NEGOTIABLE

INSTRUMENTS

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Table of contents
 Negotiable instruments

 Bill of exchange

 Cheques

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NEGOTIABLE INSTRUMENTS

 Definition:

 Negotiable instrument is a document

containing an undertaking to pay a
definite sum of money which may be
transferred by delivery or by
endorsement and delivery.

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NEGOTIATION OF BILL
 A bill is negotiated when it is transferred by
one person to another that makes the
transferee the holder of bill.

 METHOD :
 i) by mere delivery-holder of bill by
possession
 ii) by indorsement and delivery-holder
must indorse and deliver to indorsee.
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i) By mere delivery
 Where the bill is payable to bearer
 No need to indorse the bill
 The negotiation is by delivery
 Transferee becomes the holder of the bill

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ii) By indorsement and delivery
 The holder must first indorse it and the deliver
it to the indorsee
 Where the bill is payable to order
 If no indorsement, the transferee does not get
a better title to the bill than what his transferor
has

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CHARACTERISTICS OF
NEGOTIABLE INSTRUMENTS
 1. Transferability
 The title and right to it passes on delivery or
delivery plus indorsement , that is the right
can be transferred from one person to
person.

 2. The holder who is in possession of the

instrument can sue in his own name.

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 3. Notice of this transfer need not to be
given to the debtor.
 For eg: you need not inform bank when you
intend to draw a cheque on the bank so long
as your account is in credit.

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4. The transferee who had received it in a good faith
and for value gets a superior title and is
unaffected by previous defects.

 Eg: if the transferor does not have a good title.

 For example: Ahmad made out a cheque payable to
Aminah or bearer and sends the cheque by post.
Kathy steal the cheque and uses it to pay her grocery
bill. The grocer, Ali can enforce the payment on it
notwithstanding the fact that Cathy who handed him
the cheque is a thief and does not have a good title to
it.

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Types of Negotiable Instruments
 Instruments negotiable by statute:
a) Bill of exchange
b) Cheques
c) Promissory notes

 Instruments negotiable by custom:

a) Bank notes
b) Share warrants
c) Bearer debentures
d) Exchequer bills
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 BILL OF
EXCHANGE

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BILL OF EXCHANGE

 The Bill of Exchange is governed by the Bill

of Exchange Act 1949 (Act 204)

 A bill of exchange is a form of a written

promise that the person who takes the bill
will be paid the amount stated in the bill
when he presents it at the proper place
and time.

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Parties to a Bill of Exchange
 The person who draws the bill i.e the person
who writes the order to pay is called the
“drawer”.

 The person whom the order to pay given is

called the “drawee”.

 The one who receive the payment is called

the “payee”.
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 The payee so named in the bill may transfer
his right to receive payment to another
person by ‘negotiating’ the bill. The payee
does so by endorsing it with his signature and
handing it to the transferee who then
becomes the holder of the bill.

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THE FUNCTIONS OF A BILL OF
EXCHANGE
 It enables the seller of goods or services to
receive his money as soon as possible while
the buyer is able to defer the payment for a
certain period of time.

 Therefore, the seller obtains payment before

the buyer is in a position to pay and the
buyer enjoys a period of credit.

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DEFINITION OF BILL OF
EXCHANGE
 Section 3(1) of Bill of Exchange Act:-
 A bill of exchange is:-
 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 a fixed or determinable future
time, a certain sum of money to the order of a
specified person or to bearer

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 Example:
 Siti in Perlis, sells sugar to Abu in Melaka for
RM10,000.00. Abu wants 20 days credit.

 Siti will draw a bill of exchange addressed to

Abu. In the bill, it orders Abu to pay in 20
days time.
 If Abu agrees to the terms of the bill, he signs
the bill and return it to Siti.
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 Siti then sells the Bill to Maybank at its face
value or at discount.

 After 20 days, the bill is said to ‘mature’ and

Maybank will seek to enforce it by obtaining
payment from Abu.

 Therefore, Siti gets her money as soon as

she sell the bill and Abu gets 20 days credit.
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Example of bill of exchange
RM10,000

20 DAYS AFTER SIGHT PAY TO MAYBANK

THE SUM OF RINGGIT TEN THOUSAND ONLY
FOR VALUE RECEIVED

To: Abu
Perlis signed. Siti

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CHARACTERISTICS OF BILL
OF EXCHANGE
 1. There are three parties to the bill
 The person who gives the order is called
drawer (i)
 The person to whom the order is given is
called drawee (ii)
 The drawee who accept the bill by signing it,
he is called the acceptor (ii)
 The person to whom payment is to be made
is called the payee (iii)
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 2. The bill must be an unconditional
order to pay
 There must be an order and such order must
be unconditional [Section 3(2)]
 Eg: ‘pay Ahmad RM1000.00’ constitute an
order.

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 3. The bill must be in writing
 The bill can be in printed or hand written.

 4. The bill must be addressed by one

person to another.
 Drawee must be identified with reasonable
certainty [Section 6(1)]
 Person includes natural person as well as
firms and companies

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 5. The bill must be signed by the person
giving it.
 A bill must be signed by the drawer or his
authorized agent [Section 96(1)]

 6. The bill must order payment of a sum

certain in money and not in goods or
services.
 A bill is an instrument to facilitate the payment
of money.
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 7. The bill must be payable on demand or
at fixed or determinable future time.

 8. The bill must be payable to or to the

order of a specified person or to bearer
 Section 8(2) of Bill of Exchange Act 1949 provides
that a bill may be payable either to order of a
specified person or to bearer.
 Eg: A bill is payable to the order of a specified person
when the name of payee is stated, eg: Pay
Ahmad….”

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 9. Supported by consideration.

 10. Capacity to contract.

 All parties to the Bill of Exchange must
competent to the contract.
 A company is not liable unless it is competent to
do so under the law (Section 22(1)).
 Minors and insane person are not competent to
the bill.
 An agent may execute the bill if authorized by the
principal.
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Acceptance of a Bill of Exchange
 Section 41(1)
a) The presentment of acceptance must be made by or
on behalf of the holder to the drawee or to some
person authorized to accept or refuse acceptance on
his behalf, at a reasonable hour on a business day
and before the bill is overdue
b) Where the bill is addressed to two or more drawees
who are not partners, presentment must be made to
all of them, unless one has the authority to accept for
the others

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c) Where the drawee is dead, the presentment must
be made to his personal representatives
d) Where the drawee is bankrupt, presentment may be
made to him or to his trustee or assignee
e) Where authorized by agreement or usage, a
presentment through the post is sufficient.

 Once presented, the drawee will either accept the

bill or not.
 If he accept, he must carry out the drawer’s orders
and this is done by signing his name on the face of
it or with word “accepted”.
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Types of acceptance
General acceptance
Unconditional acceptance

Qualified acceptance
The drawee accepts the bill subject to condition or
qualifies it by making variation to the original terms
of the bill.
E.g. Accepted on condition that goods are in order
(signed by Ali) / Accepted for RM1000 only (signed
by Ali) where the full amount is RM2000
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 INDORSEMENT
 Indorsement means to write something,
usually signature, at the back of the bill in
order to make it payable to someone else.

 Effect of indorsement:
 i) Transfer property in bill to the transferee
 ii)makes transferor liable (who is the indorser)

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 A Valid Indorsement Must Comply With The
Following Conditions set out in Section 32 of
the BILL OF EXCHANGE ACT:-

 1. The indorsement must be written on the bill

itself and signed by the indorser. It is
generally written on the back of the bill.

 2. It must be an indorsement of the entire bill.

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 3. Where a bill is payable to several payees, all
the payees must indorse unless the one indorsing
has authority to indorse for all the others.

 4. Where the payee or indorsee’s name is

wrongly spelt, the payee or indorsee should
indorse according to the spelling on the bill.

 5. Where there are two or more indorsements on

a bill, each is presumed to have been made in
the order in which it appears on the bill, unless
the contrary is proved.

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TYPES OF INDORSEMENT
1. BLANK INDORSEMENT
Section 34(1)
The indorser simply sign his name without
adding the name of the transferee. The bill
become payable to the bearer. It is
negotiable by mere delivery.

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 2. SPECIAL INDORSEMENT
Sec 34(2)
The indorser adds the name of the transferee
or to whose order the bill is payable.

Eg: ‘pay Ali (signed Abu) = Ali is the person

who entitles to the payment, and if he wishes
to negotiate it further, he must indorse it.

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 3. RESTRICTIVE INDORSEMENT
 Sec 35(1) This indorsement prevents further
negotiation of the bill or merely gives
authority to deal with the bill (in the manner
directed) without transfer of ownership.

 Eg: “Pay Ali for collection” = Ali can obtain

payment but must hand it to the person who
authorized him to collect respectively.
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 4. CONDITIONAL INDORSEMENT
 The payment depends on certain
conditions. Eg: Pay Ali if the goods are
satisfactory (signed Abu) = payment will
be made if the goods have been
satisfactorily delivered.

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 5. FACULTATIVE INDORSEMENT
Indorser expressly gives up his
rights under the bill.
Eg: ‘Pay Ali or order, notice of
dishonour waived’

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Delivery
 Section 21(1) - a person is not liable on a bill
unless he has signed and delivered it.
 Section 2 – delivery means transfer of
possession actual or constructive from one
person to another.
 Every contract on a bill is not complete and
revocable until delivery.
 Once a bill leaves the possession of the person
who signs it, it is presumed that there is a valid
and unconditional delivery by the party who has
signed it.

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LIABILITY OF PARTIES
Signatures
S. 23 BEA 1949 – person is not liable on a bill unless
he has signed it as a drawer, acceptor or indorser.
All signature must match with the specimen signature
given to the Bank during opening a bank account.
If a person signs under a trade name, that is assumed
to be his signature (S. 23(a)
If signs in a partnership, that person is deemed to sign
the names of all partners in the firm. Each partner is
liable on the bills signed personally.
A person may sign the bill himself or by his agent (S.
96) but the agent must make it clear that he signs the
bill on behalf of the principal and not in his personal
capacity.
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Drawer.
Section 55(1)(a) – the drawer in drawing up a
bill promises that it will be paid according to its
tenor when presented and that if it is
dishonoured, he will compensate any
holder/indorser who has to pay on the bill,
provided the necessary proceedings on
dishonour are taken.

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Drawee
Only liable when he signs the bill as acceptor (S. 17)
Acceptance is completed when delivery is made or
when the drawee notifies the payee that he has
accepted the bill or when the payee is notified of such
an acceptance (S. 21(1)).
The acceptor must pay for the bill according to its
tenor and cannot refuse the payment by stating that the
drawer does not exist; the drawer’s signature is forged;
or the drawer had no capacity or authority to draw the
bill.
However, he may challenge the genuineness of the
indorsements (S. 54(b)).

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Indorser
By indorsing, the indorser promises that the
bill will be paid according to its tenor (S. 55).
If dishonoured, the indorser will compensate
the holder and any subsequent indorser.
The indorser are prevented from denying the
genuineness of all signatures prior to his
indorsement or the validity of the bill or that he
had a good title to it to the later indorser.

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 HOLDER
 The person who is in possession of the Bill.
 Can enforce a bill in his own name against a persons
who signed it and a transferor from whom he obtained
the bill irrespective of whether he had signed it.
(Section 38(a)).
 Two types of holder:
a) Holder in due course – S. 29(1) A holder who takes
the bill which is complete and regular on face of it,
before it becomes overdue without notice that it has
been previously dishonoured, in good faith has given
value for it and without notice of any defect in the title
of the person from whom the bill is taken.
b) Holder for value – S. 27(2) A holder of a bill for which
value was given some time previously.
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CHEQUES

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 CHEQUES
 Governed by the Bill of Exchange Act 1949.

 Cheque is defined as a bill of exchange

drawn on a banker and payable on demand.

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CHARACTERISTICS OF THE
CHEQUES
 1. It must be an unconditional order in
writing
 The cheque must be in the form of order and
not a request.

 The word used must be ‘pay’ and not

‘please pay’.

 Writing includes printing and handwriting.

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 2. It is signed by a drawer
 A cheque will not be valid if it is not signed by the
person who is drawing the cheque. The drawer of the
cheque will not liable unless if he signed the cheques.
(Section 23 of Bill of Exchange Act)

 3. It is drawn on a banker
 When the name of the drawee is printed on the
cheque, it is considered as order being addressed to
the banker.

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 4. It orders the banker to pay a certain
sum of money on demand
 Demand for payment happened when the
cheque is presented to the bank.

 The sum of money stated in the cheque must

be certain.

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 5. It is drawn in favour of a specified
person (payee) or his order or in favour of
a bearer.
 The cheque must be a payment to a specified
person or to a bearer.

 Bearer means the person in possession of a

bill or note which is payable to bearer
[Section 2]

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 BANK
 Paying bank – is the bank whom cheques is
drawn

 Collecting bank- bank which collect payment

for its customer who pay in cheque of his
account.

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FORMATION OF CHEQUE

 There are different ways a cheque can be

formed:-
 1. Undated Cheque
 Banker need not to honour undated cheques.
However, under Section 20 of Bill of
Exchange Act, the holder of such a cheque
can fill up the correct date within a
reasonable time and the cheque can be
honoured.

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 2. Overdue or stale Cheques
 Section 36(3) of Bill of Exchange Act stated
that a cheque is overdue if it has been in
circulation for an unreasonable length of time.

 A cheque is stale when it has been in

circulation for a long time, normally after the
expiry of six months or more from its date.

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 3. Ante-Dated and Postdated Cheque
 It is ante-dated if it bears a date earlier than
the date of actual issue that is back dated. In
contrast, it is post-dated if it bears a date in
the future that is a date later than the date of
issue.

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CROSSING OF CHEQUE

 A cheque which is crossed can only be paid

through a bank and therefore, the person
presenting the cheque must have a bank
account.

 Crossing is made to protect the cheque from

being cashed by a person who is not entitled
to do so.

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55
TYPES OF CROSSINGS
1. General crossing
 FORM: It consists two parallel transverse lines
drawn across the face of the cheques.
 (Section 76 of BEA)
 Usually, it consists words such as ‘ Co’, “Not
Negotiable” or ‘A/c Payee”
 By virtue of Section 76, a person may cross
the cheque to add the words ‘ not negotiable’.

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OBJECTIVES OF GENERAL
CROSSING
 i) To minimize fraud by conveying instruction
that payment should be made only to/
through a bank

ii) S70 of BOE Act: cannot be altered by

anyone except authorized person under S77
i) a drawer, ii) a holder or iii) a banker.

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58
Effects Of General Crossing:-

 i) The cheque losses the full character of

negotiability i.e it cannot be negotiated.
 ii) paying banker can only pay the amount of
the cheque to a collecting bankers.
 iii) no cash payment across the counter
 iv) prevents someone who obtained it wrongly
from obtaining payment through a bank.
 v) gives time to customer to ask bank to stop
payment on discovery of loss

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TYPES OF CROSSINGS
 2. SPECIAL CROSSING
FORM: the name of a banker is written
between the lines or across the face of
the cheque without the lines.

Eg: Kaya Bank Berhad

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61
 Effects Of SPECIAL Crossing:-
 i) Safer than general crossing.

 ii) The paying banker must pay the amount of

the cheque only to the collecting banker named
in the crossing.

 iii) The negotiability of the cheque is restricted,

i.e the cheque can only be negotiated to some
person who is a customer of the bank to whom
it is crossed.
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LIMITED CROSSING
 1) NOT NEGOTIABLE
 i) Form: Allow person to add ‘not negotiable’
to a cheque which has been crossed

 ii) Effect: Cheque is not easily negotiable

but remains transferable i.e the person
taking it cannot obtain a better title than that
of the person to whom he receives it.

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Wilson and Meeson V Pickering
(1946)
 Fact: W drew a cheque in blank cross ‘not
negotiable’. His clerk who was supposed to fill
in the amount and the name of payee,
inserted the sum in excess of her authority
and delivered the cheque to P in payment of
her own debt.

 Held: Since the clerk had no title to the

cheque, P had no better title than the clerk
did. Therefore, W was not liable for it.

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LIMITED CROSSING:-
 2) A/C PAYEE
 i) Form: Words- Account payee or A/C Payee
or A/c Payee only

 ii) Effects:
 A) Minimise chances of fraud as these words
operate as notice to collecting banker that
only the account of payee is to be credited.

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 B) It is not a statutory crossing but has been
widely accepted by trade and banking
practices.

 C) Collecting bank is prima facie guilty of

negligence and liable to the true owner for the
amount of the cheque if he disregards the
crossing.

 D) Collecting bank/paying bank cannot pay

cheque over the counter in any
circumstances
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PROTECTION OF THE PAYING
BANK
 Paying bank : the bank where the customer
draws a cheque
 Duty of the paying bank : to pay to the right
person, according to the order of its
customers
 If the paying bank pays to wrong person, it
must be responsible for the loss.
 The Bill of Exchange Act provides protection
to the paying bank

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 Section 59(1)
 The paying bank will not be liable if it pays a
cheque in due course.
 Due course – Payment made at or after
maturity of the bill to the holder in good faith
and without notice that his title to the cheque
is defective [Sec 90]
 Eg : Ali draws a cheque on Bank Duit,
payable to Siti. Siti indorses it in blank,
making it payable to bearer. Siti later
misplaces the cheque. Abu later finds the
cheque and take it to Bank Duit, present for
payment. The cheque is paid by the bank.
The bank is not liable to Siti for wrongful
conversion.
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 Section 60 - Forged or unauthorised
endorsement
 If the banker pays in good faith and in the
ordinary course of business a cheque drawn
on him which bears a forged or un authorised
indorsement, he is not prejudiced by the
forgery.
 Eg.: Lee draws a cheque on X Bank in favour of
Tim, and it is stolen by Tam. Tam forges Tim’s
indorsement and gave it to Man. Man gave it to
Mun. Mun obtains payment form the bank. If the
bank pays in good faith in the ordinary course of
business, it will not be prejudiced by the forgery.

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 Section 82 – No Indorsement or Irregular
Indorsement
 When a bank pays a cheque which is not
indorsed or irregularly indorsed, it will not be
liable if it has done so in good faith and in the
ordinary course of business.
 Rubber Industry (Replanting Board) v
Hong Kong Shanghai Banking Corporation
 The P issued a cheque to one Toh but the
cheque later fell into wrong hands. One Lee
opened an account with the D in the name of
Chop Toh and the cheque was paid into this
account.
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 P brought an action against the bank. The
bank sought protection under section 82 of
Bill of Exchange Ordinance 1949.
 It was held that the D failed to prove that they
had acted without negligence. Therefore, they
are not entitled to the protection of section 82.

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 Section 80 – Crossed Cheque
 The banker will not be liable when there are
alteration made on the crossing of the
cheque, if the banker pays the cheque in
good faith, without negligence, and
according to the crossing.
 The banker would lose the protection of
section 80 if he pays the cheque otherwise
than in accordance with the customer’s
mandate or if he has acted negligently.

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 Slingsby v District Bank
 The P requested their solicitor, Cumberbirch, a
partner in M/S Cumberbirch & Potts, to draw a
cheque on their account on the D bank payable
to M/S John Prust & Co. The cheque was drawn
with a gap between the payee’s name and the
words ‘or order’. After it was signed by the P,
Cumberbirch inserted the words ‘per
Cumberbirch & Potts’. Cumberbirch indorsed
the cheque and obtained payment. It was held
that the indorsement was not in accordance
with the mandate, and the bank could not
therefore rely on the protection in the Bill of
Exchange Act 1949.
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 PROTECTION OF THE
COLLECTING BANK
 Collecting bank is the holders’s bank.
 Holder is the person who presents the
cheque to his banker for credit to his account.
 The duty of the collecting bank is to collect
the amount from the paying bank.
 Collecting bank may be liable if it fails to
collect as instructed by the customer.

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 Section 85(1) gives protection to the
collecting bank where:
a) He has done it in good faith
b) Without negligence
c) Receives payment of a cheque for a
customer or, having credited the customer’s
account receives payment for himself and the
customer has no title or a defective title to the
cheque.

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 Woodlands Development SB v chartered
bank, PJTV & Densum (M) SB (Third Party)
(1986) 1 MLJ 84
 The P was the payee of three cheques. The first
cheque was crossed and the last two were
crossed with the words “Account Payee”. The
director of the P handed these cheques to Richard
and Yap to open account in a Petaling Jaya Bank
in the name of the P. They persuaded the
manager of the D bank to collect the amount for
the third party. The P brought an action against
the bank and the third party. The court held that
the D bank was negligent in collecting cheques for
the third party. The D bank was ordered to return
the amount of money with interest to the P.
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THANK YOU

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