CREDIT INSTRUMENTS ( BILL OF EXCHANGE

Q.1 DEFINE BILL OF EXCHANGE , ITS CHARACTERISTICS, PARTIES & ITS SPECIM

BILL OF EXCHANGE
" A Bill of Exchange is an instrument in writing containing an unc
the maker directing a certain sum of money to certain person at a fixed future time."

Negotiable Instrument Act 1881 states…

" An instrument in writing containing an uncond
maker, directing a certain person to pay a certain sum of money only to or to the order of a c
bearer of the instrument, on demand or at a fixed future time."

CHARACTERISTICS/ CONTENTS/ FEATURES/ ESSENTIALS OF BILL OF EXCHANGE

Following characteristics are as under.

1 IT MUST BE IN WRITING:
A bill of exchange must be in writing. A verbal order to pay canno
practice, the bill of exchange is written on stamp paper. It is written in ink. It may be printed

2 IT MUST CONTAIN AN UNCONDITIONAL ORDER TO PAY:

The language used in a bill of
not a request for e.g.. " Mr. James , please pay Rs. 5000 to Alex.
because the word please is used.
And the order to pay must not depend upon the happeni
condition. It must be unconditional. For e.g.. " Pay Rs. 5,000 to Ahmed as early as p
( This is not a valid bill of exchange because condition is there i.e. as early as possible).

3 IT MUST BE SIGNED BY THE DRAWER:

It must be signed by the drawer, if the drawer is
impression is sufficient.

4 THE SUM PAYABLE MUST BE IN MONEY:

It is necessary that the payment must be made
other goods. If the bill contains an order to pay money & something in addition to money it c
bill of exchange. For e.g.. "Pay Rs. 5,000 & deliver 100 bags of wheat to Andrew." (

5 THE SUM PAYABLE MUST BE CERTAIN:

It is also essential that the sum payable must be
" Pay Rs. 5,000 or Rs. 6,000 to Peter.' ( So this is not a valid bill of exchange).
 6 THE DRAWEE MUST BE A CERTAIN PERSON:
The drawee of a bill of exchange must be a certa
drawee must be mentioned in the bill. If the bill does not mention the name of the drawee it i

7 THE PAYEE MUST BE A CERTAIN PERSON:

The payee of a bill of exchange must be a certai
should be indicated on the bill.

8 REVENUE STAMP:
The bill of Exchange must be properly stamped.

PARTIES OF BILL OF EXCHANGE :

Following parties of Bill of Exchange are under.

1 DRAWER:
The person who makes the bill of exchange is called the drawer.

2 DRAWEE:
The person who is directed to pay is called Drawee.

3 PAYEE:
The person to whom the payment is to be made is called the Payee.

4 ACCEPTOR:
The person who accepts the bill of exchange is known as Acceptor.

5 HOLDER:
The person who physically possesses/ holds the bill of exchange is known as holde

6 ENDORSER:
The person who transfer the bill to another person is known as Endorser.

7 HOLDER IN DUE COURSE:

A person who rightfully possesses the bill , he receive s it in good
regular on the face of it & without the knowledge of its previous dishonour.

Q.2 EXPLAIN KINDS / TYPES/ CLASSIFICATION OF BILL OF EXCHANGE.

Following kinds are as under.
1 BILL IN SETS:
When bill is made in one or more in number is known as " Bill in sets."
for acceptance. The third part of bill are sent due to safety transmission. It is also used to av

2 ACCOMODATION BILL:
These bills are drawn in order to borrow certain sum of money so it is calle

3 INLAND BILL :
Inland bill means the bill which is drawn & payable within the same country is know

4 FOREIGN BILL :
The bill which is written in one country like Pakistan, but it is accepted & paid in oth
called Foreign bill.

5 DOCUMENTARY BILL:
When documents are attached with a bill is known as " Documentary bill" . These d
(i) Railway receipt (ii) Marine insurance policy (iii) Invoices (iv) Bill of lading etc.

6 NON- DOCUMENTARY BILL :

When there is no documents are attached with the bill is known as " Non-

7 DEMAND BILL :
When bill is paid immediately on demand it is known as demand bill. It does not con

8 TIME BILL :
A bill which is payable at fixed period on a specified day is known as time bill.

9 ORDER BILL:
The payment of the bill is restricted to the person whose name has been mentioned in the bi

10 BEARER BILL:
These bills are payable to any person whose carries them. There is no restriction fo
carries the bill can get the payment against the bill.

Q.3 DEFINE NEGOTIABLE INSTRUMENT & ITS ESSENTIALS.

NEGOTIABLE INSTRUMENTS:
The word negotiable means transferable by delivery, & the word i
written document. Thus the term negotiable instrument means a written document transfera
" A Negotiable instrument means a promissory note , bill of exchange or cheque payable eit
CHARACTERISTICS/ CONTENTS/ FEATURES/ ESSENTIALS OF NEGOTIABLE INSTR
Following characteristics are as under.

1 IN WRITING:
A negotiable instrument is always in writing. It cannot be verbal or in any other way
bill of exchange & promissory note all are in written form.

2 UNCONDITIONAL:
A negotiable instrument contains an unconditional promise or order. No co
Bill of exchange & cheque are unconditional order but promissory note is an unconditional p

3 PAYABLE:
A negotiable instrument is always payable on demand or at a determinable future ti

4 PAYMENT IN MONEY ONLY:

A negotiable instrument is always payable in money only.
5 CERTAIN SUM:
The amount of money written on the instrument is certain & fixed amount.
amount like whatever is payable etc.

6 PAYABLE TO THE SPECIFIC PERSON:

The amount of the instrument is payable to a specific pe
bearer. The payment of the negotiable instrument is payable to the person whose name is gi

7 EASY TRANSFERABILITY:
They are transferable from one person to another. The right of ow
instruments can be transferred from one person to another easily.

Q.4 DEFINE ENDORSEMENT ITS ESSENTIAL & ITS KINDS.

ENDORSEMENT
The word "ENDORSEMENT" is derived from the Latin word "ENDORSUM"
It mean writing of a person's name on the back or face of the negotiable instrument for the p
property in the instrument.
" Endorsement mean authorizing a person to receive the paymen
exchange or pro - note on behalf of the payee. The person who sign the cheque is called "E
transferee of cheque is called " ENDORSEE".
CHARACTERISTICS/ CONTENTS/ FEATURES/ ESSENTIALS OF ENDORSEMENT.
Following characteristics are as under.

1 It consists the signature of the holder.

2 It should be made by the holder or the maker. It cannot be endorsed by a stranger.
3 It must be made in ink. An endorsement in pencil or by rubber stamp is invalid.
4 If the endorser is an uneducated person, he may endorse the instrument by affixing his thum
5 In case of endorsement by affixing thumb impression, it should be attested by some body.
6 The name of married women should be accompanied by the name of her husband.

TYPES / KINDS/ CLASSIFICATION OF ENDORSEMENT:

Following kinds are as under.
1 BLANK / GENERAL ENDORSEMENT:
When the endorser simply puts his signature on the back
specifying the name of the endorsee it is said to be a general endorsement.. OR When the e
of the cheque , pro-note or bill of exchange without mentioning the name of the endorsee it i
general endorsement.

2 SPECIAL ENDORSEMENT:
If the endorser signs & writes the name of the person to whom the amount
it is said to be a Special Endorsement. For e.g.. " Pay to Mr. Ali."

3 PARTIAL ENDORSEMENT:
When the endorsement is made for a part of the amount rather tha
Partial Endorsement . By law such endorsement is not acceptable.
For e.g.. " Pay John Rs. 5,000 out of Rs. 10,000. ( This is not a valid endorsement)

4 QUALIFIED OR CONDITIONAL ENDORSEMENT:

When the endorser adds certain conditions to th
to be a conditional endorsement. For e.g.. " Pay to Andrew , if he returns from US

5 RESTRICTIVE ENDORSEMENT :
When an endorser transfer the credit instrument to a per
"ONLY" after his (endorsee) name, the endorsement is known as Restrictive Endorsement.
For e.g.. If endorser orders " Pay to Atif only" Such endorsement is referred

Rs.50,000 Karachi
20th -Mar- 2010
Three months after date, pay to Alex or order the sum of
Rupees Fifty Thousand Only for value received.

To
Stamp
Mr. Peter
Saddar Karachi ( Signature of John)
OF EXCHANGE )
RTIES & ITS SPECIMEN.

ing containing an unconditional order signed by

d future time."

containing an unconditional order, signed by the

o or to the order of a certain person or to the

ILL OF EXCHANGE.

bal order to pay cannot be a bill of exchange . In

ink. It may be printed or typed.

guage used in a bill of exchange should be an order

So this is not a valid bill of exchange

end upon the happening of an event or any

o Ahmed as early as possible."
early as possible).

drawer, if the drawer is uneducated his thumb

yment must be made in money only not any

addition to money it cannot be called a
of wheat to Andrew." (this is not a valid bill).

e sum payable must be certain & definite. For e.g..

of exchange).
change must be a certain person. The name of the
name of the drawee it is not a valid bill .

hange must be a certain person .The payee's name

ange is known as holder.

as Endorser.

he receive s it in good faith, takes it as complete

CHANGE.
 The bill in set are sent to drawee
on. It is also used to avoid any delay.

of money so it is called accommodation bill.

same country is known as inland bill.

accepted & paid in other country like USA is

mentary bill" . These documents includes

v) Bill of lading etc.

ill is known as " Non- Documentary Bill".

and bill. It does not contain any particular period.

nown as time bill.

en mentioned in the bill is known as order bill.

ere is no restriction for payment. A person who

delivery, & the word instrument means a

en document transferable by delivery.
or cheque payable either to order or bearer."
 EGOTIABLE INSTRUMENT.

bal or in any other way. For example the cheque

promise or order. No condition can attach with it.

e is an unconditional promise.

determinable future time.

n money only.

ertain & fixed amount. It cannot be for uncertain

ayable to a specific person or his order or to

rson whose name is given in the instrument.

nother. The right of ownership in these

n word "ENDORSUM" which mean "ON THE BACK"

le instrument for the purpose of transferring the

to receive the payment of a cheque or bill of

he cheque is called "ENDORSER" & the
NDORSEMENT.

y a stranger.

ent by affixing his thumb impression thereon.

ested by some body.
her husband.

ng kinds are as under.

s signature on the back of the instrument without

ment.. OR When the endorser sign on the back
me of the endorsee it is called simple or

n to whom the amount is to be transferred

f the amount rather than the full, it is known as

lid endorsement)

certain conditions to the endorsement it is said

, if he returns from USA within 03 months."

dit instrument to a person & adds the word

trictive Endorsement.
ndorsement is referred to restrictive endorsement.

SPECIMEN OF BILL OF EXCHANGE.