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WHAT IS NEGOTIABLE INSTRUMENTS? • A formal legal document containing an undertaking to pay a definite sum of money which may be transferred by delivery, or by indorsement and delivery.
Characteristics: • The title to it pass on delivery or delivery plus indorsement, that is , the rights can be transferred from person to person. • The person to whom the instrument is negotiated(the transferee) can sue in his or her own name; • The transferee who takes the instrument in good faith and for value, without actual notice of any defect,obtains a good title despite any defect in title of the transferor.
BILLS OF EXCHANGE • Enables a seller of goods or services to receive his money as soon as possible while enabling his buyer to defer payment for a period. • It is also a method of borrowing to cover short term financial needs of a party while enabling a lender to provide a loan without actually committing any of its own funds.
Example: • Ali, in Kuantan, sell timber to Ah Seng in Johor Bharu who wants 30 days credit. • Ali will draw a bill of exchange on Ah Seng ordering him to pay in 30 days’ time. • If Ah Seng agrees to the term of the bill, he sign (accepts) the bill and returns it to Ali. • Ali then sells or discount the bill in Kuantan at it face value less a small discount. • After 30 days the bill is said to ‘mature’ and the person holding the bill will seek to enforce it by obtaining payment from Ah Seng. • Thus, Ali gets his money at once and Ah Seng gets 30 days credit.
Definition: • Section 3(1) of the Bills of Exchange Act 1949. • A bill of exchange is: • 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 or demand or at a fixed or determinable future time • a certain sum of money • to the order of a specified person or to bearer
There are three parties to a bill: The person who draws a bill is known as the ‘drawer’. The person on whom it is drawn is called the ‘drawee’, and if the drawee accepts the bill by signing it, he is called the acceptor. Finally the person to whom payment is to be made is called the payee.
An unconditional order • A bill must be in the form of an ‘order’. Eg: “pay A…” or “please pay A…” • The order to pay must be ‘unconditional’.It must not order any act to be done in addition to the payment of money. Eg: “ Pay A…if satisfied with the goods consigned”- conditional. Case:Cooperative Exportvereniging Vecofa U.A v. Maha Syndicate • H: a document ‘payable at 10 days sight on arrival of steamer’ is a bill of exchange. The document was not a conditional order.
2. In writing • The bill must be in writing. It can be printed or written (with pencil or ink) • However, it is advisable not to write in pencil to avoid fraudulent alteration.
3. Addressed by one person to another • Persons also can be a company, a partnership or a statutory authority. • S6(1) of BEA, drawee must be identified with reasonable certainty. Thus, a bill may be addressed to joint drawees, eg: Mr.X and Mr.Y. • But it cannot be addressed to alternate drawees, eg: Mr. X or Mr. Y (S6(2) BEA).
4. Signed by the person giving it. • S 96(1): bill must be signed by the drawer or his authorized agent. • Signature by means of rubber stamp is acceptable if the drawer intent to be bound by it.
5. Requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time. • Payable on demand means that the holder is entitled to payment immediately upon demand. ( S 10(1)) • Fixed or determinable future time means payment on sight, on expiry of the period after date, or after the happening of certain event.( S 11(1)) • Eg: ’10 days after 12 October 2006’ or ‘30 days after sight’ are valid.
6. A sum certain in money • If the order is to pay by bond or gold, it is not a bill of exchange. • S.9(1) BEA: a sum is considered certain although it may be payable in the following manners: i. with interest ii. By installments iii. According to a specified exchange rate.
7. To the order of a specified person or to bearer • 8(4) and (5): a bill is payable to order in the following instances: i. It is drawn payable to order, eg: ‘pay X…’ ii. It is payable to a particular person without any other words prohibiting transfer,eg: ‘pay X $1000’ iii. It is payable to the order of a particular person, eg: ‘pay to the order of X’ – this is an instruction that indicates the bill is payable to X or to X’s order.
S 8(3): a bill is payable to bearer in the following instances: i. It is drawn payable to bearer, eg: ‘pay bearer’ or ‘pay X or bearer’- this means that X himself can obtain payment or he can negotiate the bill to another by mere delivery without indorsement. ii. Where the merely signed his name without naming the person to whom the bill is payable. iv. When the order is to pay cash.