my account and oblige.”
• The following instrument signed by Asif is not valid bill of exchange as it contains only a
request to pay and no order to pay:
• “Bushra, I shall be highly obliged if you make it convenient to pay Rs.10,000 to Ghalib.”

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Bill of Exchange
3.4 Essential elements of a bill of exchange
3.4.3 Definite and unconditional [Section 5]
• The order to pay should not depend upon a condition or upon the happening of an uncertain
event
Example
• Asif draws a bill on Behram as “Pay Rs. 5,000 to Saleem as early as possible”.
• It is not a valid bill of exchange on account of uncertainty.
• But an order to pay is not conditional if the amount is made payable
• at a particular place or
• after a specified time or
• on the happening of an event which must happen, although the time of its happening
may be uncertain
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Bill of Exchange
3.4 Essential elements of a bill of exchange
3.4.4 Signed by drawer and drawee [Section 5]
• The instrument must be signed by the maker i.e. drawer and subsequently by drawee (for
acceptance)
Example
• Asif draws a bill on Behram as “Pay Rs. 10,000 to Saleem or order” but does not sign it.
• It is not a valid bill of exchange.

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Bill of Exchange
3.4 Essential elements of a bill of exchange
3.4.5 Certain parties [Section 5]
• All the parties must be certain i.e. indicated in a bill of exchange with reasonable certainty
• Where the person intended can reasonably be ascertained from the bill of exchange, he is a
certain person although he may be misnamed or designated by description only
Example
• Asif draws a bill as “Pay Rs. 10,000 to Jameel or order” but does not specify the name of
drawee.
• It is not a valid bill of exchange.
• Where the payee is fictitious or non-existing person, the bill of exchange may be treated as
payable to bearer.

Rehan Waheed

Bill of Exchange
3.4 Essential elements of a bill of exchange
3.4.6 Sum Payable must be certain [Section 5]
• It is essential that sum of money ordered to be payable must be certain and definite. The
amount payable must not be capable of contingent addition or subtraction
Example
• Majeed draws a bill on Naveed as “Pay to Saeed Rs. 20,000 and all other sums due to him”. It is not a
valid bill.
• The sum payable is certain:
• when it is payable with interest (or return in any other form).; or
• When it is payable at an indicated or current rate of exchange; or
• When it is payable in instalments, with a provision that on default being made in payment, the balance unpaid
shall become due.
• An order to pay is not ‘conditional’ nor is the sum payable ‘uncertain’ by reason of the sum payable
being subject to adjustment for profit or loss, as the case may be, of the business of the maker.
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Bill of Exchange
3.4 Essential elements of a bill of exchange
3.4.7 Sum payable must be legal tender
• If the instrument contains an order to pay something other than money or something in
addition to money, it will not be valid bill of exchange
Example
• Azam draws a bill on Babar as “Pay Rs. 50,000 and deliver 100 bags of wheat to Saleem”. It is
not a valid bill.

Rehan Waheed

Bill of Exchange
3.5 Difference between promissory note and bill of exchange

Difference Promissory Note Bill of Exchange

No. of Parties There are two parties i.e. the maker There are three parties i.e. the drawer, the
and the payee drawee and the payee
The maker of the The maker of a promissory note cannot The drawer and the payee may be one and
note cannot be be the payee for the simple reason that the same person as where a bill is drawn as
payee the same person cannot be both the “Pay to me or my order”
promisor and the promise
Promise and There is a promise to make the There is an order for making the payment
order payment
Acceptance A promissory note requires no A bill of exchange needs acceptance by the
acceptance as it is signed by the person drawee before it is presented for payment
who is liable to pay

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Bill of Exchange
3.5 Difference between promissory note and bill of exchange (contd…)
Difference Promissory Note Bill of Exchange
Nature of The liability of the maker of a The liability of a drawer of a bill of exchange
Liability promissory note is primary and is secondary and conditional. It is only when
absolute the acceptor does not honour the bill that
the liability of the drawer arises as a surety
Maker’s Position The maker of a promissory note stands The drawer of an accepted bill stands in
in immediate relation with the payee immediate relation with the acceptor and
not the payee
Payable to A promissory note cannot be drawn A bill of exchange can be so drawn provided
Bearer “payable to bearer” that it is not drawn “payable to bearer on
demand”
Notice of In case of dishonour of a promissory In case of dishonour of a bill of exchange,
Dishonor note, no notice of dishonour is required notice of dishonour must be given by the
to be given to the maker “holder” to all prior parties who are liable to
pay (including the drawer and endorser)
Rehan Waheed

Cheque
4. Cheque
4.1 Definition of Cheque [Section 6]
• Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand
• The analysis of the above definition reveals that a cheque is a bill of exchange but is different
in following two characteristics:
• Drawee will always be a banker
• Always payable on demand

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Cheque
1.2 Parties to a cheque [Section 7 & 3(b)]
• Following are the three main parties in a cheque:
1.2.1 Drawer
• It is a person who draws a cheque i.e. the customer/ account-holder of a bank
1.2.2 Drawee
• It is a banker who is ordered to pay the amount of the cheque.
• “Banker” means a person transacting the business of accepting, for the purpose of lending or
investment, or deposits of money from the public, repayable on demand or otherwise and
withdrawable by cheque, draft, order or otherwise, and includes any Post Office Savings Bank
1.2.3 Payee
• It is a person to whom the amount of cheque is payable

Rehan Waheed

Cheque
1.3 Specimen of a cheque

Meezan Bank Limited Cheque No. 000112233

0104 - Gulshan e Iqbal Branch, Karachi Date: DD MM YYYY

Pay ______________________________________________________ or bearer Rs. _____________

Rupees ___________________________________________________________

Rehan Waheed Signature: ________________

IBAN: 0104MEZN0100PK1234567890

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Cheque
1.4 Essential elements of a cheque [Section 5 & 6]
• It must be in writing
• There must be an express order to pay and not a request to pay
• The order must be definite and unconditional
• It must be signed by the drawer
• The three parties (drawer, drawee and payee) must be certain
• The order must be to pay a certain sum
• The order must be to pay money only
• It must always be drawn upon a specified banker
• It must always be payable on demand
Example
• Adeel draws a bearer cheque on 1st July 2020. It is valid for six months. Holder of cheque may get cash
by demanding payment over the counter of the banker on whom the cheque is drawn during this time
Rehan Waheed

Cheque
1.5 Cheque not operating as assignment of funds [Section 131C]
• A cheque, of itself, does not operate as an assignment of any part of the funds to the credit of
the drawer with the banker
Example
• Adeel draws a cheque of Rs. 5 million in favour of Kashif on 1st July 2021. Kashif does not
become entitled to Rs. 5 million that are in the account of Adeel at bank on just receiving this
cheque. He must deposit the cheque in his account and when bank transfers the amount to
his credit, he will become entitled to those Rs. 5 million

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Cheque
1.6 Difference between cheque and bill of exchange
Difference Cheque Bill of Exchange
Drawee Cheque is always drawn on a banker Bill may be drawn on any person, including a banker
Payable on A cheque can only be drawn payable A bill may be drawn payable on demand or on the
Demand on demand expiry of a certain period after date or sight
Payable to A cheque drawn “payable to bearer A bill drawn “payable to bearer on demand” is
bearer on on demand” is valid absolutely void (though can be made payable to the
Demand bearer later by endorsement in blank)
Acceptance A cheque does not require any A bill requires acceptance by the drawee before he
acceptance by the drawee can be made liable upon it
Stamp A cheque does not require any stamp A bill of exchange must be properly stamped
Crossing A cheque may be crossed for the A bill of exchange cannot be crossed
purpose of safety
Stop The payment of a cheque may be The payment of a bill cannot be countermanded by
Payment countermanded by the drawer the drawer
Rehan Waheed

Crossing of Cheque
2. Crossing of Cheque
2.1 Purpose of crossing
• A cheque is said to be crossed when it bears across its face two parallel transverse lines which
are usually drawn on the left hand top corner of the cheque
• It is an instance of an alteration which is authorised by the Act
• A crossing is a direction to the paying banker not to pay across the counter
• The purpose of crossing is to direct the drawee (banker) to pay the amount of the cheque
only to a banker so that the party who receives the payment can easily be traced

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Crossing of Cheque
2.2 Types of crossing
2.2.1 General crossing [Section 123]
• A cheque is said to be crossed generally where it bears across its face an addition of the words
“and company” or any abbreviation of it between two parallel transverse lines, or of two
parallel transverse lines simply
Effect of general crossing [Section 126]
• When a cheque is crossed generally the banker on whom it is drawn shall not pay it otherwise
than to a banker

Rehan Waheed

Crossing of Cheque
2.2 Types of crossing
2.2.2 Special crossing [Section 124]
• A cheque is said to be crossed especially where it bears across its face an addition of:
• Name of the banker
• Parallel lines are not necessary
Effect of special crossing [Section 126]
• When a cheque is crossed specifically the banker on whom it is drawn shall not pay it
otherwise than to a banker to whom it is crossed or his agent for collection

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Crossing of Cheque
2.2 Types of crossing
2.2.3 Restrictive crossing [Section 123A]
• Restrictive crossing may be added with general crossing by adding the words “A/c Payee” or
“A/c Payee only”
Effect of restrictive crossing
• Where a cheque is crossed as “account payee”, it shall cease to be negotiable
• Strictly speaking, the amount collected on the cheque must be credited only to the account
of payee named in the cheque
Example
• Kamran provided some services to Ikram. Ikram paid him by cheque drawn on ABC Bank with “Account
payee only” crossing. Kamran has only one bank account in XYZ Bank. Kamran will deposit the cheque
in his account with XYZ Bank. XYZ Bank (as collecting banker) shall get clearing of cheque from ABC
Bank (paying banker). XYZ Bank shall credit the amount in account of Kamran from where Kamran may
transfer or withdraw the amount
Rehan Waheed

Crossing of Cheque
2.2 Types of crossing
2.2.4 ‘Not negotiable’ crossing [Section 130]
• The addition of the words not negotiable does not restrict further transferability of cheque
• It only takes away the main feature of negotiability, which is transferability free from defects
• Effect of ‘not negotiable’ crossing
• The effect of the words ‘not negotiable’ on a crossed cheque is that the title of the transferee
of such a cheque cannot be better than that of its transferor
• Therefore, a holder with a defective title cannot give a good title to a subsequent holder
• The object of crossing a cheque not negotiable is to afford protection to the drawer or holder
of the cheque against miscarriage or dishonesty in the course of transit by making it difficult
for the cheque so crossed cashed, until it reaches its destination

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Crossing of Cheque
2.3 Crossing of a cheque after issue [Section 125 & 125A]
• A crossing authorised by the Act is a material part of the cheque. It means that it is unlawful
for any person to obliterate, add or alter the crossing except as authorised under the Act.
• A cheque may be crossed after its issue in the following manner
Case Right to Cross
Where a cheque is uncrossed The holder may cross it generally or specially
Where a cheque is crossed generally The holder may cross it specially by adding the name
of the banker
Where a cheque is crossed generally or specially The holder may add the word “Not negotiable”

Where a cheque is crossed specially The banker to whom it is crossed may again cross it
especially to another banker (his agent) for collection

Rehan Waheed

Payment of Cheque
3. PAYMENT OF CHEQUE
3.1 Payment of cheque crossed specially more than once [Section 127]
• Where the cheque is crossed specially to more than one banker, except when crossed to an
agent for collection, the banker to whom it is drawn shall refuse payment thereof
Examples
• Azam drawn a cheque on ABC Bank in favour of Babar. Azam had crossed cheque specially
twice mentioning the name of XYZ Bank and KLM Bank. ABC Bank must refuse the payment
of such cheque.
• Jazib drawn a cheque on ABC Bank in favour of Ghalib. He crossed cheque specially
mentioning the name of XYZ Bank. XYZ Bank crossed it specially again in favour of KLM
Bank, who shall collect the amount from ABC Bank as agent of XYZ Bank. ABC Bank shall not
refuse payment of the cheque.

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Payment of Cheque
3.2 Payment of crossed cheque in due course [Section 128]
• Where the banker, on whom a cross cheque is drawn, makes a payment in due course, the
paying banker and the drawer are entitled to be positioned as if the cheque had been paid to
and received by the true owner thereof
Example
• Kashif gave a cheque drawn on ABC Bank of Rs. 10,000 to Munawar with ‘account payee’
crossing. Another person named Munawar (having account in XYZ Bank) stole the cheque
and presented for credit to his account. ABC Bank paid the amount in due course to XYZ
Bank. XYZ Bank credited the amount to the credit of (fake) Munawar, who then withdrew the
amount from his account. ABC Bank (as paying banker) and Kashif shall be entitled to be
positioned as if the cheque had been paid to true owner (the real Munawar).

Rehan Waheed

Payment of Cheque
3.3 Payment of crossed cheque out of due course [Section 129]
• Where the banker, on whom a cross cheque is drawn, makes a payment out of due course,
the paying banker shall be liable to the true owner of the cheque for any loss he may sustain
owing to the cheque having been so paid
Examples
• Adeel gave a cheque drawn on KLM Bank of Rs. 10,000 to Kumail with general crossing. The cheque was stolen by
Kamil and he presented the cheque on counter of KLM Bank for payment. KLM Bank paid the amount over the
counter. This is payment out of due course as the cheque was not payable to bearer. KLM Bank is liable to Kumail for
the loss.
• However, a paying banker shall not be responsible if it pays the cheque in good faith and without negligence where a
cheque is presented for payment which does not appear to be crossed or have had crossing which has been
obliterated or altered.
• Adeel gave a cheque drawn on KLM Bank of Rs. 10,000 to Kumail with “account payee” crossing. The cheque was
stolen by Kamil who concealed the crossing in such a way that the cheque appeared to have never been crossed.
Kamil presented the cheque on counter of KLM Bank for payment. KLM Bank paid the amount over the counter.
KLM Bank is not liable in this case.

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Payment of Cheque
3.4 Protection to the banker in case of defective title [Section 131]
• A collecting/receiving banker is one who receives the payment of a crossed cheque on behalf
of his customer
• If the collecting banker has collected a cheque on behalf of a person whose title to the cheque
was defective, the collecting banker would be protected and would not be held liable in
conversion to the true owner, provided it proves that it acted in good faith and without
negligence
Examples
• Kashif gave a cheque drawn on ABC Bank of Rs. 10,000 to Munawar with ‘account payee’ crossing. Another person
named Munawar (having account in XYZ Bank) stole the cheque and presented for credit to his account. Then, XYZ
Bank sent the cheque for collection to ABC Bank. ABC Bank paid the amount in due course to XYZ Bank. XYZ Bank
credited the amount to the credit of (fake) Munawar in good faith and without negligence, who then withdrew the
amount from his account. XYZ Bank shall be protected and would not be held liable to true owner (the real
Munawar).
• This protection to the receiving banker is available even if it credits customer’s account with the amount of the
cheque before receiving payment thereof.
Rehan Waheed

Payment of Cheque
3.4 Protection to the banker in case of defective title [Section 131] (contd…)
Examples
• Kashif gave a cheque drawn on ABC Bank of Rs. 10,000 to Munawar with ‘account payee’
crossing. Another person named Munawar (having account in XYZ Bank) stole the cheque
and presented for credit to his account. XYZ Bank credited the amount to the credit of (fake)
Munawar in good faith and without negligence, who then withdrew the amount from his
account. Then, XYZ Bank sent the cheque for collection to ABC Bank. ABC Bank paid the
amount in due course to XYZ Bank. XYZ Bank shall be protected and would not be held liable
to true owner (the real Munawar).

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Payment of Cheque
3.5 Protection to the banker crediting cheque crossed ‘account payee’ [Section 131B]
• Similarly, if the collecting banker has collected a cheque which does not at the time of
delivery appear to be crossed “account payee” or to have had a crossing “account payee”
which has been obliterated or altered, the banker, in good faith and without negligence
collecting payment of the cheque and crediting proceeds thereof to a customer, shall not
incur any liability by reason of the cheque having been so crossed
Example
• Adeel gave a cheque drawn on KLM Bank of Rs. 10,000 to Kumail with “account payee”
crossing. The cheque was stolen by Kamil who concealed the “account payee” crossing in
such a way that the cheque appeared to have crossed generally only. Kamil presented the
cheque for credit to his account at XYZ Bank. XYZ Bank collected payment from KLM Bank
and (in good faith and without negligence) credited to Kamil’s account who then withdrew
the amount. XYZ Bank shall not incur any liability.

Rehan Waheed

Payment of Cheque
3.6 Revocation of banker’s authority [Section 122A]
• The duty and authority of a banker to pay a cheque drawn on him by his customer are
determined by:
• Countermand of payment;
• Notice of customer’s death;
• Notice of adjudication of the customer as an insolvent
Examples
• Anum drawn a bearer cheque on her banker but lost it before encashment. She informed the banker immediately
the cheque number and details. Someone found that bearer cheque and is demanding the payment. The banker
must refuse.
• A customer died on 16th March. His legal representative informed the banker of his death on 26th March day-end.
The banker must refuse to honour cheques from 27th March. However, the banker is not liable if any payment of
cheque was made from 16th March to 26th March.
• Abid had account in PQR Bank. Abid was adjudicated as insolvent on 9th February and it was communicated to PQR
Bank on 10th February. PQR bank must refuse the payment of cheques from account of Abid from 10th February.
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Payment of Cheque
3.7 Rules applicable to bank draft [Section 131A]
• Rules relating to payment of cheque are also relevant to bank draft as if draft were a cheque
• A bank draft is an order issued by one bank on another bank or on its own branch instructing
it to pay a specified sum of money to a specified person or his order. A bank draft is an
instrument similar to cheque with following distinctions:
• It can be drawn only by a bank on another bank or on its own branch and not by an
individual as in the case of a cheque
• It cannot be made payable to bearer
• Its payment cannot be stopped as easily as that of a cheque

Rehan Waheed

Payment of Cheque
3.7 Rules applicable to bank draft [Section 131A] (contd…)
Example
• Adeel made a deal to buy a plot of land, the seller required payment by bank draft. Adeel
went to his banker and applied for a bank draft and provided details. The banker transferred
the relevant amount from Adeel’s account and transferred it to Bank’s name and issued the
bank draft to Adeel in the name of seller and particulars of Adeel were also mentioned on it.
Adeel gave this bank draft to seller in consideration of transfer of plot in his name. The seller
will deposit the bank draft in his account and his account will be credited with the amount.
The payment is more secure for seller because bank draft cannot be dishonoured like a
cheque due to insufficient fund in the account

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Questions
&
Discussions

Best of luck!

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