Q. 1. What do you understand by term "Negotiable Instruments”?

What are its special

characteristics?
Negotiable Instruments:

A Negotiable Instrument is a written document that guarantees the payment of a specific

amount of money, either on demand or at a set time, with certain conditions. These
instruments are transferable, meaning that the holder of the instrument can transfer it to
another party, who then assumes the rights to receive payment. Negotiable instruments are
commonly used in business transactions and finance to facilitate trade and payment.

Examples of negotiable instruments include:

 Promissory Notes
 Bills of Exchange
 Checks

Special Characteristics of Negotiable Instruments:

1. Transferability:
o The key feature of a negotiable instrument is that it can be transferred from
one person to another. When the instrument is transferred, the transferee (the
person receiving the instrument) obtains the rights to the instrument.
2. Title Transfer:
o When a negotiable instrument is transferred, the transferee acquires the legal
title to it, which means they are entitled to receive the payment specified in the
instrument. The transferee may also have the right to enforce the instrument in
case of default.
3. Freedom from Defects:
o A negotiable instrument, when transferred, is typically free from any defects
in title, assuming it is transferred in good faith. This means that the transferee
does not need to worry about issues with prior ownership or claims.
4. Unconditional Promise or Order to Pay:
o A negotiable instrument must contain an unconditional promise or order to
pay a specific amount of money. This means there must be no conditions
attached to the payment (e.g., "I promise to pay $100 on the condition that the
goods are delivered").
5. Payable to Bearer or Order:
o Negotiable instruments can be made payable to the bearer (anyone who holds
the instrument) or to the order (specific person or their assignee). Instruments
payable to the bearer are transferred simply by delivery, while instruments
payable to order require endorsement (signing) by the holder to transfer.
6. Certainty of Amount:
o The amount to be paid under a negotiable instrument must be certain or
capable of being made certain. The sum must be fixed or calculable, and no
other factors should affect the amount owed.
7. Legal Tender:
o In some jurisdictions, negotiable instruments such as checks and bills of
exchange are considered a form of legal tender in certain transactions.
However, the specific recognition depends on local laws.
8. Time-bound:
 o Some negotiable instruments (like bills of exchange) are payable at a certain
time or on demand. Promissory notes may be payable on demand or after a
specified period, and the time of payment must be clearly defined.

Types of Negotiable Instruments:

1. Promissory Notes:
o A written promise by one party (the maker) to pay a specified sum to another
party (the payee) either on demand or at a fixed future date.
2. Bills of Exchange:
o A written order from one party (the drawer) to another party (the drawee) to
pay a certain sum of money to a third party (the payee) either on demand or at
a specified date.
3. Checks:
o A written order from the account holder (the drawer) to a bank (the drawee) to
pay a specific sum of money from their account to a designated payee.

Q. 2. Define and explain `Promissory Note'. What are its essential features?

Promissory Note:

A promissory note is a written, unconditional promise by one party (the maker) to pay a
certain sum of money to another party (the payee) either on demand or at a specified future
date. It is a negotiable instrument, meaning it can be transferred from one party to another,
making it a common financial tool used in loans, credit transactions, and business dealings.

A promissory note typically contains the following basic elements:

 A promise to pay a specific amount of money.

 The name of the payee (the person to whom the money will be paid).
 The signature of the maker (the person who is making the promise).
 A date or condition for the payment.

Essential Features of a Promissory Note:

1. Unconditional Promise to Pay:

o A promissory note contains an unconditional promise by the maker to pay a
specified sum of money. This means the payment is not dependent on any
external condition or event, unlike some other financial agreements (such as
conditional contracts).
2. In Writing:
o The note must be written down on paper or another tangible medium. Oral
promises to pay are not considered promissory notes.
3. Specific Amount:
o The note must state the exact amount of money that is to be paid. This amount
must be fixed or easily ascertainable.
4. Signature of the Maker:
 o The promissory note must be signed by the maker (the person who promises to
pay). The signature serves as the legal acknowledgment and binding consent
to fulfill the obligation.
5. Payable to a Specific Person or Order:
o A promissory note is usually payable to a specific person (the payee) or to
their order, meaning the note can be transferred to someone else through
endorsement.
6. Time of Payment:
o The note must specify a time or event when the payment will be made. It may
be either on demand (when the payee requests it) or at a specific date in the
future.
7. Transferable:
o A promissory note is negotiable, meaning it can be transferred to another
person, typically by endorsement. This allows the payee to transfer their right
to receive payment to a third party.
8. No Conditions:
o The promise to pay in the note cannot be contingent on any conditions or
events, except for the time of payment. For instance, the note cannot state that
payment will be made only if the borrower is satisfied with the goods or
services.
9. In Writing and Signed:
o The note must be formally written and signed by the maker to be legally
enforceable.

Q. 3. Define and explain "Bill of Exchange". What are the essential requisites of Bill of
Exchange What is the distinction between Promissory Note and Bill of Exchange?
Bill of Exchange:

A Bill of Exchange is a written, unconditional order from one person (the drawer) to another
(the drawee) directing the drawee to pay a certain sum of money to a third party (the payee)
or to the order of the payee at a specified time. It is primarily used in international and
domestic trade to facilitate payments for goods and services.

In simple terms, a Bill of Exchange is a financial instrument used to transfer money from one
party to another under agreed terms. It functions as a written demand for payment, and the
party who issues the Bill of Exchange (the drawer) instructs the party who owes the money
(the drawee) to pay a specified amount to the payee, either on demand or at a specified future
date.

Essential Requisites of a Bill of Exchange:

A Bill of Exchange must fulfill the following essential requisites to be valid:

1. Written and Signed:

o The Bill must be in writing and signed by the drawer (the person issuing the
order).
 2. Unconditional Order to Pay:
o The document must contain an unconditional order (not a mere request) to
pay a specified amount of money. It cannot be dependent on any condition.
3. Specific Amount:
o The Bill must state a fixed amount of money that is to be paid. This amount
must be clearly mentioned in the Bill.
4. Parties Involved:
o There must be at least three parties involved:
 Drawer: The person who creates and signs the Bill and orders the
payment.
 Drawee: The person or entity (usually a bank) to whom the order to
pay is directed. The drawee becomes the acceptor once they agree to
pay the amount stated in the Bill.
 Payee: The person or entity to whom the payment is to be made.
5. Payable to Order or Bearer:
o The Bill of Exchange must specify to whom the payment is to be made. It can
be payable to a specific person or their order (which can be endorsed) or to the
bearer (anyone who holds it).
6. Time of Payment:
o The Bill must specify when the payment is due. It could be payable either:
 On demand (as soon as presented),
 At a certain time after sight (e.g., 30 days after the Bill is presented for
acceptance),
 At a fixed or determinable future date.
7. Acceptance by Drawee:
o Once the drawee agrees to the terms of the Bill, they must accept it, typically
by signing it, indicating their commitment to pay. Without acceptance, the Bill
is not enforceable.
8. Clear Language:
o The language used in the Bill should be clear and unequivocal, leaving no
room for doubt about the amount to be paid, the parties involved, and the
payment date.

Distinction Between Promissory Note and Bill of Exchange:

While both Promissory Notes and Bills of Exchange are negotiable instruments used in
financial transactions, they have distinct differences:

Feature Promissory Note Bill of Exchange

A written promise by one party A written order by one party (drawer)
(maker) to pay a certain sum ofdirecting another party (drawee) to pay
Definition
money to another party (payee) on
a certain sum of money to a third party
demand or at a future date. (payee) or to the bearer.
Three parties: Drawer (orders
Two parties: Maker (promises to
payment), Drawee (who is ordered to
Parties Involved pay) and Payee (to whom payment
pay), and Payee (the recipient of the
is made).
payment).
 Feature Promissory Note Bill of Exchange
Nature of
It is a promise to pay. It is an order to pay.
Instrument
No need for acceptance from the Requires acceptance by the drawee
Acceptance
payee or any third party. (the person ordered to pay).
Can be transferred by endorsement,
Can be transferred by endorsement
Transferability which may require acceptance to be
or delivery.
negotiable.
The drawee is primarily liable after
Payment The maker is primarily liable for
acceptance. If the drawee does not
Obligation the payment.
accept, the drawer remains liable.
Typically used in personal loans or Commonly used in trade transactions,
Usage
informal credit. especially in international trade.
Can be payable on demand or at a
Demand or Can be payable on demand or at a
future date, but usually after the
Time specified future date.
drawee’s acceptance.
The drawer is liable if the drawee
Form of The maker of the note is directly refuses to pay after acceptance, but the
Liability liable for the payment. drawee is primarily responsible once
they accept the Bill.

Q. 4. What is a cheque? What is the difference between cheque and bill of exchange?

Cheque:

A cheque is a written order from a drawer (the account holder) directing their bank (the
drawee) to pay a specific amount of money to a payee (the person or entity specified on the
cheque). It is a type of negotiable instrument that is used for transferring money from the
drawer’s bank account to the payee.

A cheque serves as a payment instruction rather than a promise to pay, which is one of its
key features. It is primarily used in personal, business, or financial transactions, providing a
secure and convenient means of making payments without the need for cash.

Key Features of a Cheque:

1. Written Order: A cheque is a written order addressed to the drawer’s bank.

2. Unconditional: It must be an unconditional order to pay a specific sum of money.
3. Bank Involved: A cheque involves a bank (the drawee) which must pay the amount
mentioned on the cheque.
4. Payee: The cheque specifies the person or entity (the payee) to whom the money will
be paid.
5. Date and Signature: A cheque includes the date of issue and the drawer’s signature.
6. Demand Payment: A cheque is typically payable on demand (i.e., as soon as it is
presented to the bank for payment).

Difference Between Cheque and Bill of Exchange:

While both cheques and bills of exchange are negotiable instruments used in transactions,
they differ in several significant ways:

Feature Cheque Bill of Exchange

A cheque is a written order from
A bill of exchange is a written order by
a bank account holder to the
Definition the drawer to the drawee to pay a certain
bank to pay a specified sum to
sum of money to the payee or the bearer.
the payee on demand.
Involves three parties: the drawer (who
Involves two parties: the
orders the payment), the drawee (the
drawer (account holder) and the
Parties Involved person or entity to whom the payment is
drawee (bank). The payee
directed), and the payee (the recipient of
receives the payment.
the payment).
A cheque is a demand A bill of exchange is an order to pay,
Nature of
instrument. Payment is made and payment is typically made at a later
Instrument
immediately or when presented. date after the drawee accepts it.
No acceptance is required. The Requires acceptance from the drawee
bank must honor the cheque if (the party directed to pay) for it to be
Acceptance
the drawer has sufficient funds enforceable. Without acceptance, the
in their account. drawer remains liable.
Payable on demand, meaning it
Can be payable on demand or at a future
can be cashed or deposited by
Payment Time date, depending on the terms specified in
the payee at any time within the
the bill.
bank’s business hours.
The bank (drawee) is primarily
The drawee is primarily liable after
Form of liable for payment, provided
acceptance. If the drawee does not accept
Liability there are sufficient funds in the
or pay, the drawer is responsible.
drawer’s account.
A cheque can be crossed,
meaning it is payable only A bill of exchange is not commonly
Crossing through a bank, adding security crossed, but it can be made payable
by restricting the payment through a bank if specified.
method.
Primarily used for personal or Used primarily in trade transactions,
Usage business transactions (paying particularly in international trade and
bills, salaries, etc.). business dealings.
A cheque can be transferred to A bill of exchange is easily transferable
others via endorsement, but it is through endorsement or delivery,
Transferability
primarily for the payee specified making it a versatile negotiable
on the cheque. instrument.
A cheque may be dishonored
A bill of exchange can be dishonored if
Risk of (rejected by the bank) if there
the drawee refuses to accept or pay it, and
Dishonor are insufficient funds in the
the drawer will be liable.
drawer's account.