NEGOTIABLE
INSTRUMENTS
Syllabus Content
1. Characteristics of Cheques
2. Crossing of Cheques
3. Alteration of Cheques
4. Protection of Paying and Collecting
Bank
Introduction
• Cheque is a negotiable instrument. Instrumen yg blh
dirunding
• Refers to an instrument that can be
transferred to another person.
• The document (instrument) is a
contractual obligation to pay money.
• Negotiation means to transfer ownership
from one person to another so that the
transferee obtains a good title and gives him
the right to sue in his own name.
Examples of Negotiable Instruments
1.Bills of exchange 8.Dividend warrants
2.CHEQUES 9.Debentures
3.Promissory notes 10.Travellers’ cheques
4.Bankers’ drafts
5.Bank notes
6.Treasury bills
7.Share warrants
CHEQUES
• Refer to the Bills of Exchange Act 1949
• Definition of cheque
Section 73(1) Bills of Exchange Act 1949
A cheque is a bill of exchange drawn on a
banker and payable on demand.
Parties in a cheque
• There are three parties to a cheque;
The drawer (who issued the cheque)
The drawee (who pays the cheque)
The payee (who receives the cheque & the
payment)
• Person means a legal person and would
include natural and artificial persons i.e.
firms and companies
1. Characteristics of Cheques
1. An Unconditional Order
The drawer or the depositor should not lay down any
condition in the cheque. e.g. pay Simon RM280
2. Drawn Upon A Specified Banker (drawee)
The drawer issues cheque directing a particular bank to
pay the amount of cheque. The drawer must have money
deposited in the bank
3. Signed By The Maker (drawer)
The cheque must be signed by the account holder.
4. Exact Amount In Words And Figures
The amount of cheque must be mentioned in words and
figures. e.g. Pay Amy RM138.72
5. Payable On Demand
The amount of cheque must be paid by the bank as soon
as it is presented at its counter.
6. It is drawn in favour of a specified person (payee)
or to his order or in favour of a bearer.
The payee can be specified in name or it can be payable
to ‘order’ or to ‘bearer’. e.g. Pay Ida or order or bearer
Types of Cheques
Forged
Undated
Overdue Cheques
Post-dated
or cheques
stale
cheques
cheques
Ante-dated cheques
Undated Cheques
• Bankers need not honour undated
cheques.
• However, under Section 20 Bills of
Exchange Act 1949, 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 Cheques
• Section 36(3) of the Bills of Exchange Act 1949
- An overdue cheque is one which has been in
circulation for an unreasonable length of time.
• A cheque is stale when it it has been in
circulation for a long time, normally after the
expiry of six months or more from its date.
• It can be rejected by the bank
Ante-Dated Cheques
• It bears a date earlier than the date of
actual issue.
• Back-dated cheques
Post-Dated Cheques
• It bears a date in the future
• Date later than the date of issue
• Cheques may also be dated on a
Sunday or a public holiday
Forged Cheques
• A banker who pays out on a cheque where the
drawer’s signature is forged, would be liable for
having paid without any mandate or authority to
debit the customer’s account.
• If the banker can prove that the drawer had
knowingly or negligently contributed to the forgery
or the making of the unauthorized signature, the
banker may use that as partial defence.
2. Crossing of Cheques
• An open cheque (one that is not crossed) can be exchanged
for cash across the counter even before the loss is
discovered by the owner.
• A cheque is crossed for protection and security purposes
especially when it is delivered by post.
• The purpose is to minimise fraud by conveying instructions
that payment should be made only to, or through a bank.
• A crossed cheque can only be paid through a bank, and
therefore the person presenting the cheque would not
receive the money in cash.
Types of Crossing
General Limited/Restrictive
Special Crossing
Crossing Crossing
Not Negotiable
Crossing
Account Payee Only
Crossing
General Crossing
• Section76(1) Bills of Exchange Act 1949.
• In a general crossing, there are simply two
parallel transverse lines, with or without the
words 'not negotiable' in between, may be
drawn. Such a cheque is crossed generally.
• Effect: The paying banker can only pay the
amount of the cheque to a collecting banker.
Special Crossing
• Section76(2) Bills of Exchange Act 1949.
• In a special crossing, the name of a banker with or
without the words 'not negotiable' is written on the
cheque. Such a cheque is crossed specially to that
banker.
• Effect: the paying banker will pay the amount of the
cheque only through the bank named in the cheque.
• Confers more security compared to the general crossing
because if the cheque is to be negotiated, it must be
done so to a customer of the bank to whom it is crossed
Not Negotiable Crossing
• This crossing means that the cheque cannot be
negotiated
• It can still be transferred
• The transferee’s title will depend on the transferor
• In the event the cheque is misappropriated, the
owner may recover the money from the payee
even if the payee had taken the cheque in good
faith
Effect of “Not Negotiable” crossing on holder
• Section 81 Bills of Exchange Act 1949.
• The effect of a ‘not negotiable’ crossing is that
the cheque can be transferred but the transferee
will not acquire a better title to the cheque.
• Thus a cheque is deprived of its essential
feature of negotiability.
Wilson & Meeson v Pickering
[1946] KB 422
• Wilson drew a cheque in blank crossed
“Not Negotiable”. His clerk, who was
supposed to fill in the amount and the name
of the payee, inserted a sum in excess of
her authority and delivered it to Pickering
in payment of her own debt.
• It was held that since the clerk had no title
to the cheque, Pickering had no better title
and Wilson was therefore, not liable on it.
Account Payee Only Crossings
• Cheque bears across its face the words
‘Account payee’ or ‘A/C payee’
• Minimize the chances of fraud because these
words operate as notice to the collecting
banker that only the account of the payee is to
be credited.
• Effect: A collecting bank that ignores this
crossing is prima facie negligent and liable to
the real owner of the cheque for conversion
• This cheque can be negotiated as long as
payment is made to the payee’s account
Woodland Development Sdn. Bhd. v Chartered
Bank, PJTV Densen (M) Sdn. Bhd.
[1986] 1 MLJ 84
• Plaintiff company were the payees of two
“Account Payee” cheques.
• A director of the company handed these two
cheques to two other directors for the purpose of
opening an account in the plaintiff’s name in a
bank (Chartered Bank).
• All three directors of the plaintiff company were
also directors of Densen (M) Sdn. Bhd.
• Densen (M) Sdn. Bhd. already had an account
with the Chartered Bank.
Woodland Development Sdn. Bhd. v Chartered
Bank, PJTV Densen (M) Sdn. Bhd
• The two directors persuaded the manager of
Chartered Bank to collect the amount for the Densen
(M) Sdn. Bhd. instead of opening an account in the
name of the plaintiff company.
• The plaintiff company brought an action against
Chartered Bank and Densen (M) Sdn. Bhd. for
conversion and for money received for their use.
• The court held that Chartered Bank is liable for
negligence in collecting the two “Account Payee”
cheques for Densen (M) Sdn. Bhd. who was not the
payee named on the cheques.
3. Alteration on a Cheque
• If a cheque has been materially altered without
the drawer’s authority, the drawer will be
discharged from liability.
• If the bank pays a cheque which has been
materially altered, the bank cannot debit the
drawer’s account for the amount of the cheque.
• Examples of material alteration are alterations
on the date, amount, name of payee or any
crossing on the cheque.
• Consent of the owner can be shown by his
signature beside the alteration.
Apparent Alteration of Cheque
• The alteration may be apparent – it can be
clearly seen by ordinary and reasonable
examination.
• The paying banker will be liable if payment is
made.
• Where the material alteration is apparent, all
parties liable on the bill at the time of such
alteration will be discharged from liability on
the cheque.
• However, the person who made, authorised or
assented to the alteration and all
subsequent parties who took it will be
bound by the cheque and the alteration.
Non-Apparent Alteration of Cheque
• Where the material alteration is not apparent, the
bank will not be liable if it pays the cheque.
• The alteration may be so cleverly done that it is
not obvious through reasonable
examination.
• A holder in due course can enforce payment of
the cheque where alteration is not apparent.
• If the drawer wants to sue, he must prove that the
bank was negligent in not seeing the alteration.
• The bank may instead claim that the drawer was
negligent himself.
Duty to take care
• It is implied between banker and customer
that a customer must exercise due care in
drawing cheques so as not to facilitate fraud.
• Banker is protected if the alteration was due
to the customer’s negligence.
• If the alteration was not apparent, the bank is
not considered negligent for paying it
especially when the alteration was caused by
the drawer’s failure to take care.
• The bank can lawfully debit the customer’s
account for the full amount of the cheque
despite the alteration.
London Joint Stock Bank v Macmillan And
Arthur [1918] AC 777
• A partner in a firm drew a cheque for two sterling pounds
which was payable to bearer.
• The sum was stated in figures but not in words. He also left
blank spaces on either side of the figure ‘2’.
• A clerk of the firm misappropriated the cheque and altered the
figures to read one hundred and twenty sterling pounds and
wrote in the appropriate words before cashing the cheque at
the bank.
• The bank could debit the firm’s account with the sum stated as
the alteration was not apparent. The partner had neglected to
take all precautions to prevent the alteration.
Section 59 BEA 1949
4. Protection of Banker (Payment in due course)
Paying Banker
Section 60 BEA 1949
(Forged or unauthorised
endorsement)
Section 80 BEA 1949
(Crossed cheque)
Section 82 BEA 1949
(No indorsement or
irregular endorsement)
Collecting Banker Section 85(1) BEA 1949
The Paying Banker
• Where a customer draws or issues a cheque on
his banker, that banker is known as the paying
banker or drawee banker
• A paying bank is negligent if it does the
following;
Payment of forged cheque
Payment of a cheque that has been materially
altered
Wrongful dishonour of cheque
Wrongful debit of customer account
Wrongful conversion of cheque
Protection of Paying Banker
Section 59 BEA Section 60 BEA Section 80 BEA Section 82 BEA
1949 (Payment in 1949 (Forged or 1949 (Crossed 1949 (No
due course) unauthorised cheque) indorsement or
endorsement) irregular
endorsement)
Made at or after
Good faith Good faith
maturity of the bill
Good faith
In the ordinary Without
Good faith
course of business negligence In the ordinary
course of business
According to the
Without notice
crossing
Payment in due course
• Section 59 Bill of Exchange Act 1949.
• A banker is not liable if he pays a cheque in due
course.
• Payment in due course means payment made at
or after maturity of the bill to the holder in good
faith and without notice that his title to the
cheque is defective.
• Good faith:
defined as “if an act is done honestly, whether it is
done negligently or not” - Section 95 of the Bill of
Exchange Act 1949
Forged or unauthorised endorsement
• Section 60 Bill of Exchange Act 1949.
• If the banker pays in good faith and in the
ordinary course of business, a cheque
drawn on him which bears a forged or
unauthorized endorsement, he is not
prejudice by the forgery
Crossed cheque
• Section 80 Bill of Exchange Act 1949.
• This protection is limited to crossed
cheque only. If the paying banker pays a
crossed cheque in good faith, without
negligence and according to the crossing,
he is not liable.
Slingsby v District Bank
[1932] 1 KB 544
• The plaintiffs requested their solicitor, Cumberbirch, a partner
in Messrs. Cumberbirch & Potts to draw a cheque on their
account in the defendant’s bank payable to Messrs. John Prust
& Co. The cheque was drawn with a gap between the payee’s
name and the word “or order”.
• After it was signed by the plaintiffs, Cumberbirch inserted the
words “per Cumberbirch & Potts”. Cumberbirch indorsed the
cheque and obtained payment.
• The court held that the endorsement was not in accordance
with the customer’s mandate. The bank could not therefore
rely on Section 60 and Section 80 of the Act when
Cumberbirch misappropriated the proceeds.
No indorsement or
irregular endorsement
• Section 82 Bill of Exchange Act 1949.
• The paying banker is protected if he pay
the cheque, which is not endorsed or is
irregularly indorsed, in good faith and in
the ordinary course if business.
Rubber Industry (Replanting Board) v
Hong Kong Shanghai Banking Corporation
[1957] 1 MLJ 103
• The plaintiff issued an ‘account payee only’ cheque for
$6762.33 in favour of Toh Why Teck. The cheque somehow
fell into wrong hands.
• Later, a Lee Man Choi opened an account with the defendant
bank in the name of Chop Toh Whye Teck and the cheque was
paid into this account. The plaintiff sued the bank for
conversion of the cheque.
• The court held that the bank could not prove that they had acted
without negligence and thus, were not entitled to the protection
afforded by Section 82 of the Act. They were therefore liable to
the plaintiffs for damages due to conversion of the cheque.
The collecting bank
• The banker to whom a holder of a cheque presents the
cheque for payment into his account is called the collecting
banker
• The collecting banker collects the amount stated in the
cheque from the drawer’s bank ( the paying banker) and
deposit it in the payee’s account.
• A collecting banker may become liable to his customer for
breach of contract; for example when he fails to collect
when instructed to do so.
• He may also be liable to the true owner for wrongful
interference or conversion where he collects improperly on
behalf of a customer who is not entitled to the money.
Protection of
Collecting
Banker
Section 85(1) Bill
of Exchange Act
1949
(1)That the (2)Must have
(3)Acting without
banker acted for done so in good
negligence
the customer faith
• Section 85 Bill of Exchange Act 1949
provides that if a banker receives payment
for a customer in good faith and without
negligence and have credited a customer’s
account with the amount (acted for the
customer), the bank is not liable if it was
later found that the cheque actually
belonged to someone else
• The true owner of the cheque may only
sue the payee, not the bank
Woodland Development Sdn. Bhd. v Chartered Bank,
PJTV Densen (M) Sdn. Bhd.
• The plaintiff was the payee of three cheques. The first cheque was
crossed and the last two were crossed with the words “Account Payee”.
• The director of the plaintiff handed these cheques to Richard Seow and
Yap Yoke Min to open an account in the defendant bank in the name of
the plaintiff.
• They persuaded the bank manager to collect the amount for the third
party (Densen).
• The plaintiff brought an action against the bank and the third party.
• The court held that the defendant bank was negligent in collecting
cheques for the third party.
• The defendant bank was ordered to returned the amount of money with
interest to the plaintiff.
