Negotiable Instrument and Secured Transactions

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  • Topic: Negotiable instrument, Promissory note, Bearer instrument
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CPA Regulation
Negotiable Instruments and Secured Transactions

Negotiable Instruments and
Secured Transactions
What is a note and who are
the parties to a note?

© 2011 HOCK international

91

A note is a written promise to pay money. Notes are different from drafts in that notes are a promise to pay. If there is any doubt whether a document is a note or a
draft, the holder of the document can decide what it is.
There are two parties involved in a note.
1) The Issuer (Maker) is the promisor. This is the party
who is obligated to pay the note.
2) The Payee is the person to whom the note is owed.
The Payee will receive the money paid by the Issuer.

CPA Regulation
Negotiable Instruments and Secured Transactions

What is a draft and who
are the parties to a draft?

© 2011 HOCK international

92

A draft is a written order to pay money. In a draft, one
party orders another party to pay money to yet a third
party.
If there is any doubt whether a document is a note or a
draft, the holder of the document can decide what it is.
There are three parties involved in a note:
1) The Drawer – The drawer writes and signs the note,
2) The Drawee (usually a bank) – The drawee is ordered by the drawer to pay the Payee, and 3) The Payee – The payee will receive the money from
the drawee.

CPA Regulation
Negotiable Instruments and Secured Transactions

What are the
common types of
notes and drafts?

© 2011 HOCK international

93

The main types of notes are:
1) certificate of deposit (a bank promissory note);
2) time note (payable at a specific time in the future);
3) demand note (payable when it is presented to the
issuer); and
4) installment note (the principal is payable over
time).
The main types of drafts are:
1) checks (written on a bank and payable on demand,
requiring the drawee to be a bank);
2) cashier’s checks (a check that is drawn by a bank
on itself);
3) trade acceptances (a seller of goods writes a draft
ordering the buyer to pay at a future time);
4) sight drafts (a draft payable when it is delivered);
and
5) time drafts (a draft payable with a certain period of
time).

CPA Regulation
Negotiable Instruments and Secured Transactions

What are the five
elements of negotiability?

© 2011 HOCK international

94

In order for an instrument to be negotiable, it must
have the following five elements:
1) It must be in writing and signed by the issuer.
2) There must be a sum certain.
3) There must be an unconditional promise or order
to pay.
4) It must be payable upon demand or at a specific
time.
5) It must be payable either to order or to bearer.

CPA Regulation
Negotiable Instruments and Secured Transactions

What are the
requirements for the
writing and signature?

© 2011 HOCK international

95

A negotiable instrument cannot be an oral communication
– it must be written. However, there is no requirement
that the writing be on a piece of paper (the writing may
be on other items).
Additionally, the instrument must be signed by the
issuer, or drawer, to be considered negotiable. The use
of any symbol executed or adopted by a party with a
present intention to authenticate a writing is sufficient to meet the definition of signed. Thus, a signature can be
made manually or by means of a device or a machine,
and it can use any name (including a trade or business
name) so long as the signatory intends to authenticate the
writing. The signature can also be a sign or symbol different from the person’s name.

CPA Regulation
Negotiable Instruments and Secured Transactions

What are the exceptions
to a sum certain?

© 2011 HOCK international

96

Though these items appear to contradict the sum certain
requirement, the following items do not destroy the negotiability of a note: 1) A disparity between the words and numbers on an
instrument (in this case the written words are used,
not the numbers);
2) A...
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