1. Chapter Three
Credit Instruments

2. Definition
A credit instrument is a written or printed paper by means of which funds are transferred from one person to another.
Credit instruments most commonly used in international payments and settlements are bills of exchange, promissory notes and checks. They are also known as negotiable instruments. Credit instruments may also take such forms as traveler’s cheques, certificates of deposit, treasury bills, treasury bonds, etc.

3. Negotiable Instruments What is a negotiable instrument?
Bills of exchange, checks, promissory notes, dividend warrants (股息单), bearer bonds （不记名债券）, bearer scrips （不记名临时凭证）, debentures payable to bearer （不记名公司债券）, share warrants payable to bearer （不记名认股证）, Treasury Bills, certificates of deposit are all negotiable instruments, providing they are in a deliverable state, i.e. in favor of “the bearer”. D. Richardson defines a negotiable instrument as:

4. Definition
“A negotiable instrument is a chose in action（依法判得但未实际占有的动产）, the full and legal title to which is transferable by delivery of the instrument (possibly with the transferor’s endorsement) with the result that complete ownership of the instrument and all the property it represents passes free from equities to the transferee, providing the latter takes the instrument in good faith（善意持有）and for value（付了对价）.”

5. Functions of a negotiable instrument
(a)    As a means of payment
(b)    As a credit instrument
(c)    As a negotiable instrument

6. Parties to a negotiable instrument
(a)    Drawer : A drawer is the person who draws a bill of exchange or a check upon the drawee for the payment of a certain amount of money.
(b)    Drawee : A drawee is the person upon whom a bill of exchange or a check is drawn. He is also known as the addressee of a draft.
(c)    Payee: A payee is the person to whose order the drawee is to make payment or to whom the money is to be paid.

7. Parties to a negotiable instrument
(d)    Acceptor: If and when the drawee agrees and assents to the order in writing addressed to him on a bill of exchange by signing his name on its face, indicating that he will pay on due date, the drawee will become an acceptor.
(e)    Endorser: When a payee or a holder signs his name on the back of an instrument for the purpose of transferring it to another person, he is called an endorser. He is liable to his subsequent endorser（后手）, his endorsee or any subsequent holder of the instrument.

8. 3 Parties to a negotiable instrument
(f)     Endorsee: An endorsee is the person to whom an instrument is endorsed. He is the holder of an instrument, which has been transferred by the endorser.

9. Parties to a negotiable instrument
(g)    Guarantor: A guarantor is the person who guarantees the acceptance and payment of a bill of exchange, though he is not a party liable thereto. The obligations of the guarantor are the same as those of the guaranteed.

10. Parties to a negotiable instrument
(h)      Holder: A holder is the possessor of an instrument, namely the payee, the endorsee or bearer. He may sue, if needed , on the instrument in his own name.

11. 3 Parties to a negotiable instrument
(i)      Holder for value: A holder for value is the person who possesses an instrument for which value has been given by himself or by some other person.

12. Parties to a negotiable instrument
Holder in due course（正当持票人）: The person who is in possession of an instrument that is
(1) complete and regular on its face, (2) taken before maturity without notice of its previous dishonor

13. Parties to a negotiable instrument
(3) taken in good faith and for value and
(4) taken without notice of any infirmity in the instrument or defect in the title of the person negotiating it. He is also called a bona fide holder（善意持票人）, who may claim payment from all parties liable on the instrument.

14. Essentials of a negotiable instrument
1.   An unconditional order or promise in writing to pay a sum certain in money;
2.   Addressed by one person to another;
3.   Payable to bearer or to order;
4.  Payable on demand or at a definite future time.

15. Bill of Exchange (Draft) What is a bill of exchange?
A bill of exchange is an unconditional order① in writing⑥, addressed by one person (the Drawer) ②to another (the Drawee)③, signed by the person giving it④, requiring the person to whom it is addressed (the Drawee, who when he signs becomes the Acceptor) ⑤ to pay on demand, or at a fixed or determinable future time⑦, a sum certain in money⑧, to or to the order of a specified person, or to bearer (the payee)⑨. (Bills of Exchange Act, 1882 of the United Kingdom)

16. EXHIBIT-1 ⑥ Exchange for ⑧USD25, 000. Shanghai, March 19th, 2001
⑦ At sight① pay to the order of ⑨ the Bank of China
The sum of ⑧twenty-five thousand U.S dollars only.
Value received.
To: ③⑤The Citi Bank For②China National Chemicals New York, N. Y., U.S.A. Import & Export Corporation, S. B.
(Signed)④

17.      
Exchange for
£ 6,856.00
Hong Kong., 25th July, 2007 At
……30 days………sight
of this First of Exchange
(Second of the same tenor and date unpaid)
to the order of
Pay to
The Chartered Bank
The Sum of
POUNDS STERLING SIX THOUSAND EIGHT HUNDRED AND FIFTY SIX ONLY ……
Drawn under Standard Chartered Bank Ltd., London Letter of Credit
No. 4/4108 dated 12th July, against shipment of Grey Shirting
from Hong Kong to Liverpool per s. s. Golden Star.
To: Standard Chartered Bank Ltd.,
London.
For Hong Kong Textiles Manufacturing
Company, Hong Kong
(Signed)    

18. Essentials of a bill of exchange
In conformity with the Bills of Exchange Act 1882 of the United Kingdom and the Uniform Law on Bills of Exchange and Promissory Notes 1930 of Geneva, a bill of exchange must fulfill the following requirements:

19. KEY ELEMENT (a)The word “Exchange”
(b)An unconditional order in writing
(c)Name and address of the drawee
(d)Drawer’s signature(s)

20. KEY ELEMENT (e) Date and place of issue
(f)  Name or business entity of the payee
(g)    Tenor
(h)    Place of payment
(i) Amount

21. Acts of bill of exchange ( draft )
Issuance: to issue a draft comprises two acts to be performed by the drawer. One is to draw and sign a draft; the other is to deliver it to the payee.

22. 3 Acts of bill of exchange ( draft )
Endorsement: It is an act of negotiation. Prerequisites for a valid endorsement:
(1) should be normally effected on the back of a draft and signed by the endorser.
(2) must be made for the whole of the draft.

23. Four kinds of endorsements
Blank endorsement: An endorsement in blank is one that shows an endorser’s signature only and specifies no endorsee. It is also called a general endorsement. A draft so endorsed becomes payable to bearer（持票来人）.

24. (2) Special endorsement
A special endorsement is one that specifies an endorsee to whom or to whose order the draft is to be paid, in addition to the signature of an endorser. For example:
“Pay John Smiths”.

25. (3) Restrictive endorsement
An endorsement is restrictive when it prohibits further transfer of the draft. For example:
“Pay John Smiths only”.

26. (4)Conditional endorsement
A conditional endorsement is a special endorsement adding some words thereto that create a condition bound to be met before the special endorsee is entitled to receive payment. The endorser is liable only if the condition is fulfilled. For example: “Pay to John Smith upon his delivery of warehouse receipt（仓库收据）of 100 cases of corn”.

27. (b)  Presentment
a draft must be duly presented for payment if it is a sight bill or duly presented for acceptance first and then presented for payment at maturity if it is a time bill.

28. (c)  Acceptance
Acceptance of a draft is a signification by the drawee of his assent to the order given by the drawer. He engages, by signing his name across the face of the bill that he will pay when it falls due. So presentment for acceptance is legally necessary to fix the maturity date of a draft payable after sight. Valid acceptance requires:

29. (c)  Acceptance
(1) the word “accepted” must be written on the bill to be followed by the signature of the acceptor and the date of acceptance. A mere signature of the acceptor without additional words is also justified.
(2) It ought not be expressed that the drawee will carry out his promise by any other means than the payment of money.

30. (d) Payment
Act of payment is performed when a bill of exchange is paid. A bill is discharged（偿还债务，清偿） by payment in due course only when such payment is made by or on behalf of the drawee or the acceptor.

31. (e)  Dishonor
Act of dishonor is a failure or refusal to make acceptance on or payment of a draft when presented.

32. (f)Notice of dishonor
A notice on which default of acceptance or of payment by the drawee or the acceptor is advised, to be given by holder of a draft to the drawer and all the endorsers whom he seeks to hold liable for payment.

33. (f)Notice of dishonor
A notice of dishonor must be given by or on behalf of the holder or an endorsee on the next business day after the dishonor of the draft.

34. (g)      Protest
A written statement under seal drawn up and signed by a Notary Public or other authorized person for the purpose of giving evidence that a bill of exchange has been presented by him for acceptance or for payment but dishonored.

35. (h)  Right of recourse
In the event of a draft being dishonored, the holder has a right of recourse against the other thereto, that is, a right to claim compensation from the drawer or any endorser.

36. (k) Guarantee
(k).Act of guarantee is performed by a third party called guarantor, who engages that the bill will be paid on presentation if it is a sight bill or accepted on presentation and paid at maturity if it is a time bill.

37. (l) Discounting
Discounting a bill of exchange is to sell a time bill already accepted by the drawee but not yet fallen due to a financial institution at a price less than its face value.

38. Illustration of procedures
①     To issue a bill, present it for acceptance
②     To accept it
③     To sell it to the discounting house
④     To pay the amount (i.e. less than the face value)
⑤     To present it for payment at maturity
⑥     To pay the face value
  Drawer ③ Discount house
② ④ ⑤
① Drawee⑥

39. For example
suppose an accepted bill for USD50, 000 falls due on June 30, the exporter takes it to a discount bank on April 6. If the discount rate is 10%, the discount interest is calculated as follows: D = V x T x R / 360, where
D = discount interest V = face value of the bill T = tenor (days) R=discount rate (n%p.a.)
Hence: D = 50,000 x 85 x 10% / 360 = 1180
The amount the exporter can get is:
50, = USD 48,820

40. Classification of a bill of exchange
(a)    According to the drawer
Banker’s draft or bank draft: It is a draft drawn by a bank on another bank.
Trade bill: It is a bill issued by a trader on another trader or on a bank

41. (b) According to the acceptor
(1)    Trader’s acceptance bill
It is a time bill drawn on a trader and has been accepted and signed by him for payment at maturity.

42. (b) According to the acceptor
(2)    Banker’s acceptance bill: It is a time bill drawn on a bank and accepted and signed by this bank for payment at maturity. This kind of bill is more preferable and negotiable than the trader’s acceptance bill and more acceptable in the discount market.

43. (c) According to the tenor
(1)    Sight bill: It is a bill payable on demand or at sight or on presentation.
(2)    Time bill or Usance bill: It is a bill payable at a fixed or determinable future time.

44. (d) According to whether commercial documents are attached thereto
(1)    Clean bill (光票): It is a bill without shipping documents attached thereto.
(2)    Documentary bill: It is a bill with shipping documents attached thereto.

45. Promissory Note
A promissory note is an unconditional promise① in writing⑦ made by one person (the maker) ② to another (the payee or the holder) ③ signed by the maker④ engaging to pay ⑤on demand or at a fixed or determinable future time⑧ a sum certain in money⑥ to or to the order of a specified person or bearer.

46.    EXHIBIT -9
Promissory Note New York, April 1, 2001
For ⑥ USD99,
On ⑧the 20th June 2001 fixed by the promissory note ①we promise⑤to pay③BA the sum of ⑥ninety-nine thousand and nine hundred and ninety-nine U.S. Dollars only.
For and on behalf of
②CD
(signed)④

47. Characteristics of a promissory note
(a)    It is an unconditional promise in writing.
(b)    The basic parties to a promissory note are the maker and the payee. The maker corresponds to the drawer as well as the drawee of a bill of exchange.

48. Characteristics of a promissory note
(c)    There is no need to accept the instrument if it is payable at a fixed or determinable future time. In all cases the maker is the primarily liable party.

49. Characteristics of a promissory note
(d)    Promissory notes other than those issued by banks are not very widely used in modern commercial transactions. Bearer promissory notes payable on demand and issued by banks are equivalent to bank notes of large denomination, which may cause inflation and are prohibited by the government in many countries.

50. Essentials to a promissory note
(a)    The words “promissory note” clearly indicated.
(b)    An unconditional promise to pay.
(c)    Name of the payee or his order.
(d)    Maker’s signature.

51. Essentials to a promissory note
(e)    Place and date of issue.
(f)     Period of payment.
(g)    A certain amount of money.
(h)    Place of payment.

52. Difference between a promissory note and a bill of exchange
(a)A promissory note is a promise to pay, whereas a bill of exchange is an order to pay.
(b)There are only two parties to a promissory note, namely the maker and the payee (or the holder in the case of a bearer note), whereas there are three parties to a bill of exchange, namely the drawer, the drawee and the payee;

53. Difference between a promissory note and a bill of exchange
(c)The maker is primarily liable on a promissory note, whereas the drawer is primarily liable, if it is a sight bill, and the acceptor becomes primarily liable, if it is a time bill;

54. Difference between a promissory note and a bill of exchange
(d)When issued, a promissory note has an original note only, whereas a bill of exchange may be either a sole bill or a bill in a set, i.e. a bill drawn with second of exchange and third of exchange in addition to the original one.

55.       Check
A check is an unconditional order① in writing② addressed by the customer③ (the drawer) to a bank (the drawee) ⑤ signed by that customer④ authorizing the bank to pay on demand⑥ a specified sum of money⑦ to or to the order of a named person or to bearer (the payee) ⑧.

56. Exhibit ②Check for ⑦USD10,000. Shanghai, May 4,2001
Pay to⑥①the order of John Smith⑧ the sum of⑦ ten thousand U.S. Dollars only
To:⑤ Bank of China, For China National Shanghai, China Arts& Crafts Import & Export Corp. ③
(Signed)④

57. Essentials to a check (a) The word “check” clearly indicated.
(b)    An unconditional order in writing.
(c)    Name of the paying bank.
(d)    Drawer’s signature.

58. Essentials to a check
(e)    Place and date of issue.
(f)     Address of the paying bank.
(g)    A sum certain in money.
(h)    Name of the payee.

59. Features of a check (a) A check must be unconditional.
(b)    A check must be drawn on a bank.
(c)  A sum certain in money must be written on a check, which should be signed by or per procurement for the drawer.

60.       Features of a check
(d)The date of a check is not essential in that it can be antedated, post-dated or dated on a non-business day.
(e)The payee may be bearer, a specified person or his order.

61. Parties to a check (a) Drawer: The customer who writes the check
(b)    Drawee: The banker on whom the check is drawn and to whom the order to pay is given.
(c)    Payee: The person to whom a check is stated to be payable

62. A banker’s duty to honor checks
The banker is obliged to honor a customer’s checks up to the amount of his credit balance or available overdraft limit. The banker’s duty to honor the check ends on
1. Countermanding of payment by the customer—commonly known as “stop”;
2. Receiving notice that the customer has died or dissolved;

63. A banker’s duty to honor checks
receiving notice of bankruptcy or liquidation of the customer;
receiving order that is made against the customer;
receiving notice of mental disorder of the customer;
receiving a garnishee order (向债务人下达的扣押（财产）令) against the customer’s account;
receiving a court order freezing the customer’s account.

64. Countermand of payment
Countermand of payment denotes the cancellation by the customer (the drawer) of his mandate to the drawee bank or paying bank of the check, but in order to be effective the countermand must actually come to that bank’s notice.
Mere constructive countermand〖推定止付〗, such as the bank is supposed to be in a position to learn of the stop payment, is not enough.

65. Countermand of payment
The drawer is the only person who can instruct the drawee bank to stop payment on a particular check.

66. Position when a banker wrongfully pays a check.
If a banker pays a check without authority, if the customer’s signature is forged, or the check is void because of material alteration, prima facie(at first sight; before closer inspection) the banker cannot debit its customer’s account. But:

67. Position when a banker wrongfully pays a check.
i. The customer must bear any loss caused by breaching his duty to carefully draw a check in such a way that no alteration could have been made.

68. Position when a banker wrongfully pays a check
ii. Sometimes the customer is estopped〖禁止翻供〗, for example, if the banker suffers detriment损失 from the customer’s failure to notify him promptly after discovering that his signature has been forged.

69. Check clearing
The process of obtaining payment for his customers for checks that are paid into the branch from customers of other branches.
a system of sending these items from one bank to another.

70. Check clearing
When a customer pays a check into his branch that is drawn on another branch or bank, he is asking his branch to obtain payment on his behalf and to have his account credited.当顾客将一张开给另一银行为付款人的支票存入自己的银行时，他就是要求自己的银行代表他来获得付款并贷记他的帐户。

71. Check clearing
This process identifies two key roles that banks have to play in the check clearing system. These are the roles of collecting bank and paying bank.

72. Collecting bank代收银行
Collecting bank: the bank who accepts a check for credit into an account of his customer.承兑支票并贷记入其客户的帐户
To carry out the role of collecting bank, it is important that all the checks accepted for deposit should be carefully scrutinized. The points to be checked:

73.   Date
Out of date〖支票过期〗: A check is valid for six months from the date of issue, unless a shorter period is written on the face of the check. For example, if a check dated 8th March 2001 is presented on 10th September the same year, it would be out of date.

74. Post dated
Post dated〖填迟日期〗: This means that the check is dated later than the day on which it is presented, in the above example, if the check was presented on any day before 8th March 2001, it would be “post-dated”.

75. Undated
Undated〖未注明日期〗: If a check is presented undated, the payee can insert a date and should be asked to do so by the bank cashier. If any undated checks are mistakenly accepted, the date stamp can be used to insert it. However, once a date is entered on a check, it cannot be altered by the payee.

76. Payee and Words and figures
The payee’s name should be the same as the one shown on the account that the check is being paid into. If the name is different, an endorsement is required.

77. Payee and Words and figures
n       Words and figures
Both words and figures should be written and should agree. If they disagree, the check should be returned to the drawer for amendment or for a new check to be issued.

78. Signature, Endorsement and Crossing
Signature The check must be examined to see if it is signed. A check without a signature written in is not an effective check.

79. Signature, Endorsement and Crossing
If a check is transferred to a third party, it should be endorsed by the payee, and if it is transferred for more than once, the endorsement should agree and be consistent.
Crossing When a check is crossed, it must be paid into a bank account and cannot be cashed over the counter.

80. Paying bank 解付行
Paying bank: the bank who effects payment of the check drawn by his customer.

81. The points worthy of attention
the check is drawn on the paying bank and its branch;
the check has the correct date;
the words and figures agree;
the signature complies with the authority;

82. The points to pay attention:
the check must be complete and regular;
there is no material alteration (重要改变,实质性改变)
the check is payable to a specified person or bearer;
there is no countermand of payment;
there is sufficient funds;
there is no legal bar〖法律约束〗

83. Process of Check Clearing
1. The payee presents the check to his own bank and requests the bank to collect it.
2.The collecting bank examines the check to insure that it is in order.

84. Process of Check Clearing
Payee
Paying bank
Drawer
Collecting bank
cheque
payment
Payment or credit note
debit note
a/c

85. Process of Check Clearing
3. The collecting bank presents the check to the paying bank.
4.The paying bank pays the collecting bank when it is satisfied that the check is properly drawn and there are sufficient funds or overdraft balance in the drawer’s account.
5. The collecting bank credits the payee’s account when he receives the funds from the paying bank.

86.      Crossed checks
A crossing is in effect an instruction to the paying bank from the drawer or holder to pay the fund to a bank only. Hence, such checks will not be paid over the counter of the paying bank and must be presented for payment by a collecting bank.

87. General crossing
General crossing: Where a check bears across its face an addition of:
(a)    the words “and company”, or any abbreviation thereof, between two parallel transverse lines, either with or without the words “not negotiable”; or

88. General crossing
(b)    two parallel transverse lines simply, either with or without the words “not negotiable”, that addition constitutes a crossing, and the check is crossed generally.
The effect of a general crossing is to make the check payable only through another banker (it must be deposited into a bank account for clearing).

89. Examples are: EXHIBIT -12
___________ _____________
___________ Not negotiable negotiable
(A) (B)
___________ ______________
Account payee Not negotiable a/c payee
(C) (D)

90. Special crossing
Special crossing: Where a check bears across its face an addition of the name of a bank, either with or without the two parallel transverse lines, that addition constitutes a special crossing〖特殊划线〗. If a check is crossed specially, only the bank mentioned in the check can receive payment from the drawee bank.

91. Examples are: EXHIBIT -13
___________ ____________
___ABC Bank ABC Bank____
(A) ICBC Bank for collection
(B)
______________
A/C Payee
BOC Bank
(C)

92. Aim of crossing a check
Principally, crossing a check is aimed at making it more certain for the right holder to obtain its payment, and more difficult for a wrongful holder to negotiate it or obtain the sum stated in the check.

93. Aim of crossing a check
The holder of a crossed check cannot encash it at the drawee bank and must either deposit it in the drawee bank crediting his account or have the drawee bank pay the sum to another bank crediting his account through the local clearing.

94. Aim of crossing a check 'Not transferable' and 'account payee only'
Crossing a cheque with 'not transferable', 'account payee' or 'a/c payee' means that the cheque cannot be used by someone else. A cheque marked as 'account payee' can only be paid into the bank account in the same name of the person it is made out to. Some people write 'only' after a/c payee. This makes it clearer to the person receiving the cheque but it is not necessary to add only.
This will help reduce cheque fraud, as anyone using the cheque can only put it into the account named on the cheque. But because only the person named on the cheque can bank it, it is very important that the name is correct.

95. Aim of crossing a check Not negotiable cheques
This is not the same as 'non-transferable'. A cheque marked 'not or non- negotiable' can be transferred to someone other than the person it is made out to. But it still has to be paid into a bank account.
Do not accept a 'not transferable' or 'account payee' cheque if it has been transferred to you. Only accept it if it has been made out to you in the first place. Make sure your name is written correctly, as it must be the same name as your bank account.
eg, imagine you were selling your car over the weekend. The buyer didn't have enough cash but offered you their pay cheque. If it's 'non transferable' your bank could decline to take it. Then you'd have to track down the buyer and get them to pay you again.

96. Aim of crossing a check Cash cheques
Writing a cheque out to 'cash' means that anyone can cash it for the sum it is written out for. It does not have to be paid into a bank account. This can be done for someone who may not have a bank account so don't also cross the cheque with 'non transferable' or 'a/c payee'.
But also be aware that if a cash cheque is lost, anyone could bank it.

97. Difference between a check and a bill of exchange
A bill of exchange may be drawn upon any person, whereas a check must be drawn upon a banker.
Unless a bill is payable on demand, it is usually accepted, whereupon the acceptor is the primarily liable party. A check need not be accepted for it is payable only on demand and the drawer is the party primarily liable.

98. Difference between a check and a bill of exchange
A bill must be presented for payment when due, or else the drawer will be discharged. A check must be presented for payment within a reasonable time or within a certain time, such as 30 days according to the regulations of the country concerned.

99. Difference between a check and a bill of exchange
The drawer of a check is not discharged even though it has not been presented for payment within the stipulated time unless the delay in presentation incurs losses to the drawer.

105. 1、出票行出票的处理（①~③）
（1）申请人——填交汇票申请书（一式三联）
①存根
②借方传票
③贷方传票