Lesson 27 Negotiable Instrument-Banking and Finance-Handout, Exercises of Banking and Finance

Download Lesson 27 Negotiable Instrument-Banking and Finance-Handout and more Exercises Banking and Finance in PDF only on Docsity! LESSON 27 NEGOTIABLE INSTRUMENT Another important type of negotiable instrument is cheque. Cheque as defined in section 6 of the Act is given below: Cheque “A cheque is a bill of exchange drawn on a specified banker and not expressed to payable otherwise than on demand”. Parties: There are three parties in the cheque which are as under: o Drawer o Drawee (in case of cheque, drawee is always a banker) o Payee Essentials of a Cheque: A cheque must fulfill the following requirements:  It must be in writing  It should contained unconditional order  It must by signed by drawer  Cheque is always payable on demand  The cheque is always drawn on a specified banker  As a matter of practice, cheque leaves are in printed form  The amount payable should be specified in the form of legal tender money and is paid accordingly.  The amount must be certain amount  The cheque is payable to specified person or order of or to bearer.  Date of issue must be mentioned on the cheque. Explanation: A cheque is a peculiar sort of instrument in many ways resembling a bill of exchange, but in some entirely different. In the ordinary course, it is never accepted, it is not intended for circulation, it is given for immediate payment, it is not entitled to days of grace. In addition, a cheque is presented for payment, whereas a bill in the first instance is presented for acceptance, this is not so in the case of a cheque, because the holder of a cheque, as between himself and the drawer, has no right to require acceptance. A cheque is not intended for circulation; it is given for immediate payment; it is not entitled to days of grace; and though it is, strictly speaking an order upon a debtor by a creditor to pay to a third person the whole or part of a debt, yet, in the ordinary understanding of persons, it is not so considered. Types of Cheques: The cheques can be divided in the following forms: Bearer Cheques: In this type cash is payable to anyone presenting the cheque for payment at the cash counter of bank? Order Cheques Such cheques are payable to the specified person on proper identification of the payee. Crossed Cheques Crossing may be of different types, we shall discuss all these types of crossing. However if the cheque is crossed as payees account only such cheques cannot be paid at the cash counter of the bank and these must be credited to the bank account of the payee. docsity.com Crossed Cheques and their Collection Crossing of cheques: The cheques are of two types—open (uncrossed) cheques and crossed cheques. Payment of a cheque by the drawee banker depends upon whether the cheque is open or crossed. The payment of open cheque is made at the counter of the banker on its presentation. The open cheque is liable to a great risk in the course of circulation. Since an open cheque is payable to a bearer, it involves a risk of payment to any person, if it is lost. In order to avoid such risk and to protect the interest of the genuine holder, the system of crossing the cheques was introduced. In case of a crossed cheque, payment can be obtained only through a banker. That is, the payee or the holder, having an account in a bank, has to deposit the crossed cheque for collection, and draw the moen ywhen the cheque is collected and the proceeds are credited to his account. It is only with a view to avoiding any such risk of fraud that businessmen introduced the divice of crossing. Thus, crossing of a cheque may be defined as, “ a direction to the drawee banker to pay the money on a crossed cheque through a banker, so that the party getting the payment of a crossed cheque may be easily traceable.” Types of Crossing There are two types of crossing 1. General Crossing 2. Special Crossing. General Crossing: A cheque is said to contain a general crossing when two parallel lines are drawn across the face of the cheque. According to Sec. 123. “ where a cheque bears across its face an addition of the words “ and company” or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words “ not negotiable”, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally.” A cheque is said to be crossed when two parallel transverse lines, with or without any words, are drawn on the left hand top corner of the cheque. It is relevant to state that such lines are essential for general crossing and may not be drawn in case of special crossing. Special Crossing: Sec. 124 of the Act defines special crossing as “Where cheque bears across its face an addition of the name of a banker, either with or without the word “not negotiable” that addition shall be deemed a crossing, and cheque shall be eemed to be crossed specially and to be crossed to that banker.” Further, Sec. 126, Para 2 states “Where a cheque is crossed specially the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent, for collection. In the case of special crossing the paying banker is to honour the cheque only when it is presented through the bank mentioned in the crossing or an agent of such bank, further, sec. 127 states, “Where a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof. “ A special crossing makes the cheque safer than a general crossing because now a thief will have to search an account-holder of that particular bank only whose name appears in the crossing which may only create more difficulty. Account Payee (Restrictive crossing) Although the Act is silent with regard to this form of crossing, it has been recognized by custom amongst businessmen and bankers. The words ‘account payee’ within a general or a special crossing, are a direction to the collecting banker to collect and credit the payee;s account with the proceeds of the cheque. It means that a cheque marked ‘account payee only’ or A/c Payee’ or ‘Payee’s A/c’ have same significance. If the docsity.com or person is a creditor of the banker to a larger amount than he would have been if such cheque had been paid. (2) In determining what a reasonable time is, regard shall be had to the nature of the instrument, the usage of trade and of bankers, and the facts of the particular case. (3) The holder of the cheque as to which such drawer or person is so discharged shall be a creditor, in lieu of such drawer or person, of such banker to the extent of such discharge and entitled to recover the amount from him. Illustrations (a). A draws a cheque for Rs. 1,000 and when the cheque ought to be presented, has funds at the bank to meet it. The bank fails before the cheque is presented. The drawer is discharged, but the holder can prove against the bank for the amount of the cheque. (b). A draws a cheque at Sialkot on a Bank in Karachi. The Bank fails before the cheque could be presented in ordinary course. A is not discharged, for he has not suffered actual damage through any delay in presenting the cheque. Cheque payable to order: Sec 85 (1) Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course. (2) Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing thereon, and notwithstanding that any such endorsement purports to restrict or exclude further negotiation. Drafts drawn by one branch of a bank on another payable to order: Sec 85-A Where any draft, that is, an order to pay money, drawn by. one office of a bank upon another office of the same bank for a sum, of money payable to order on demand, purports to be endorsed by or on behalf of the payee, the bank is discharged by payment in due course. Special provisions relating to cheques as contained in the Act: Revocation of banker's authority: Sec 122-A (1) The duty and authority of a banker to pay a cheque drawn on him by his customer are determined by- (2) Countermand of payment; (3) Notice of the customer's death; (4) Notice of adjudication of the customer as an insolvent. Cheque crossed generally: Sec 123 Where a cheque bears across its face an addition of the words "and company" or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words "not negotiable", that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally. Cheque crossed "account payee: sec 123A. (1) Where a cheque crossed generally bears across its face an addition of the word "account payee" between the two parallel transverse line constituting the general crossing, the cheque, besides being crossed generally, is said to be crossed" account payee". (2) Where a cheque is crossed "account payee"--- (a). It shall cease to be negotiable; and (b). It shall be the duty of the banker collecting payment of the cheque to credit the proceeds thereof only to the account of the payee named in the cheque. Cheque crossed specially: Sec 124. docsity.com Where a cheque bears across its face an addition of the name of a banker either, with or without the words "not negotiable, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker. Crossing after issue: Sec 125  Where a cheque is uncrossed, the holder may cross it generally or specially.  Where a cheque is crossed generally, the holder may cross specially.  Where a cheque is crossed generally or especially the holder may add the words "not negotiable".  Where a cheque is crossed specially, the banker to whom it is crossed may again cross it especially to another banker, his agent, for collection.  When an uncrossed cheque, or a cheque crossed generally, is sent to a banker for collection he may cross it especially to himself. Crossing a material part of a cheque: Sec 125-A A crossing authorized by this Act is a material part of the cheque; it shall not be lawful for any person to obliterate, or, except as authorized by this Act, to add to or alter, the crossing. Payment of cheque crossed generally: Sec 126 Where a cheque is-crossed generally, the banker on whom it is drawn shall to pay it otherwise than to a banker. Payment of cheque crossed specially Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than: to the banker to whom it is crossed, or his agent for collection. Payment of cheque crossed especially more than once: Sec 127. Where a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof. Payment in the course of crossed cheque: Sec 128 Where the banker on whom a crossed cheque is drawn in good faith and without negligence pays it, if crossed generally, to a banker, and if crossed specially, to the banker to whom it is crossed or his agent for collection, being a banker, the banker paying the cheque, and (in case such cheque has come to the hands of the payee) the drawer thereof, shall respectively be entitled to the same rights, and be placed in the same position in all respects, as they would respectively be entitled to and placed in if the amount of the cheque had been paid to and received by the true owner thereof. Payment of crossed cheque out of due course: Sec 129 Any banker paying a cheque crossed generally otherwise than to a banker, or a cheque crossed specially otherwise than to the banker Difference between a cheque and a bill of exchange: i. A cheque is drawn on a specified banker, but a bill may be drawn on any one including a banker ii. A cheque is payable immediately on demand, a bill is entitled to days of grace. iii. A cheque requires no acceptance: it is intended for immediate payment whereas a bill of exchange has to be accepted before acceptor can be made liable. iv. Failure of presentment for payment discharges the drawer in the case of a bill, but the drawer of a cheque is not discharged by failure of the holder to present it in due time unless the drawer has sustained damage by the delay. v. When a cheque is not met, notice of dishonor is not necessary as in the case of bills: want to assets in the hands of the banker is sufficient notice. vi. A cheque is revocable while a bill is not. docsity.com In case the drawer of the cheque denies its execution, he may take a plea in the alternative that if his signature on the cheque is found to be genuine it may be taken that a signed cheque had been stolen from him and as such he is not liable on it. In such a case it is for the plaintiff to prove that the cheque was actually drawn by the defendant and therefore he was liable on it. Cheques in the nature of an order from the account—holder to the Bank directing it to pay the specified amount out of his account. Where signature of the account-holder on a cheque is forged then it is not his order to pay. Payment on the basis of a foraged cheque is thus payment without authority and would not bind the customer. The different types of negotiable instruments have been covered in detail; we shall discuss the other aspects regarding these instruments in coming Lessons. docsity.com