LAW OF BANKING AND
NEGOTIABLE
INSTRUMENTS
What you have to learn?
• Introduction
• Bills of exchange
• Negotiations, acceptance, indorsement and bill delivery
• Liabilities of parties involved in negotiable instruments
• Rights of holder
• Payment
• Procedure for dishonour
• Cheques
• Crossing and alteration of cheque
• protection if paying / collecting bank
• Termination of authority of the bank to make payments
Introduction
• Negotiable instruments (NI) refers to types of
documents used in commercial or financial
transactions
• Negotiable means transfer of property
(ownership) from one person to another in a
document evidencing contractual obligations to
pay money.
• The change of ownership is effected by delivery
or by indorsement (transferor signing on the
back of the document + delivery
• Characteristics of NI:
i. Title to it passes to the acceptor by a delivery,
order of payment or indorsement + delivery
ii. The holder can sue in his own name
iii. No notice of assignment need to be given to
the debtor
iv. A bona fide holder for value gets a superior
title and unaffected by previous defects in the
title of its predecessor
• Examples of NI:
i. Bill of exchange
ii. Cheques
iii. Promissory notes
iv. Bank drafts
v. Bank notes
vi. Share warrants
vii. Debentures, etc
• law applicable: the Bills of Exchange Act 1949 (BEA)
Bills of Exchange (BE)
• S.3(1) of BEA :
“an unconditional order in writing, addressed 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 bearer”.
• There are two or three parties involved:
Drawer – person who gives the order to pay
Drawee – the person to whom the order to pay is given
Payee – the person to whom the payment is to be made
• The payee may transfer his right to receive payment to
another person by negotiating the bill. i.e by indorsing the
bill with his signature and handing it to the transferee who
is then become a “holder”
Cont’d
Characteristics of BE
a) An unconditional order in writing
b) Addressed by one person to another
c) Signed by the person giving it
d) To pay on demand
e) A sum certain in money
f) At a fixed date or determinable future
time
Negotiation of bills
• S.31(1) “negotiation is when the bills is
transferred from one person to another in
such a manner as to constitute the
transferee the holder of the bill”.
• It means BE can be transferred from one
person to another
Acceptance of bills
• S.17(1) “acceptance is the signification by the
drawee of his assent to the order of the drawer”.
• Conditions to make acceptance valid:
(i) acceptance must be written on the bill and
signed by the drawee. (mere signature is
sufficient)
(ii) must not be express that the drawee will
perform his promise by any other means than
the payment of money.
S.41(1): bills is said to be presented in the following
situations:
a. Presentment must be made by or on behalf of the
holder to the drawee to accept or reject must be made
at a reasonable hour on the business day before the
bill is overdue
b. When the bills – address to two or more drawees who
are not partners – presentment must be made to all of
them unless one has authority to accept
c. Where the drawee is dead, presentment may be made
to his personal representative
d. Where the drawee is bankrupt, presentment may be
made to him, or trustee or assignee
e. Where authorised by agreement or usage,
presentment may be made through post
Cont’d
• On presentment, the drawee may accept or
reject the bills
• If he accept, means he must carry out the
drawer’s instruction.
• He accepts the bill by signing on the face of the
bill with or without the word ‘accepted’
• Acceptance :
(i) general – unconditional acceptance
(ii) qualified – if this happen, then can consider
the bill as dishonoured by non-acceptance
Indorsement
• Indorsement has the effect of transferring
the property in the bill to the transferee
• An indorsement is important to negotiate
order bill
• Indorsement can only operate as a
negotiation if fulfills the following
conditions stated in (S.32): (refer module
pg 169)
Cont’d
• Types of indorsement:
i. Blank indorsement – where indorser simply signed the
bills and no indorsee is specified
ii. Special indorsement – specifies the person to whom,
or to whose order, the bill is payable
iii. Restrictive indorsement – prohibits further
indorsement or express the way to deals with the bills
iv. Conditional indorsement – when payment is subject to
a condition. H/e conditions may be disregards by
payer and the payment is valid
v. Facultative indorsement – where the indorser waives
or discharge part or all his legal rights
Delivery
• S.21(1) : every contract on a bill is
incomplete and revocable until delivery
• However, where an acceptance is written
on the bill, and drawee gives notice to as
regards to acceptance, then the
acceptance is complete and irrevocable.
Rights of Holder
• S.2: “holder is the payee, or indorsee having
possession of a bill or the bearer of a bill”.
• What are holder’s rights? S.38:
a) May sue on the bill in his own name
b) Holds the bill free from any defect of title of any of the
prior parties
c) Where his title is defective:
- if he can negotiate the bill with the holder in due
course, that holder obtains a good and complete title to
the bill
- if he obtains payment, the person who pays him gets
a valid discharge for the bill
Payment
• Must be made when the bill is presented
• Presentment for payment must comply with the rules
stated under S.45(2):
a) When the bill is not payable on demand – presentment
must be made on the day it falls due
b) If payable on demand – must be made within a
reasonable time (from issue to make drawer liable)
and reasonable time (from indorsement (to make
indorser liable)
c) Must be made by holder/ person authorised to receive
payment on his behalf (at a reasonable hour on
business day, at a proper place) – to the person
designated by the bill as payer / authorised to pay
d) Proper place :
If specified in the bill – must be made
there
Not specified but address of drawee or
acceptor is given – msut be made there
Neither place nor address is given – at
the acceptor’s place of business (if
known) or at his ordinary residence
Whereever the drawee or acceptor can
be found or at any his last known place
of business or residence
Cont’d
e) Where the bill is presented at proper place and
exercise reasonable dilligence, no person
authorise to pay/refuse payment can be found
– no further presentment is required
f) Where a bill is drawn to two or more persons
who are not partners – must be made to all of
them
g) Where the drawee or acceptor is dead and no
place is specified for presentment, - must be
made to personal representative
h) Where agreement or usage authorise –
presentment may be made by post
Procedure for Dishonour
• S.47(1) : a bill dishonoured by non-payment is a bill that:
(i) when duly presented, payment is refused or cannot be
obtained
(ii) when presentment is excused and the bill is overdue
and unpaid
• When the bill is dishonoured, the drawer and every
indorser must be given a dishonour notice
• Drawer or indorser who were not given such notice
cannot be sue UNLESS:
(i) when the right of holder in due course is not affected
(ii) if notice already given, then the fresh notice is not
necessary to be given unless in the meantime the bill
has been accepted
• Valid and effective notice of dishonour – as provided by
S.49 (refer to module pg 174)
Cheques – definition and forms
• Definition: S.73(1): “a bill of exchange drawn on a banker
payable on demand”.
• Forms of cheques:
Undated cheque – bank not bound to honour the
cheque. H/e S.20 – holder is authorised to fill in the date
within a reasonable time
Overdue or stale cheque – cheque becomes overdue 6
mths after it was issued
Post dated cheque – cheque with future date inserted.
S.30 – a bill is not invalid due to it being pre-dated or
post-dated or with a date on Sunday
Crossing of cheques
• Two types:
(i) general crossing
By writing words “and company” “not
negotiable” between two parallel lines
across the cheque
By drawing two parallel lines without any
word written between it
(ii) Special crossing – with the name of
banker written between the parallel lines
Alteration of cheques
• If the alteration is apparent (material alteration)–
all parties liable on the bill shall be free from any
liabilities
• If non apparent – the holder may still can
enforce payment
• S.64 (2): material alteration means any
alteration of the date, the sum payable, the time
of payment, the place of payment and where a
bill has been accepted generally, the addition of
the place of payment without the acceptor’s
consent.
Cont’d
• Contract between bank and customer –
customer has to take extra precaution
• If the bank cannot detect the alteration (material
alteration) payment will be made to the holder
and debit the amount from customer’s account
• Case: London Joint Stock Bank v Macmillan and
Arthur - the bank could debit the amount from
the account of the firm
Protection of paying banker
• Paying banker – the bank where the customer
has a drawing account
• Duty of paying banker – to make payment to
the right person
• If the bank made payment to the wrong
person, the bank still has the right to debit from
the customer’s account provided that:
a) Payment made in due course – i.e payment
made at or after maturity of the bill to the
holder in good faith and without notice that his
title is defective
Cont’d
b) The banker pays it on good faith on the
ordinary course of business – without
knowledge such indorsement has been forged
/ without authority
c) In good faith and without knowledge that the
cheque was not indorsed where there is an
irregular indorsement
d) When the cheque is crossed, pays in good
faith and in accordance with the crossing
Protection of collecting banker
• collecting banker : the bearer’s bank where the
bearer presented the cheque to be credited.
• Collecting banker will be liable to its customer if
there is breach of contract (i.e failure to make
collection as ordered by its customer)
• If it wrongly collects for a customer who is not
entitled to the money, is liable to its true owner
• S.85 – give protection to the banker which
collects payment of cheques for customer who
has no title or defective title. The banker is not
liable to its true owner if:
Cont’d
a) It acts on behalf of its customer
b) It acts in good faith
c) It acts without any negligence
Termination of authority of the bank
to make payments
• The bank under duty to honour customer
cheques until the end of its credit balance
• If the bank refuse to honour, customer may sue
for damages for the returned cheques
• The bank cannot honour such cheques if his
authority is terminated.
• Termination can take place in the following
situations:
a) By a revocation order
b) Notice of death of customer
c) Notice of unsoundness of customer
d) Due to garnishee order / other order from a
court
e) Knowing tt customer is facing bankruptcy
petition/ bankrupt person
f) The person who present the cheque has
defective title
g) Knowing tt the customer has intention to
commit breach on trust fund
h) Customer transferred his money into third
party’s account
i) Customer serve notice to close account
j) If customer has no sufficient fund to honour the
cheque
Thank You
Any Question?
