Module # 4 Lectures Notes On Regulatory Framework And Legal.pdf

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LECTURES NOTES ON REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS BSA 2104; Sections BFC and BEC College of Business Administration University of the East – Manila

MODULE 4 Atty. Benjamin R. Reonal Professor Please allow me to discuss with you essential and significant subject matters which I believe ought to be discussed at this early stage since as we go along hereon you have to understand these basic and fundamental postulates which are critical in the study of the subject matter for an effective and productive study of our law On Negotiable Instruments, otherwise known as Regulatory Framework and Legal Issues in Business and relevant issues and topics. a)A Holder - he is the payee or the indorsee of a bill of exchange who is in possession of the instrument, or the bearer thereof. The person who has legally acquired possession of the instrument by indorsement or delivery and who is entitled to receive payment thereof. b) Bearer is the person in possession of a bill or note which is payable to bearer. c) Indorsers – they are persons who transfer or negotiate an instrument by indorsement completed by delivery. d) Indorsee – the person to whom a negotiable instrument, promissory note, bill of exchange, bill of lading, etc. is assigned by indorsement. e) Indorsement – it connotes a legal transaction between the indorser and the indorsee effected by writing the indorser’s signature at the back of the instrument or in a separate paper by which the indorser (i) transfers title of the instrument to the indorsee, and (ii) enters into an implied guaranty that the note/bill will be paid. f) Issue – the first delivery of the instrument complete in form to a person who takes it as a holder. g) Negotiation - is the transfer of a negotiable instrument from one person to another vesting legal ownership to the latter and giving the new owner the right to demand payment of the face amount of the instrument along with any interest that may be due.

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2 h) Party primarily liable – the person who, by the terms of the instrument is absolutely required to pay the same upon its maturity because he is unconditionally bound. (Maker, drawee/acceptor upon acceptance and certifier of a check.) i) Party secondarily liable – the person who undertakes to pay the instrument only after certain conditions have been fulfilled, such as, due presentment for payment, dishonor of instrument by party primarily liable and complying with the requirements of law. (Drawer and indorser) j) Holder for Value – one who gives value or consideration for the instrument issued or negotiated to him. He is a holder for value in respect to all parties who became such prior to that time. (Example: A, maker, issued a promissory note to B, payee, without consideration. B indorsed the note to C, also without consideration, then C indorsed it to D for value. D is a holder for value as to A, B and C. k) Holder in Due Course – a holder who takes a valid negotiable instrument in good faith, for value and in the regular course of trade, free from defenses between the parties, and without notice of defects in title to the instrument. A holder in due course is a holder who has taken the instrument under the following conditions: 1) That it is complete and regular on its face; 2) That he became the holder of it before it was overdue and without notice that it had been previously dishonored if such was the fact; 3) That he took it in good faith and for value; 4) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. l) Concept of Defenses - defenses are grounds available to the payor (the person who pays a bill, note or check) to refuse payment or escape liability from the holder of a negotiable instrument. Any valid reason which the payor may have for refusing to pay the holder of the instrument will constitute a defense. The kinds of defenses include the following: a) Personal defenses -- those defenses available to prior parties among themselves and include all defenses to the contract which arises out of the relation of the parties to the contract. They do not include those defenses which go to the validity of the instrument as a contract or to the capacity of the parties. Personal defenses are called Equitable Defenses. As a rule personal or equitable defenses are available against holders for value but not against holders in due course.

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3 (Examples: Absence or failure of consideration; total or partial failure of consideration; Want of delivery of a complete instrument; Filling up of wrong date of instrument, where it is payable at a fixed period after date, or it is issued undated; Filling up of blanks contrary to authority given, or not within a reasonable time; Fraud in inducement; Duress unless extreme in nature; illegality of consideration; Undue influence, intimidation or violence; Negotiation in breach of faith; Acquisition by unlawful means). b) Real defenses – those defenses which go to the existence or validity of the instrument as a contract or to the capacity of the parties. They are those that attach to the instrument itself and can be set up against all holders including the holder in due course (Examples: Material alteration; Want of delivery of an incomplete instrument; Contractual fraud or fraud in factum; Minority; Forgery)

SECTION 7. When payable on demand --payable on demand ---

An instrument is

a) When it is expressed to be so payable on demand, or at sight, or on presentation; or b) In which no time for payment is expressed; c) Where an instrument is issued, accepted, or indorsed when overdue, it is as regards, the person so issuing, accepting or indorsing it, payable on demand. a) On demand, at sight, or on presentation --Examples: I promise to pay to the order of B P10,00000 on demand. (Sgd.) A Pay to B or order the sum of P10,000.00 at sight. (Sgd.) A To: X

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Pay to B or order the sum of Ten Thousand Pesos (P10,000.00) on presentation. (Sgd.) A To: X b) Where no time of payment is expressed --Examples: I promise to pay to the order B the sum of Ten Thousand Pesos (P10,000.00) (Sgd.) A On ___________ I promise to pay to the order of B the sum of Ten Thousand Pesos (P10,000.00). (Sgd.) A Here the maker left the blank space unfilled, and it was held that the promissory note is deemed payable on demand because no time of payment was expressed. (Chelsea Excha. Bank vs. Warner, 202 App. Div. 499).

c)

Where an instrument issued, accepted, or indorsed already overdue --Examples: Manila, September 15, 2020

I promise to pay to the order of B the sum of Thousand Pesos (P10,000.00) on September 16, 2020.

Ten

(Sgd.) A A issued the note to B on September 18, 2020, two (2) days after maturity date. As to B it becomes payable on demand, and B can present it for payment to A within a reasonable time after it has been issued to him. MODULE 4

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Suppose A issued it to B on September 5, 2020. B indorsed it to C, C to D, D to E and E indorsed it to F on September 18, 2020. As to F, the last indorsee and holder of the promissory note, it is now payable on demand because it was indorsed to him when it was already overdue. Pay to the order of B the sum of Five Thousand Pesos (P5,000.00) on August 20, 2020. (Sgd.) A To: X If X accepts the bill of exchange say August 25, 2020, after it was already overdue, the bill becomes payable on demand. SECTION 8. When payable to order. --- The instrument is payable to order when it is drawn payable to the order of a specified person, or to him or his order. It may be drawn payable to the order of --a) A payee who is not the maker, drawer or drawee; or b) The drawer or maker; or c) The drawee; or d) Two or more payees jointly; or e) One or some of several payees; or f) The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. It is important to know whether a negotiable instrument is payable “to order” or “to bearer” because each has a different means of negotiating and passing title to the instrument. The general rule says that if the instrument is “payable to order” it may be negotiated by proper indorsement plus delivery. No title to the instrument can be MODULE 4

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passed on without such an indorsement and delivery. On the other hand, an instrument “payable to bearer” , can be negotiated by (i) mere delivery or (ii) by blank indorsement plus delivery if the indorsement is originally payable to order. Under this Section therefore a negotiable instrument is “payable to order” when: 1) It is payable to the order of a specified person. I promise to pay to the order of B the sum of Five Thousand Pesos (P5,000.00) on July 20 2020. (Sgd.) A 2) It is payable to a specified person or his order. I promise to pay to B or order the sum of Five Thousand Pesos (P5,000.00) on July 30, 2020. (Sgd.) A The instrument may be drawn payable to the order of – a) A payee who is not the maker, drawer, or drawee – I promise to pay to the order of Pedro Santos the sum of Five Thousand Pesos (P5,000.00). Pedro de la Cruz Pay to the order of Pedro Santos the sum of Five Thousand Pesos (P5,000.00). Mariano San Jose MODULE 4

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b) Drawn to the order of maker or drawer – I promise to pay to the order of myself the sum of One Thousand Pesos (P1,000.00). (Sgd.) A The above promissory note must be indorsed by the maker to make it complete. (Correlate with Sec. 184). Pay to the order of myself the sum of One thousand Pesos (P1,000.00). (Sgd.) A To: X This bill of exchange can be negotiated by a proper indorsement by the drawer, completed with delivery. c) Drawn to the order of drawee -Pay to the order of yourself the sum of Five Thousand Pesos (P5,000.00). (Sgd.) A To: X X must make a proper indorsement, plus delivery to negotiate it. D) To two (2) or ore payees jointly – I promise to pay to the order of B and C the sum of Five Thousand Pesos (P5,000.00). (Sgd.) A MODULE 4

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If B and C want to negotiate the promissory note, both must sign the indorsement, unless one authorizes the other to sign for the two of them. If B above indorses the instrument to D without authority from C, B is just indorsing his share of the sum payable and D therefore does not acquire a clear title to the instrument It will result in the multiplicity of suits. If B and C are partners, under the Partnership Law, anyone of them can validly indorse the instrument for both of them. d) To one or more of several payees – I promise to pay to the order of B or C the sum of Five Thousand Pesos (P5,000.00). (Sgd.) A Indorsement of either B or C will be valid to transfer title, and also payable to either one of them. f)To the holder of an office – The rule says that where an instrument is payable to order, the payee must be named or indicated with reasonable certainty. If maker or drawer intends to make the instrument payable to an Office, then it will be payable to whoever holds the Office at the time of maturity of the instrument. SECTION 9. When payable to bearer. instrument is payable to bearer – a) b)

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The

When it is expressed to be so payable; or When it is payable to a person named therein or bearer; or ATTY. BRR

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c) d) e)

When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or When the name of the payee does not purport to be the name of any person; or When the only or last indorsement is an indorsement in blank.

The two most common ways of making a negotiable instrument payable to “bearer” are – I promise to pay to bearer the sum of Five Thousand Pesos (P5,000.00). (Sgd.) A I promise to pay to B or bearer the sum of Five Thousand Pesos (P5,000.00). (Sgd.) A When payable to order of a fictitious or non-existing person – I promise to pay to the order of Robin Hood the sum of Five Thousand Pesos (P5,000.00). (Sgd.) A To treat the above promissory note a “Bearer” instrument, the following requisites must be present: 1) The payee is a fictitious or non-existing person; 2) Such fact is known to the maker who intentionally makes the promissory note payable to such fictitious or non-existing person.

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Thus, if A issues the above promissory note to B, it becomes a bearer instrument B becomes the bearer and may negotiate the promissory note by mere delivery. There are instances when a payee designated as “fictitious” is really a true and existing person, but the instrument is still deemed payable to bearer if the maker or drawer has no intention of making the instrument payable to such existing person. What is controlling is the intent of the maker or drawer in making the instrument. a)When the only or last indorsement is a blank indorsement – Blank indorsement is merely the plain signature of the indorser without any additional words attached to it, usually made at the back of the instrument. I promise to pay to the order of B the sum of Five Thousand Pesos (P5,000.00). (Sgd.) A If B merely signs his name at the back of the promissory note, then he has made a blank indorsement and the instrument becomes payable to bearer, and whoever receives the negotiable instrument from B becomes the bearer, and may further negotiate it by mere delivery. SECTION 10. Terms when sufficient. – The instrument need not follow the language of this Act, but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof. The above rule states that no particular form is required in the preparation of negotiable instruments and words synonymous MODULE 4

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to “promise” or “order” may be used and such other appropriate terms, provided they conform to the requirements of the law. Example: 1) “Pay to bearer” -- can be expressed – “Pay to the possessor of this instrument” 2) “I promise” -- can be -- “I agree or undertake to pay”

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