law

LAW 251NEGOTIABLE INSTRUMENT

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Acknowledgement

Thank god. I can complete this task. I am Akmal laili binti Khairi . I am 4th semester students

in study business. Interim speech I wish to thank my law lecturer Miss NorHanisah

Johar. Business law 251 about negotiable instruments: checks and bills of exchange. Negotiable

instrument has several parts. In addition, this study about the role bill of exchange checks. The

Negotiable Instruments Act was passed in 1881. Some provisions of the Act have become

redundant due to passage of time, change in methods of doing business and technology changes.

However, the basic principles of the Act are still valid and the Act has stood test of time. The Act

extends to the whole of India. There is no doubt that the Act is to regulate commercial

transactions and was drafted to suit requirements of business conditions then prevailing. The

instrument is mainly an instrument of credit readily convertible into money and easily passable

from one hand to another.


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1.0 Introduction

The nature and type of negotiable instruments an area of law than is extremely important

for anyone in the accounting profession. Apart from cheques, promissory notes and bills and

exchange play, a very important role in Australia and elsewhere in raising money or well as

playing an important role in international trade. This topic looks at negotiable instruments in

general and then focuses on cheques. For assessment purposes, any questions on this topic will

focus on cheques only. Liability on negotiable instruments is based primarily on signatures. In

addition, the rights and duties of financial institutions depend upon a variety of factors:

crossings, nature of the mandate and provisions of the Cheques Act 1986 (Cth). These aspects are

explored in this Topic.

1.1 Areas covered in this topic include:

o General concepts relating to negotiable instruments.

o Accommodation bills and promissory notes (non-examinable).

o Cheques.

1.2 Key points

General concepts relating to negotiable instruments

1.3Principle of negotiability

• ownership is transferred by mere physical delivery.

• in the case of order negotiable instruments, by physical delivery plus endorsement.

Concept of holder in due course - the person who takes a negotiable instrument in good faith and

for value is assured of obtaining a good title.


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1.4 Uses of negotiable instruments

• to facilitate payment for exports

• to provide proof of a debt .

• to provide ancillary or collateral security for the payment of an existing debt - Promissory notes

• to grant a debtor an extension of time to pay an existing debt - bills of exchange and promissory

notes payable at future dates.

• to accommodate a party short on credit -accommodation bills (bills of exchange drawn upon a

person of some financial standing and discounted with a third party) .These form the basis of the

modern Australian bills market.

• to raise finance - eg. Accommodation bills drawn upon financial institutions.

• to provide investment.

2.0 Negotiable instrument

Negotiable instrument are governed by the Bill of exchange 1949 ( Revised 1978 )

2.1 Section 101 (2) of Act states:

Subject to the provision of any writ law for the time being force the rules of the common

Law of England , including the law of merchant , shall save in so far as they are inconsistent

with the express provisions of this Act , apply to bill of exchange, promissory notes and cheques.

As far as the states of Malacca , Penang, Sabah and Sarawak are concerned this provision does

not be necessary since under section 5(2) of the Civil Law Act, 1956 (Revised 1972 ) there is a

continuing reception of English Law as far as banks and banking and mercantile law generally

are concerned.

But for the states of Peninsular Malaysia ( excluding Malacca and Penang ) the reception of

English Commercial Law stopped on April 7 1956; such aspects of English Law may aspects of

English Law may not continue to apply to these states after that date.


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The general rule is that a contract between two parties cannot confer either rights or impose

liabilities on a third person there is no privities of contract . It follows from this that a person

cannot have obligation imposed on him by a contract to which is not a party. There are usual,

Exception to this general rule and negotiable instruments is one of these exceptions. Right under

a contract can be transferred to a third party under the following circumstances:-

2.1.1.By operation of law :

For example , in the cases of death or bankruptcy off a person the rights and liabilities of the

deceased pass on to the personal representatives or official assignee respectively: or

2.1.2.By novation:

Where parties to a contract agree that a third person shall replace one of them and all three agree

to the arrangement. For example, A owes B $100 and B owes $100. All three now agree that A

shall pay C $ 100. B drops out : or

2.1.3.By assignment :

The debtor is only bound to pay the assignee when he has received notice of assignment. The

assignee takes subject to any defenses available against the assignor: or

2.1.4.By statute :

For example , policies of life or marine insurance , copyrights , patents, bills of lading, shares in

companies and negotiable instrument.


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3.0 Definitions negotiable instrument:

It is a document containing an undertaking to pay a definite sum of money which may be

transferred by delivery , pr by endorsement and delivery.

Examples:

Bill of exchanges , cheques promissory notes , and bank notes but not included postal orders and

money orders.

o Negotiable instruments (NI) have the quality of transferability

o Effect: the transferee takes a good little to instrument notwithstanding any detect in the

little of the transferor provided the transferee:

a) Takes in good faith and for value

b) Without any notice of any defect in title

3.1The characteristics of Negotiable instrument

-.The title to it passes on delivery and endorsement. This means that the rights can be

transferred from one person to another person.

-.The holder who is in possession of it can sue in his own name.

-. Notice of assignment need not be given to the debtor , e.g. a person who draws a cheque

does not have to give notice to his bank.

-The transferor of negotiable instrument can give a better title than he himself has . This

means that the transferee takes free from ant detect in the title of transferor. This

transferee is known as ‘holder in due course.’


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3.2 Types of negotiable instrument

Negotiable instruments are written orders or unconditional promises to pay a fixed sum of

money on demand or at a certain time. Promissory notes, bills of exchange, checks, drafts, and

certificates of deposit are all examples of negotiable instruments. Negotiable instruments may be

transferred from one person to another, who is known as a holder in due course. Upon transfer,

also called negotiation of the instrument, the holder in due course obtains full legal title to the

instrument. Negotiable instruments may be transferred by delivery or by endorsement and

delivery.

One type of negotiable instrument, called a promissory note, involves only two parties, the

maker of the note and the payee, or the party to whom the note is payable. With a promissory

note, the maker promises to pay a certain amount to the payee. Another type of negotiable

instrument, called a bill of exchange, involves three parties. The party who drafts the bill of

exchange is known as the drawer. The party who is called on to make payment is known as the

drawee, and the party to whom payment is to be made is known as the payee. A check is an

example of a bill of exchange, where the individual or business writing the check is the drawer,

the bank is the drawee, and the person or business to whom the check is made out is the payee.

To be valid a negotiable instrument must meet four requirements. First, it must be in writing

and signed by the maker or drawee. Second, it must contain an unconditional promise

(promissory note) or order (bill of exchange) to pay a certain sum of money and no other promise

except as authorized by the Uniform Commercial Code (UCC). Third, it must be payable on

demand or at a definite time. Finally, it must be payable either to order or to bearer.

The laws governing negotiable instruments are spelled out in Article 3 of the UCC. Modeled

after the Negotiable Instruments Law, Article 3 has been adopted as law by all 50 states and the

District of Columbia. It spells out the basic requirements for valid negotiable instruments and

covers such matters as the rights of the holder, types of endorsement, warranties given to

subsequent holders, forgeries, dating, and alterations.

A negotiable instrument is said to be dishonored when, upon presentation, payment or

acceptance has been refused. To qualify as a holder in due course, an individual or business must


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have taken the negotiable instrument before it was overdue and without notice that it had been

previously dishonored, if such was the case. The negotiable instrument must also be complete

and regular upon its face; that is, all of the necessary information must be present. The holder

must also take the instrument in good faith and for value. At the time it was negotiated, the

holder in due course must have had no notice of an infirmity in the instrument or a defect in the

title of the person negotiating it.

If these conditions are met, then the holder in due course generally holds the instrument free

from any defect of title of prior parties involved with the instrument. The holder in due course

may enforce payment of the instrument for the full amount against all parties liable thereon, free

from any defenses available to prior parties among themselves.

Negotiable instruments may be endorsed in various ways, and some negotiable instruments do

not require any endorsement. If a negotiable instrument is a bearer instrument, then it may be

negotiated by simply delivering it from one person to another with no endorsement required.

Such negotiable instruments typically have a blank endorsement consisting of a person's name

only. If the negotiable instrument is an order instrument, then the payee must first endorse it and

deliver it before negotiation is complete. For example, if the instrument says, "Pay to the order of

Jane Smith," then it is an order instrument and Jane Smith must endorse it and then deliver it to

the payer or drawee.

Endorsements such as "Pay to the order of Jane Smith" are known as special endorsements

and have the effect of making the instrument an order instrument rather than a bearer instrument.

Restrictive endorsements ("Pay to Jane Smith only") and qualified endorsements ("Pay without

recourse to the order of Jane Smith") also have the effect of requiring the payee to endorse the

negotiable instrument. Qualified endorsements also affect the nature of implied warranties

associated with endorsement.

Under the UCC, an unqualified endorser who receives payment or consideration for a

negotiable instrument provides a series of implied warranties to the transferee and any

subsequent holder in due course. An unqualified endorser warranties that he or she has good title

to the instrument or represents a person with title, and that the transfer is otherwise rightful. The


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endorser also warranties that all signatures are genuine or authorized, that the instrument has not

been materially altered, that no defense of any prior party is good against the endorser, and that

the endorser has no knowledge of any insolvency proceeding involving the payer.

Other issues concerning negotiable instruments are also covered in Article 3 of the UCC. In

the case of a forgery, the negotiable instrument becomes inoperative. Antedated or past-dated

instruments are not invalid, provided the dating was not done for fraudulent or illegal purposes.

Negotiable instruments that have been materially altered without the permission of all parties

involved are void. But a holder in due course who is not party to the material alteration can

enforce payment according to the instrument's original terms. Also covered in Article 3 are

interpretations of contradictions that may appear from time to time in negotiable instruments.

4.0 Definition Bill Of Exchange

By § 3 of the act a bill of exchange is defined to be "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 sum certain in

money to or to the order of a specified person, or to bearer."' The person who gives the order is

called the drawer. The person thereby required to pay is called the drawee. If he assents to the

order, he is then called 1 This is also the definition given in the United States, by § 126 of the

general act relating to negotiable instruments, prepared by the conference of state

commissioners on uniform legislation, and it has been adopted in the leading states.

the acceptor. An acceptance must be in writing and must be signed by the drawee. The

mere signature of the drawee is sufficient (§17). The person to whom the money is payable is

called the payee. The person to whom a bill is transferred by endorsement is called the indorsed.

The generic term "holder" includes any person in possession of a bill who holds it either as

payee, indorse or bearer. A bill which in its origin is payable to order becomes payable to bearer

if it is indorsed in blank. If the payee is a fictitious person the bill may be treated as payable to

bearer (§ 7).


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The following is a specimen of an ordinary form of a bill of exchange: £I 00 London, 1st

January 1901. Three months after date pay to the order of Mr J. Jones the sum of one hundred

pounds for value received.

To Messrs. Smith & Sons, Liverpool.

The scope of the definition given above may be realized by comparing it with the definition

given by Sir John Comyns' Digest in the early part of the 18th century: - "A bill of exchange is

when a man takes money in one country or city upon exchange, and draws a bill whereby he

directs another person in another country or city to pay so much to A, or order, for value received

of B, and subscribes it." Comyns' definition illustrates the original theory of a bill of exchange. A

bill in its origin was a device to avoid the transmission of cash from place to place to settle trade

debts. Now a bill of exchange is a substitute for money. It is immaterial whether it is payable in

the place where it is drawn or not. It is immaterial whether it is stated to be given for value

received or not, for the law itself raises a presumption that it was given for value. But though

bills are a substitute for cash payment, and though they constitute the commercial currency of the

country, they must not be confounded with money. No man is bound to take a bill in payment of

debt unless he has agreed to do so. If he does take a bill, the instrument ordinarily operates as

conditional, and not as absolute payment. If the bill is dishonored the debt revives. Under the

laws of some continental countries, a creditor, as such, is entitled to draw on his debtor for the

amount of his debt, but in England the obligation to accept or pay a bill rests solely on actual

agreement. A bill of exchange must be an unconditional order to pay. If an instrument is made

payable on a contingency, or out of a particular fund, so that its payment is dependent on the

continued existence of that fund, it is invalid as a bill, though it may, of course, avail as an

agreement or equitable assignment. In Scotland it has long been the law that a bill may operate as

an assignment of funds in the hands of the drawee, and § 53 of the act preserves this rule.

4.1 Characteristic of bills of exchange:

4.1.1.There are 3 parties to the bill

a) Drawer – person who gives the order


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b) Drawee – person to whom the order is given

c) Payee – person to whom the payment is made

4.1.2.The bill must be an order to pay

Example : ‘Please pay X’ or ‘Pay’

S.3(2) of the Bill of Exchange Act (BEA) states that order must be unconditional . If the

order is conditional , the document ia not a bill of exchange.

4.1.3.The bill must be writing

The bill can be printed or written ( with pencil and ink)

However , it is advisable not write in pencil to avoid fraudulent alteration.

4.1.4.The bill must be addressed by one person or body of persons to another

Body of persons refers to a company, a partnership or a statutory authority.

S.6(1) of BEA drawee must be identified with reasonable certainty. Thus , a bill may be

addressed to alternate drawees e.g. Mr.X or Mr.Y (S.6(2) OF BEA)

S.5(1) of BEA – drawer and payee may be a same person.

S.5(2) of BEA – if the drawer and drawee are the same persons (e.g. drawer is the branch

finance company and the drawee is the HQ) the holder may treat the document as either a

bill of exchange or a promissory note.

4.1.5. The bill must be signed

S.96(1) states that the bill must be signed by the drawer or his authorized agent.

Signature by means of rubber stamp is acceptable if the drawer intent to be bound by

it.

4.1.6.The bill must order payment of sum certain in money and not in goods or services


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If the order is to pay by bond or gold , it is not a bill of exchange.

S.9(1) of BEA – a sum is considered certain although it may be payable in the following

manners:

a) With interest

b) By installments

c) According to a specified exchange rate

S.9(2) of BEA – if there is a difference in the amount stated words and figures , the sum

stated in words is the amount payable –although in practice the negotiable instrument will

be returned to the drawer.

4.1.7.The bill must be payable on demand or at a fixed or determinable future time

Payable on demand means that the holder is entitled to payment immediately upon

demand.

Fixed or determinable future times means payment on sight , on expiry of period after

date or after the happening of certain event.

4.1.8.The bill must be payable to or to the order of a specified person or to the bearer

S.8(4) and (5) – a bill is payable to order in the following instances:

a) It is drawn payable to order, e.g. ‘Pay X or order’

b) It is payable to a particular person without any other words prohibiting transfer e.g.

‘Pay X $1000’

c) It is payable to the order of a particular person, e.g. ‘Pay to the order of X’ – this is an

instruction that indicates the bill is payable to X or to X’ order.

S.8(3)- a bill is payable to bearer in the following instances:

a)It is drawn payable to bearer , e.g. ‘Pay bearer’ and ‘Pay Y or bearer’- this means that

Y himself can be obtain payment or he can negotiable the bill to another by mere delivery

without endorsement.

b) Where the endorser merely signed his name without naming the person to whom the

bill is payable

c) It is payable to a fictitious person


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d) When the order is to pay ‘Cash’

4.2 Return of cheque should be for insufficiency of funds

- The offence takes place only when cheque is dishonored for insufficiency of funds or

where the amount exceeds the arrangement. Section 146 of NI Act only provides that

once complainant produces bank’s slip or memo having official mark that the cheque

is dishonored, the Court will presume dishonor of the cheque, unless and until such

fact is disproved.

4.3 Calculation of date of maturity of Bill of Exchange

- If the instrument is not payable on demand, calculation of date of maturity is

important. An instrument not payable on demand is entitled to get 3 days grace period.

4.4 Presentment of Negotiable Instrument

- The Negotiable Instrument is required to be presented for payment to the person who

is liable to pay. Further, in case of Bill of Exchange payable ‘after sight’, it has to be

presented for acceptance by drawee. ‘Acceptance’ means that drawee agrees to pay the

amount as shown in the Bill. This is required as the maker of bill (drawer) is asking

drawee to pay certain amount to payee. The drawee may refuse the payment as he has

not signed the Bill and has not accepted the liability.

In case of Promissory Note, such acceptance is not required, as the maker who has

signed the note himself is liable to make payment. However, if the promissory note is

payable certain days ‘after sight’ [say 30 days after sight], it will have to be presented

for ‘sight’.

- If the instrument uses the expressions “on demand”, “at sight” or “on presentment”,

the amount is payable on demand. In such case, presentment for acceptance is not

required. The Negotiable Instrument will be directly presented for payment.


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4.5 Acceptance and payment for honor and drawee in need

- Provisions for acceptance and payment for honor have been made in case when the

negotiable instrument is dishonored. Bill is accepted for honor when it is dishonored

when presenting for acceptance, while payment for dishonor is made when Bill is

dishonored when presented for payment.

4.6 Negotiation of Instrument

- The most salient feature of the instrument is that it is negotiable. Negotiation does

not mean a mere transfer. After negotiation, the holder in due course can get a better

title even if title of transferor was defective. If the instrument is ‘to order’, it can be

negotiated by making endorsement. If the instrument is ‘to bearer’, it can be negotiated

by delivery. As per definition of ‘delivery’, such delivery is valid only if made by

party making, accepting or indorsing the instrument or by a person authorized by him.

An instrument can be negotiated any number of times. As per section 118(e),

endorsements appearing on the negotiable instrument are presumed to have been made

in the order in which they appear on the instrument, unless contrary is proved. [There

is no mandatory provision to put date while signing, though advisable to do so].

Section 118(d) provides that there is presumption that the instrument was negotiated

before its maturity, unless contrary is proved. As per section 60, Bill can be negotiated

even after date of maturity by persons other than maker, drawee or acceptor after

maturity. However, person getting such instrument is not ‘holder in due course’ and

does not enjoy protections available to ‘holder in due course’.

4.7 Liability of parties - Basic liability of payment is as follows –

(a) Maker in case of Promissory Note or Cheque

(b) Drawer of Bill till it is accepted by drawee and acceptor after the Bill is accepted .

They are liable as ‘principal debtors’ and other parties to instrument are liable as


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sureties for maker, drawer or acceptor, as the case may be. When document is

endorsed number of times, each prior party is liable to each subsequent party as

principal debtor. In case of dishonor, notice is required to be given to drawer and all

earlier endorsees.

4.8 PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTS –

Until the contrary is proved, the following presumptions shall be made :

(a) of consideration - that every negotiable instrument was made or drawn for

consideration, and that every such instrument, when it has been $ accepted, indorsed,

negotiated or transferred, was accepted, indorsed, negotiated or transferred for

consideration;

(b) as to date - that every negotiable instrument bearing a date was oide or drawn on such

date;

(c) as to time of acceptance - that every accepted bill of exchange was accepted within a

reasonable time after its date and before its maturity;

(d) as to time of transfer - - that every transfer of a negotiable instrument was made before

its maturity;

(e) as to order of endorsements - that the endorsements appearing upon a negotiable

instrument were made in the order in which they appear thereon;

(f) as to stamps -that a lost promissory note, bill of exchange or cheque was duly stamped;

(g) that holder is a holder in due course - that the holder of a negotiable instrument is a

holder in due course : provided that, where the instrument has been obtained from its

lawful owner, or from any person in lawful custody thereof, by means of an offence or

fraud, or has been obtained from the maker or acceptor thereof by means of an of fence or

fraud, or for unlawful consideration, the burden of proving that the holder in due course

lies upon him. [section 118]


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5.0 CHEQUE

5.1 Definition: S.73 of BEA 1949

A bill of exchange drawn on a banker and payable on demand

5.2 Characteristics of a cheque:

1. It is an unconditional order in writing

2. It is signed by the drawer

3. It is drawn on the banker

4. It order the banker to pay sum certain in money on demand

5.3 CROSSING OF CHEQUE

– The Act makes specific provisions for crossing of cheques.

5.3.1 Purpose

To make it difficult , though not possible, for an authorized person such as a rogue to

obtain payment across the counter

Reason: a crossed cheque can only be through bank


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5.3.2 Types of cheques:

I) CHEQUE CROSSED GENERALLY - Where a cheque bears across its face an

addition of the words “and company” or any abbreviation thereof, between two

parallel transverse lines, or of two parallel transverse lines simply, either with or

without the words “not negotiable”, that addition shall be deemed a crossing, and the

cheque shall be deemed to be crossed generally. [section76(1)]

5.3.3 Cases Wilson and Meeson v Pickering ( 1946)

Facts : W drew a cheque in blank cross ‘Not Negotiable’. His clerk, who was supposed to fill in

the amount and the name of the payee , inserted a sum in excess of her authority and delivery 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.

Cases Woodland Development Sdn Bhd v Chartered Bank; PJTVDensen (M) Sdn .Bhd (Third

Party) (1986)

Facts: The plaintiff company was the payees of 2 ‘Account Payees’ cheques to two other

directors for the purpose of opening an account in the plaintiff’s name in bank.

All three directors were also directors of Densen (M) Sdn Bhd ( Third Party ). The third Party

had an account with defendant bank .

The two directors – to whom the 2 cheques were handed to – persuaded the manager of the

defendant bank to collect the amount for the third party instead of opening an account in the

name of the plaintiff company.


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Consequently , the plaintiff company brought an action against the defendant bank and the Third

Party for conversion and for money received for their use.

Held : The defendant bank was liable for negligence in collecting the 2 ‘Account Payee’ cheques

for a third party who not payee named on the cheques.

II) CHEQUE BEARING “NOT NEGOTIABLE” - A person taking a cheque crossed

generally or specially, bearing in either case the words “not negotiable”, shall not

have, and shall not be capable of giving, a better title to the cheque than that which the

person form whom he took it had. [section 130]. Thus, mere writing words ‘Not

negotiable’ does not mean that the cheque is not transferable. It is still transferable, but

the transferee cannot get title better than what transferor had.

a) Electronic Cheque - Provisions of electronic cheque has been made by Amendment

Act, 2002. As per Explanation I(a) to section 6, ‘A cheque in the electronic form’

means a cheque which contains the exact mirror image of a paper cheque, and is

generated, written and signed by a secure system ensuring the minimum safety

standards with the use of digital signature (with or without biometrics signature) and

asymmetric crypto system.

b) Truncated Cheque - Provisions of electronic cheque has been made by Amendment

Act,2002. As per Explanation I(b) to section 6, ‘A truncated cheque’ means a cheque

which is truncated during the clearing cycle, either by the clearing house during the

course of a clearing cycle, either by the clearing house or by the bank whether paying

or receiving payment, immediately on generation of an electronic image for

transmission, substituting the further physical movement of the cheque in writing.

c) Penalty in case of dishonor of cheques for insufficiency of funds - If a cheque is

dishonored even when presented before expiry of 6 months, the payee or holder in

due course is required to give notice to drawer of cheque within 30 days from

receiving information from bank.. The drawer should make payment within 15 days


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of receipt of notice. If he does not pay within 15 days, the payee has to lodge a

complaint with Metropolitan Magistrate or Judicial Magistrate of First Class, against

drawer within one month from the last day on which drawer should have paid the

amount. The penalty can be up to two years imprisonment or fine up to twice the

amount of cheque or both. The offense can be tried summarily. Notice can be sent to

drawer by speed post or courier. Offense is compoundable.

III) CHEQUE CROSSED SPECIALLY - Where a cheque bears across its face an

addition of the name of a banker, either with or without the words “not negotiable”,

that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed

specially, and to be crossed to that banker.

5.4 Types of alteration:

1. Apparent alterations

- S.64 (1) states that party who makes such apparent alteration will be held liable , thus

discharging the liability of the party on the bill at the time.

2. Non –Apparent alterations

- This alteration invisible on reasonable inspection.

- However , the holder in course has the right to enforce it according to its original

tenor.

3. Cases London Joint Stock Bank v Macmillan and Authur(1918)

Fact: A partner in a firm was negligent in drawing a cheque for $2 payable to a bearer.

The sum was stated in figures but not in words. A clerk of the firm misappropriated


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in figured read $120 and wrote it in the appropriate words before cashing the

cheque at the bank.

Held: The bank could debit the firm’s account with the $120. This is because the partner

Neglected to take all precautions by leaving the space blank where the amount

should have been stated in words and by leaving spaces on either side of the figure

4. Cases Barbour Ltd v Ho Hong Bank (1929)

Facts : Barbour Ltd, through its manager ,drew a cheque for $2520 but the words ‘two’

was written in such a way it could bee changed to ‘twelve’. He had also left a

space between the $ sign , so that an additional figure , i.e. ‘1’ , could be inserted ,

thus changing the sum of $2520 to $12520. Consequently , the bank paid contended

that since the cheque was negligently drawn by the manager of Barbour Ltd , the

latter must be bear the loss.

Held : The court of Appeal held that the manager was negligently drawing the cheque.

Therefore , the respondents had to bear the loss.

5.5 Transferability of cheques

• Transferable by negotiation notwithstanding anything written or placed on the cheque - s.39(2)

Cheques Act.

• Crossing of a cheque does not affect the transferability of the cheque - s.39(3).

• A bearer cheque is transferred by delivery - s.40(3).

• An order cheque is transferred by delivery plus endorsement - s.40(2)


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the endorsement can be written on the cheque or placed on the cheque s.41.

• Liability of endorser s.74. Liability of transferor by delivery s.77

• Endorser may limit or negative his liability: see s.17(2). Contrast with a

drawer of a cheque - he cannot negate his liability

• Where an order cheque is delivered but unendorsed the holder receives the title that the

transferor had and also has the right to make the transferor endorse the cheque - see s.42.

• Dishonored or stale cheques are taken subject to defects in title - see s.46.

• There is a presumption that endorsements have been made in the order (if any) in which they

appear on the cheque – see s.48 Cheques Act.

• Where the payee or endorsee is wrongly designated or name is misspell then the person can

endorse likewise but must add his proper signature - see s.44 Cheques Act.

5.6 Signatures on cheques

5.6.1 the drawer has primary liability, then, if he doesn’t pay, the endorser (if there is one).

5.6.2 unauthorized ‘signature’ of drawer.

− If the drawer’s signature is forged or placed on

Without authority, it is wholly inoperative unless there is estoppels or ratification (s.32

Cheques Act).

− The forger’s signature operates as his own. Greenwood v Martins Bank, Tina Motors Pty Ltd v

ANZ.


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− The paying or drawee institution’s position - the financial institution should not pay the

cheque.

5.6.3 unauthorized ‘signature’ by endorser

− The endorser’s signature, if forged or applied without authority, is inoperative but subject to:

- Estoppels against endorser -s.74.

- Financial institution paying according to the crossing - s.92 and s.93.

- Protection of drawee institution where endorsement forged or irregular- s.94.

- Protection of collecting institution - s.95.

- Estoppels or ratification.

5.6.4 the concept of a holder in due course.

− contrast to’ holder’ and ‘holder for value’.

− accorded the extraordinary privilege of being able to receive a better title to a cheque than the

person who gave it to him, and to take free from disputes between the immediate parties to the

cheque.

− cheque must be transferred by negotiation to the holder.

− cheque must be complete and regular on the face of it (note ss.18 and 16 Cheques Act).

− cheque must not be stale (see s.3(5), 46(1).


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− cheque must not have on it a ‘not negotiable’ crossing.

− holder must take the cheque in good faith and without notice of dishonour or of any defect in

The transferor’s title (see ss.3(2), 3(3)).

− there must not be forgeries on the cheque (s.32).

5.6.5 the nature and meaning of crossings.

− General crossing requires that the drawee institution only pays the cheque to another financial

Institution - s.53.

− Not negotiable crossing does not mean non-transferable, but rather that a person who receives,

By negotiation, a cheque crossed in this way is not capable of receiving a better title to the

cheque than had the person from whom he received it. (S.55).

- If the words ‘Not Negotiable ‘appear outside, or substantially outside, the parallel lines, then

they appear to have no affect whatsoever so the crossing will be treated as merely a general

crossing. (s.53 (3)).

− Account payee only - these words cannot take effect as a crossing under the Act, but they

may nonetheless continue to impose some obligation on the collecting institution

- the words do not affect transferability- s.39 Cheques Act

5.7 The liability of the financial institutions

5.7.1 role of the drawee institution and when it should not pay.

− where the cheque has become stale (s.89(1)), subject to agreement or direction by drawer.

(Note also s.89(2)(b) re liability of drawer on stale cheque).

− where the drawer has countermanded the order to pay (s.90). (Note: a countermand does not


23

extinguish the drawer’s liability on the cheque).

− where the financial institution has reliable notice of the drawer’s mental incapacity or death

(s.90).

− where financial institution has reliable notice of drawer’s death. The drawee institution’s

authority will continue for ten days from notice and providing that the financial institution has

not received a countermand from the deceased’s representative.

− drawee institution’s authority to pay will also terminate in certain other circumstances.

− drawee institution may be protected when paying improperly raised cheques - ss.78(2) and 91

plus customers’ common law duty of care to the financial institution.

− drawee institution which pays crossed cheque in accordance with crossing (and in good faith,

without negligence) is deemed to have paid the cheque in due course - s.92, subject to s.32

(unauthorised/forged signatures).

− Where drawee institution pays a crossed cheque otherwise than in accordance with crossing, it

will be liable to the true owner for resulting loss, unless crossing erased and financial

institution acts without negligence - s.93.

5.7.2 role of collecting institution.

− potential liability (and limited defenses) where cheque is collected by an institution on behalf

of a person who is not entitled to its proceeds then the institution exposes itself to an action in

conversion by the true owner of the cheque - s.95.


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6.0 Conclusion

The conclusion , negotiable instrument have two part bill of exchange and cheque.

Negotiable instrument involve types of negotiable , uses of negotiable section and others.

Bill of exchanges have definition ,section , promissory note and others. Cheque also have types

of cheque cases , section and others . the most important to identify the characteristic of bill of

exchange and cheque. Thank you.


25

III References

1. Business law (uitm)

2. The commercial law of Malaysia , Beatrix Vohrah and Wu Min Aun

3. http://en.academic.ru/dic.nsf/enwiki/581812

4. http://www.1911encyclopedia.org/Bill_of_Exchange

5. http://www.referenceforbusiness.com/encyclopedia/Mor-Off/Negotiable-

Instruments.html#ixzz117MNIdxf

6. http://www.dateyvs.com/gener10.htm

7. A Law Dictionary, Adapted to the Constitution and Laws of the United States. By John

Bouvier. Published 1856.

http://legal-dictionary.thefreedictionary.com/bill+of+exchange

http://legal-dictionary.thefreedictionary.com/bill+of+exchange

http://www.dateyvs.com/gener10.htm

http://www.referenceforbusiness.com/encyclopedia/Mor-Off/Negotiable-Instruments.html#ixzz117MNIdxf

http://www.referenceforbusiness.com/encyclopedia/Mor-Off/Negotiable-Instruments.html#ixzz117MNIdxf

http://www.1911encyclopedia.org/Bill_of_Exchange

http://en.academic.ru/dic.nsf/enwiki/581812

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