Fin360 Chapter 2 - Negotiable Instrument

CHAPTER 2
NEGOTIABLE
INSTRUMENTS
Chapter 2 : Negotiable Instruments 1

NEGOTIABLE INSTRUMENTS
Negotiable instrument can be transferred

from one person to another.
A bill or any instrument is negotiable when it

is transferred from one person to another
person in such manner as to constitute the
transferee the holder of the bill or
instrument.
E.g. traveller cheque , bank draft and

promissory notes.
NEGOTIABLE INSTRUMENTS
Characteristic of Negotiable Instruments
a) Transferable from one person to another with or

without endorsement.
b) The holder can sue in his own name
c) The transferee who takes it in good faith and for
value obtains a good title to it even though his
transferor had a defective title or no title at all.
d) No notice is needed to be given to the debtor or
issuer of the negotiable instrument.
If the words “ non – negotiable ” appear on a bill of

exchange, it means that the bill cannot be
negotiated .

WHAT IS BILL OF EXCHANGE?
According to Bill Of Exchange Act, 1949 –
An unconditional order in writing, addressed by

one person to another, signed by the person
giving it, requiring the person to whom it is
addressed to pay on demand or at fixed or
determinable future time a sum certain in
money to, or to the order of, a specified person,
or to the bearer.

• NEGOTIABILITY vs TRANSFERABILITY
• Negotiability ( niaga ) – is a form of transfer of

property ( ownership ) from one person to
another in a document evidencing a
contractual obligation to pay money. It also
refers to the ability of the transferee (penerima)
to acquire a better title than that enjoyed by the
transferor (pemberi). – IT STRESS ON
QUALITY
• Transferability (pindah ) – refers to the ability

( of the transferor-pemberi ) to assign whatever
title one possess in an instrument to another
person (the transferee – penerima ) IT
STRESS ON PROCESS
• Thus, transferability relates to the
Process of passing title in an
instrument, whereas negotiability
usually relates to the Quality of the
title.
• Therefore, while all negotiable

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

instrument such as bearer cheque and
negotiates it to an innocent third party who
takes it in good faith and for value, then,
generally, the third party (transferee ) will
acquire better title to the cheque than the thief
( transferor) because he can get the money.

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

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

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

• Penang, 3 rd May 2007
•
• To : RHB Bank
•
• Payable on demand pay Mr Greg David the sum
of Ringgit Malaysia Five Thousand (RM 5,000 )
value received.
•
• Signed :
• Mr Greg David
• Note : Payee and drawer is same person
2 types of Bill Of Exchange
a) Local or inland bill

bill drawn and payable in Malaysia
b) Foreign bill
bill drawn and payable outside
Malaysia e.g. in Singapore, China
etc

The bill is payable either “ bearer ” or “
order ”
a) Bearer bill ( Pembawa )
Bills that are drawn payable to bearer or on
which the last endorsement is blank
endorsement. The bill is transferable by
mere delivery without any necessity for
endorsement OR signature.
Example : “ Pay Ali or bearer ”. Ali or any

person including thief carrying this bill can
get money from bank.
b) Order bill ( arahan )
Bills that are payable to or to the order

of a specified person without words
prohibiting further transfer. The bill
requires valid endorsement in order to
complete a transfer.
Example : “ Pay Ali or order ”. Ali must

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

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

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

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

BLANK ENDORSEMENT
• RIDZWAN

SPECIAL ENDORSEMENT
• PAY TO :
•
• RIDZWAN or order
•

RESTRICTIVE ENDORSEMENT
• PAY TO :
• RIDZWAN only

4 rules governing Presentment of payment of Bill of
Exchange as provided under section 45 of Bills of
Exchange Act 1949. ( Apr 07 Q 5 a / Apr 01 Q 2 b )
1. The proper place of presentation

2. The parties to whom presentment is to be made
3. That presentment must be made by the holder or by
some person authorized to receive payment on his
behalf.
4. That such presentment is required to be made at a
reasonable hour on a business day.
A bill of exchange must be presented for payment

and if it not presented, the drawer and endorsers are
discharge from liability.
A bill not paid after it has been presented for
payment is said to be dishonored ( tidak laku )
3 types of holder
a) Holder of a bill
Any person who is in the possession of the bill such as payee
or endorsee
b) Holder for value

A holder for value is the holder of a bill for which value was
given sometime previously. So he is a person who purchased
the bill from payee or endorsee
c) Holder in due course

A holder in due course is the holder of a bill AND also a holder
for value that receive a bill that is complete and regular on the
face of it, before it is overdue and in good faith, and without
any notice of defect in the title.

Dishonour
When a bill is dishonoured, it is sometimes necessary to
obtain formal proof that it was duly presented and
dishonoured.
Noting ( Noted ) – when a bill is to be noted, the lawyer

will present the bill AGAIN for acceptance or payment
as the case may be. If acceptance or payment is still
refused, the bill is then noted.
Protesting ( protested ) – involve the making of a

declaration by the lawyer that the bill has been
presented and that acceptance or payment has been
refused.

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

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

Differences
Differences between bill of exchange and cheque
BILL OF EXCHANGE ( BOE) CHEQUE

Can be drawn upon any person Must be drawn upon a banker
only ( Paying bank)
Can be made payable at a fixed Payable on demand
or determinable future
Must be presented for payment Can be presented for payment
when due or the drawer will be within 6 months from the date
discharged issue
BOE cannot be crossed The cheque may be crossed
Required to be endorsed by the Technical speaking, a cheque
payee before it is presented for need not to be endorsed by
payment payee especially Bearer cheque.
A bill when accepted, the The drawer /accountee is the
acceptor/drawee is primarily party primarily liable if the
liable to the holder ( pemegang cheque is rejected.
bill )
ADVANTAGES OF CHEQUE
a) Can be issued for any amount subject to
availability of funds ( must have enough credit
balance if no overdraft facility )
b) Cheques are more secured than cash.
c) Cheque can be stop if loss.
d) Can easily send through the post /mail.
e) Cheques can easily be transferred between
parties. Can pass to another person .

DISADVANTAGES OF CHEQUE
a) Shops will normally reject cheques as mode of
payment. They prefer cash or credit cards.
b) Cheques are susceptible to theft and fraud.
c) A person accepting a cheque may find that is

dishonoured or rejected by Paying bank.
d) It is less easy to use than cash. Take time to clear a

cheque before can utilise or use the fund.Eg KL
cheques take 5 working days to clear.

POINTS TO CONSIDER WHEN DRAWING OR
ISSUING A CHEQUE
a) The cheque must be an unconditional order. Cannot

be changed or altered.
b) It must be in writing which includes print ( using
printer).
c) Cheque must be signed. Thumb print ?
d) It is important that the amount on the cheque must
be stated in words tally with that in figures to meet
the criteria “ a sum certain in money ”
e) A cheque must be dated. If undated, how ?

OPEN OR CROSS CHEQUE
A cheque can be encashed over the counter ( withdraw cash
through counter ) OR bank into an account with a bank.
a) Open / uncrossed cheque

A cheque without a crossing. The proceed of the cheque need
not go through any account. Payment may be made over the
counter.
b) Crossed cheque ( Cek berpalang )

The holder will not be able to cash it and has to be paid into a
bank account. Advantages of cross cheque:
i. Being able to trace into whose account the money went.
ii. More time to stop payment of a cross cheque than an open
cheque. WHO
MAY CROSS CHEQUE ? Drawer, Payee & Bank

2 Types of bank crossing
i. General crossing – two parallel
transverse lines drawn across
the face of the cheque, with or
without the following words
written between or near the
line.
i. and company
ii. & co
iii.not negotiable
Special Crossing
Special crossing – a cheque bears its
face an addition of the NAME of a banker
either with or without the words “ Not
Negotiable ”. Cheque is crossed
specially and to that banker. Must bank
in into that particular bank ONLY.
The main difference between general

and special crossing is that special
crossing contains the name of a banker
whereas a general crossing does not.

Special types of crossing
a) Not negotiable crossing ( Tak boleh niaga)
According to Section 81 BEA 1949. Where a person takes a
crossed cheque which bears on it the words “ not
negotiable”, he shall not have and shall not be capable of
giving a better title to the cheque than that which the person
from whom he took it had. It questions the question of TITLE
and not the question of Tansferability. Thus, this crossing
deprives the cheque of its Negotiability but not its
Transferability.
If A pass the cheque to B, A has better title than B because A will

get the money from B but B is not guarantee to get money
from other person if he want to transfer the cheque to
another party.
CASE: Wilson and Meeson vs Pickering. Refer Pjj page 42

b) Account Payee crossing
It merely an instruction to the COLLECTING bank
that the cheque should be paid ONLY into the
account of the payee ( named person only) .
The proceed of the cheque ( cash) must be collected

for the account of the Named Payee only.
CASE: House Property co of London Ltd vs London

Country & Westminister Bank.
Cheque in favour of 2 trustee was paid into the
trustee’s lawyer account ( single name). Bank was held
liable for WRONGFUL CONVERSION.

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

Types of Dates
• A) Ante dated – A cheque that have a date
BEFORE the date of issue ( Today’s date).
• B) Post dated – A cheque that have a date

LATER than the date of issue. Post dated cheque
IS not payable on demand and therefore
cannot fall within definition of “
cheque”
• C) Stale or Out of date – A cheque that have a

date MORE than 6 months from date of issue.
•
Exercise.
• If today is 15 / 8 / 2006, Classify the following
cheques whether ANTEDATED, POST DATED or STALE
/ OUT OF DATE:
• a) 18 / 8 / 2006.
• b) 1 / 8 / 2006
• c) 14 / 2 / 2006

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

NEGLIGENCE; otherwise it may be used for
wrongfully converting the proceeds of the cheque.

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

What is Without Negligence ?
• A lack of reasonable care or reasonable skill or
breach of the common duty of care imposed
( Cuai )

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

Protection for the collecting bank
( defence available to collecting bank )
a) Statutory protection – Section 85 BEA 1949

bank must acted in good faith and without
negligence when collecting cheques from a
customer. As such bank will not incur any liability
to the true owner
CASE: Landbroke vs Todd

Bank was held negligent for not obtaining a
reference / introducer before opening an
account
b) Defence of Estoppel
Protection for collecting bank where the plaintiff
or customer is estopped ( preclude/prevent ) from
succeeding in his claim against a bank as a result
of something which he has said or done something
which led the collecting banker to believe on
reasonable grounds that is would be in order for
the bank to collect the cheques concerned for the
account of customer.
The representation by the plaintiff may be by

conduct or by statement ( in writing ) and it must
be an existing fact and not be ambiguous. The
bank must acted assuming that the
representation/information was true.
c) Defence of Contributory Negligence (Apr 08 Q 6 a)
A plaintiff / customer who had failed to take reasonable care
for his own safety against forseeable risk could be met with
a Defence of contributory negligence.
CASE: Lumsden & Co vs London Trustee Savings Bank

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

d) Defence of Holder in due course – according Section 29
BEA 1949
It also known as holder for value. The bank would
acquire a good title to the cheque if it become a holder
in due course by giving value ( consider the cheque
good ) for the cheque in Good Faith
e) Indemnity from customer

Customer indemnified the bank for any wrong doing or
liabilities incurred in the reasonable performance of the
duty. Normally bank requires customer to sign an
indemnity form. Refer sample March 2005, Q 5b

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

Types of liabilities of a paying bank
a) The bank is liable for damages for cheque wrongly debited to

a customer’s account
i. Pay stopped payment cheque
ii. Pay a post dated cheque
iii. Pay a cheque with signature forged
CASE 1: Greenwood vs Martin Bank ( 1933 )
Customer knows his signature has been
forged by his wife but fails to inform the
bank. He let his wife to withdraw money
using forged signature of husband.

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

false alteration of a cheque.

iv. Pay cheque with alteration without customer’s
consent
CASE: London Joint Stock Bank vs Mac Millan &

Authur ( 1918 )
The duty of the customer to exercise
reasonable care in drawing cheques and the rights
of the bank to expect the customer to exercise
reasonable care in drawing a cheque.
b) The bank wrongfully dishonour a cheque – breach of

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

Legal protection available to paying bank
(according to BEA 1949 )
a) Sec 60 BEA 1949 – Payment of cheque with forged
document ( Dokumen palsu )
It states that when a drawee bank pays a cheque with a

forged or unauthorised endorsement, in good faith and in
the ordinary course of business, the bank is deemed to
have paid it in due course. A cheque is deemed to be paid
in the ordinary course of business if a bank follows a
standard practise of banking as regard to payment of
cheques.

b) Sec 80 BEA 1949 – payment of a crossed
cheque
It provides that a drawee bank paying a

crossed cheque is entitled to the same rights,
and to be placed in the same position as if
payment has been made to the true owner if the
drawee bank;
i. Pays to bank ( if it is crossed generally )
or to the bearer to whom it is crossed ( if it
crossed specially )
ii. In good faith and without negligence.
Or in other word, bank pays crossed cheque in

good faith, without negligence and according
to the crossing.

c) Sec 82 BEA 1949 – Payment of cheque without
endorsement or irregular endorsement.
It states that where a bank in good faith and in

the ordinary course of business pays a cheque
which is not endorsed or is irregularly
endorsed, the banker does not incur any
liability and is deemed to have paid it in due
course.

d) Sec 59 BEA 1949 – Cheque was endorsed
but the presenter is unknown to bank.
It states that the bank can pay on the

cheque through the presenter in
unknown to the bank as long as the bank
takes all the necessary steps in
examining the cheque and identifying
the presenter.

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

COUNTERMAND OF CHEQUE
( STOP PAYMENT )
Countermand of cheque is the cancellation of cheque

due to several reasons
SECTION 75 OF BEA 1949, the duty and authority of a

bank to pay a cheque drawn
on him are determine by:
a) Countermand of payment and

b) Notices of the customer’s death

Customer can countermand of payments for several
reasons such as lost, stolen or failed contract etc.
Rules/steps/procedures which a customer should follow when

making a countermand or stop payment. ( Oct 03 Q 2 b)
a) The instruction should be in writing. Countermand of
payment may be done by telephone but must be followed by
letter soonest possible.
b) The written instruction should be delivered to the banker as
soon as possible in time for the bank to take effective action.
CASE: Baines vs National Provincial Bank Ltd
The bank will not be responsible if the countermand
instruction reach the bank after the payment has
been made eventhough the delay was caused by the
bank’s negligence.

c) The instruction should be accurate as far as the particulars
of the cheque are concerned.
CASE: Westminster Bank vs Hilton

The customer provide wrong cheque
number to the bank for countermand
117285 instead of 117283 as mentioned in the
letter.
The following particulars should be correctly given:

i. Number of the cheque
ii. Name of the payee
iii. Date of the cheque
iv. Amount of the cheque
v. Account number if customer has more than 1
account.
Please refer to Sept 2001 Q 1 a.

d) The instruction is not effective until it actually received by
the bank. Bank to acknowledge receipt of the letter.
CASE: Curtice vs London City and Midland Bank Ltd

Payment to stop using telegram, bank is bound
to accept an unauthorised telegram as sufficient
authority for the serious step of refusing to pay a
cheque. If the cheque is presented, bank to
indicator “ payment stop by telegram and
postponed pending confirmation with the drawer ”
NOTE: For joint account, any one party may countermand a

payment. How about partnership account ?

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

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CHAPTER 2

Chapter 2 : Negotiable Instruments 1

Negotiable instrument can be transferred

A bill or any instrument is negotiable when it

E.g. traveller cheque , bank draft and

a) Transferable from one person to another with or

If the words “ non – negotiable ” appear on a bill of

Chapter 2 : Negotiable Instruments 3

According to Bill Of Exchange Act, 1949 –

An unconditional order in writing, addressed by

Chapter 2 : Negotiable Instruments 4

• Negotiability ( niaga ) – is a form of transfer of

• Transferability (pindah ) – refers to the ability

• Therefore, while all negotiable

• However, if the thief steals a negotiable

Chapter 2 : Negotiable Instruments 7

Chapter 2 : Negotiable Instruments 8

Chapter 2 : Negotiable Instruments 9

Chapter 2 : Negotiable Instruments 10

a) Local or inland bill

Chapter 2 : Negotiable Instruments 12

Example : “ Pay Ali or bearer ”. Ali or any

Bills that are payable to or to the order

Example : “ Pay Ali or order ”. Ali must

Chapter 2 : Negotiable Instruments 14

A simple signature is sufficient.

Chapter 2 : Negotiable Instruments 15

Chapter 2 : Negotiable Instruments 16

Chapter 2 : Negotiable Instruments 17

Chapter 2 : Negotiable Instruments 18

Chapter 2 : Negotiable Instruments 19

Chapter 2 : Negotiable Instruments 20

1. The proper place of presentation

A bill of exchange must be presented for payment

b) Holder for value

c) Holder in due course

Chapter 2 : Negotiable Instruments 22

Noting ( Noted ) – when a bill is to be noted, the lawyer

Protesting ( protested ) – involve the making of a

Chapter 2 : Negotiable Instruments 23

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

Chapter 2 : Negotiable Instruments 24

Chapter 2 : Negotiable Instruments 25

BILL OF EXCHANGE ( BOE) CHEQUE

Chapter 2 : Negotiable Instruments 27

b) Cheques are susceptible to theft and fraud.

c) A person accepting a cheque may find that is

d) It is less easy to use than cash. Take time to clear a

Chapter 2 : Negotiable Instruments 28

a) The cheque must be an unconditional order. Cannot

Chapter 2 : Negotiable Instruments 29

a) Open / uncrossed cheque

b) Crossed cheque ( Cek berpalang )

Chapter 2 : Negotiable Instruments 30

The main difference between general

Chapter 2 : Negotiable Instruments 32

If A pass the cheque to B, A has better title than B because A will

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

Chapter 2 : Negotiable Instruments 33

The proceed of the cheque ( cash) must be collected

CASE: House Property co of London Ltd vs London

Chapter 2 : Negotiable Instruments 34

Chapter 2 : Negotiable Instruments 35