Fin360 Chapter 2 - Negotiable Instrument

CHAPTER 2

NEGOTIABLE INSTRUMENTS

1Chapter 2 : Negotiable Instruments

NEGOTIABLE INSTRUMENTS 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.


Characteristic of Negotiable Instruments

a) Transferable from one person to another with or without endorsement.

b) The holder can sue in his own namec) 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.

d) No notice is needed to be given to the debtor or issuer of the negotiable instrument.

If the words “ non – negotiable ” appear on a bill of exchange, it means that the bill cannot be negotiated .

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NEGOTIABLE INSTRUMENTS NEGOTIABLE INSTRUMENTS

Chapter 2 : Negotiable Instruments

WHAT IS BILL OF EXCHANGE?WHAT IS BILL OF EXCHANGE?

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.


• 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 transferor (pemberi). – IT STRESS ON 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


• Thus, transferability relates to the Process of passing title in an instrument, whereas negotiability usually relates to the Quality of the title.

• Therefore, while all negotiable instruments can be transferable, not all transferable instruments are negotiable. E.g. Cheque.


• For example, A thief steals a gold ring and sells it to an innocent third party, this third party will not, as a general rule, acquire good title to the gold right – “ No one can give what he does not possess”. Gold can be transfer but it is not negotiable instrument.

• 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, then, generally, the third party (transferee ) will acquire better title to the cheque than the thief ( transferor) because he can get the money.


Parties involved in Bill Of ExchangeParties involved in Bill Of Exchangea) Drawer

the person who issue the bill. He can also issue the bill to himself.

b) Drawee the bank that is paying the bill when it is

due or matured . Also known as paying bank ( bank pembayar )

c) Payee the bearer ( penerima) of the bill. It can

also be the drawer of the bill itself (receive payment ). Cheque pay to himself


• 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

( Drawer )


• Penang, 3 rd May 2007• • To : Mr Andrew Black• • Payable on demand pay BEARER the sum of

Ringgit Malaysia Ten Thousand ( RM 10,000 ) value received.

• • Signed :• Mr Greg David


• Penang, 3 rd May 2007• • To : RHB Bank• • Payable on demand pay Mr Greg David the sum

of Ringgit Malaysia Five Thousand (RM 5,000 ) value received.

• • Signed :• Mr Greg David• Note : Payee and drawer is same person


2 types of Bill Of Exchange2 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.g. in Singapore, China etc


The bill is payable either “ bearer ” or “ order ”

The bill is payable either “ bearer ” or “ order ”

a) Bearer bill ( Pembawa )

Bills that are drawn payable to bearer or on which the last endorsement is blank endorsement. The bill is transferable by mere delivery without any necessity for endorsement OR signature.

Example : “ Pay Ali or bearer ”. 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. The bill requires valid endorsement in order to complete a transfer.

Example : “ Pay Ali or order ”. Ali must

sign behind this bill if he want to give the bill to Ahmad.


ENDORSEMENTENDORSEMENT

It means a signature on the back of the bill. Sec 32 BOE Act 1949 stipulates that, to operates as a negotiation, the endorsement must be written on the bill itself and signed by the endorser.

A simple signature is sufficient.


3 types of endorsement3 types of endorsement

1. 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


2. 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.

3. Restrictive endorsement This endorsement prevent further negotiation

of the bill. The endorsee will only have the right to receive payment on

the bill. ( use word ONLY )


BLANK ENDORSEMENT

• RIDZWAN


SPECIAL ENDORSEMENT

• PAY TO :•

• RIDZWAN or order•


RESTRICTIVE ENDORSEMENT

• PAY TO :• RIDZWAN only


4 rules governing Presentment of payment of Bill ofExchange as provided under section 45 of Bills ofExchange Act 1949. ( Apr 07 Q 5 a / Apr 01 Q 2 b )

1. The proper place of presentation2. The parties to whom presentment is to be made 3. That presentment must be made by the holder or by

some person authorized to receive payment on his behalf.

4. That such presentment is required to be made at a reasonable hour on a business day.

A bill of exchange must be presented for payment and if it not presented, the drawer and endorsers are discharge from liability.

A bill not paid after it has been presented for payment is said to be dishonored ( tidak laku )


3 types of holder 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, before it is overdue and in good faith, and without any notice of defect in the title.


DishonourDishonourWhen a bill is dishonoured, 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.

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.


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CHEQUE / CHECKCHEQUE / CHECKDefinition of a cheque – According to section 73(1) Bill of Exchange

(BEA) 1949. 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 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.

A cheque is therefore is a specified from of Bill of Exchange.


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Parties to a chequeParties to a chequea) Drawer

The person who draws a cheque ( issue the cheque / account holder / accountee)

b) Drawee bank The banker on whom the cheque is drawn ( also known as Paying bank )

c) Payee The person to whom the cheque is drawn payable ( Penerima )


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Differences between bill of exchange and cheque Differences between bill of exchange and cheque

BILL OF EXCHANGE ( BOE) CHEQUE

Can be drawn upon any person Must be drawn upon a banker only ( Paying bank)

Can be made payable at a fixed or determinable future

Payable on demand

Must be presented for payment when due or the drawer will be discharged

Can be presented for payment within 6 months from the date issue

BOE cannot be crossed The cheque may be crossed

Required to be endorsed by the payee before it is presented for payment

Technical speaking, a cheque need not to be endorsed by payee especially Bearer cheque.

A bill when accepted, the acceptor/drawee is primarily liable to the holder ( pemegang bill )

The drawer /accountee is the party primarily liable if the cheque is rejected.


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ADVANTAGES OF CHEQUEADVANTAGES OF CHEQUE

a) Can be issued for any amount subject to availability of funds ( must have enough credit balance if no overdraft facility )

b) Cheques are more secured than cash.

c) Cheque can be stop if loss.

d) Can easily send through the post /mail.

e) Cheques can easily be transferred between parties. Can pass to another person .


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DISADVANTAGES OF CHEQUEDISADVANTAGES OF CHEQUE

a) Shops will normally reject cheques as mode of payment. They prefer cash or credit cards.

b) Cheques are susceptible to theft and fraud.

c) A person accepting a cheque may find that is dishonoured or rejected by Paying bank.

d) It is less easy to use than cash. Take time to clear a cheque before can utilise or use the fund.Eg KL cheques take 5 working days to clear.


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POINTS TO CONSIDER WHEN DRAWING OR ISSUING A CHEQUE

POINTS TO CONSIDER WHEN DRAWING OR ISSUING A CHEQUE

a) The cheque must be an unconditional order. Cannot be changed or altered.

b) It must be in writing which includes print ( using printer).

c) Cheque must be signed. Thumb print ?

d) It is important that the amount on the cheque must be stated in words tally with that in figures to meet the criteria “ a sum certain in money ”

e) A cheque must be dated. If undated, how ?


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OPEN OR CROSS CHEQUEOPEN OR CROSS CHEQUE A cheque can be encashed over the counter ( withdraw cash

through counter ) OR bank into an account with a bank.

a) Open / uncrossed cheque A cheque without a crossing. The proceed of the cheque need not go through any account. Payment may be made over the counter.

b) Crossed cheque ( Cek berpalang ) The holder will not be able to cash it and has to be paid into a bank account. Advantages of cross cheque:

i. Being able to trace into whose account the money went.ii. More time to stop payment of a cross cheque than an open

cheque. WHO MAY CROSS CHEQUE ? Drawer, Payee & Bank


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2 Types of bank crossing2 Types of bank crossing

i. General crossing – two parallel transverse lines drawn across the face of the cheque, with or without the following words written between or near the line.i. and companyii. & coiii.not negotiable


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Special Crossing Special crossing – a cheque bears its

face an addition of the NAME of a banker either with or without the words “ Not Negotiable ”. Cheque is crossed specially and to that banker. 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.


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Special types of crossingSpecial types of crossinga) Not negotiable crossing ( Tak boleh niaga)

According to Section 81 BEA 1949. Where a person takes a crossed cheque which bears on it the words “ not negotiable”, 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. It questions the question of TITLE and not the question of Tansferability. Thus, this crossing deprives the cheque of its Negotiability but not its Transferability.

If A pass the cheque to B, 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.

CASE: Wilson and Meeson vs Pickering. Refer Pjj page 42


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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) . The proceed of the cheque ( cash) must be collected for the account of the Named Payee only.

CASE: House Property co of London Ltd vs London Country & Westminister Bank. Cheque in favour of 2 trustee was paid into the trustee’s lawyer account ( single name). Bank was held liable for WRONGFUL CONVERSION.


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Material alteration of chequesaccording to section 64 BEA 1949

Material alteration of chequesaccording to section 64 BEA 1949

A cheque is deemed to have materially alteredif there has been any alteration in the following:a) Dateb) Amount c) Words and figuresd) Crossinge) Alteration from order to bearer. Remove line.f) Payee’s name.

NOTE : Bank will not pay Cheque with above alterations. Refer OCT 2004, Q 5b


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Types of Dates• A) Ante dated – A cheque that have a date

BEFORE the date of issue ( Today’s date).

• B) Post dated – A cheque that have a date LATER than the date of issue. 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.

•


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Exercise.

• If today is 15 / 8 / 2006, Classify the following cheques whether ANTEDATED, POST DATED or STALE / OUT OF DATE:

• a) 18 / 8 / 2006.• b) 1 / 8 / 2006• c) 14 / 2 / 2006


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Collection of chequeDuties of Collecting bank to its customersa) To present a cheque for payment within a reasonable

time.b) To contact / sent notice of any dishonour cheque to

its customers by post on the same day it becomes aware of the dishonoured. ( 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; otherwise it may be used for wrongfully converting the proceeds of the cheque.


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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.


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What is Without Negligence ?

• A lack of reasonable care or reasonable skill or breach of the common duty of care imposed ( Cuai )


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Negligence of collecting bankNo protection under section 85 BEA 1949 forthe following negligence:-a) Failure to obtain an introducer’s reference when

opening an accountb) Failure the check legalities of the documents with

relevant authoritiesc) Failure to make enquiries when the customers

paid in third party chequesd) Failure to make enquiries where the customer is

drawing cheques on a principal’s account to reduce an advance owed to the bank


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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

accountChapter 2 : Negotiable Instruments

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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.


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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.

CASE: Lumsden & Co vs London Trustee Savings BankThe bank was sued for damages for the conversion of certain cheques which it had collected for a customer. It was held that although the bank had been guilty of negligence, the plaintiff had also been partly negligent, and thus the damages awarded to the plaintiff was reduced ( by 10% ). Write short name for company. Eg Ali Sdn Bhd, he wrote just “Ali” and bank into personal A/C.


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d) Defence of Holder in due course – according Section 29 BEA 1949It also known as holder for value. 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 customerCustomer indemnified the bank for any wrong doing or liabilities incurred in the reasonable performance of the duty. Normally bank requires customer to sign an indemnity form. Refer sample March 2005, Q 5b


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PAYMENT OF CHEQUEAnother one of the primary functions of a bank is the payment of cheques (Paying Bank ) drawn by his customer on him. The bank may make payment in two ways, that is:-

a) Payment of cash over the counter against Open cheque

b) Payment against open or crossed cheques through the clearing system. Bank into customer’s account.


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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 chequeii. Pay a post dated cheque iii. 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. He let his wife to withdraw

money using forged signature of husband.


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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 anyfalse alteration of a cheque.


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iv. 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.

b) The bank wrongfully dishonour a cheque – breach of contract

c) The bank pays a person not entitled to the cheque. Account payee cheque OR Order cheque . Refer Nov 2005 Q 7b / Apr 2008 Q 6 a


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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, in good faith and in the ordinary course of business, the bank is deemed to have paid it in due course. 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.


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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, and to be placed in the same position as if payment has been made to the true owner if the drawee bank;

i. 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.

Or in other word, bank pays crossed cheque in good faith, without negligence and according to the crossing.


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c) Sec 82 BEA 1949 – Payment of cheque withoutendorsement or irregular endorsement.

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, the banker does not incur any liability and is deemed to have paid it in due course.


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d) Sec 59 BEA 1949 – Cheque was endorsed but the presenter is unknown to bank.

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.


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Negligence on part of Paying bank (pjj page 50)

• a) Payment of cheque bearing a forged drawer’s signature. The signature is different from specimen card.

• Case:Greenwood vs Martin Bank (Mar 05,Q7a)• b) Payment of cheque bearing an unauthorised

alteration. The alteration must clearly seen, if not bank will not responsible for any fraud.

• 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, Q 6 a (iii) / April 2006, Q 5 (a) / Mar 2002 Q 6 c / Oct 2003 Q 4 a ).


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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 andb) Notices of the customer’s death


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Customer can countermand of payments for severalreasons such as lost, stolen or failed contract etc.

Rules/steps/procedures which a customer should follow when making a countermand or stop payment. ( Oct 03 Q 2 b)

a) The instruction should be in writing. 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.


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c) The instruction should be accurate as far as the particulars of the cheque are concerned.

CASE: Westminster Bank vs HiltonThe customer provide wrong cheque number to the bank for countermand 117285 instead of 117283 as mentioned in

the letter.

The following particulars should be correctly given:i. Number of the chequeii. Name of the payeeiii. Date of the chequeiv. Amount of the chequev. Account number if customer has more than 1

account. Please refer to Sept 2001 Q 1 a.


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d) The instruction is not effective until it actually received by the bank. Bank to acknowledge receipt of the letter.

CASE: Curtice vs London City and Midland Bank Ltd Payment to stop using telegram, bank is bound to accept an unauthorised telegram as sufficient authority for the serious step of refusing to pay a

cheque. If the cheque is presented, bank to indicator “ payment stop by telegram and postponed pending confirmation with the drawer ”

NOTE: For joint account, any one party may countermand a payment. How about partnership account ?


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Some other terminology related to cheque

a) Refer to drawer RDThe presenter to check with the drawer why the cheque cannot paid by paying bank.

b) Effect not cleared ENCThere 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


Fin360 Chapter 2 - Negotiable Instrument

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