Chapter 2 : Negotiable Instruments


Negotiable instrument can be transferred from one person to another. A bill or any instrument is negotiable when it is transferred from one person to another person in such manner as to constitute the transferee the holder of the bill or instrument. E.g. traveller cheque , bank draft and promissory notes.
Chapter 2 : Negotiable Instruments 2

Characteristic of Negotiable Instruments
a) b) c) d) Transferable from one person to another with or without endorsement. The holder can sue in his own name The transferee who takes it in good faith and for value obtains a good title to it even though his transferor had a defective title or no title at all. No notice is needed to be given to the debtor or issuer of the negotiable instrument. If the words ³ non ± negotiable ´ appear on a bill of exchange, it means that the bill cannot be negotiated .
Chapter 2 : Negotiable Instruments 3

According to Bill Of Exchange Act, 1949 ± An unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to, or to the order of, a specified person, or to the bearer.

Chapter 2 : Negotiable Instruments


‡ NEGOTIABILITY vs TRANSFERABILITY ‡ Negotiability ( niaga ) ± is a form of transfer of property ( ownership ) from one person to another in a document evidencing a contractual obligation to pay money. It also refers to the ability of the transferee (penerima) to acquire a better title than that enjoyed by the IT STRESS ON transferor (pemberi). ± QUALITY ‡ Transferability (pindah ) ± refers to the ability ( of the transferor-pemberi ) to assign whatever title one possess in an instrument to another person (the transferee ± penerima ) IT STRESS ON PROCESS
Chapter 2 : Negotiable Instruments 5

while all negotiable instruments can be transferable. Chapter 2 : Negotiable Instruments 6 . not all transferable instruments are negotiable. transferability relates to the Process of passing title in an instrument. ‡ Therefore. whereas negotiability usually relates to the Quality of the title.‡ Thus.g. Cheque. E.

‡ For example. generally. Gold can be transfer but it is not negotiable instrument. then. A thief steals a gold ring and sells it to an innocent third party. Chapter 2 : Negotiable Instruments 7 . this third party will not. acquire good title to the gold right ± ³ No one can give what he does not possess´. the third party (transferee ) will acquire better title to the cheque than the thief ( transferor) because he can get the money. as a general rule. ‡ However. if the thief steals a negotiable instrument such as bearer cheque and negotiates it to an innocent third party who takes it in good faith and for value.

b) Drawee the bank that is paying the bill when it is due or matured . He can also issue the bill to himself. It can also be the drawer of the bill itself (receive payment ).Parties involved in Bill Of Exchange a) Drawer the person who issue the bill. Also known as paying bank ( bank pembayar ) c) Payee the bearer ( penerima) of the bill. Cheque pay to himself Chapter 2 : Negotiable Instruments 8 .

‡ ‡ Signed : Mr Greg David ( Drawer ) Chapter 2 : Negotiable Instruments 9 .000 ) value received.‡ EXAMPLE OF BILL OF EXCHANGE ‡ ‡ Kuala Lumpur. 2nd July 2007 ‡ ‡ To : Mr. Andrew Black ( Drawee) ‡ ‡ Three month after date pay Mr Paul Jones ( Payee) on order the sum of Ringgit Malaysia Five Thousands ( RM 5.

000 ) value received. ‡ ‡ Signed : ‡ Mr Greg David Chapter 2 : Negotiable Instruments 10 . 3 rd May 2007 ‡ ‡ To : Mr Andrew Black ‡ ‡ Payable on demand pay BEARER the sum of Ringgit Malaysia Ten Thousand ( RM 10.‡ Penang.

‡ Penang. 3 rd May 2007 ‡ ‡ To : RHB Bank ‡ ‡ Payable on demand pay Mr Greg David the sum of Ringgit Malaysia Five Thousand (RM 5. ‡ ‡ Signed : ‡ Mr Greg David ‡ Note : Payee and drawer is same person Chapter 2 : Negotiable Instruments 11 .000 ) value received.

g. in Singapore.2 types of Bill Of Exchange a) Local or inland bill bill drawn and payable in Malaysia b) Foreign bill bill drawn and payable outside Malaysia e. China etc Chapter 2 : Negotiable Instruments 12 .

Example : ³ Pay Ali or bearer ´. The bill is transferable by mere delivery without any necessity for endorsement OR signature. Chapter 2 : Negotiable Instruments 13 .The bill is payable either ³ bearer ´ or ³ order ´ a) Bearer bill ( Pembawa ) Bills that are drawn payable to bearer or on which the last endorsement is blank endorsement. Ali or any person including thief carrying this bill can get money from bank.

b) Order bill ( arahan ) Bills that are payable to or to the order of a specified person without words prohibiting further transfer. Ali must sign behind this bill if he want to give the bill to Ahmad. The bill requires valid endorsement in order to complete a transfer. Chapter 2 : Negotiable Instruments 14 . Example : ³ Pay Ali or order ´.

to operates as a negotiation.ENDORSEMENT It means a signature on the back of the bill. A simple signature is sufficient. Sec 32 BOE Act 1949 stipulates that. Chapter 2 : Negotiable Instruments 15 . the endorsement must be written on the bill itself and signed by the endorser.

Blank endorsement It is the signature of the person holding on the bill with no further instructions. In this case. the bill can be passed to anyone without further endorsement Chapter 2 : Negotiable Instruments 16 .3 types of endorsement 1.

3. Restrictive endorsement This endorsement prevent further negotiation of the bill. Special endorsement Specifies the name of the transferee and is thus payable to the named endorsee or his order. The endorsee may further negotiate it by endorsement and delivery.2. The endorsee will only have the right to receive payment on the bill. ( use word ONLY ) Chapter 2 : Negotiable Instruments 17 .

BLANK ENDORSEMENT ‡ RIDZWAN Chapter 2 : Negotiable Instruments 18 .

SPECIAL ENDORSEMENT ‡ ‡ ‡ ‡ PAY TO : RIDZWAN or order Chapter 2 : Negotiable Instruments 19 .

RESTRICTIVE ENDORSEMENT ‡ ‡ PAY TO : RIDZWAN only Chapter 2 : Negotiable Instruments 20 .

4 rules governing Presentment of payment of Bill of Exchange as provided under section 45 of Bills of Exchange Act 1949. The proper place of presentation The parties to whom presentment is to be made That presentment must be made by the holder or by some person authorized to receive payment on his behalf. 3. ( Apr 07 Q 5 a / Apr 01 Q 2 b ) 1. A bill not paid after it has been presented for payment is said to be dishonored ( tidak laku ) Chapter 2 : Negotiable Instruments 21 . A bill of exchange must be presented for payment and if it not presented. the drawer and endorsers are discharge from liability. 4. That such presentment is required to be made at a reasonable hour on a business day. 2.

before it is overdue and in good faith. and without any notice of defect in the title. Chapter 2 : Negotiable Instruments 22 .3 types of holder a) Holder of a bill Any person who is in the possession of the bill such as payee or endorsee b) Holder for value A holder for value is the holder of a bill for which value was given sometime previously. So he is a person who purchased the bill from payee or endorsee c) Holder in due course A holder in due course is the holder of a bill AND also a holder for value that receive a bill that is complete and regular on the face of it.

it is sometimes necessary to obtain formal proof that it was duly presented and dishonoured. Noting ( Noted ) ± when a bill is to be noted. the lawyer will present the bill AGAIN for acceptance or payment as the case may be. If acceptance or payment is still refused. the bill is then noted.Dishonour When a bill is dishonoured. Chapter 2 : Negotiable Instruments 23 . Protesting ( protested ) ± involve the making of a declaration by the lawyer that the bill has been presented and that acceptance or payment has been refused.

Chapter 2 : Negotiable Instruments 24 . An unconditional order in writing addressed by one person to another who must be a banker signed by the person (drawer ) giving it requiring the banker to pay on demand a sum certain in money to the ORDER of a specified person ( payee /penerima) or to BEARER ( pembawa ). Or simply. A cheque is therefore is a specified from of Bill of Exchange. A cheque is a written order instructing a bank to pay someone on demand that is to pay them when the cheque is paid in or a request for cash is made.CHEQUE / CHECK Definition of a cheque ± According to section 73(1) Bill of Exchange (BEA) 1949.

Parties to a cheque a) Drawer The person who draws a cheque ( issue the cheque / account holder / accountee) Drawee bank The banker on whom the cheque is drawn ( also known as Paying bank ) Payee The person to whom the cheque is drawn payable ( Penerima ) b) c) Chapter 2 : Negotiable Instruments 25 .

Differences between bill of exchange and cheque BILL OF EXCHANGE ( BOE) Can be drawn upon any person Can be made payable at a fixed or determinable future Must be presented for payment when due or the drawer will be discharged BOE cannot be crossed Required to be endorsed by the payee before it is presented for payment A bill when accepted. 26 Chapter 2 : Negotiable Instruments . a cheque need not to be endorsed by payee especially Bearer cheque. The drawer /accountee is the party primarily liable if the cheque is rejected. the acceptor/drawee is primarily liable to the holder ( pemegang bill ) CHEQUE Must be drawn upon a banker only ( Paying bank) Payable on demand Can be presented for payment within 6 months from the date issue The cheque may be crossed Technical speaking.

Can pass to another person .ADVANTAGES OF CHEQUE a) Can be issued for any amount subject to availability of funds ( must have enough credit balance if no overdraft facility ) Cheques are more secured than cash. Cheques can easily be transferred between parties. Cheque can be stop if loss. b) c) d) e) Chapter 2 : Negotiable Instruments 27 . Can easily send through the post /mail.

A person accepting a cheque may find that is dishonoured or rejected by Paying bank. Chapter 2 : Negotiable Instruments 28 b) c) d) . Cheques are susceptible to theft and fraud. They prefer cash or credit cards. Take time to clear a cheque before can utilise or use the fund. It is less easy to use than cash.DISADVANTAGES OF CHEQUE a) Shops will normally reject cheques as mode of payment.Eg KL cheques take 5 working days to clear.

Cheque must be signed. Thumb print ? It is important that the amount on the cheque must be stated in words tally with that in figures to meet the criteria ³ a sum certain in money ´ A cheque must be dated. It must be in writing which includes print ( using printer). If undated.POINTS TO CONSIDER WHEN DRAWING OR ISSUING A CHEQUE a) b) c) d) The cheque must be an unconditional order. Cannot be changed or altered. how ? Chapter 2 : Negotiable Instruments 29 e) .

WHO MAY CROSS CHEQUE ? Drawer. Payee & Bank b) Chapter 2 : Negotiable Instruments 30 . a) Open / uncrossed cheque A cheque without a crossing. Being able to trace into whose account the money went. More time to stop payment of a cross cheque than an open cheque. Advantages of cross cheque: i. ii. Crossed cheque ( Cek berpalang ) The holder will not be able to cash it and has to be paid into a bank account. The proceed of the cheque need not go through any account.OPEN OR CROSS CHEQUE A cheque can be encashed over the counter ( withdraw cash through counter ) OR bank into an account with a bank. Payment may be made over the counter.

2 Types of bank crossing i. i. & co iii. General crossing ± two parallel transverse lines drawn across the face of the cheque. and company ii. with or without the following words written between or near the line.not negotiable Chapter 2 : Negotiable Instruments 31 .

Must bank in into that particular bank ONLY. The main difference between general and special crossing is that special crossing contains the name of a banker whereas a general crossing does not.Special Crossing Special crossing ± a cheque bears its face an addition of the NAME of a banker either with or without the words ³ Not Negotiable ´. Cheque is crossed specially and to that banker. Chapter 2 : Negotiable Instruments 32 .

CASE: Wilson and Meeson vs Pickering. this crossing deprives the cheque of its Negotiability but not its Transferability. It questions the question of TITLE and not the question of Tansferability. Where a person takes a crossed cheque which bears on it the words not negotiable . A has better title than B because A will get the money from B but B is not guarantee to get money from other person if he want to transfer the cheque to another party.Special types of crossing a) Not negotiable crossing ( Tak boleh niaga) According to Section 81 BEA 1949. Refer Pjj page 42 Chapter 2 : Negotiable Instruments 33 . he shall not have and shall not be capable of giving a better title to the cheque than that which the person from whom he took it had. Thus. If A pass the cheque to B.

Bank was held liable for WRONGFUL CONVERSION. CASE: House Property co of London Ltd vs London Country & Westminister Bank. The proceed of the cheque ( cash) must be collected for the account of the Named Payee only. Cheque in favour of 2 trustee was paid into the trustee s lawyer account ( single name).b) Account Payee crossing It merely an instruction to the COLLECTING bank that the cheque should be paid ONLY into the account of the payee ( named person only) . Chapter 2 : Negotiable Instruments 34 .

Q 5b Chapter 2 : Negotiable Instruments 35 . f) Payee s name. Refer OCT 2004. NOTE : Bank will not pay Cheque with above alterations. Remove line.Material alteration of cheques according to section 64 BEA 1949 A cheque is deemed to have materially altered if there has been any alteration in the following: a) Date b) Amount c) Words and figures d) Crossing e) Alteration from order to bearer.

‡ Chapter 2 : Negotiable Instruments 36 . Post dated cheque IS not payable on demand and therefore cannot fall within definition of cheque ‡ C) Stale or Out of date A cheque that have a date MORE than 6 months from date of issue. ‡ B) Post dated A cheque that have a date LATER than the date of issue.Types of Dates ‡ A) Ante dated A cheque that have a date BEFORE the date of issue ( Today s date).

POST DATED or STALE / OUT OF DATE: ‡ a) 18 / 8 / 2006. Classify the following cheques whether ANTEDATED. ‡ b) 1 / 8 / 2006 ‡ c) 14 / 2 / 2006 Chapter 2 : Negotiable Instruments 37 . ‡ If today is 15 / 8 / 2006.Exercise.

b) To contact / sent notice of any dishonour cheque to its customers by post on the same day it becomes aware of the dishonoured. Chapter 2 : Negotiable Instruments 38 . otherwise it may be used for wrongfully converting the proceeds of the cheque. ( Section 49(13) BEA 1949 c) To be liable of its customer if a cheque is delay and in the clearing system. The bank has to act in GOOD FAITH and WITHOUT NEGLIGENCE.Collection of cheque Duties of Collecting bank to its customers a) To present a cheque for payment within a reasonable time.

What is GOOD FAITH ? ‡ Section 95 Bill of Exchange provide that a thing is deemed to be done in Good Faith where it is in fact done HONESTLY ( Amanah) whether it is done negligently or not. Chapter 2 : Negotiable Instruments 39 .

What is Without Negligence ? ‡ A lack of reasonable care or reasonable skill or breach of the common duty of care imposed ( Cuai ) Chapter 2 : Negotiable Instruments 40 .

Negligence of collecting bank No protection under section 85 BEA 1949 for the following negligence:a) Failure to obtain an introducer s reference when opening an account b) Failure the check legalities of the documents with relevant authorities c) Failure to make enquiries when the customers paid in third party cheques d) Failure to make enquiries where the customer is drawing cheques on a principal s account to reduce an advance owed to the bank Chapter 2 : Negotiable Instruments 41 .

Protection for the collecting bank ( defence available to collecting bank ) a) Statutory protection Section 85 BEA 1949 bank must acted in good faith and without negligence when collecting cheques from a customer. As such bank will not incur any liability to the true owner CASE: Landbroke vs Todd Bank was held negligent for not obtaining a reference / introducer before opening an account Chapter 2 : Negotiable Instruments 42 .

Chapter 2 : Negotiable Instruments 43 .b) Defence of Estoppel Protection for collecting bank where the plaintiff or customer is estopped ( preclude/prevent ) from succeeding in his claim against a bank as a result of something which he has said or done something which led the collecting banker to believe on reasonable grounds that is would be in order for the bank to collect the cheques concerned for the account of customer. The representation by the plaintiff may be by conduct or by statement ( in writing ) and it must be an existing fact and not be ambiguous. The bank must acted assuming that the representation/information was true.

Write short name for company.c) Defence of Contributory Negligence (Apr 08 Q 6 a) A plaintiff / customer who had failed to take reasonable care for his own safety against forseeable risk could be met with a Defence of contributory negligence. and thus the damages awarded to the plaintiff was reduced ( by 10% ). he wrote just Ali and bank into personal A/C. the plaintiff had also been partly negligent. Chapter 2 : Negotiable Instruments 44 . Eg Ali Sdn Bhd. It was held that although the bank had been guilty of negligence. CASE: Lumsden & Co vs London Trustee Savings Bank The bank was sued for damages for the conversion of certain cheques which it had collected for a customer.

The bank would acquire a good title to the cheque if it become a holder in due course by giving value ( consider the cheque good ) for the cheque in Good Faith e) Indemnity from customer Customer indemnified the bank for any wrong doing or liabilities incurred in the reasonable performance of the duty. Q 5b Chapter 2 : Negotiable Instruments 45 . Normally bank requires customer to sign an indemnity form.d) Defence of Holder in due course according Section 29 BEA 1949 It also known as holder for value. Refer sample March 2005.

The bank may make payment in two ways.PAYMENT OF CHEQUE Another one of the primary functions of a bank is the payment of cheques (Paying Bank ) drawn by his customer on him. that is:a) Payment of cash over the counter against Open cheque b) Payment against open or crossed cheques through the clearing system. Chapter 2 : Negotiable Instruments 46 . Bank into customer s account.

Types of liabilities of a paying bank a) The bank is liable for damages for cheque wrongly debited to a customer s account i. Pay stopped payment cheque ii. Chapter 2 : Negotiable Instruments 47 . He let his wife to withdraw money using forged signature of husband. Pay a cheque with signature forged CASE 1: Greenwood vs Martin Bank ( 1933 ) Customer knows his signature has been forged by his wife but fails to inform the bank. Pay a post dated cheque iii.

CASE 2: Brown vs Westminister ( 1964 ) The bank queried the authenticity of a signature on a number of cheques but was assured by the customer that the signature was hers. Customer should inform the bank immediately of any false alteration of a cheque. Chapter 2 : Negotiable Instruments 48 .

iv. b) c) The bank wrongfully dishonour a cheque breach of contract The bank pays a person not entitled to the cheque. Refer Nov 2005 Q 7b / Apr 2008 Q 6 a Chapter 2 : Negotiable Instruments 49 . Pay cheque with alteration without customer s consent CASE: London Joint Stock Bank vs Mac Millan & Authur ( 1918 ) The duty of the customer to exercise reasonable care in drawing cheques and the rights of the bank to expect the customer to exercise reasonable care in drawing a cheque. Account payee cheque OR Order cheque .

A cheque is deemed to be paid in the ordinary course of business if a bank follows a standard practise of banking as regard to payment of cheques. Chapter 2 : Negotiable Instruments 50 .Legal protection available to paying bank (according to BEA 1949 ) a) Sec 60 BEA 1949 Payment of cheque with forged document ( Dokumen palsu ) It states that when a drawee bank pays a cheque with a forged or unauthorised endorsement. the bank is deemed to have paid it in due course. in good faith and in the ordinary course of business.

Or in other word. Pays to bank ( if it is crossed generally ) or to the bearer to whom it is crossed ( if it crossed specially ) ii. In good faith and without negligence. and to be placed in the same position as if payment has been made to the true owner if the drawee bank. without negligence and according to the crossing. i. Chapter 2 : Negotiable Instruments 51 . bank pays crossed cheque in good faith.b) Sec 80 BEA 1949 ± payment of a crossed cheque It provides that a drawee bank paying a crossed cheque is entitled to the same rights.

c) Sec 82 BEA 1949 Payment of cheque without endorsement or irregular endorsement. Chapter 2 : Negotiable Instruments 52 . the banker does not incur any liability and is deemed to have paid it in due course. It states that where a bank in good faith and in the ordinary course of business pays a cheque which is not endorsed or is irregularly endorsed.

It states that the bank can pay on the cheque through the presenter in unknown to the bank as long as the bank takes all the necessary steps in examining the cheque and identifying the presenter. Chapter 2 : Negotiable Instruments 53 .d) Sec 59 BEA 1949 Cheque was endorsed but the presenter is unknown to bank.

Negligence on part of Paying bank (pjj page 50) ‡ a) Payment of cheque bearing a forged drawer s signature. Q 6 a (iii) / April 2006.Q7a) ‡ b) Payment of cheque bearing an unauthorised alteration. The alteration must clearly seen. The signature is different from specimen card. ‡ Case:Greenwood vs Martin Bank (Mar 05. ‡ Case : London Joint Stock Bank vs Macmillan ‡ A customer has a duty to write a cheque carefully to prevent any possibilities of fraud ‡ ( Nov 2005. Chapter 2 : Negotiable Instruments 54 . Q 5 (a) / Mar 2002 Q 6 c / Oct 2003 Q 4 a ). if not bank will not responsible for any fraud.

COUNTERMAND OF CHEQUE ( STOP PAYMENT ) Countermand of cheque is the cancellation of cheque due to several reasons SECTION 75 OF BEA 1949. the duty and authority of a bank to pay a cheque drawn on him are determine by: a) Countermand of payment and b) Notices of the customer s death Chapter 2 : Negotiable Instruments 55 .

Customer can countermand of payments for several reasons such as lost. ( Oct 03 Q 2 b) a) The instruction should be in writing. stolen or failed contract etc. Countermand of payment may be done by telephone but must be followed by letter soonest possible. b) The written instruction should be delivered to the banker as soon as possible in time for the bank to take effective action. CASE: Baines vs National Provincial Bank Ltd The bank will not be responsible if the countermand instruction reach the bank after the payment has been made eventhough the delay was caused by the bank s negligence. Chapter 2 : Negotiable Instruments 56 . Rules/steps/procedures which a customer should follow when making a countermand or stop payment.

Name of the payee iii. Date of the cheque iv. Number of the cheque ii. Amount of the cheque v.c) The instruction should be accurate as far as the particulars of the cheque are concerned. Please refer to Sept 2001 Q 1 a. The following particulars should be correctly given: i. Account number if customer has more than 1 account. CASE: Westminster Bank vs Hilton The customer provide wrong cheque number to the bank for countermand 117285 instead of 117283 as mentioned in the letter. Chapter 2 : Negotiable Instruments 57 .

CASE: Curtice vs London City and Midland Bank Ltd Payment to stop using telegram. Bank to acknowledge receipt of the letter. bank to indicator payment stop by telegram and postponed pending confirmation with the drawer NOTE: For joint account. How about partnership account ? Chapter 2 : Negotiable Instruments 58 . If the cheque is presented.d) The instruction is not effective until it actually received by the bank. any one party may countermand a payment. bank is bound to accept an unauthorised telegram as sufficient authority for the serious step of refusing to pay a cheque.

Some other terminology related to cheque a) Refer to drawer RD The presenter to check with the drawer why the cheque cannot paid by paying bank. b) Effect not cleared ENC There are cheques paid in under hold or not yet cleared. c) BAD cheque. Drawee bank or paying bank cannot pass the cheque due to several re Chapter 2 : Negotiable Instruments 59 .

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