Bills of Exchange, Cheques & Promissory Notes : 1 Bills of Exchange, Cheques & Promissory Notes Theory, principle, concept
Operational significance Objectives : 2 Objectives Theory and Principles
Definition and features of bill of exchange.
Cheque, components, features and crossing
To understand the components of cheques.
Return cheques & BMC
Difference between bills of exchange and cheques
To define promissory notes. Theory : 3 Theory Money as medium of exchange. Now FIAT
BE, cheques, & Promissory notes as proxy for money: For ease of exchange Security in exchange
Bill of Exchange Act 1949 derived from English law (Common Law, Tort, & Law of Equity) Principles : 4 Principles Common Law’s “nemo dat quod non habet” (no one can give what he doesn’t possess).
With negotiable instrument, the above common law principle may not apply. Thus, if you steal a RM500 bearer cheque and negotiates with an innocent party who takes it in good faith and for value, that innocent party acquires good title to the cheque. Dictionary: What is good faith? : 5 Dictionary: What is good faith? A thing is deemed to be done in good faith, within the meaning of this Act, where it is in fact done honestly, whether it is done negligently or not. Slide 6: 6 Transferability – transferor transfers whatever title in the instrument he has to the transferee.
If transferor has defective title (such as stolen cheque), he can only transfer the defective title. Transferee will obtain a defective title.
Transferability is viewed from the angle of ‘transfer’. Transferring a bad title will result into the receiver acquiring a bad title. Slide 7: 7 Negotiability – transferee acquires a better title to the instrument than that possessed by the transferor. Negotiate to obtain value.
Depending on the case, transferee may acquire a good title, although the transferor transfers defective title. It’s from the angle of ‘acquiring.’ receiver may acquire good title which was bad at time of transfer.
Thus, all negotiable instruments are transferable. Not all transferable instruments are negotiable. Characteristics of Negotiable Instrument : 8 Characteristics of Negotiable Instrument Negotiable instrument – a formal legal document which contains legal obligation to pay money & involves transfer of property (ownership) from one person to another. 3 characteristics:
1. Instrument and title are transferable by delivery alone or by delivery & endorsement. Transfer may be either actual or constructive.
2. The holder (the person to whom instrument is negotiated) can sue in his own name. Slide 9: 9 3. The transferee who takes in good faith and for value will obtain a good title though the transferor may have had a defective title or may not have title to it.
4. The holder does not have to give notice to any holder to establish his/her title. Slide 10: 10 Example of negotiable instruments – bill of exchange (which also includes cheques), treasury bills, dividend warrant, bank draft, negotiable instrument of deposit (NID), bearer securities, etc.
Traveller’s cheques are not really a negotiable instrument. It has a condition attached, i.e., drawer must sign in front of the payee. Dictionary: 2 Kinds of Personal Property : 11 Dictionary: 2 Kinds of Personal Property Choses in Possession – corporeal property (exist in material form – cash, jewellery, goods) which may be physically possessed/transferred. Can be protected physically.
Choses in Action –incorporeal property comprising rights like copyrights, shareholders’ rights n contractual rights. Transferred by assignment. For negotiable instrument, contractual rights transferred by negotiation. Protection by means of legal action. Dictionary: Delivery n Indorsement : 12 Dictionary: Delivery n Indorsement Handling over of the document (negotiable instrument) by way of transfer of possession , actual or constructive, from one person to another.
Indorsement – signature of transferor on the back of the document/instrument. Bills of Exchange : 13 Bills of Exchange BE is a written promise of payment from one person to another that is legally binding. Initially, there are 3 parties:1. the drawer
2. the drawee – the person to whom the bill is addressed n who becomes the acceptor when he/she signs the bill.3. the payee
Should the bill be negotiated (i.e. transferred) then anyone holding or endorsing it becomes a party to the bill n liable upon it. Slide 14: 14 Where the acceptor is unable to pay, the beneficiary should look to the drawer or any person who subsequently signed the bill. Eg., exporter draws a BE n subsequently signed n accepted by the importer (acceptor). Here, Importer accepts the obligation to pay n will pay 90 days later. Exporter discounts the BE with the banker (beneficiary) n obtains the money immediately. If 90 days later the banker fails to recover the money from the importer/acceptor, the banker can seek recovery from either the exporter or the importer. Slide 15: 15 Acceptance by the drawee is indicated by his /her signature.
BEs are widely used in internationally trade. In domestic trade they are replaced by cheques. Bills of Exchange Definition : 16 Bills of Exchange Definition Bill of Exchange Act 1949 (Revised 1998).
An unconditional order in writing, signed by a drawer, requiring a drawee to pay on demand/fixed/determinable time, a sum certain in money, to, or to the order of, a specified person, or to the bearer.
Thus, BE contains several elements which must be there to acquire the status of BE. Necessary Elements of BE : 17 Necessary Elements of BE 1. Unconditional order in writing:Order for payment is independent of any condition.Unconditional: Pay to Izzat the sum of RM500.
Conditional: Pay to CT Sara the sum of RM700 if she graduates with PMK of 3.8.
In Ong Kim Lian V Kwek Beng Choo, “Both men and documents to be identified. False drawing not allowed” amount to conditional order. Court case : 18 Court case At 60 days after sight D/A on arrival of steamer, pay this first of exchange….. to the order of RHB Bank, Kuala Lumpur…’
Is it a bill of exchange? Is the order conditional? D/A means ‘documents released against acceptance’ n payment was not conditional upon arrival of steamer. It is a BE. A BE at Sight n Drawer n Payee Are The Same : 19 A BE at Sight n Drawer n Payee Are The Same RM50,000 K. Lumpur
30TH March 2007
Pay to me or my order at sight the sum of RM50,000
To: Saad A BE at Where Three Parties Are Named : 20 A BE at Where Three Parties Are Named RM50,000 K. Lumpur
30TH March 2007
90 days after sight pay Shahril or order the sum of RM50,000
To: Saad Slide 21: 21 In Nathan v Ogdens (1905), ‘R’ cheque:* If the request is for receipt by the payee, n does not involve the bank, it’s a BE.* If the request for a receipt is addressed to the bank not to pay unless receipted, then it is a condition, n it is not a BE.
In Thairlwall v Great Northen Railway Company (1910), a clause stating that the cheque must be presented within 3 months of issue is not a condition. It was just an instruction to the payee n not a condition for the bank to fulfil. Slide 22: 22 Order in writing – instruction must be an order n not a mere request. This explains why your cheque is pre-printed‘Pay…………………. Or order’.For a cheque, the written order could be on any material such as a pair of knickers, a cow, m dustbin lid. Slide 23: 23 2. Addressed by one person to another: Dayang sells a book to Kathie:
A. Kathie draws a RHB cheque for $50 to pay Dayang. Kathie is drawer, RHB is drawee & Dayang is payee.
B. Kathie uses $50 cash cheque she receives from Harun to pay Dayang. Kathie signs on the back of that cheque and passes it to Dayang. Kathie is indorser, Dayang is a payee Slide 24: 24 C. Dayang draws a sight draft for $50 Dayang is a drawer, Kathie a drawee
D. Dayang draws a 30-day usance/tenor/after sight draft. Kathie
accepts Dayang is a drawer, Kathie is an acceptor Slide 25: 25 Dual roles Drawer –drawee: Drawer draws a bill on the drawee requiring payment to himself. Banker releases loan to the borrower by bank’s cheque.Drawee-payee: Customer draws a cheque on the MBB to pay loan to MBB.Drawee-drawer: Bank issues a draft drawn on its head office.
The word “person” means legal person & include a company, Treasurer.
For a cheque, joint drawers acceptable, but not alternative ones. Slide 26: 26 Sign by the person giving it:* Either the drawer or his agent can sign the BE. * Thumb print is acceptable.
* A signature of a partner is a signature of all the partners.
* Under Bill of Exchange Act, a forged signature is no signature, no matter how accurate the forgery is. BE/cheque with forged signature can not be enforced, neither can the signature be ratified. Slide 27: 27 * The use of facsimile signature should be supported by an indemnity insurance policy.
* Possible that agent is liable on a cheque, unless he stressed his agency. To stress, quote ‘per pro’.
* Unsigned bill – invalid, not tradable.
* Note that for a BE, it is signed by the person
receiving payment, n accepted by the
person making payment. Slide 28: 28 Requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future date.
On demand – expressed to be payable on demand, at sight, or on presentation or when time for payment is not stated.
Fixed future date – pay on January 10, 2005.
Determinable future date – 60 days from the date the goods are dispatched, 30 days after sight. Slide 29: 29 A sum certain in moneyStated sum of money which is legaltender. BE Act 1949 –although it isrequired to be paid a. with interest
b. by stated installments
c. by installment with provision “on default whole amount is due and payable”. Slide 30: 30 a ‘certain sum’ will also include exchange rate where this can be determined. Where ‘words n figure’ disagree, it is safe to pay based on amount in words. Slide 31: 31 To, or to the order of, a specified person or tobearer. For the cheque:* To a specified person – the payee whom the drawer intends to receive the money. Joint payees are acceptable (eg, Mr & Mrs Harold).
* Or to the order of a specified person – this allows the payee to pass the cheque on to someone else, by merely endorses the cheque n orders it to be paid to the other person. Person may also be “State Secretary or Bendahari UUM” Slide 32: 32 * A bill may be payable either to order. Section 8(4), an order bill is expressed to be payable to order or to a particular person. it can still be transferred. * Or to bearer (the person in possession of the cheque) – it is rare for a cheque to be written to ‘bearer’. But it become a bearer cheque when payee endorses it in blank. Slide 33: 33 For bearer – payable to bearer or on which the only or last indorsement is indorsement in blank. Indorsement is a signature on the back of the bill.
Sec. 34(1), indorsement in blank is where the holder (an indorser) signs the bill on the reverse without naming the person (an indorsee) to whom title is being transferred. Be then becomes a bearer instrument. Parties to a bill : 34 Parties to a bill Drawer – a person who draws the BE, such as the seller.
Drawee – the person who will be making the payment, such as the buyer or the bank so authorized to pay.
Payee – the party who is to receive the payment.
Acceptor – drawee who sign to indicate he accepts the obligation to pay at a later date.
Endorser – one who endorses/signs on the back of BE (to transfer or to negotiate BE to another party). Slide 35: 35 Transferor – one who transfers, either by delivering “a bearer bill” or by endorsement.
Holder – payee or endorsee or bearer in possession of BE. Holder must have possession of BE. However, the possessor may not be the owner of the BE.If he accepts irregular BE, he doesn’t acquire a better title than the person from whom he took. Can still sue in his own name but subject to the defects of title of prior parties. Slide 36: 36 Holder’s rights – convert blank to special indorsement, cross the uncrossed cheque, request a fresh cheque to replace the lost one, negotiate, present, give notice of dishonor, right of action (sue in his own name), enforce against anyone who has signed it n against his immediate transferor.Holder gets no better title than the person from whom he took.
A person who takes the bill which is irregular on the face of it is same as if the bill is overdue. He is just the ‘holder’, not ‘holder in due course’. Slide 37: 37 Holder for value – where value or valuable consideration has been given for the bill.
Valuable can be:a. any valuable consideration.
b. settlement of debt.
c. where the holder has a lien on the cheque.
Once a BE/cheque is given the value, all subsequent holders are holders of value. Slide 38: 38 Example of ‘lien’
In negotiating the bills, banker pays seller 10% of the amount (seller has line of credit with the banker). The 90% is deferred until such time when the banker receives payment from the buyer. The goods automatically pledged to the banker. Here, banker holds claim over the value (10%). The pledge of goods forms a consideration. Slide 39: 39 Rights of holder for value:
1. He can sue in his own name but his titledepends on what his transferor has.
Example: A payee who received a cheque which was returned due to insufficient of funds???A payee was paid with a stolen cheque carrying a forged signature of a drawer???
BE Act says that a forged or unauthorized signature is wholly inoperative.
transferor. Slide 40: 40 All rights conferred to ‘holder.’ In addition, can enforce the BE/cheque against any party to the BE/cheque prior to the giving of value. However, he only has as good a title as his immediate transferor.
Eg., Shahril gives Maisra his cheque for $500 in exchange for goods (value given). Maisra endorses it to Fadilah. Fadilah gives the cheque as a gift to Faezah. Faezah is holder for value, despite having given no value herself. However, she cannot enforce the cheque against Fadilah, as she gave no value for it. She (Faezah) can, however, enforce the cheque against Maisra n Shahril. Slide 41: 41 Holder in due course – is someone who1. takes the bill complete and regular on the face of it (on both sides of the BE/cheque), which means that: a. no forgery of essential endorsement b. cheque is complete, without any missing sections. C. cheque must not be overdue n must be taken without notice of previous dishonor. Slide 42: 42 Examples:
1. A cheque payable to ‘P or order’ is stolen and P’s indorsement is forged, no one can become a holder or holder in due course of that cheque because P’s signature is essential to pass the title. However, he may sometimes have the rights of holder in due course against certain parties who are estopped from setting up the forgery. Eg. entitled to sue indorser who become a party to the cheque subsequent to the forgery, n tracing down the chain until the person who accepts the cheque with forged indorsement is found. That person has to bear the loss, unless he can find the person who forged the indorsement. Slide 43: 43 2.If payable to ‘P or bearer’ instead, P’s signature is not essential to pass the title. The innocent party could become holder in due course of that cheque provided he satisfies the conditions on slide 27. Slide 44: 44 2. take the BE/cheque in good faith n for value. Good faith is “something done honestly n without notice or intent of deceit or fraud whether negligent or not”.
3. must personally give value.
4. must take the BE/cheque without notice of defect in title of the person negotiating the BE/cheque to him. Slide 45: 45 Note
The value may be full or partial. But giving partial value may indicate bad faith. Also, prior mark of return cheque constitutes ‘notice of defect’. Slide 46: 46 Rights of holder in due course:A. is an absolute legal owner of BE/cheue. His title cannot be disputed n is not affected by any defect in the previous title or by any counter claims (eg, claims of set-off).B. can enforce against any prior parties, sue all prior parties, if necessary, in his own name if BE/cheque is not paid/honored.
C. can pass a perfect title to his immediate transferee. Slide 47: 47 Impliedly, every holder is prima facie holder in due course unless one or more of the above conditions are absent.
A payee of a cheque can’t be a holder in due course, as it was issued n not negotiated to him.The cheue was merely transferred to him. He is just a holder of that cheque. Court case: Yee Chow Fah v Multihorizon S/B : 48 Court case: Yee Chow Fah v Multihorizon S/B A draws a crossed, post-dated cheque payable to “Cash or bearer’ n delivered to B. A countermanded the payment. C negotiated the cheque with D n obtained cash from D. D presented the cheque for payment but it was dishonored. Was D holder in due course?
Held: D was holder in due course. He took the cheque complete n regular on the face of it, n before it became overdue n without notice of countermand. Holds the cheque free from any defect of title of prior parties. Can sue A, B or C in his own name. Slide 49: 49 3. in documentary collection, banker discount (i.e. negotiates) a usance BE to a walk-in customer (seller with no line of credit with the banker). Banker then sends the BE for collection to the buyer. If buyer refuses to pay, banker can resort to seller for reimbursement. If buyer signed acceptance but failed to pay, banker has recourse against seller as well as buyer. Banker is holder in due course.
4. OCBC v Woo Hing Brothers (M) S/B on Traveller’s cheques. Wrongful Possessor : 50 Wrongful Possessor is a person who takes a BE/cheque bearing a forged (or unauthorized) essential endorsement.
A forged signature is no signature. So he can not be a holder, a holder for value or a holder in due course. Slide 51: 51 Goods BE , Documents BE, Documents RHB Bank Deutche Bank Seller Buyer Slide 52: 52 Japanese Exporter Sakura Bank, Tokyo HSBC
K.L. BCB Sintok Importer, Sintok BE BE BE BE Drawer Indorser Holder Drawee Rules – Presentment for Payment : 53 Rules – Presentment for Payment Present on the due date.
On demand – present within reasonable time to make drawer or endorser liable.
Present at the proper place, at reasonable hour on a business day to payer or his authorized representative.
Present at proper place specified, or business address or his residence
If no one can be found at proper place? No 2nd or 3rd presentation is necessary. Slide 54: 54 If drawn upon or accepted by two or more persons, present to all of them, unless partnership
Where drawee or acceptor is dead, and no place of payment is specified, present to his personal representative, example his son or wife.
Where specified by agreement or by customary practice, present through post/mail. Acceptance : 55 Acceptance When the drawee signs on the bill.
Sign to indicate accepting the obligation to pay, unconditionally.
Sign to indicate acceptance of goods in trust of bank, i.e., ownership of goods is with the bank.
BE payable on demand needs not be presented to drawee for acceptance. It may be paid immediately. Slide 56: 56 Acceptance is necessary when:
1. The bill is payable after sight, presentment is necessary to determine the date of payment.
Where the bill expressly state that it must be presented for payment.
Where the bill is payable elsewhere other than at the place of residence or business of drawee. Non-Acceptance : 57 Non-Acceptance Four ways BE dishonored for non-acceptance
When acceptance is refused or can’t be obtained
When drawee does not accept within the customary time
When acceptance given is qualified and holder refuses to take it
When presentment for acceptance is excused and the bill is not accepted.
Immediate right of recourse against drawer and
indorsers accrues to the holder. Payment : 58 Payment BE must be presented for payment, else drawer and endorser are discharged from liability.
Presentment for payment must be made by holder of the bill or his agent to the drawee or his agent at the proper place , at a reasonable hour and on a business day.
Bill unpaid after presentment is said to be dishonored. Holder then has right of action against drawer and endorser, but must give them notice of dishonor first. Slide 59: 59 Dishonored by non-acceptance.
Dishonored by non-payment and the bill becomes overdue and unpaid.
To take legal actions it is necessary to obtain proof of dishonor by noting and protesting. Noting & Protesting : 60 Noting & Protesting Noting –Public Notary or lawyer will present to drawee for acceptance or to the acceptor for payment, and if refused, the bill will be noted.
Protesting – declaration by a solicitor in a formal document under seal. Sec 51, must be signed by solicitor, specify the person, place, date, reason for protesting, demand made and answer given or that drawee or acceptor can’t be found. Discharge of Bill : 61 Discharge of Bill When payment made in due course by or on behalf of the drawee or acceptor at or after maturity, in good faith.
When the acceptor of the bill becomes the holder of the bill at or after maturity.
When holder unconditionally renounces his rights in writing or by returning to the acceptor.
Where the bill is intentionally cancelled by the holder or his agent. Cheque : 62 Cheque A bill of exchange, which is an unconditional order in writing, addressed by one person (drawer customer) to the drawee bank, signed by the drawer, requiring the drawee bank to pay on demand (i.e. on presentation) a sum certain in money to, or to the order of, a specified person (payee) or to bearer and which does not order the drawee to perform additional acts. Slide 63: 63 Unconditional – see slides on BE.
Order in writing - see slides on BE.
Addressed by a person to another person (banker) - see slides on BE.
Signed by the drawer - see slides on BE. Slide 64: 64 Payable on demand – ‘post dated cheque’ is not within the definition of on demand. However, it will still be enforceable between the parties to it ( the drawer, drawee n payee).
A sum certain in money - see slides on BE.
To, or to the order of, a specified person - see slides on BE. Cheques as negotiable instruments : 65 Cheques as negotiable instruments To qualify as ‘negotiable’, must pass 3 tests:
1. that tile can pass by mere delivery or by delivery plus endorsement.
2. that holder of the instrument can acquire absolute legal title by taking it (a) in good faith, (b) for value, and (c) without notice of defect in the title.
3. that no notice of transfer needs to be given to the person liable on the instrument. When is endorsement necessary? : 66 When is endorsement necessary? When the cheque is payable to a named payee.
When the cheque has been specially endorsed, i.e. where the endorser has negotiated a cheque to a specified person.
Endorsement is not required for a bearer cheque or cheque endorsed in blank. Types of endorsements : 67 Types of endorsements Blank endorsement – endorser merely signs on the reverse, making it a bearer cheque, hence, needs no further endorsement to transfer the title. Rationale is, a cheque payable to bearer is transferable without any endorsement. Slide 68: 68 Special endorsement – endorser specifies the person to whom the cheque is being transferred (endorsee). For the endorsee to transfer the tile further, he must endorse the cheque himselfEg, ‘Pay to the order of Azlan’ Slide 69: 69 Restrictive endorsement – prohibits further transfer, eg, ‘Pay to the order of Azlan only’. Endorsee has all rights of a holder (can sue in his own name, etc.), but not free to transfer the title, n can not be a holder in due course. Why? A mere transfer from transferor to Azlan. Slide 70: 70 Conditional endorsement – eg, ‘Pay Sarah on giving birth to her fifteenth child’ . Paying banker can just ignore this endorsement. Although bank has right to ask for proof of the condition, it is under no obligation to do so. Forged or unauthorized endorsement : 71 Forged or unauthorized endorsement Implications of ‘forged signature is no signature’:1. a person receiving the cheque subsequent to the forged ‘essential endorsement’ obtains no title.
2. when taken the cheque subsequent to the forged endorsement, can enforce the cheque against anyone subsequent to the forgery but not against anyone prior to forgery (eg, the drawer) – see slide 42.
3. where the cheque is payable to a fictitious payee, it can be treated as if payable to bearer. The forged endorsement does not invalid the cheque as endorsement is not essential, the cheque being effectively a bearer. Types of cheque : 72 Types of cheque Open cheque Pay to Norhatiyah or bearer
Order cheque Pay to Faziana, Pay to Wira only
Bearer cheque“Pay to Faziana or bearer”
Faziana may transfer to Azlan by signing/indorsing on the back of the cheque in blank or write “Pay to the order of azlan” or “Pay to the order of Azlan only”. Slide 73: 73 A cheque starts its life when it is issued. Delivery is either actual or constructive.
Constructive – delivery effected by mere intention. Example, drawer completes a cheque n notifies payee n holding it on payee’s behalf – the cheque is deemed issued.
Sec. 2 – Holder is payee or indorsee in possession of it or the bearer. Other Types of Cheque : 74 Other Types of Cheque Travellers cheque
“R” cheque – for pension, compensation, etc. Crossing : 75 Crossing Cross to to prevent fraud & as safeguard to drawer and subsequent holders.
General crossing – two parallel lines “& Company” and/or “Not Negotiable”.Must be paid direct into payee’s account. Must not exchange for cash over the counter.“ABC Bank Bhd” appears in between the two parallel lines, cheque must only be paid by the drawee banker to the banker named in the crossing. Special crossing : 76 Special crossing This is the addition of the name of a bank, with or without the addition of two transverse lines on the cheque.
To ensure paying bank pays the proceeds of the cheque to the bank stated in the crossing.
Collecting banker stamps its “crossing stamp” for the same reason - if lost or stolen, paying bank will only make payment to bank stated in crossing.
If two banks stated, the cheque will be returned. Not negotiable crossing : 77 Not negotiable crossing This is a general or special crossing plus the words ‘not negotiable’.
It removes negotiability n only allows transferability (to the payee who cannot be holder in due course).
No one else can obtain a better title.
Should use this crossing, esp. when sending cheque by post. Slide 78: 78 “Not Negotiable” crossing – court case.
In Wilson and Meeson vs Pickering, a clerk took a signed blank cheque from his employer (the cheque duly crossed “non-negotiable” and fraudulently made it payable to Pickering. Court held employer could recover from Pickering since the clerk has received no title to the cheques, Pickering could get no better title because of the crossing. Slide 79: 79 “Account Payee” crossing – becomes a Pay Order, not transferable n negotiable. Banker deemed negligent if it collects such cheque for the party other than the named payee (n loses its statutory protection).Should not be paid to third party unless one with undoubted standing and with satisfactory explanation why it is negotiated.In House Property Company of London Ltd vs London County and Westminster Bank Ltd, cheque drawn in favor of two trustees was paid into account of the trustees’ solicitor. Bank was liable for wrongful conversion in that they acted negligently for collecting “account payee” cheque for someone other than the named payee. Slide 80: 80 In RHB Bhd v Comax Sdn Bhd (1999)$650,000 payable to Abrasive Waterjet S/B was credited into a/c Abrasive Waterjet Services S/B.
Held: Validity of a/c payee cheque is restricted to the parties thereto. RHB was negligent. Slide 81: 81 “Not Negotiable” and “Account Payee” crossingThe safest crossing. It prevent negotiability and warns the collecting banker to pay only to the named payee.
Now bank pre-print ‘A/C Payee’ only. Crossing and bank : 82 Crossing and bank Crossing is to give protection to either drawer or holder.
General crossing – take longer time to DR drawer’s a/c means more time to stop payment.
General crossing - easier to trace who beneficiary is.
‘A/c payee’ crossing reduces losses due to fraud. Slide 83: 83 Order cheque – negotiated by indorsement. Holder may indorse generally or specially.
Bearer cheque – negotiated by delivery alone. Remains as bearer for rest of its life, Sec. 8 (3). Can’t convert into an order cheque.
“Pay X or Y” – to negotiate, both must indorse, unless a partnership.
Forged or unauthorized indorsement/signature – deemed ‘irregular,’ i. e. the cheque is ‘not complete n regular on its face.’ an innocent 3rd party who gives value in good faith can’t be the holder in due course (Arab Bank Ltd v Ross). Material Alteration : 84 Material Alteration Sec 64 of BE Act 1949: where materially altered without consent of all parties liable to the cheques, the cheque is void except as against
a. a party who has himself made, authorized or consented to alteration
b. subsequent endorser provided alteration is not apparent
c. a holder in due course. What Constitutes Material Alteration : 85 What Constitutes Material Alteration When alteration on date, amount payable in word and figures, crossing, change from “order” to “bearer”, and alteration to payee’s name.
An unauthorized alteration discharges all parties prior to alteration, unless they agree to it. Slide 86: 86 Banker will not pay cheque bearing material alteration unless the alteration has been agreed to and signed by the drawer
Where not apparent, a holder in due course can enforce the cheque as if it was unaltered. Slide 87: 87 Note: the bank may not be liable for any non-apparent alteration, as in the case of London/Joint Stock Bank v Macmillan n Arthur.
Current practice, all cheques with alteration will be retuned unpaid on technical ground and charges RM10 per cheque. Liabilities of Collecting Banker : 88 Liabilities of Collecting Banker Banker collecting proceeds of cheques run the risk of being:
1. negligent such as making payment for cheque with forged signature.
2. conversion such as crediting A/C Payee cheque into hird part’s account. Conversion – ‘an unauthorized act which deprives another person of his property permanently or for an indefinite time.’ Slide 89: 89 3. liable to financial loss if fails to notify customer of the dishonor of a cheque within reasonable time (such as customer unable to enforce the cheque against previous endorser).
4. liable for losses due to incorrect clearance procedure. Statutory Protection to Banker : 90 Statutory Protection to Banker Protection against conversion.
Collecting bank as holder in due course or holder for value.
Protection against wrongful dishonor or incorrect clearance procedure.
For paying bank – doctrine of estoppel. Protection against conversion : 91 Protection against conversion Sec. 85, Bill of Exchange Act 1949 – collecting bank can claim statutory protection if satisfy these conditions:Acted in good faith, Acted for a customer, n without negligent.
In Ladbroke v Todd (1944), an a/c was fraudulently opened by a thief in the name of payee of a stolen cheque. Bank was negligent for not taking reference when opening a/c. no statutory protection. Must compensate the loss. Slide 92: 92 Other cases of negligent:a. collecting, without sufficient enquiry, cheques payable to a partnership, into private a/c of a partner.
b. ‘A/c payee’ cheque paid into a/c of 3rd party.
c. collecting, without sufficient enquiry, cheque paying to a limited co., for an a/c other than the company’s. Slide 93: 93 Sec 85 of the Bill of Exchange Act:Where a banker, in good faith and without negligence:
a. receives payment for a customer of an instrument to which this section applies, or
b. having credited the customer’s account with the amount of such an instrument, receives payment thereof for himself
and the customer has no title or defective title to the instrument, the banker does not incur any liability to the true owner of the instrument by reason only having received payment thereof. Defence of estoppel : 94 Defence of estoppel Estoppel – if acting based on customer’s conduct or statement, banker is prevented from denying. Defence of Contributory Negligence : 95 Defence of Contributory Negligence Defence of Contributory Negligence – customer failed to take reasonable care for his own safety again foreseable risks.
In Lumsden & Co vs London Trustee Saving Bank on conversion of cheques collected for customer. Though bank was negligent, customer was also partly negligent, hence must partly bear the burden of loss or damage. Collecting bank as holder in due course or holder for value. : 96 Collecting bank as holder in due course or holder for value. As protection against conversion, seek under holder in due course (HIDC), if ca satisfy conditions – without notice of defect in title, in good faith, n for value.
HIDC has an absolute legal title n can enforce aganst all previous parties. Slide 97: 97 Holder for value. What constitutes giving value:
1. payment against unclear effects, value considered not given in absence of agreement, if bank has not done so on regular basis in the past, n when bank policy expressly forids.
2. reduction of debt, must be specific or permanent reduction, not just a temporary decrease n the debt.
3. bank holding a lien on cheque, value considered given. Slide 98: 98 4. when the bank is paid for services by check, value is deemed given. Eg., foreign currency transactions, n estate agency fee.
5. where cheque is cashed over the counter, value deemed given. Protection against wrongful dishonor or incorrect clearance : 99 Protection against wrongful dishonor or incorrect clearance To seek protection set up as holder in due course or for value (provided notice of default given to other parties other than the customer).
And that delay is justified (eg., postal strike etc.)
Wrongful dishonor – bank exposed to claims for breach of contract (causing financial losses) n libel (‘refer to drawer’ hurts customer’s reputation). For paying bank – doctrine of estoppel. : 100 For paying bank – doctrine of estoppel. Although ‘forged signature is no signature’, customer my be estopped from preventing the debiting of cheque to his a/c – as in London Joint Stock Bank v Macmillan and Arthur (1918), and in Greenwood v Martin Bank (1933). Subrogation : 101 Subrogation Where a bank has paid a cheque in breache a mandate, then it has a right of subrogation, i.e. right to step into the shoes of the creditor. Eg., ability of the bank to claim back from the customer th goods purchased with ‘stopped cheque’ , in order to prevent the unjust enrichment of the customer. Slide 102: 102 In B. Liggett (Liverpool) Ltd v Barclays Bank Ltd (19280, court held that the bank could be subrogated to the position of trade creditors n enforce the cheque. Rationale – to prevent unjust enrichment of the customer. Payment under mistake of fact : 103 Payment under mistake of fact Use this defence to reclaim any money paid in breach of the mandate from the person benefitting from the payment. Three conditions:1. payment must not be made under mandate., but as result of forged signature, stopped payment etc.
2. payment must be a mistake of fact, not a mistake of law (how to distinguish?)
3. payment must be as a result of the mistake. Slide 104: 104 Thus, in Barclays Bank Ltd. V W.J.Smith, Son & Cooke (Southern) Ltd and Sowman (1979), bank able to reclaim money from beneficiary paid on stop payment cheque.
In National Westminster Bank Ltd v Barclays Bank International Ltd and Ismail (1975), bank able to reclaim money paid out on forged cheque. Other preventive action n defence : 105 Other preventive action n defence Indemnity from customer
Defence of ex turpi causa non oritur actio (Out of immoral situation action does not arise)In Thackwell v Barclay Bank Plc. Returned cheque : 106 Returned cheque Reasons - Refer to drawer, Words and figure differ, Post-dated, Unauthorized alteration, Out-dated (stale), Signature irregular, A/C Payee only, etc.
Returned due to insufficient of fund– global closure of accounts after 3 returned cheques within 1-year period. Only current account of same constitution affected.
Can only open current a/c after 6-month probationary period. Slide 107: 107 For current account with incoming payments, a/c will be frozen, incoming payments will be credited to the account, and withdrawal is by bank draft only. 5.3.05
RC Biro Maklumat Cek : 108 Biro Maklumat Cek All returned cheques will be reported to BMC
Report is available on line on daily basis. Differences Between Bill of Exchange & Cheque. : 109 Differences Between Bill of Exchange & Cheque. Differences Between Bill of Exchange & Cheque continue….. : 110 Differences Between Bill of Exchange & Cheque continue….. Slide 111: 111 Promissory notes : 112 Promissory notes Is an unconditional promise in writing made by the maker to another signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person or to bearer.
It’s an I OWE YOU note, a promise made to pay a specified sum of money. Example, bank note, and commemorative notes issued by BNM, TB.
Bankers’ Draft – an order to pay a specified sum. May treat as BE or promissory note. Slide 113: 113 Much like BE.
Principal differences – a note is a promise to pay and has only 2 parties, i.e the maker who is liable to pay and the payee (holder in case of bearer note) Who is entitled to money it represents.
“I promise to pay…..” Slide 114: 114 It is inchoate (incomplete or undeveloped) and ineffective until its delivery to the payee or bearer (put into circulation). Otherwise, no one in position to sue the maker.
Like BE, negotiated by delivery or by delivery plus endorsement. Presentment, noting, protesting, etc applies.
Special rule – where a note payable on demand is negotiated, it is not deemed to be overdue for the purpose of affecting the holder with defects of title of which it has no notice. Summary : 115 Summary We have discussed:
Theory & principles
Characteristics of negotiable instrument
Definition & features of bill of exchange
Definition & features of cheque
Protecton to bankers
Returned cheques & BMC
Differences between BE and cheque
Any more questions? Slide 116: 116 Woodland Development Sdn Bhd vs Chartered Bank (1986)Cheques of ‘$10,000 favoring Woodland, or bearer,’ ‘$50,000 favoring Woodland and crossed A/C Payee’ & ‘$10,000 favoring Woodland, or bearer and crossed A/C Payee paid into account of another company. Bank was negligent. Slide 117: 117 Kepitigalla Rubber Estates Ltd vs National Bank of India (1909). The company’s secretary forged company’s cheques for 2 months. Accepted and paid by the bank. Bank is liable if pays the cheques under a forged signature. Slide 118: 118 Greenwood vs Martins Bank Ltd: Wife has been forging husband’s signature. Husband noticed but did not inform the bank. Bank is not liable. Customer has duty to inform banker immediately.