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Malaysian Negotiable Instruments
Bills of Exchange
Definition of a Bill of Exchange
Case Scenario
Sarah Furniture Sdn. Bhd. sells office furniture worth RM50,000 to Ali Trading Sdn. Bhd. on 90 days’ credit.
To secure payment, Sarah prepares a written document ordering Ali to pay RM50,000 after 90 days.
Ali signs the document to indicate his agreement to pay on the due date.
Questions
- Is this document a bill of exchange?
- What legal requirements must be satisfied before a document becomes a bill of exchange?
- Who are the drawer, drawee, payee, and acceptor?
- What happens after the drawee accepts the bill?
Questions and Answers
Question 1
What is a bill of exchange?
Answer
A bill of exchange is an unconditional written order made by one person directing another person to pay a specified sum of money either immediately or at a future date to a specified person, to that person’s order, or to the bearer.
Statutory Provision
Section 3(1) of the Bills of Exchange Act 1949
Defines a bill of exchange as:
“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 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.”
Question 2
Why must the order be unconditional?
Answer
The order to pay must not depend on any event or condition.
Payment must be made simply because the bill requires it.
If payment depends on another event occurring, the document is not a valid bill of exchange.
Example
✔ Valid
“Pay Sarah RM20,000 ninety days after sight.”
❌ Invalid
“Pay Sarah RM20,000 if the furniture is successfully sold.”
The second document is conditional and therefore is not a bill of exchange.
Question 3
Why must the bill be in writing?
Answer
The law requires every bill of exchange to be in written form so that the parties’ rights and obligations can be clearly identified and enforced.
Example
A handwritten bill, a typed bill, or a printed bill may all satisfy this requirement provided the other legal requirements are fulfilled.
Question 4
Why must the bill be signed?
Answer
The drawer’s signature confirms that the drawer authorises the order to pay.
Without the drawer’s signature, there is no valid bill of exchange.
Example
Sarah prepares a bill ordering Ali to pay RM30,000.
If Sarah forgets to sign the bill, it is ineffective because one of the statutory requirements is missing.
Question 5
Who is the drawer?
Answer
The drawer is the person who creates (draws) and signs the bill of exchange.
The drawer usually orders another person to make payment.
In commercial transactions, the drawer is usually the creditor.
Example
Sarah sells furniture to Ali on credit.
Sarah prepares and signs the bill.
Sarah is the drawer.
Question 6
Who is the drawee?
Answer
The drawee is the person to whom the bill is addressed and who is ordered to make payment.
The drawee is usually the debtor.
Example
Sarah draws a bill ordering Ali to pay RM50,000.
Ali is the drawee.
Question 7
Who is the payee?
Answer
The payee is the person entitled to receive payment under the bill.
The payee is often the drawer but may also be another person named in the bill.
Example
Sarah draws a bill stating:
“Pay Sarah or order RM50,000.”
Sarah is both the drawer and the payee.
Question 8
Who is the acceptor?
Answer
When the drawee agrees to pay by signing the bill, the drawee becomes the acceptor.
The acceptor is primarily liable to pay the bill when it matures.
Example
Ali signs the bill drawn by Sarah.
After signing, Ali becomes the acceptor.
Question 9
When must payment be made?
Answer
A bill of exchange may require payment:
- on demand; or
- at a fixed future date; or
- at a determinable future time.
On Demand
“Pay Sarah on demand.”
Fixed Future Time
“Pay Sarah on 31 December 2026.”
Determinable Future Time
“Pay Sarah ninety days after sight.”
Question 10
What is meant by “a sum certain in money”?
Answer
The amount payable must be clearly ascertainable.
The bill cannot require payment of an uncertain amount.
Example
✔ Valid
RM25,000
✔ Valid
RM18,500
❌ Invalid
“Pay whatever amount of profit is earned.”
Question 11
Can a bill require something other than payment of money?
Answer
No.
A bill of exchange must require only payment of money.
If it also requires another act to be performed, it is not a valid bill of exchange.
Statutory Provision
Section 3(2) of the Bills of Exchange Act 1949
Provides that an instrument is not a bill of exchange if it orders any act to be done in addition to the payment of money.
Examples
✔ Valid
“Pay Sarah RM20,000.”
❌ Invalid
“Pay Sarah RM20,000 and deliver 50 office chairs.”
Because the second document requires delivery of goods in addition to payment, it is not a bill of exchange.
Statutory Provisions Explained
Section 3(1) – Definition of a Bill of Exchange
Requirements
A valid bill of exchange must:
- be an unconditional order;
- be in writing;
- be addressed by one person to another;
- be signed by the drawer;
- require payment:
- on demand; or
- at a fixed future date; or
- at a determinable future time;
- require payment of a sum certain in money; and
- be payable to:
- a specified person;
- the order of a specified person; or
- the bearer.
Sarah writes and signs a document ordering Ali to pay RM30,000 ninety days after sight to Sarah or order.
All statutory requirements are satisfied.
The document is a valid bill of exchange.
Section 3(2) – Additional Acts Not Allowed
Rule
A document is not a bill of exchange if it requires any act in addition to paying money.
Example 1
“Pay Sarah RM15,000.”
✔ Valid bill of exchange.
Example 2
“Pay Sarah RM15,000 and deliver ten office desks.”
❌ Not a bill of exchange because it requires an additional act.
Parties to a Bill of Exchange
Drawer
Meaning
The person who draws and signs the bill.
Usually
The creditor.
Example
Sarah sells furniture and draws the bill.
Drawee
Meaning
The person ordered to pay.
Usually
The debtor.
Example
Ali owes Sarah money and is ordered to pay.
Payee
Meaning
The person entitled to receive payment.
Example
Sarah is named as the payee.
Acceptor
Meaning
The drawee after accepting the bill.
Example
Ali signs the bill and becomes the acceptor.
Relationship Between the Parties
Before Acceptance
- Drawer → Sarah.
- Drawee → Ali.
- Payee → Sarah.
After Acceptance
- Drawer → Sarah.
- Acceptor → Ali.
- Payee → Sarah.
Key Examination Notes
A Valid Bill of Exchange Must Be
- An unconditional order.
- In writing.
- Signed by the drawer.
- Addressed to another person.
- For payment of money only.
- For a certain sum.
- Payable on demand or at a fixed or determinable future time.
- Payable to a specified person, to order, or to bearer.
It Is NOT a Bill of Exchange If
- The order is conditional.
- The amount is uncertain.
- It is not in writing.
- It is unsigned.
- It requires delivery of goods or performance of another act in addition to payment.
Critical Analysis
The strict statutory requirements under sections 3(1) and 3(2) of the Bills of Exchange Act 1949 promote certainty and reliability in commercial transactions. Every person dealing with a bill of exchange can easily determine whether the instrument is legally valid.
By requiring the order to be unconditional and limited solely to the payment of money, the law minimises disputes and ensures that bills of exchange remain simple, predictable, and readily negotiable.
Practical Applications
Bills of exchange are commonly used in:
- domestic credit sales;
- international trade;
- export financing;
- import financing;
- banking transactions;
- commercial credit arrangements.
Five Real-Life Examples
Example 1
A furniture manufacturer supplies goods on 90 days’ credit and draws a bill of exchange on the purchaser.
Example 2
A Malaysian exporter draws a bill on an overseas buyer for payment under a documentary letter of credit.
Example 3
A wholesaler grants credit to a retailer and receives an accepted bill of exchange as security for payment.
Example 4
A bank discounts an accepted bill of exchange before its maturity date.
Example 5
A supplier negotiates an accepted bill to another creditor to settle an outstanding debt.
Conclusion
A bill of exchange is a formal negotiable instrument governed by sections 3(1) and 3(2) of the Bills of Exchange Act 1949. To be legally valid, it must satisfy every statutory requirement, including being an unconditional written order requiring payment of a certain sum of money only. Understanding the roles of the drawer, drawee, payee, and acceptor is fundamental to mastering the law of negotiable instruments in Malaysia.
Short Answer Questions with Answers
1. Which section defines a bill of exchange?
Answer: Section 3(1) of the Bills of Exchange Act 1949.
2. Who is the drawer?
Answer: The person who draws and signs the bill, usually the creditor.
3. Who is the drawee?
Answer: The person ordered to pay, usually the debtor.
4. Who becomes the acceptor?
Answer: The drawee after accepting the bill.
5. Who is the payee?
Answer: The person entitled to receive payment.
6. Can a bill of exchange contain conditions?
Answer: No. It must contain an unconditional order.
7. Must a bill be in writing?
Answer: Yes.
8. Must the drawer sign the bill?
Answer: Yes.
9. Can a bill require delivery of goods as well as payment?
Answer: No. It must require payment of money only.
10. What happens if the bill orders another act besides payment?
Answer: It is not a valid bill of exchange under section 3(2) of the Bills of Exchange Act 1949.
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