NEGOTIABLE INSTRUMENT

The operations of negotiable instruments in Malaysia are being governed by the Bills of
Exchange Act (BOEA) 1949

Negotiable instruments are a class of documents used in commercial and financial

transactions. They are used in both domestic transactions and international trade.
Negotiability is therefore a form of transfer of property (ownership) from one person to
another in document evidencing a contractual obligation to pay money.

Examples of Negotiable Instruments

Negotiable instruments which are currently in use include the following:

1. Bills of exchange; 6. Treasury bills;

2. cheques; 7. Share warrants;
3. Promissory notes, 8. Dividend warrants;
4. Bankers’ drafts; 9. Debentures
5. Bank notes; 10. traveller’s cheques.

BILLS OF EXCHANGE

It is a form of a written promise that the person who takes the bill will be paid the amount
stated in the Bill when he presents it at the proper place and time.

Parties to the Bill

a. Drawer – Person who draws the Bill or gives the Order

b. Drawer – Person to whom the Bill is addressed to
c. Payee – Person to whom payment is made to.

Function of a Bill

To enable the seller to receive money as soon as possible while enabling buyer to defer
payment.

Definition of a Bill

A bill of exchange is defined in section 3(1) of the Bill Of Exchange Act 1949 (Revised 1978)
as:

1. an unconditional order
2. in writing
3. Addressed by one person to another
4. Signed by the person giving it
5. Requiring the person to whom it is addressed to pay on demand or at a

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 fixed or determinable future time
6. a certain sum in money
7. to the order of a specified person or to bearer.

Beside the above the other important characteristic of a Bill of Exchange is that it must be
supported by consideration and the requirement of capacity to contract.

CHEQUES

Section 73(1) BOEA defines a cheque is a bill of exchange drawn on a banker payable on
demand.

Characteristics

a. It is an unconditional order in writing

-The cheque must be in the form of order and not a request
-The word used must be “Pay” and not “Please Pay”
-writing includes printing and handwriting

b. It is signed by the drawer

-A cheque will not be valid if it is not signed by the person who is
drawing the cheque.
-The drawer of the cheque will not be liable unless if he signed the
cheques.

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

d. It orders the banker to pay sum certain in money on demand.

-demand for payment happened when the cheque is presented to the
bank.
-According to section 10 of BOEA “on demand” means a bill is payable
on demand which is expressed to be payable on demand,or at sight, or
o presentation or in which no time is expressed.

e. It is drawn in favour of a specified person (payee) or to his order or in favour of a

bearer.
-The cheque must be a payment to a specified person or to a bearer.
-According to Section 2 “bearer” means the person in possession of abill
or note which is payable to the bearer.

TYPES OF CHEQUES

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Undated Cheque
Bankers need not honour undated cheques. However, under section 20 of the Bills of
exchange Act, a holder of such a cheque can fill up the correct date within a reasonable time
and the cheque can be honoured.

Overdue or Stale Cheque

An overdue cheque is one which has been in circulation for an unreasonable length of time.
A stale cheque is one which has been in circulation for a long time. According to banking
practice in Malaysia currently, a stale cheque is one which bears a date which is half a year
old; i.e. six months or more have expired since the date of the cheque.

Post-dated Cheque
A post-dated cheque is one which bears a date in the future, that is a later date than the
date of issue

Ante Dated
An ante daetd cheque is if it bears a date earlier than the date of actual issue (back dated)

Forged Cheque
A banker who pays out on a cheque where the signature is forged would be liable for having
paid without any mandate or authority to debit the customer’s account.

Crossing on cheques

- The purpose of crossing on a cheque is to instruct that payment can only be

made through a bank or that it must be paid in a certain manner, e.g. through
an account.
- Drawers cross their cheques in order to ensure that even if the cheques fall
into wrong hands, it would be difficult for such unauthorized persons to obtain
payment on the cheques. For instance, a crossed cheque must be cleared
through an account and this makes it difficult for the wrong party to obtain
payment and it also enables the recipient to be traced.

- Crossings are either general or special.

General Crossings

- According to Section 76 (1) BEA, a general crossing may take any of the
following forms.

1. Two parallel transverse line only

2. Two parallel transverse line with words “not negotiable”
3. Two parallel transverse line with words “and company”
4. The word “ & Co”
5. The word “and company” with the words “not negotiable”
6. The words “& Co” with the words “not negotiable”

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The effect of a general crossing is that the paying banker can only pay the amount of the
cheque to a collecting banker. The banker cannot pay cash across the counter in such a
case.

Special Crossings

Where a cheque bears across its face an addition of the name of a banker, either with or
without the words “not negotiable”, the cheque is crossed specially to that banker.

The effect of a special crossing is that the paying banker must pay the amount of the cheque
only to the collecting banker named in the crossing.

A crossing is a material part of the cheque (Section 78 BEA)

It is common for the words, ‘account payee’ or ‘A/C Payee’ or ‘A/C Payee only’ to be put in a
crossing. These words operate as notice to the collecting banker that only the account of the
payee can be credited

ALTERATION ON CHEQUES

- Section 64(1) of BOEA provides that if a bill of exchange or a cheque has

been materially altered without the drawer’s authority, the drawer is
discharged from liablility and the drawee bank cannot debit the drawer’s
account if it had paid such a bill or cheque.

- Section 64(3) of BOEA states that a cheque is amterially altered if there are
changes to date,amount ,name of payee or any crossing or any change which
alters the business effect the cheque.

- If a cheque has been materially altered without the drawer’s authority, the
drawer will be discharged from liability.

- This means that if the bank pays on a cheque which has been materially
altered, the bank cannot debit the drawer’s account for the amount of the
cheque. Examples of material alterations on the date, amount, name of payee
or any crossing or any change which alters the business effect of the cheque.

TYPES OF ALTERATION

-Alteration may be (1) Apparent

(2) Non Apparent

APPARENT ALTERATION

- In the case of WOOLATT v STANLEY

“If the intending holder on scrutinizing the document with reasonable care, would observe
that it has been altered, then that constitutes an apparent alteration.”

-Where a material alteration is apparent, parties liable on the bill at the time of such
alteration will be discharged but the person who made the alteration and all subsequent
parties who took it will be bound by it as altered.

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- In other words, where the material alteration is apparent, parties liable on the bill at the
time of such alteration will be discharged. However, the person who made authorized or
assented to the alteration and all subsequent parties who took it will be bound by it as
altered.

NON - APPARENT ALTERATION

-This occurs when the alteration is executed so cleverly that it is not visible on reasonable
scrutiny.
-As between banker and customer, it is part of the implied terms of the contract between
them that a customer must exercise due care in drawing cheques so as not to facilitate
fraud.
-Thus, if due to the customer’s negligence is not properly drawn up a cheque, a dishonest
holder alters the amount and obtains a greater sum from the bank without the alteration
being apparent, and the banker is protected. It is entitled to debit the customer’s account
with the full amount.

LONDON JOINT STOCK BANK v MACMILLAN AND ARTHUR.

A partner in a firm drew a cheque for two pounds stated in figure but not in words. A clerk of
the firm misappropriated the cheque and altered the figures to read as 120 pounds and
wrote in the appropriate words before cashing the cheque at the bank.

The court held that the bank could debit the firm,s account at 120 pounds. The partner had
neglected to take all precautions by leaving a blank space where the amount should have
been stated and also by leaving blank spaces on either side of the figure two.

-In cases where the alteration had been obvious, the bank is not protected.
-In case of fraudulent alterations, the customer owes a duty of care in drawing the cheque
not to facilitate fraud.

PROTECTION TO THE PAYING BANKER

- Where a customer draws a cheque on his a banker, that banker is known as

a paying banker.
- It is the duty of a paying banker to pay to the right person according to his
banker’s mandate.
- If he pays to the wrong person, he must bear the loss.
- However, the BOEA has provide the paying banker some protection in this
respect :-

a) Section 59 BOEA

A banker incurs no liability if he pays a cheque in due course. Payment in due

course is defined as payment made:

- At or after maturity
- In good faith : it is done honestly whether negligent or not; and
- Without notice that title to the cheque is defective

b) Section 60 BOEA

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 If the indorsement on the cheque has been forged, a banker is protected by
this section if he makes payment:

- In good faith
- In the ordinary course of business- it is made during normal banking hours
and in accordance with the crossing , if any

c) Section 82 BOEA

Where a banker makes payment for a cheque which is not indorsed or is

irregularly indorsed he will be protected by this section if payment is made:

- In good faith
- In the ordinary course of business

d) Section 80 BOEA
This section protects on the payment made in regards to crossed
cheques.The banker will not be liable where there are alteration made on the
crossing of the cheque if the banker pays the cheque in :

- good faith
- without negligence
- according to the crossing

Rubber Industry (Replanting Board) Hongkong v Shanghai Banking Corporation

The Plaintiff issued one cheque to one man name Toh but the cheque fell into the wrong
hand. One Lee Man Choi opened an account with the defendant in the name of Chop Toh
and the cheque was paid into this account. The Plaintiff brought an action against the bank.
The bank sought protection under Section 82 of the BOEA

It was held: Buhagiar J: The Defendant failed to prove that they had acted without
negligence. Therefore they are not entitled to the protection of Section 82.

On the other hand, Section 80 provides that the banker is not protected if he pays
otherwise than in accordance with the customers mandate or he acted negligently.

Slingsby v District Bank

In this case where there was a cheque drawn with a gap between the payee’s name and the
words ‘or order’. After it was signed by the Plaintiffs, Cumberbirch who was the solicitor
inserted the words “per Cumberbirch & Potts” and obtained payment

The Plaintff brought an action for the recovery of the amount on the ground that the paying
banker was negligent when performing their duty.

It was held that the words “percumberbirch & Potts” was unknown to the Plaintiff. The bank
was not entitled to debit the Plaintiff‘s account as there was no breach of the drawer’s duty
as it was not usual precautions to draw line before or after the payee’s name.

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PROTECTION TO THE COLLECTING BANKER

Duty of collecting banker

The banker to whom a holder of a cheque presents the cheque for the credit of his account
is called the collecting banker. The duty of such banker is to collect the amount stated in the
cheque from the drawer’s bank (the paying bank)

Liability of collecting banker

- A collecting bank may become liable to his customer for breach of contract,
e.g. when he fails to collect when instructed to do so.
- He may also be liable to the true owner for wrongful conversion where he
collects improperly on behalf of a customer who is not entitled to the money.

Protection under BOEA

In view of the above, the BOEA affords some protection to the collecting banker.

Section 85 of the BOEA states that where a banker:-

- In good faith; and

- Without negligence

Receives payment of a cheque for a customer who has no title or a defective title to the
cheque, he is not liable to the true owner.

To get protection under s 85, the following elements must be proved:

1. The banker acted for the customer

The definition of a customer is stated in the case of Oriental Bank of Malaya V

The Rubber Industry (Replanting Board) where it was stated that a customer of a
bank is someone who has an account with the bank. The duration of the account is
immaterial.

2. The banker acted in good faith.

Section 95 says that a thing is deemed to be done in good faith, where it is in fact
done honestly whether it is done negligently or not.

3. The banker acted without negligence

Thus even if the banker had acted in good faith, if he has been negligent, the banker
would not be protected under this section.

- It has been suggested that negligence is to be measured by current banking

practice and each case on its merits.
- It does not require a banker to be normally suspicious when he collects for
the customer but he is expected to be reasonably careful when there are
suspicious circumstances, for example when there is something on the face
of the cheque or the behaviour of the customer which should put the bank on
enquiry, in which case he would be expected to make proper enquiries such
as by asking questions and find the truth.

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