11

Bills of Exchange, Cheques & Bills of Exchange, Cheques & Promissory NotesPromissory Notes

Theory, principle, conceptTheory, principle, concept

And And

Operational significanceOperational significance

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ObjectivesObjectives

• Theory and PrinciplesTheory and Principles• Negotiable instruments.Negotiable instruments.• Definition and features of bill of exchange.Definition and features of bill of exchange.• Cheque, components, features and Cheque, components, features and

crossingcrossing• To understand the components of cheques.To understand the components of cheques.• Return cheques & BMCReturn cheques & BMC• Difference between bills of exchange and Difference between bills of exchange and

chequescheques• To define promissory notes.To define promissory notes.

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TheoryTheory

• Money as medium of exchange. Now Money as medium of exchange. Now FIATFIAT

• BE, cheques, & Promissory notes as BE, cheques, & Promissory notes as proxy proxy for money: for money:

For ease of exchangeFor ease of exchangeSecurity in exchangeSecurity in exchange

• Bill of Exchange Act 1949 derived Bill of Exchange Act 1949 derived from English law (Common Law, Tort, from English law (Common Law, Tort, & Law of Equity)& Law of Equity)

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PrinciplesPrinciples

• Common Law’s “nemo dat quod non habet” Common Law’s “nemo dat quod non habet” (no one can give what he doesn’t possess).(no one can give what he doesn’t possess).

• With negotiable instrument, the above With negotiable instrument, the above common law principle may not apply. Thus, common law principle may not apply. Thus, if you steal a RM500 bearer cheque and if you steal a RM500 bearer cheque and negotiates with an innocent party who takes negotiates with an innocent party who takes it it in good faithin good faith and and for valuefor value, that innocent , that innocent party acquires good title to the cheque.party acquires good title to the cheque.

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Dictionary: What is good Dictionary: What is good faith?faith?

• A thing is deemed to be done in good faith, A thing is deemed to be done in good faith, within the meaning of this Act, where it is within the meaning of this Act, where it is in fact done honestly, whether it is done in fact done honestly, whether it is done negligently or not.negligently or not.

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• Transferability – transferor transfers Transferability – transferor transfers whatever title in the instrument he whatever title in the instrument he has to the transferee. has to the transferee.

• If transferor has defective title (such If transferor has defective title (such as stolen cheque), he can only as stolen cheque), he can only transfer the defective title. Transferee transfer the defective title. Transferee will obtain a defective title.will obtain a defective title.

• Transferability is viewed from the Transferability is viewed from the angle of ‘transfer’. Transferring a bad angle of ‘transfer’. Transferring a bad title will result into the receiver title will result into the receiver acquiring a bad title.acquiring a bad title.

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• Negotiability – transferee acquires a better Negotiability – transferee acquires a better title to the instrument than that possessed title to the instrument than that possessed by the transferor. Negotiate to obtain value.by the transferor. Negotiate to obtain value.

• Depending on the case, transferee may Depending on the case, transferee may acquire a good title, although the transferor acquire a good title, although the transferor transfers defective title. It’s from the angle transfers defective title. It’s from the angle of ‘acquiring.’ receiver may acquire good of ‘acquiring.’ receiver may acquire good title which was bad at time of transfer.title which was bad at time of transfer.

• Thus, all negotiable instruments are Thus, all negotiable instruments are transferable. Not all transferable transferable. Not all transferable instruments are negotiable.instruments are negotiable.

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Characteristics of Negotiable Characteristics of Negotiable InstrumentInstrument• Negotiable instrument – a formal legal Negotiable instrument – a formal legal

document which contains legal obligation document which contains legal obligation to pay money & involves transfer of to pay money & involves transfer of property (ownership) from one person to property (ownership) from one person to another. 3 characteristics:another. 3 characteristics:

1.1. Instrument and title are transferable Instrument and title are transferable by by delivery delivery alone or alone or by delivery & by delivery & endorsement. endorsement. Transfer may be either Transfer may be either actualactual or or constructiveconstructive..

2.2. The holder (the person to whom The holder (the person to whom instrument is negotiated) instrument is negotiated) can sue in his can sue in his own nameown name..

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3.3. The transferee who takes in The transferee who takes in good faith and for value will good faith and for value will obtain a obtain a good titlegood title though the transferor may though the transferor may have had a defective title or may not have had a defective title or may not have title to it.have title to it.

4.4. The holder does not have to give The holder does not have to give notice to any holder to establish notice to any holder to establish his/her title.his/her title.

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• Example of negotiable instruments – bill of Example of negotiable instruments – bill of exchange (which also includes cheques), exchange (which also includes cheques), treasury bills, dividend warrant, bank treasury bills, dividend warrant, bank draft, negotiable instrument of deposit draft, negotiable instrument of deposit (NID), bearer securities, etc.(NID), bearer securities, etc.

• Traveller’s cheques are not really a Traveller’s cheques are not really a negotiable instrument. It has a condition negotiable instrument. It has a condition attached, i.e., drawer must sign in front of attached, i.e., drawer must sign in front of the payee.the payee.

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Dictionary: 2 Kinds of Dictionary: 2 Kinds of Personal PropertyPersonal Property• Choses in Possession – corporeal property Choses in Possession – corporeal property

(exist in material form – cash, jewellery, goods) (exist in material form – cash, jewellery, goods) which may be physically which may be physically possessed/transferred. Can be protected possessed/transferred. Can be protected physically.physically.

• Choses in Action –incorporeal property Choses in Action –incorporeal property comprising comprising rightsrights like copyrights, shareholders’ like copyrights, shareholders’ rights n contractual rights. Transferred by rights n contractual rights. Transferred by assignment. For negotiable instrument, assignment. For negotiable instrument, contractual rights transferred by contractual rights transferred by negotiation. negotiation. Protection by means of legal action.Protection by means of legal action.

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Dictionary: Delivery n Dictionary: Delivery n IndorsementIndorsement

• Handling over of the document Handling over of the document (negotiable instrument) by way of (negotiable instrument) by way of transfer of possession , actual or transfer of possession , actual or constructive, from one person to constructive, from one person to another.another.

• Indorsement – signature of transferor Indorsement – signature of transferor on the back of the on the back of the document/instrument.document/instrument.

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Bills of ExchangeBills of Exchange

• BE is a written promise of payment from one BE is a written promise of payment from one person to another that is legally binding. Initially, person to another that is legally binding. Initially, there are 3 parties:there are 3 parties:1.1. the drawerthe drawer2.2. the drawee – the person to whom the bill is the drawee – the person to whom the bill is addressed n who becomes the acceptor when addressed n who becomes the acceptor when he/she signs the bill.he/she signs the bill.3.3. the payeethe payee

• Should the bill be negotiated (i.e. transferred) Should the bill be negotiated (i.e. transferred) then anyone holding or endorsing it becomes a then anyone holding or endorsing it becomes a party to the bill n liable upon it.party to the bill n liable upon it.

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• Where the acceptor is unable to pay, the Where the acceptor is unable to pay, the beneficiary should look to the drawer or any beneficiary should look to the drawer or any person who subsequently signed the bill. person who subsequently signed the bill.

Eg., exporter draws a BE n subsequently Eg., exporter draws a BE n subsequently signed n accepted by the importer signed n accepted by the importer (acceptor). Here, Importer accepts the (acceptor). Here, Importer accepts the obligation to pay n will pay 90 days later. obligation to pay n will pay 90 days later. Exporter discounts the BE with the banker Exporter discounts the BE with the banker (beneficiary) n obtains the money (beneficiary) n obtains the money immediately. If 90 days later the banker fails immediately. If 90 days later the banker fails to recover the money from the to recover the money from the importer/acceptor, the banker can seek importer/acceptor, the banker can seek recovery from either the exporter or the recovery from either the exporter or the importer.importer.

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• Acceptance by the drawee is Acceptance by the drawee is indicated by his /her signature.indicated by his /her signature.

• BEs are widely used in internationally BEs are widely used in internationally trade. In domestic trade they are trade. In domestic trade they are replaced by cheques.replaced by cheques.

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Bills of Exchange DefinitionBills of Exchange Definition

• Bill of Exchange Act 1949 (Revised 1998).Bill of Exchange Act 1949 (Revised 1998).• An unconditional order in writing, signed An unconditional order in writing, signed

by a drawer, requiring a drawee to pay on by a drawer, requiring a drawee to pay on demand/fixed/determinable time, a sum demand/fixed/determinable time, a sum certain in money, to, or to the order of, a certain in money, to, or to the order of, a specified person, or to the bearer.specified person, or to the bearer.

• Thus, BE contains several elements which Thus, BE contains several elements which must be there to acquire the status of BE.must be there to acquire the status of BE.

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Necessary Elements of BENecessary Elements of BE1.1.Unconditional order in writing:Unconditional order in writing:

Order for payment is independent of any Order for payment is independent of any condition.condition.

Unconditional: Pay to Izzat the sum of RM500.Unconditional: Pay to Izzat the sum of RM500.

Conditional: Pay to CT Sara the sum of Conditional: Pay to CT Sara the sum of RM700 if she graduates with PMK of 3.8.RM700 if she graduates with PMK of 3.8.

In In Ong Kim Lian V Kwek Beng ChooOng Kim Lian V Kwek Beng Choo, “Both , “Both men and documents to be identified. False men and documents to be identified. False drawing not allowed” amount to conditional drawing not allowed” amount to conditional order.order.

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Court caseCourt case

• At 60 days after sight D/A on arrival At 60 days after sight D/A on arrival of steamer, pay this first of of steamer, pay this first of exchange….. to the order of RHB exchange….. to the order of RHB Bank, Kuala Lumpur…’Bank, Kuala Lumpur…’

Is it a bill of exchange? Is the order Is it a bill of exchange? Is the order conditional?conditional?D/A means ‘documents released against acceptance’ n payment was not conditional upon arrival of steamer. It is a BE.

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A BE at Sight n Drawer n Payee Are The A BE at Sight n Drawer n Payee Are The SameSame

RM50,000 K. Lumpur

30TH March 2007

Pay to me or my order at sight the sum of RM50,000

Arshad

To: Saad

2020

A BE at Where Three Parties Are A BE at Where Three Parties Are NamedNamed

RM50,000 K. Lumpur 30TH March 2007

90 days after sight pay Shahril or order the sum of RM50,000

Arshad

To: Saad

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• In In Nathan v Ogdens (1905),Nathan v Ogdens (1905), ‘R’ cheque: ‘R’ cheque:* If the request is for receipt by the payee, * If the request is for receipt by the payee, n does not involve the bank, it’s a BE.n does not involve the bank, it’s a BE.* If the request for a receipt is addressed * If the request for a receipt is addressed to the bank not to pay unless receipted, to the bank not to pay unless receipted, then it is a condition, n it is not a BE.then it is a condition, n it is not a BE.

• In In Thairlwall v Great Northen Railway Thairlwall v Great Northen Railway Company (1910),Company (1910), a clause stating that the a clause stating that the cheque must be presented within 3 cheque must be presented within 3 months of issue is not a condition. It was months of issue is not a condition. It was just an instruction to the payee n not a just an instruction to the payee n not a condition for the bank to fulfil.condition for the bank to fulfil.

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• Order in writing – instruction must be Order in writing – instruction must be an order n not a mere request. This an order n not a mere request. This explains why your cheque is pre-explains why your cheque is pre-printedprinted

‘Pay…………………. Or order’.‘Pay…………………. Or order’.

For a cheque, the written order could For a cheque, the written order could be on any material such as a pair of be on any material such as a pair of knickers, a cow, m dustbin lid.knickers, a cow, m dustbin lid.

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2.2. Addressed by one person to another:Addressed by one person to another:

Dayang sells a book to Kathie:Dayang sells a book to Kathie:

A.A. Kathie draws a RHB cheque for Kathie draws a RHB cheque for $50 to$50 to

pay pay Dayang.Dayang.

Kathie is Kathie is drawerdrawer, RHB is , RHB is drawee drawee & & Dayang Dayang is is payeepayee..

B.B. Kathie uses $50 cash cheque Kathie uses $50 cash cheque she receives from Harun to pay Dayang. she receives from Harun to pay Dayang. Kathie signs on the back of that cheque Kathie signs on the back of that cheque and passes it to Dayang.and passes it to Dayang.

Kathie is Kathie is indorserindorser, Dayang is a , Dayang is a payeepayee

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C.C. Dayang draws a sight draft for $50Dayang draws a sight draft for $50

Dayang is a Dayang is a drawedrawer, Kathie a r, Kathie a draweedrawee

D.D. Dayang draws a 30-day Dayang draws a 30-day usance/tenor/after sight draft. usance/tenor/after sight draft. KathieKathie

acceptsaccepts

Dayang is a Dayang is a drawerdrawer, Kathie is an , Kathie is an acceptoracceptor

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Dual roles Dual roles Drawer –drawee: Drawer draws a bill on Drawer –drawee: Drawer draws a bill on the drawee requiring payment to himself. the drawee requiring payment to himself. Banker releases loan to the borrower by Banker releases loan to the borrower by bank’s cheque.bank’s cheque.

Drawee-payee: Customer draws a cheque Drawee-payee: Customer draws a cheque on the MBB to pay loan to MBB.on the MBB to pay loan to MBB.

Drawee-drawer: Bank issues a draft drawn Drawee-drawer: Bank issues a draft drawn on its head office.on its head office.

The word “person” means legal person & The word “person” means legal person & include a company, Treasurer.include a company, Treasurer.

For a cheque, joint drawers acceptable, but For a cheque, joint drawers acceptable, but not alternative ones.not alternative ones.

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3.3. Sign by the person giving it:Sign by the person giving it:

* Either the drawer or his agent can sign* Either the drawer or his agent can signthe BE.the BE.

* Thumb print is acceptable.* Thumb print is acceptable.

* A signature of a partner is a signature of all the * A signature of a partner is a signature of all the partners.partners.

* Under Bill of Exchange Act, a forged signature is * Under Bill of Exchange Act, a forged signature is no no signature, no matter how accurate the signature, no matter how accurate the forgery is. forgery is. BE/cheque with forged signature can not be BE/cheque with forged signature can not be enforced, neither can the signature be ratified. enforced, neither can the signature be ratified.

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* The use of facsimile signature should be * The use of facsimile signature should be supported by an indemnity supported by an indemnity

insurance policy.insurance policy.

* Possible that agent is liable on a cheque, * Possible that agent is liable on a cheque, unless he stressed his agency. To stress, unless he stressed his agency. To stress,

quote quote ‘per pro’. ‘per pro’.

* Unsigned bill – invalid, not tradable. * Unsigned bill – invalid, not tradable.

* Note that for a BE, it is signed by the * Note that for a BE, it is signed by the personperson receiving payment, n accepted by thereceiving payment, n accepted by the person making payment.person making payment.

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4.4. Requiring the person to whom it is Requiring the person to whom it is addressed to pay on demand or at a addressed to pay on demand or at a fixed or determinable future date.fixed or determinable future date.

On demand – expressed to be payable on On demand – expressed to be payable on demand, at sight, or on presentation or demand, at sight, or on presentation or when time for payment is not stated.when time for payment is not stated.

Fixed future date – pay on January 10, Fixed future date – pay on January 10, 2005.2005.

Determinable future date – 60 days from Determinable future date – 60 days from the date the goods are dispatched, 30 the date the goods are dispatched, 30 days after sight.days after sight.

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5.5. A sum certain in moneyA sum certain in money

Stated sum of money which is legalStated sum of money which is legaltender. BE Act 1949 –although it istender. BE Act 1949 –although it isrequired to be paid required to be paid a.a. with interestwith interestb. b. by stated installmentsby stated installmentsc.c. by installment with provision “onby installment with provision “ondefault whole amount is due anddefault whole amount is due andpayable”.payable”.

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a ‘certain sum’ will also include a ‘certain sum’ will also include exchange rate where this can be exchange rate where this can be

determined.determined.

Where ‘words n figure’ disagree, Where ‘words n figure’ disagree, it is it is

safe to pay based on amount in safe to pay based on amount in words.words.

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6.6. To, or to the order of, a specified person or To, or to the order of, a specified person or totobearer. For the cheque:bearer. For the cheque:** To a specified person – the payee To a specified person – the payee whom the whom the drawer drawer intends to intends to receive the money. receive the money. Joint payees are Joint payees are acceptable (eg, Mr & Mrs acceptable (eg, Mr & Mrs Harold).Harold).

** Or to the order of a specified person Or to the order of a specified person – this – this allows the payee to pass the allows the payee to pass the cheque on to cheque on to someone else, by merely someone else, by merely endorses the endorses the cheque n orders it to be cheque n orders it to be paid to the other paid to the other person. Person may person. Person may also bealso be “State Secretary or Bendahari UUM” “State Secretary or Bendahari UUM”

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* A bill may be payable either to * A bill may be payable either to order. Section 8(4), an order bill is order. Section 8(4), an order bill is expressed to be payable to order expressed to be payable to order

or to a particular person. it can or to a particular person. it can still be transferred. still be transferred.

* Or to bearer (the person in * Or to bearer (the person in possession of the cheque) – it is possession of the cheque) – it is

rare for a rare for a cheque to be written to cheque to be written to ‘bearer’. But it ‘bearer’. But it become a bearer cheque become a bearer cheque when payee when payee endorses it in blank. endorses it in blank.

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For bearer – payable to bearer or onFor bearer – payable to bearer or on which the only or last indorsement is which the only or last indorsement is indorsement in blank. indorsement in blank.

Indorsement is a signature on the back Indorsement is a signature on the back of the bill. of the bill. Sec. 34(1), indorsement in blank is where theSec. 34(1), indorsement in blank is where the holder (an indorser) signs the bill on the holder (an indorser) signs the bill on the reverse without naming the person (an reverse without naming the person (an indorsee) to whom title is being transferred. indorsee) to whom title is being transferred. BeBe then becomes a bearer instrument. then becomes a bearer instrument.

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Parties to a billParties to a bill

• Drawer – a person who draws the BE, such Drawer – a person who draws the BE, such as the seller.as the seller.

• Drawee – the person who will be making Drawee – the person who will be making the payment, such as the buyer or the the payment, such as the buyer or the bank so authorized to pay.bank so authorized to pay.

• Payee – the party who is to receive the Payee – the party who is to receive the payment.payment.

• Acceptor – drawee who sign to indicate he Acceptor – drawee who sign to indicate he accepts the obligation to pay at a later accepts the obligation to pay at a later date.date.

• Endorser – one who endorses/signs on the Endorser – one who endorses/signs on the back of BE (to transfer or to negotiate BE back of BE (to transfer or to negotiate BE to another party).to another party).

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• Transferor – one who transfers, either by Transferor – one who transfers, either by delivering “a bearer bill” or by endorsement. delivering “a bearer bill” or by endorsement.

• Holder – payee or endorsee or bearer in Holder – payee or endorsee or bearer in possession of BE. possession of BE. Holder must have possession of BE. However, Holder must have possession of BE. However, the possessor may not be the owner of the BE.the possessor may not be the owner of the BE.

If he accepts irregular BE, he doesn’t acquire a If he accepts irregular BE, he doesn’t acquire a better title than the person from whom he better title than the person from whom he took. Can still sue in his own name but subject took. Can still sue in his own name but subject to the defects of title of prior parties.to the defects of title of prior parties.

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• Holder’s rights – convert blank to special Holder’s rights – convert blank to special indorsement, cross the uncrossed cheque, indorsement, cross the uncrossed cheque, request a fresh cheque to replace the lost request a fresh cheque to replace the lost one, negotiate, present, give notice of one, negotiate, present, give notice of dishonor, right of action (sue in his own dishonor, right of action (sue in his own name), enforce against anyone who has name), enforce against anyone who has signed it n against his immediate transferor.signed it n against his immediate transferor.

Holder gets no better title than the person Holder gets no better title than the person from whom he took.from whom he took.A person who takes the bill which is irregular A person who takes the bill which is irregular on the face of it is same as if the bill is on the face of it is same as if the bill is overdue. He is just the ‘holder’, not ‘holder in overdue. He is just the ‘holder’, not ‘holder in due course’.due course’.

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• Holder for value – where value or valuable Holder for value – where value or valuable consideration has been given for the bill.consideration has been given for the bill.

Valuable can be:Valuable can be:a.a. any valuable consideration.any valuable consideration.b.b. settlement of debt.settlement of debt.c.c. where the holder has a lien on the where the holder has a lien on the cheque. cheque.

Once a BE/cheque is given the value, all Once a BE/cheque is given the value, all subsequent holders are holders of value.subsequent holders are holders of value.

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Example of ‘lien’Example of ‘lien’

In negotiating the bills, banker pays seller In negotiating the bills, banker pays seller 10% of the amount (seller has line of 10% of the amount (seller has line of credit with the banker). The 90% is credit with the banker). The 90% is deferred until such time when the banker deferred until such time when the banker receives payment from the buyer. The receives payment from the buyer. The goods automatically pledged to the goods automatically pledged to the banker. Here, banker holds claim over the banker. Here, banker holds claim over the value (10%). The pledge of goods forms a value (10%). The pledge of goods forms a consideration.consideration.

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Rights of holder for value:Rights of holder for value:

1.1. He can sue in his own name but his titleHe can sue in his own name but his titledepends on what his transferor has. depends on what his transferor has.

Example: A payee who received a cheque Example: A payee who received a cheque which was returned due to insufficient of which was returned due to insufficient of funds???funds???

A payee was paid with a stolen cheque A payee was paid with a stolen cheque carrying a forged signature of a drawer???carrying a forged signature of a drawer???

BE Act says that a forged or unauthorized BE Act says that a forged or unauthorized signature is wholly inoperative. signature is wholly inoperative.

transferor.transferor.

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2.2. All rights conferred to ‘holder.’ In addition, can All rights conferred to ‘holder.’ In addition, can enforce the BE/cheque against any party to the enforce the BE/cheque against any party to the BE/cheque prior to the giving of value. However, BE/cheque prior to the giving of value. However, he only has as good a title as his immediate he only has as good a title as his immediate transferor. transferor. Eg., Shahril gives Maisra his cheque for $500 in Eg., Shahril gives Maisra his cheque for $500 in exchange for goods (value given). Maisra endorses exchange for goods (value given). Maisra endorses it to Fadilah. Fadilah gives the cheque as a gift to it to Fadilah. Fadilah gives the cheque as a gift to Faezah. Faezah is holder for value, despite having Faezah. Faezah is holder for value, despite having given no value herself. However, she cannot given no value herself. However, she cannot enforce the cheque against Fadilah, as she gave enforce the cheque against Fadilah, as she gave no value for it. She (Faezah) can, however, enforce no value for it. She (Faezah) can, however, enforce the cheque against Maisra n Shahril.the cheque against Maisra n Shahril.

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• Holder in due course – is someone whoHolder in due course – is someone who1.1. takes the bill complete and regular on the takes the bill complete and regular on the face of it (on both sides of the BE/cheque), face of it (on both sides of the BE/cheque), which means that:which means that:

a.a. no forgery of no forgery of essentialessential endorsementendorsement

b.b. cheque is complete, without any cheque is complete, without any missing sections.missing sections.

C.C. cheque must not be overdue n must cheque must not be overdue n must bebe taken without notice of previous taken without notice of previous

dishonor.dishonor.

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Examples:Examples:1.1. A cheque payable to ‘P or order’ is stolen and P’s A cheque payable to ‘P or order’ is stolen and P’s

indorsement is forged, no one can become a indorsement is forged, no one can become a holder or holder in due course of that cheque holder or holder in due course of that cheque because P’s signature is because P’s signature is essentialessential to pass the to pass the title. title.

However, he may sometimes have the However, he may sometimes have the rights of rights of holder in due courseholder in due course against certain parties who against certain parties who are are estopped estopped from setting up the forgery. Eg. from setting up the forgery. Eg. entitled to sue indorser who become a party to entitled to sue indorser who become a party to the cheque subsequent to the forgery, n tracing the cheque subsequent to the forgery, n tracing down the chain until the person who accepts the down the chain until the person who accepts the cheque with forged indorsement is found. That cheque with forged indorsement is found. That person has to bear the loss, unless he can find person has to bear the loss, unless he can find the person who forged the indorsement.the person who forged the indorsement.

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2.If payable to ‘P or bearer’ instead, 2.If payable to ‘P or bearer’ instead, P’s signature is not essential to pass P’s signature is not essential to pass the title. The innocent party could the title. The innocent party could become holder in due course of that become holder in due course of that cheque provided he satisfies the cheque provided he satisfies the conditions on slide 27.conditions on slide 27.

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2.2. take the BE/cheque in good faith take the BE/cheque in good faith n for value. Good faith is “n for value. Good faith is “something something done honestly n without notice or done honestly n without notice or intent of deceit or fraud whether intent of deceit or fraud whether negligent or notnegligent or not”.”.3.3. must must personallypersonally give value. give value.4.4. must take the BE/cheque without must take the BE/cheque without notice of defect in title of the person notice of defect in title of the person negotiating the BE/cheque to him.negotiating the BE/cheque to him.

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•NoteNote

The value may be full or partial. But The value may be full or partial. But giving giving partial value may indicate bad faith. partial value may indicate bad faith. Also, Also, prior mark of return cheque constitutes prior mark of return cheque constitutes

‘notice of defect’. ‘notice of defect’.

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Rights of holder in due course:Rights of holder in due course:A.A. is an absolute legal owner of is an absolute legal owner of BE/cheue. His title cannot be disputed n is BE/cheue. His title cannot be disputed n is not affected by any defect in the previous not affected by any defect in the previous title or by any counter claims (eg, claims of title or by any counter claims (eg, claims of set-off).set-off).B. can enforce against any prior parties, sue B. can enforce against any prior parties, sue all prior parties, if necessary, in his own all prior parties, if necessary, in his own name if BE/cheque is not paid/honored.name if BE/cheque is not paid/honored.C.C. can pass a perfect title to his can pass a perfect title to his immediate transferee.immediate transferee.

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• Impliedly, every holder is Impliedly, every holder is prima facieprima facie holder in due course unless one or more holder in due course unless one or more of the above conditions are absent.of the above conditions are absent.

• A payee of a cheque can’t be a holder in A payee of a cheque can’t be a holder in due course, as it was issued n not due course, as it was issued n not negotiated to him.negotiated to him.The cheue was merely transferred to The cheue was merely transferred to him. He is just a holder of that cheque.him. He is just a holder of that cheque.

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Court case: Yee Chow Fah v Court case: Yee Chow Fah v Multihorizon S/BMultihorizon S/B• A draws a crossed, post-dated cheque A draws a crossed, post-dated cheque

payable to “Cash or bearer’ n delivered to payable to “Cash or bearer’ n delivered to B. A countermanded the payment. C B. A countermanded the payment. C negotiated the cheque with D n obtained negotiated the cheque with D n obtained cash from D. D presented the cheque for cash from D. D presented the cheque for payment but it was dishonored. Was D payment but it was dishonored. Was D holder in due course?holder in due course?Held: D was holder in due course. He took Held: D was holder in due course. He took the cheque complete n regular on the face the cheque complete n regular on the face of it, n before it became overdue n without of it, n before it became overdue n without notice of countermand. Holds the cheque notice of countermand. Holds the cheque free from any defect of title of prior free from any defect of title of prior parties. Can sue A, B or C in his own name. parties. Can sue A, B or C in his own name.

4949

3.3. in documentary collection, banker in documentary collection, banker discount (i.e. negotiates) a usance BE to a discount (i.e. negotiates) a usance BE to a walk-in customer (seller with no line of walk-in customer (seller with no line of credit with the banker). Banker then sends credit with the banker). Banker then sends the BE for collection to the buyer. If buyer the BE for collection to the buyer. If buyer refuses to pay, banker can resort to seller refuses to pay, banker can resort to seller for reimbursement. If buyer signed for reimbursement. If buyer signed acceptance but failed to pay, banker has acceptance but failed to pay, banker has recourse against seller as well as buyer. recourse against seller as well as buyer. Banker is holder in due course.Banker is holder in due course.

4.4. OCBC v Woo Hing Brothers (M) S/B on OCBC v Woo Hing Brothers (M) S/B on Traveller’s cheques.Traveller’s cheques.

5050

Wrongful PossessorWrongful Possessor

• is a person who takes a BE/cheque is a person who takes a BE/cheque bearing a forged (or unauthorized) bearing a forged (or unauthorized) essential endorsement.essential endorsement.

• A forged signature is no signature. So A forged signature is no signature. So he can not be a holder, a holder for he can not be a holder, a holder for value or a holder in due course.value or a holder in due course.

5151

Goods

BE , Documents

BE, Documents

RHB Bank Deutche Bank

Seller Buyer

5252

Japanese Exporter

Sakura Bank, Tokyo

HSBC

K.L.

BCB Sintok

Importer, Sintok

BE

BE

BE

BEDrawer

Indorser

Holder

Drawee

5353

Rules – Presentment for Rules – Presentment for PaymentPayment• Present on the due date.Present on the due date.• On demand – present within reasonable On demand – present within reasonable

time to make drawer or endorser liable.time to make drawer or endorser liable.• Present at the proper place, at reasonable Present at the proper place, at reasonable

hour on a business day to payer or his hour on a business day to payer or his authorized representative.authorized representative.

• Present at proper place specified, or Present at proper place specified, or business address or his residencebusiness address or his residence

• If no one can be found at proper place? No If no one can be found at proper place? No 22ndnd or 3 or 3rdrd presentation is necessary. presentation is necessary.

5454

• If drawn upon or accepted by two or If drawn upon or accepted by two or more persons, present to all of them, more persons, present to all of them, unless partnershipunless partnership

• Where drawee or acceptor is dead, Where drawee or acceptor is dead, and no place of payment is specified, and no place of payment is specified, present to his personal present to his personal representative, example his son or representative, example his son or wife.wife.

• Where specified by agreement or by Where specified by agreement or by customary practice, present through customary practice, present through post/mail.post/mail.

5555

AcceptanceAcceptance

• When the drawee signs on the bill.When the drawee signs on the bill.• Sign to indicate accepting the obligation to Sign to indicate accepting the obligation to

pay, unconditionally.pay, unconditionally.• Sign to indicate acceptance of goods in trust Sign to indicate acceptance of goods in trust

of bank, i.e., ownership of goods is with the of bank, i.e., ownership of goods is with the bank.bank.

• BE payable on demand needs not be BE payable on demand needs not be presented to drawee for acceptance. It may presented to drawee for acceptance. It may be paid immediately.be paid immediately.

5656

• Acceptance is necessary when:Acceptance is necessary when: 1. The bill is payable after sight, 1. The bill is payable after sight,

presentment is necessary to presentment is necessary to determinedetermine the date of payment. the date of payment.

2.2. Where the bill expressly state that it must Where the bill expressly state that it must be presented for payment.be presented for payment.

3.3. Where the bill is payable elsewhere other Where the bill is payable elsewhere other than at the place of residence or business than at the place of residence or business of drawee.of drawee.

5757

Non-AcceptanceNon-Acceptance

Four ways BE dishonored for non-acceptanceFour ways BE dishonored for non-acceptance• When acceptance is refused or can’t be When acceptance is refused or can’t be

obtainedobtained• When drawee does not accept within the When drawee does not accept within the

customary timecustomary time• When acceptance given is qualified and When acceptance given is qualified and

holder refuses to take itholder refuses to take it• When presentment for acceptance is excused When presentment for acceptance is excused

and the bill is not accepted.and the bill is not accepted.Immediate right of recourse against drawer andImmediate right of recourse against drawer andindorsers accrues to the holder.indorsers accrues to the holder.

5858

PaymentPayment

• BE must be presented for payment, else BE must be presented for payment, else drawer and endorser are discharged from drawer and endorser are discharged from liability.liability.

• Presentment for payment must be made by Presentment for payment must be made by holder of the bill or his agent to the drawee or holder of the bill or his agent to the drawee or his agent at the proper place , at a reasonable his agent at the proper place , at a reasonable hour and on a business day.hour and on a business day.

• Bill unpaid after presentment is said to be Bill unpaid after presentment is said to be dishonored. Holder then has right of action dishonored. Holder then has right of action against drawer and endorser, but must give against drawer and endorser, but must give them notice of dishonor first.them notice of dishonor first.

5959

• Dishonored by non-acceptance.Dishonored by non-acceptance.

• Dishonored by non-payment and the Dishonored by non-payment and the bill becomes overdue and unpaid.bill becomes overdue and unpaid.

• To take legal actions it is necessary To take legal actions it is necessary to obtain proof of dishonor by noting to obtain proof of dishonor by noting and protesting.and protesting.

6060

Noting & ProtestingNoting & Protesting

• Noting –Public Notary or lawyer will present Noting –Public Notary or lawyer will present to drawee for acceptance or to the acceptor to drawee for acceptance or to the acceptor for payment, and if refused, the bill will be for payment, and if refused, the bill will be notednoted..

• Protesting – declaration by a solicitor in a Protesting – declaration by a solicitor in a formal document under seal. Sec 51, must formal document under seal. Sec 51, must be signed by solicitor, specify the person, be signed by solicitor, specify the person, place, date, reason for protesting, demand place, date, reason for protesting, demand made and answer given or that drawee or made and answer given or that drawee or acceptor can’t be found.acceptor can’t be found.

6161

Discharge of BillDischarge of Bill

• When payment made in due course by or When payment made in due course by or on behalf of the drawee or acceptor at or on behalf of the drawee or acceptor at or after maturity, in good faith.after maturity, in good faith.

• When the acceptor of the bill becomes the When the acceptor of the bill becomes the holder of the bill at or after maturity.holder of the bill at or after maturity.

• When holder unconditionally renounces his When holder unconditionally renounces his rights in writing or by returning to the rights in writing or by returning to the acceptor.acceptor.

• Where the bill is intentionally cancelled by Where the bill is intentionally cancelled by the holder or his agent.the holder or his agent.

6262

ChequeCheque

• A bill of exchange, which is an unconditional A bill of exchange, which is an unconditional order in writing, addressed by one person order in writing, addressed by one person ((drawer customerdrawer customer) to the ) to the drawee bankdrawee bank, , signed by the drawer, requiring the drawee signed by the drawer, requiring the drawee bank to bank to pay on demand pay on demand (i.e. on (i.e. on presentation) a sum certain in money to, or presentation) a sum certain in money to, or to the order of, a specified person (to the order of, a specified person (payeepayee) ) or to bearer and or to bearer and which does not order the which does not order the drawee to perform additional acts.drawee to perform additional acts.

6363

• Unconditional – see slides on BE.Unconditional – see slides on BE.

• Order in writing - see slides on BE.Order in writing - see slides on BE.

• Addressed by a person to another Addressed by a person to another person (banker) - see slides on BE.person (banker) - see slides on BE.

• Signed by the drawer - see slides on Signed by the drawer - see slides on BE.BE.

6464

• Payable on demand – ‘post dated Payable on demand – ‘post dated cheque’ is not within the definition of cheque’ is not within the definition of on demand. However, it will still be on demand. However, it will still be enforceable between the parties to it enforceable between the parties to it ( the drawer, drawee n payee).( the drawer, drawee n payee).

• A sum certain in money - see slides A sum certain in money - see slides on BE.on BE.

• To, or to the order of, a specified To, or to the order of, a specified person - see slides on BE.person - see slides on BE.

6565

Cheques as negotiable Cheques as negotiable instrumentsinstruments

• To qualify as ‘negotiable’, must pass 3 tests:To qualify as ‘negotiable’, must pass 3 tests:1.1. that tile can pass by mere delivery or by that tile can pass by mere delivery or by delivery plus endorsement.delivery plus endorsement.2.2. that holder of the instrument can that holder of the instrument can acquire absolute legal title by taking it (a) in acquire absolute legal title by taking it (a) in good faith, (b) for value, and (c) without good faith, (b) for value, and (c) without notice of defect in the title.notice of defect in the title.3.3. that no notice of transfer needs to be that no notice of transfer needs to be given to the person liable on the instrument.given to the person liable on the instrument.

6666

When is endorsement When is endorsement necessary?necessary?

• When the cheque is payable to a When the cheque is payable to a named payee.named payee.

• When the cheque has been specially When the cheque has been specially endorsed, i.e. where the endorser has endorsed, i.e. where the endorser has negotiated a cheque to a specified negotiated a cheque to a specified person.person.

Endorsement is not required for a bearer Endorsement is not required for a bearer cheque or cheque endorsed in blank.cheque or cheque endorsed in blank.

6767

Types of endorsementsTypes of endorsements

• Blank endorsement – endorser Blank endorsement – endorser merely signs on the reverse, making merely signs on the reverse, making it a bearer cheque, hence, needs no it a bearer cheque, hence, needs no further endorsement to transfer the further endorsement to transfer the title. Rationale is, a cheque payable title. Rationale is, a cheque payable to bearer is transferable without any to bearer is transferable without any endorsement.endorsement.

6868

• Special endorsement – endorser Special endorsement – endorser specifies the person to whom the specifies the person to whom the cheque is being transferred cheque is being transferred (endorsee). For the endorsee to (endorsee). For the endorsee to transfer the tile further, he must transfer the tile further, he must endorse the cheque himselfendorse the cheque himself

Eg, ‘Pay to the order of Azlan’Eg, ‘Pay to the order of Azlan’

6969

• Restrictive endorsement – prohibits Restrictive endorsement – prohibits further transfer, eg, ‘Pay to the order further transfer, eg, ‘Pay to the order of Azlan only’. of Azlan only’.

Endorsee has all rights of a holder (can Endorsee has all rights of a holder (can sue in his own name, etc.), but not free sue in his own name, etc.), but not free to transfer the title, n can not be a to transfer the title, n can not be a holder in due course. Why? A mere holder in due course. Why? A mere transfer from transferor to Azlan.transfer from transferor to Azlan.

7070

• Conditional endorsement – eg, ‘Pay Conditional endorsement – eg, ‘Pay Sarah on giving birth to her fifteenth Sarah on giving birth to her fifteenth child’ . Paying banker can just ignore child’ . Paying banker can just ignore this endorsement. Although bank has this endorsement. Although bank has right to ask for proof of the condition, right to ask for proof of the condition, it is under no obligation to do so. it is under no obligation to do so.

7171

Forged or unauthorized Forged or unauthorized endorsementendorsement• Implications of ‘forged signature is no signature’:Implications of ‘forged signature is no signature’:

1.1. a person receiving the cheque subsequent to a person receiving the cheque subsequent to the forged ‘essential endorsement’ obtains no title.the forged ‘essential endorsement’ obtains no title.2.2. when taken the cheque subsequent to the when taken the cheque subsequent to the forged endorsement, can enforce the cheque forged endorsement, can enforce the cheque against anyone subsequent to the forgery but not against anyone subsequent to the forgery but not against anyone prior to forgery (eg, the drawer) – against anyone prior to forgery (eg, the drawer) – see slide 42.see slide 42.3.3. where the cheque is payable to a fictitious where the cheque is payable to a fictitious payee, it can be treated as if payable to bearer. payee, it can be treated as if payable to bearer. The forged endorsement does not invalid the The forged endorsement does not invalid the cheque as endorsement is not essential, the cheque as endorsement is not essential, the cheque being effectively a bearer. cheque being effectively a bearer.

7272

Types of chequeTypes of cheque• Open cheque Open cheque

Pay to Norhatiyah or bearerPay to Norhatiyah or bearer

• Order chequeOrder chequePay to Faziana, Pay to Wira onlyPay to Faziana, Pay to Wira only

• Bearer chequeBearer cheque“Pay to Faziana or bearer”“Pay to Faziana or bearer”Faziana may transfer to Azlan by Faziana may transfer to Azlan by signing/indorsing on the back of the cheque signing/indorsing on the back of the cheque in blankin blank or write or write “Pay to the order of azlan” “Pay to the order of azlan” or or “Pay to the order of Azlan only”.“Pay to the order of Azlan only”.

7373

• A cheque starts its life when it is issued. A cheque starts its life when it is issued. Delivery is either actual or constructive.Delivery is either actual or constructive.

• Constructive – delivery effected by mere Constructive – delivery effected by mere intention. Example, drawer completes a intention. Example, drawer completes a cheque n notifies payee n holding it on cheque n notifies payee n holding it on payee’s behalf – the cheque is deemed payee’s behalf – the cheque is deemed issued.issued.

• Sec. 2 – Holder is payee or indorsee in Sec. 2 – Holder is payee or indorsee in possession of it or the bearer.possession of it or the bearer.

7474

Other Types of ChequeOther Types of Cheque

• Travellers chequeTravellers cheque

• Banker’s draftBanker’s draft

• Banker’s chequeBanker’s cheque

• ““R” cheque – for pension, R” cheque – for pension, compensation, etc.compensation, etc.

7575

CrossingCrossing

• Cross to to prevent fraud & as safeguard Cross to to prevent fraud & as safeguard to drawer and subsequent holders.to drawer and subsequent holders.

• General crossing – two parallel lines “& General crossing – two parallel lines “& Company” and/or “Not Negotiable”.Must Company” and/or “Not Negotiable”.Must be paid direct into payee’s account. Must be paid direct into payee’s account. Must not exchange for cash over the counter.not exchange for cash over the counter.“ABC Bank Bhd” appears in between the “ABC Bank Bhd” appears in between the two parallel lines, cheque must only be two parallel lines, cheque must only be paid by the drawee banker to the banker paid by the drawee banker to the banker named in the crossing. named in the crossing.

7676

Special crossingSpecial crossing

• This is the addition of the name of a bank, This is the addition of the name of a bank, with or without the addition of two with or without the addition of two transverse lines on the cheque.transverse lines on the cheque.

• To ensure paying bank pays the proceeds of To ensure paying bank pays the proceeds of the cheque to the bank stated in the the cheque to the bank stated in the crossing.crossing.

• Collecting banker stamps its “crossing Collecting banker stamps its “crossing stamp” for the same reason - if lost or stamp” for the same reason - if lost or stolen, paying bank will only make payment stolen, paying bank will only make payment to bank stated in crossing.to bank stated in crossing.

• If two banks stated, the cheque will be If two banks stated, the cheque will be returned.returned.

7777

Not negotiable crossingNot negotiable crossing

• This is a general or special crossing This is a general or special crossing plus the words ‘not negotiable’.plus the words ‘not negotiable’.

• It removes negotiability n only allows It removes negotiability n only allows transferability (to the payee who transferability (to the payee who cannot be holder in due course).cannot be holder in due course).

• No one else can obtain a better title.No one else can obtain a better title.• Should use this crossing, esp. when Should use this crossing, esp. when

sending cheque by post.sending cheque by post.

7878

• ““Not Negotiable” crossing – court case.Not Negotiable” crossing – court case.

In In Wilson and Meeson vs Pickering, Wilson and Meeson vs Pickering, a a clerk took a signed blank cheque from clerk took a signed blank cheque from his employer (the cheque duly crossed his employer (the cheque duly crossed “non-negotiable” and fraudulently made “non-negotiable” and fraudulently made it payable to Pickering. Court held it payable to Pickering. Court held employer could recover from Pickering employer could recover from Pickering since the clerk has received no title to since the clerk has received no title to the cheques, Pickering could get no the cheques, Pickering could get no better title because of the crossing.better title because of the crossing.

7979

• ““Account Payee” crossing – becomes a Pay Account Payee” crossing – becomes a Pay Order, not transferable n negotiable. Order, not transferable n negotiable. Banker deemed negligent if it collects such Banker deemed negligent if it collects such cheque for the party other than the named cheque for the party other than the named payee (n loses its statutory protection).payee (n loses its statutory protection).Should not be paid to third party unless Should not be paid to third party unless one with undoubted standing and with one with undoubted standing and with satisfactory explanation why it is satisfactory explanation why it is negotiated.negotiated.

In In House Property Company of London Ltd House Property Company of London Ltd vs London County and Westminster Bank vs London County and Westminster Bank Ltd, Ltd, cheque drawn in favor of two trustees cheque drawn in favor of two trustees was paid into account of the trustees’ was paid into account of the trustees’ solicitor. Bank was liable for wrongful solicitor. Bank was liable for wrongful conversion in that they acted conversion in that they acted negligentlynegligently for collecting “account payee” cheque for for collecting “account payee” cheque for someone other than the named payee.someone other than the named payee.

8080

• In In RHB Bhd v Comax Sdn Bhd (1999)RHB Bhd v Comax Sdn Bhd (1999)$650,000 payable to Abrasive $650,000 payable to Abrasive Waterjet S/B was credited into a/c Waterjet S/B was credited into a/c Abrasive Waterjet Services S/B.Abrasive Waterjet Services S/B.

Held: Validity of a/c payee cheque is Held: Validity of a/c payee cheque is restricted to the parties thereto. RHB restricted to the parties thereto. RHB was negligent.was negligent.

8181

• ““Not Negotiable” and “Account Not Negotiable” and “Account Payee” crossingPayee” crossingThe safest crossing. It prevent The safest crossing. It prevent negotiability and warns the collecting negotiability and warns the collecting banker to pay only to the named banker to pay only to the named payee.payee.

• Now bank pre-print ‘A/C Payee’ only.Now bank pre-print ‘A/C Payee’ only.

8282

Crossing and bankCrossing and bank

• Crossing is to give protection to either Crossing is to give protection to either drawer or holder.drawer or holder.

• General crossing – take longer time to DR General crossing – take longer time to DR drawer’s a/c means more time to stop drawer’s a/c means more time to stop payment.payment.

• General crossing - easier to trace who General crossing - easier to trace who beneficiary is.beneficiary is.

• ‘‘A/c payee’ crossing reduces losses due to A/c payee’ crossing reduces losses due to fraud.fraud.

8383

• Order cheque – negotiated by indorsement. Order cheque – negotiated by indorsement. Holder may indorse generally or specially.Holder may indorse generally or specially.

• Bearer cheque – negotiated by delivery alone. Bearer cheque – negotiated by delivery alone. Remains as bearer for rest of its life, Sec. 8 Remains as bearer for rest of its life, Sec. 8 (3). Can’t convert into an order cheque.(3). Can’t convert into an order cheque.

• ““Pay X or Y” – to negotiate, both must Pay X or Y” – to negotiate, both must indorse, unless a partnership.indorse, unless a partnership.

• Forged or unauthorized Forged or unauthorized indorsement/signature – deemed ‘irregular,’ i. indorsement/signature – deemed ‘irregular,’ i. e. the cheque is ‘not complete n regular on its e. the cheque is ‘not complete n regular on its face.’ an innocent 3face.’ an innocent 3rdrd party who gives value in party who gives value in good faith can’t be the holder in due course good faith can’t be the holder in due course (Arab Bank Ltd v Ross).(Arab Bank Ltd v Ross).

8484

Material AlterationMaterial Alteration

• Sec 64 of BE Act 1949: where materially Sec 64 of BE Act 1949: where materially altered without consent of all parties liable altered without consent of all parties liable to the cheques, the cheque is void except to the cheques, the cheque is void except as againstas against

• a.a. a party who has himself made, a party who has himself made, authorized or consented to alterationauthorized or consented to alteration

b.b. subsequent endorser provided subsequent endorser provided alteration is not apparentalteration is not apparent

c.c. a holder in due course.a holder in due course.

8585

What Constitutes Material What Constitutes Material AlterationAlteration

• When alteration on date, amount When alteration on date, amount payable in word and figures, payable in word and figures, crossing, change from “order” to crossing, change from “order” to “bearer”, and alteration to payee’s “bearer”, and alteration to payee’s name.name.

• An unauthorized alteration An unauthorized alteration discharges all parties prior to discharges all parties prior to alteration, unless they agree to it.alteration, unless they agree to it.

8686

• Banker will not pay cheque bearing Banker will not pay cheque bearing material alteration unless the material alteration unless the alteration has been agreed to and alteration has been agreed to and signed by the drawersigned by the drawer

• Where not apparent, a holder in due Where not apparent, a holder in due course can enforce the cheque as if it course can enforce the cheque as if it was unaltered.was unaltered.

8787

• Note: the bank may not be liable for Note: the bank may not be liable for any non-apparent alteration, as in any non-apparent alteration, as in the case of the case of London/Joint Stock Bank v London/Joint Stock Bank v Macmillan n ArthurMacmillan n Arthur..

• Current practice, all cheques with Current practice, all cheques with alteration will be retuned unpaid on alteration will be retuned unpaid on technical ground and charges RM10 technical ground and charges RM10 per cheque. per cheque.

8888

Liabilities of Collecting Liabilities of Collecting BankerBanker• Banker collecting proceeds of cheques run the Banker collecting proceeds of cheques run the

risk of being:risk of being:1.1. negligent such as making payment for negligent such as making payment for cheque with forged signature.cheque with forged signature.

2.2. conversion such as crediting A/C Payee conversion such as crediting A/C Payee cheque into hird part’s account. Conversion –cheque into hird part’s account. Conversion –

‘an unauthorized act which deprives ‘an unauthorized act which deprives anotheranother

person of his property permanently or for person of his property permanently or for anan

indefinite time.’indefinite time.’

8989

3.3. liable to financial loss if fails to liable to financial loss if fails to notify notify customer of the dishonor of customer of the dishonor of a cheque a cheque within reasonable time within reasonable time (such as (such as customer unable to customer unable to enforce the cheque enforce the cheque against against previous endorser).previous endorser).

4.4. liable for losses due to incorrect liable for losses due to incorrect clearance procedure.clearance procedure.

9090

Statutory Protection to Statutory Protection to BankerBanker• Protection against conversion.Protection against conversion.

• Collecting bank as holder in due Collecting bank as holder in due course or holder for value.course or holder for value.

• Contributory negligence.Contributory negligence.

• Protection against wrongful dishonor Protection against wrongful dishonor or incorrect clearance procedure.or incorrect clearance procedure.

• For paying bank – doctrine of estoppel.For paying bank – doctrine of estoppel.

9191

Protection against Protection against conversionconversion• Sec. 85, Bill of Exchange Act 1949 – Sec. 85, Bill of Exchange Act 1949 –

collecting bank can claim statutory collecting bank can claim statutory protection if satisfy these conditions:protection if satisfy these conditions:Acted in good faith, Acted for a customer, n Acted in good faith, Acted for a customer, n without negligentwithout negligent..In In Ladbroke v Todd (1944),Ladbroke v Todd (1944), an a/c was an a/c was fraudulently opened by a thief in the name fraudulently opened by a thief in the name of payee of a stolen cheque. Bank was of payee of a stolen cheque. Bank was negligent for not taking reference when negligent for not taking reference when opening a/c. no statutory protection. Must opening a/c. no statutory protection. Must compensate the loss.compensate the loss.

9292

Other cases of negligent:Other cases of negligent:a.a. collecting, without sufficient enquiry, collecting, without sufficient enquiry, cheques payable to a partnership, into cheques payable to a partnership, into private a/c of a partner.private a/c of a partner.

b.b. ‘A/c payee’ cheque paid into a/c of 3‘A/c payee’ cheque paid into a/c of 3rdrd party.party.

c.c. collecting, without sufficient enquiry, collecting, without sufficient enquiry, cheque paying to a limited co., for an a/c cheque paying to a limited co., for an a/c other than the company’s.other than the company’s.

9393

• Sec 85 of the Bill of Exchange Act:Sec 85 of the Bill of Exchange Act:

Where a banker, in good faith and without Where a banker, in good faith and without negligence:negligence:a. receives payment for a customer of an a. receives payment for a customer of an instrument to which this section applies, orinstrument to which this section applies, orb.b. having credited the customer’s account having credited the customer’s account with the amount of such an instrument, with the amount of such an instrument, receives payment thereof for himselfreceives payment thereof for himself

and the customer has no title or defective and the customer has no title or defective title to the instrument, the banker does not title to the instrument, the banker does not incur any liability to the true owner of the incur any liability to the true owner of the instrument by reason only having received instrument by reason only having received payment thereof.payment thereof.

9494

Defence of estoppelDefence of estoppel

• Estoppel – if acting based on Estoppel – if acting based on customer’s conduct or statement, customer’s conduct or statement, banker is prevented from denying.banker is prevented from denying.

9595

Defence of Contributory Defence of Contributory NegligenceNegligence

• Defence of Contributory Negligence – Defence of Contributory Negligence – customer failed to take reasonable care for customer failed to take reasonable care for his own safety again foreseable risks.his own safety again foreseable risks.

• In In Lumsden & Co vs London Trustee Saving Lumsden & Co vs London Trustee Saving Bank Bank on conversion of cheques collected for on conversion of cheques collected for customer. Though bank was negligent, customer. Though bank was negligent, customer was also partly negligent, hence customer was also partly negligent, hence must partly bear the burden of loss or must partly bear the burden of loss or damage.damage.

9696

Collecting bank as holder in Collecting bank as holder in due course or holder for value.due course or holder for value.

• As protection against conversion, As protection against conversion, seek under holder in due course seek under holder in due course (HIDC), if ca satisfy conditions – (HIDC), if ca satisfy conditions – without notice of defect in title, in without notice of defect in title, in good faith, n for value.good faith, n for value.

• HIDC has an absolute legal title n can HIDC has an absolute legal title n can enforce aganst all previous parties.enforce aganst all previous parties.

9797

• Holder for value. What constitutes giving Holder for value. What constitutes giving value:value:1.1. payment against unclear effects, value payment against unclear effects, value considered not given in absence of considered not given in absence of agreement, if bank has not done so on agreement, if bank has not done so on regular basis in the past, n when bank policy regular basis in the past, n when bank policy expressly forids.expressly forids.2.2. reduction of debt, must be specific or reduction of debt, must be specific or permanent reduction, not just a temporary permanent reduction, not just a temporary decrease n the debt.decrease n the debt.3. bank holding a lien on cheque, value 3. bank holding a lien on cheque, value considered given.considered given.

9898

4.4. when the bank is paid for when the bank is paid for services by check, value is deemed services by check, value is deemed given. Eg., foreign currency given. Eg., foreign currency transactions, n estate agency fee.transactions, n estate agency fee.

5.5. where cheque is cashed over the where cheque is cashed over the counter, value deemed given.counter, value deemed given.

9999

Protection against wrongful Protection against wrongful dishonor or incorrect clearancedishonor or incorrect clearance

• To seek protection set up as holder in due To seek protection set up as holder in due course or for value (provided notice of default course or for value (provided notice of default given to other parties other than the given to other parties other than the customer). customer).

• And that delay is justified (eg., postal strike And that delay is justified (eg., postal strike etc.)etc.)

• Wrongful dishonor – bank exposed to claims Wrongful dishonor – bank exposed to claims for breach of contract (causing financial for breach of contract (causing financial losses) n libel (‘refer to drawer’ hurts losses) n libel (‘refer to drawer’ hurts customer’s reputation).customer’s reputation).

100100

For paying bank – doctrine of For paying bank – doctrine of estoppel.estoppel.

• Although ‘forged signature is no Although ‘forged signature is no signature’, customer my be signature’, customer my be estoppedestopped from preventing the debiting of from preventing the debiting of cheque to his a/c – as in cheque to his a/c – as in London Joint London Joint Stock Bank v Macmillan and Arthur Stock Bank v Macmillan and Arthur (1918), (1918), and in and in Greenwood v Martin Greenwood v Martin Bank (1933).Bank (1933).

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SubrogationSubrogation

• Where a bank has paid a cheque in Where a bank has paid a cheque in breache a mandate, then it has a right breache a mandate, then it has a right of subrogation, i.e. right to step into of subrogation, i.e. right to step into the shoes of the creditor. Eg., ability of the shoes of the creditor. Eg., ability of the bank to claim back from the the bank to claim back from the customer th goods purchased with customer th goods purchased with ‘stopped cheque’ , in order to prevent ‘stopped cheque’ , in order to prevent the unjust enrichment of the customer.the unjust enrichment of the customer.

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• In In B. Liggett (Liverpool) Ltd v B. Liggett (Liverpool) Ltd v Barclays Bank Ltd (19280, Barclays Bank Ltd (19280, court held court held that the bank could be subrogated to that the bank could be subrogated to the position of trade creditors n the position of trade creditors n enforce the cheque. Rationale – to enforce the cheque. Rationale – to prevent unjust enrichment of the prevent unjust enrichment of the customer.customer.

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Payment under mistake of factPayment under mistake of fact

• Use this defence to reclaim any money paid in Use this defence to reclaim any money paid in breach of the mandate from the person breach of the mandate from the person benefitting from the payment. Three conditions:benefitting from the payment. Three conditions:1.1. payment must not be made under payment must not be made under mandate., but as result of forged signature, mandate., but as result of forged signature, stopped payment etc.stopped payment etc.

2. payment must be a mistake of fact, not a 2. payment must be a mistake of fact, not a mistake of law (how to distinguish?)mistake of law (how to distinguish?)

3.3. payment must be as a result of the payment must be as a result of the mistake.mistake.

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Thus, in Thus, in Barclays Bank Ltd. V W.J.Smith, Barclays Bank Ltd. V W.J.Smith, Son & Cooke (Southern) Ltd and Sowman Son & Cooke (Southern) Ltd and Sowman (1979),(1979), bank able to reclaim money from bank able to reclaim money from beneficiary paid on stop payment cheque.beneficiary paid on stop payment cheque.

In In National Westminster Bank Ltd v National Westminster Bank Ltd v Barclays Bank International Ltd and Ismail Barclays Bank International Ltd and Ismail (1975),(1975), bank able to reclaim money paid bank able to reclaim money paid out on forged cheque.out on forged cheque.

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Other preventive action n Other preventive action n defencedefence

• Indemnity from customerIndemnity from customer

• Defence of ex turpi causa non oritur Defence of ex turpi causa non oritur actio (Out of immoral situation action actio (Out of immoral situation action does not arise)does not arise)In In Thackwell v Barclay Bank Plc.Thackwell v Barclay Bank Plc.

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Returned chequeReturned cheque

• Reasons - Refer to drawer, Words and Reasons - Refer to drawer, Words and figure differ, Post-dated, Unauthorized figure differ, Post-dated, Unauthorized alteration, Out-dated (stale), Signature alteration, Out-dated (stale), Signature irregular, A/C Payee only, etc.irregular, A/C Payee only, etc.

• Returned due to insufficient of fund– global Returned due to insufficient of fund– global closure of accounts after 3 returned closure of accounts after 3 returned cheques within 1-year period. Only current cheques within 1-year period. Only current account of same constitution affected.account of same constitution affected.

• Can only open current a/c after 6-month Can only open current a/c after 6-month probationary period.probationary period.

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• For current account with incoming For current account with incoming payments, a/c will be frozen, payments, a/c will be frozen, incoming payments will be credited incoming payments will be credited to the account, and withdrawal is by to the account, and withdrawal is by bank draft only.bank draft only.

5.3.05

RC

7.10.05

RC

3.4.06

RC

8.8.06

RC

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Biro Maklumat Cek Biro Maklumat Cek

• All returned cheques will be reported All returned cheques will be reported to BMCto BMC

• Report is available on line on daily Report is available on line on daily basis.basis.

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Differences Between Bill of Exchange & Differences Between Bill of Exchange & Cheque.Cheque.

ChequeCheque BEBE

DrawerDrawer Customer of his Customer of his mandate.mandate.

Creditor of the Creditor of the drawee.drawee.

Drawned onDrawned on Always drawn on Always drawn on banker.banker.

On a drawee bank or On a drawee bank or any party.any party.

Payment Payment date & date & liability of liability of drawerdrawer

on demand & presented on demand & presented at reasonable time, at reasonable time, failing which drawer not failing which drawer not discharged.discharged.

On demand or tenor On demand or tenor (must present for (must present for acceptance), else acceptance), else drawer is discharged.drawer is discharged.

AcceptanceAcceptance Need no acceptance. Need no acceptance. Drawer is primarily Drawer is primarily liableliable

Must accept for tenor Must accept for tenor bill. Acceptor bill. Acceptor primarily liable to primarily liable to holder.holder.

PresentatioPresentation for n for paymentpayment

Within reasonable time; Within reasonable time; Liable for 6 monthsLiable for 6 months

Within reasonable Within reasonable time for sight & on time for sight & on maturity date for maturity date for tenor.tenor.

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Differences Between Bill of Exchange & Differences Between Bill of Exchange & Cheque continue…..Cheque continue…..

ChequeCheque BEBE

EndorsementEndorsement No need to No need to endorse.endorse.

Payee must Payee must endorse. endorse.

Paying bankerPaying banker Statutory Statutory protection (sec protection (sec 85) on cheque 85) on cheque bearing forged bearing forged indorsementindorsement

No protection.No protection.

CrossingCrossing Yes.Yes. No.No.

““Not Negotiable”Not Negotiable” Restricts title but Restricts title but not transfernot transfer

Prevents its Prevents its transferabilitytransferability

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ChequeCheque BEBE

DrawnDrawn Upon a bankerUpon a banker Upon any personUpon any person

PayablePayable On demandOn demand On demand, fixed On demand, fixed or determinable or determinable

AcceptanceAcceptance Usually accepted. Usually accepted. drawer primarily drawer primarily liable to holder.liable to holder.

Not accepted. Not accepted. Acceptor Acceptor primarily liable.primarily liable.

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Promissory notesPromissory notes• Is an unconditional promise in writing made Is an unconditional promise in writing made

by the maker to another signed by the maker, by the maker to another signed by the maker, engaging to pay, on demand or at a fixed or engaging to pay, on demand or at a fixed or determinable future time, a sum certain in determinable future time, a sum certain in money to, or to the order of, a specified money to, or to the order of, a specified person or to bearer.person or to bearer.

• It’s an I OWE YOU note, a promise made to It’s an I OWE YOU note, a promise made to pay a specified sum of money. Example, bank pay a specified sum of money. Example, bank note, and commemorative notes issued by note, and commemorative notes issued by BNM, TB. BNM, TB.

• Bankers’ Draft – an order to pay a specified Bankers’ Draft – an order to pay a specified sum. May treat as BE or promissory note.sum. May treat as BE or promissory note.

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• Much like BE.Much like BE.

• Principal differences – a note is a Principal differences – a note is a promise to pay and has only 2 promise to pay and has only 2 parties, i.e the parties, i.e the makermaker who is liable to who is liable to pay and the pay and the payeepayee (holder in case of (holder in case of bearer note) Who is entitled to bearer note) Who is entitled to money it represents.money it represents.

““I promise to pay…..”I promise to pay…..”

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• It is inchoate (incomplete or undeveloped) It is inchoate (incomplete or undeveloped) and ineffective until its delivery to the payee and ineffective until its delivery to the payee or bearer (put into circulation). Otherwise, or bearer (put into circulation). Otherwise, no one in position to sue the maker.no one in position to sue the maker.

• Like BE, negotiated by delivery or by Like BE, negotiated by delivery or by delivery plus endorsement. Presentment, delivery plus endorsement. Presentment, noting, protesting, etc applies.noting, protesting, etc applies.

• Special rule – where a note payable on Special rule – where a note payable on demand is negotiated, it is not deemed to demand is negotiated, it is not deemed to be overdue for the purpose of affecting the be overdue for the purpose of affecting the holder with defects of title of which it has no holder with defects of title of which it has no notice.notice.

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SummarySummary

We have discussed:We have discussed:• Theory & principlesTheory & principles• Characteristics of negotiable instrumentCharacteristics of negotiable instrument• Definition & features of bill of exchangeDefinition & features of bill of exchange• Definition & features of chequeDefinition & features of cheque• Protecton to bankersProtecton to bankers• Returned cheques & BMCReturned cheques & BMC• Differences between BE and chequeDifferences between BE and cheque• Promissory notesPromissory notes• Any more questions?Any more questions?

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• Woodland Development Sdn Bhd vs Woodland Development Sdn Bhd vs Chartered Bank (1986)Chartered Bank (1986)Cheques of ‘$10,000 favoring Cheques of ‘$10,000 favoring Woodland, or bearer,’ ‘$50,000 Woodland, or bearer,’ ‘$50,000 favoring Woodland and crossed A/C favoring Woodland and crossed A/C Payee’ & ‘$10,000 favoring Woodland, Payee’ & ‘$10,000 favoring Woodland, or bearer and crossed A/C Payee paid or bearer and crossed A/C Payee paid into account of another company. Bank into account of another company. Bank was negligent.was negligent.

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• Kepitigalla Rubber Estates Ltd vs Kepitigalla Rubber Estates Ltd vs National Bank of India (1909). National Bank of India (1909).

The company’s secretary forged The company’s secretary forged company’s cheques for 2 months. company’s cheques for 2 months. Accepted and paid by the bank. Bank Accepted and paid by the bank. Bank is liable if pays the cheques under a is liable if pays the cheques under a forged signature.forged signature.

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• Greenwood vs Martins Bank Ltd:Greenwood vs Martins Bank Ltd: Wife has been forging husband’s Wife has been forging husband’s signature. Husband noticed but did signature. Husband noticed but did not inform the bank. Bank is not not inform the bank. Bank is not liable. Customer has duty to inform liable. Customer has duty to inform banker immediately.banker immediately.