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Malaysian Negotiable Instruments
Bills of Exchange
Payable to Order or to Bearer
Case Scenario
Sarah Furniture Sdn. Bhd. sells office furniture worth RM60,000 to Ali Trading Sdn. Bhd.
Ali accepts a bill of exchange.
Sarah now has three options:
Questions and Answers
Question 1
To whom may a bill of exchange be made payable?
Answer
A bill of exchange may be made payable:
Question 2
What is an order bill?
Answer
An order bill is a bill payable to a named person or to that person’s order.
The holder must usually endorse (sign) the bill before transferring it to another person.
Statutory Provision
Section 8(4) of the Bills of Exchange Act 1949
An order bill is one expressed to be payable:
Example
Sarah draws a bill stating:
“Pay Sarah Furniture Sdn. Bhd. or order RM50,000.”
Sarah is the payee.
If Sarah wishes to transfer the bill to Ali Supplier Sdn. Bhd., she must:
Question 3
What is a bearer bill?
Answer
A bearer bill is payable to whoever lawfully possesses it.
Unlike an order bill, it may generally be transferred by delivery alone.
Statutory Provision
Section 8(3) of the Bills of Exchange Act 1949
A bearer bill is:
Example
Sarah draws a bill stating:
“Pay bearer RM20,000.”
Sarah simply hands the bill to Ali.
Ali immediately becomes the holder without requiring any endorsement.
Question 4
What is a blank indorsement?
Answer
A blank indorsement occurs when the holder signs the back of the bill without naming the next holder (indorsee).
Statutory Provision
Section 34(1) of the Bills of Exchange Act 1949
A blank indorsement specifies no indorsee.
The effect is that the bill becomes payable to bearer.
Example
Originally, the bill states:
“Pay Sarah or order RM40,000.”
Sarah simply signs her name on the back:
Sarah Furniture Sdn. Bhd.
Nothing else is written.
The bill now becomes a bearer bill.
Anyone lawfully possessing it may negotiate it by delivery.
Question 5
Can an order bill become a bearer bill?
Answer
Yes.
An order bill becomes a bearer bill when its last or only endorsement is a blank endorsement.
Example
Original bill:
Pay Sarah or order RM60,000.
Sarah signs only:
Sarah
The bill now becomes payable to bearer.
No further endorsement is required for future transfers.
Question 6
What happens if the named payee does not exist?
Answer
Sometimes the drawer names a person who does not actually exist.
In such cases, the bill may be treated as payable to bearer.
Case Law
Clutton v Attenborough
Facts
A dishonest clerk persuaded his employer to sign a cheque payable to:
George Brett
The employer believed George Brett was one of his creditors.
However, no such person existed.
Decision
The court held that George Brett was a non-existent person.
Therefore, the cheque was treated as payable to bearer.
Principle
Where the named payee does not exist, the instrument may operate as though it were payable to bearer.
Wrong Date Inserted
Sometimes a bill:
The Bills of Exchange Act allows the holder to insert the true date.
If the Holder Inserts the Wrong Date by Mistake
If the holder honestly inserts an incorrect date,
the bill is not invalid.
It operates as though the correct date had been inserted.
If the Holder Inserts the Wrong Date Dishonestly
Even if the holder inserts an incorrect date in bad faith,
the bill remains valid if it later comes into the hands of a holder in due course.
The holder in due course is protected.
Example
Sarah issues a bill but forgets to write the date.
Ali inserts the correct date.
The bill remains valid.
If Ali accidentally writes the wrong date honestly,
the bill is still valid.
Inland Bills and Foreign Bills
Bills of exchange may be classified as either:
Inland Bills
Meaning
A bill satisfying the requirements of section 4(1) of the Bills of Exchange Act 1949.
Usually:
Foreign Bills
Meaning
Any bill that is not an inland bill.
Usually involves international trade.
Important Difference
Inland Bill
If dishonoured,
protesting is generally optional, except in certain circumstances.
Foreign Bill
If dishonoured through:
What Is a Protest?
A protest is a formal certificate prepared by an authorised person (usually a notary public) confirming that a foreign bill has been dishonoured.
It serves as official legal evidence that payment or acceptance has been refused.
Example
ABC Furniture Sdn. Bhd. exports office furniture to Japan.
The Japanese buyer refuses to honour the foreign bill.
The bill is formally protested.
ABC Furniture may then rely on the protest when taking legal action.
Bills Drawn in Sets
Inland Bills
Usually drawn as one original document only.
This is called a sola bill.
Foreign Bills
Sometimes drawn in two or three identical originals, known as a set of bills.
Each part:
Why?
International mail may be delayed or lost.
Having multiple originals reduces commercial risk.
Only one part may ultimately be enforced.
Example
A Malaysian exporter sends:
If one original is lost during shipment,
another original may still reach the buyer.
Comparison in Note Form
Order Bill
Meaning
Payable to a named person or that person’s order.
Transfer
Requires:
Pay Sarah or order RM50,000.
Bearer Bill
Meaning
Payable to whoever lawfully possesses the bill.
Transfer
By delivery alone.
Example
Pay bearer RM50,000.
Blank Indorsement
Meaning
The holder signs without naming an indorsee.
Effect
The order bill becomes payable to bearer.
Key Examination Notes
Order Bill
Bearer Bill
Blank Indorsement
Non-Existent Payee
Wrong Date
Inland Bill
Foreign Bill
Sola Bill
Set of Bills
Critical Analysis
The Bills of Exchange Act 1949 facilitates commercial certainty by providing different methods of payment and transfer through order bills and bearer bills. Blank endorsements enhance negotiability by allowing an order bill to circulate as a bearer instrument. The Act also recognises practical commercial realities by protecting holders who honestly insert incorrect dates and by permitting foreign bills to be issued in sets to reduce the risks associated with international trade.
Practical Applications
Bills of exchange are frequently used for:
Five Real-Life Examples
Example 1
A supplier endorses an order bill to its wholesaler as payment for raw materials.
Example 2
A bearer bill is transferred simply by delivery to settle a commercial debt.
Example 3
A Malaysian exporter sends three originals of a foreign bill to Germany to minimise postal risks.
Example 4
A foreign buyer dishonours a bill, requiring a formal protest before legal proceedings.
Example 5
A holder accidentally inserts the wrong issue date on a bill. The bill remains valid because the mistake was made honestly.
Conclusion
The Bills of Exchange Act 1949 provides detailed rules governing order bills, bearer bills, endorsements, non-existent payees, dating of bills, and the distinction between inland and foreign bills. These rules promote certainty, negotiability, and efficiency in both domestic and international commercial transactions.
Short Answer Questions with Answers
1. What is an order bill?
Answer: A bill payable to a specified person or that person’s order.
2. What is a bearer bill?
Answer: A bill payable to whoever lawfully possesses it.
3. How is an order bill transferred?
Answer: By endorsement and delivery.
4. How is a bearer bill transferred?
Answer: By delivery only.
5. What is a blank endorsement?
Answer: An endorsement that names no indorsee, causing the bill to become payable to bearer.
6. Which section defines a bearer bill?
Answer: Section 8(3) of the Bills of Exchange Act 1949.
7. Which section defines an order bill?
Answer: Section 8(4) of the Bills of Exchange Act 1949.
8. What is a protest?
Answer: A formal certificate confirming that a foreign bill has been dishonoured.
9. What is a sola bill?
Answer: An inland bill drawn in one part only.
10. Why are foreign bills sometimes drawn in sets?
Answer: To reduce the risk of loss or delay during international transmission.
Bills of Exchange
Payable to Order or to Bearer
Case Scenario
Sarah Furniture Sdn. Bhd. sells office furniture worth RM60,000 to Ali Trading Sdn. Bhd.
Ali accepts a bill of exchange.
Sarah now has three options:
- Make the bill payable to Sarah or order.
- Make the bill payable to bearer.
- Endorse the bill in blank before transferring it to another supplier.
- What is the difference between an order bill and a bearer bill?
- How is each transferred?
- What is a blank indorsement?
- What happens if the named payee does not exist?
Questions and Answers
Question 1
To whom may a bill of exchange be made payable?
Answer
A bill of exchange may be made payable:
- to a specified person;
- to the order of a specified person; or
- to bearer.
Question 2
What is an order bill?
Answer
An order bill is a bill payable to a named person or to that person’s order.
The holder must usually endorse (sign) the bill before transferring it to another person.
Statutory Provision
Section 8(4) of the Bills of Exchange Act 1949
An order bill is one expressed to be payable:
- to order; or
- to a particular person,
Example
Sarah draws a bill stating:
“Pay Sarah Furniture Sdn. Bhd. or order RM50,000.”
Sarah is the payee.
If Sarah wishes to transfer the bill to Ali Supplier Sdn. Bhd., she must:
- endorse the bill; and
- deliver it.
Question 3
What is a bearer bill?
Answer
A bearer bill is payable to whoever lawfully possesses it.
Unlike an order bill, it may generally be transferred by delivery alone.
Statutory Provision
Section 8(3) of the Bills of Exchange Act 1949
A bearer bill is:
- expressed to be payable to bearer; or
- an order bill whose last or only endorsement is a blank endorsement.
Example
Sarah draws a bill stating:
“Pay bearer RM20,000.”
Sarah simply hands the bill to Ali.
Ali immediately becomes the holder without requiring any endorsement.
Question 4
What is a blank indorsement?
Answer
A blank indorsement occurs when the holder signs the back of the bill without naming the next holder (indorsee).
Statutory Provision
Section 34(1) of the Bills of Exchange Act 1949
A blank indorsement specifies no indorsee.
The effect is that the bill becomes payable to bearer.
Example
Originally, the bill states:
“Pay Sarah or order RM40,000.”
Sarah simply signs her name on the back:
Sarah Furniture Sdn. Bhd.
Nothing else is written.
The bill now becomes a bearer bill.
Anyone lawfully possessing it may negotiate it by delivery.
Question 5
Can an order bill become a bearer bill?
Answer
Yes.
An order bill becomes a bearer bill when its last or only endorsement is a blank endorsement.
Example
Original bill:
Pay Sarah or order RM60,000.
Sarah signs only:
Sarah
The bill now becomes payable to bearer.
No further endorsement is required for future transfers.
Question 6
What happens if the named payee does not exist?
Answer
Sometimes the drawer names a person who does not actually exist.
In such cases, the bill may be treated as payable to bearer.
Case Law
Clutton v Attenborough
Facts
A dishonest clerk persuaded his employer to sign a cheque payable to:
George Brett
The employer believed George Brett was one of his creditors.
However, no such person existed.
Decision
The court held that George Brett was a non-existent person.
Therefore, the cheque was treated as payable to bearer.
Principle
Where the named payee does not exist, the instrument may operate as though it were payable to bearer.
Wrong Date Inserted
Sometimes a bill:
- payable after date; or
- payable after sight,
The Bills of Exchange Act allows the holder to insert the true date.
If the Holder Inserts the Wrong Date by Mistake
If the holder honestly inserts an incorrect date,
the bill is not invalid.
It operates as though the correct date had been inserted.
If the Holder Inserts the Wrong Date Dishonestly
Even if the holder inserts an incorrect date in bad faith,
the bill remains valid if it later comes into the hands of a holder in due course.
The holder in due course is protected.
Example
Sarah issues a bill but forgets to write the date.
Ali inserts the correct date.
The bill remains valid.
If Ali accidentally writes the wrong date honestly,
the bill is still valid.
Inland Bills and Foreign Bills
Bills of exchange may be classified as either:
- Inland bills; or
- Foreign bills.
Inland Bills
Meaning
A bill satisfying the requirements of section 4(1) of the Bills of Exchange Act 1949.
Usually:
- drawn in Malaysia;
- payable in Malaysia.
Foreign Bills
Meaning
Any bill that is not an inland bill.
Usually involves international trade.
Important Difference
Inland Bill
If dishonoured,
protesting is generally optional, except in certain circumstances.
Foreign Bill
If dishonoured through:
- non-acceptance; or
- non-payment,
What Is a Protest?
A protest is a formal certificate prepared by an authorised person (usually a notary public) confirming that a foreign bill has been dishonoured.
It serves as official legal evidence that payment or acceptance has been refused.
Example
ABC Furniture Sdn. Bhd. exports office furniture to Japan.
The Japanese buyer refuses to honour the foreign bill.
The bill is formally protested.
ABC Furniture may then rely on the protest when taking legal action.
Bills Drawn in Sets
Inland Bills
Usually drawn as one original document only.
This is called a sola bill.
Foreign Bills
Sometimes drawn in two or three identical originals, known as a set of bills.
Each part:
- is numbered;
- contains identical terms;
- refers to the other parts.
Why?
International mail may be delayed or lost.
Having multiple originals reduces commercial risk.
Only one part may ultimately be enforced.
Example
A Malaysian exporter sends:
- First Original
- Second Original
- Third Original
If one original is lost during shipment,
another original may still reach the buyer.
Comparison in Note Form
Order Bill
Meaning
Payable to a named person or that person’s order.
Transfer
Requires:
- endorsement; and
- delivery.
Pay Sarah or order RM50,000.
Bearer Bill
Meaning
Payable to whoever lawfully possesses the bill.
Transfer
By delivery alone.
Example
Pay bearer RM50,000.
Blank Indorsement
Meaning
The holder signs without naming an indorsee.
Effect
The order bill becomes payable to bearer.
Key Examination Notes
Order Bill
- Payable to a specified person.
- Requires endorsement and delivery.
- Governed by section 8(4).
Bearer Bill
- Payable to bearer.
- Transfer by delivery only.
- Governed by section 8(3).
Blank Indorsement
- Governed by section 34(1).
- Converts an order bill into a bearer bill.
Non-Existent Payee
- Governed by the decision in Clutton v Attenborough.
- Bill may be treated as payable to bearer.
Wrong Date
- Honest mistake does not invalidate the bill.
- Holder in due course remains protected.
Inland Bill
- Protest generally optional.
Foreign Bill
- Protest generally required when dishonoured.
Sola Bill
- Inland bill drawn in one part only.
Set of Bills
- Foreign bill sometimes drawn in two or three identical originals.
Critical Analysis
The Bills of Exchange Act 1949 facilitates commercial certainty by providing different methods of payment and transfer through order bills and bearer bills. Blank endorsements enhance negotiability by allowing an order bill to circulate as a bearer instrument. The Act also recognises practical commercial realities by protecting holders who honestly insert incorrect dates and by permitting foreign bills to be issued in sets to reduce the risks associated with international trade.
Practical Applications
Bills of exchange are frequently used for:
- export financing;
- international trade;
- supplier credit arrangements;
- banking transactions;
- trade finance under documentary letters of credit.
Five Real-Life Examples
Example 1
A supplier endorses an order bill to its wholesaler as payment for raw materials.
Example 2
A bearer bill is transferred simply by delivery to settle a commercial debt.
Example 3
A Malaysian exporter sends three originals of a foreign bill to Germany to minimise postal risks.
Example 4
A foreign buyer dishonours a bill, requiring a formal protest before legal proceedings.
Example 5
A holder accidentally inserts the wrong issue date on a bill. The bill remains valid because the mistake was made honestly.
Conclusion
The Bills of Exchange Act 1949 provides detailed rules governing order bills, bearer bills, endorsements, non-existent payees, dating of bills, and the distinction between inland and foreign bills. These rules promote certainty, negotiability, and efficiency in both domestic and international commercial transactions.
Short Answer Questions with Answers
1. What is an order bill?
Answer: A bill payable to a specified person or that person’s order.
2. What is a bearer bill?
Answer: A bill payable to whoever lawfully possesses it.
3. How is an order bill transferred?
Answer: By endorsement and delivery.
4. How is a bearer bill transferred?
Answer: By delivery only.
5. What is a blank endorsement?
Answer: An endorsement that names no indorsee, causing the bill to become payable to bearer.
6. Which section defines a bearer bill?
Answer: Section 8(3) of the Bills of Exchange Act 1949.
7. Which section defines an order bill?
Answer: Section 8(4) of the Bills of Exchange Act 1949.
8. What is a protest?
Answer: A formal certificate confirming that a foreign bill has been dishonoured.
9. What is a sola bill?
Answer: An inland bill drawn in one part only.
10. Why are foreign bills sometimes drawn in sets?
Answer: To reduce the risk of loss or delay during international transmission.
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