Seminar by:• Adithya BR• Balakrishna Kini 03/04/2013• Dhanush Urs• Ganesh Kuruvadi• Iliyaz Ahamed2nd Sem B.Com „C‟, SBRR MFGC, Mysore.
Meaning & Definition Specimen of Cheque Essentials of a Cheque Types of Cheques Endorsement of Cheques As a Paying Banker Dishonour of Cheques As a Collecting Banker
Section 6 defines a cheque as “A bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form”.
Thus a cheque is also a bill of exchange with three additional qualifications: (a) It is always drawn on a specified banker. (b) It is always payable on demand. (c) It includes the electronic image of a truncatedcheque and also a cheque in electronic form.In other words, "Cheque is an instrument inwriting containing an unconditional order,addressed to a banker, sign by the person whohas deposited money with the banker, requiringhim to pay on demand a certain sum of moneyonly to or to the order of certain person or to thebearer of instrument."
The essential features of a cheque are:1. A Cheque must be in writing. The writing may be by means of a pen, a type-writer, printed characters, ball- pen or even pencil because law has not specified the writing materials with which a cheque has to be written.2. Cheques must be in form of a order and not in form of a request.3. The order must be unconditional. If any condition is attached with the order, the cheque will lose its legality.4. The Amount demanded must be for certain amount in money and not in kind.5. The payment must be made to a certain person, bearer or self.6. It must be drawn on a banker.7. It must be signed by the account holder.
Different types of cheques are: Bearer Cheque Order Cheque Uncrossed/Open Cheque Crossed Cheque Anti-Dated Cheque Post-Dated Cheque Stale Cheque
1. Bearer ChequeWhen the words "or bearer" appearing on theface of the cheque are not cancelled, thecheque is called a bearer cheque. The bearercheque is payable to the person specifiedtherein or to any other else who presents it tothe bank for payment. However, such chequesare risky, this is because if such cheques arelost, the finder of the cheque can collectpayment from the bank.
2. Order ChequeWhen the word "bearer" appearing on the faceof a cheque is cancelled and when in its placethe word "or order" is written on the face ofthe cheque, the cheque is called an ordercheque. Such a cheque is payable to theperson specified therein as the payee, or toany one else to whom it is endorsed(transferred).
3. Uncrossed / Open ChequeWhen a cheque is not crossed, it is known asan "Open Cheque" or an "Uncrossed Cheque".The payment of such a cheque can be obtainedat the counter of the bank. An open chequemay be a bearer cheque or an order one.
4. Crossed ChequeCrossing of cheque means drawing two parallellines on the face of the cheque with or withoutadditional words like "& CO." or "AccountPayee" or "Not Negotiable". A crossed chequecannot be encashed at the cash counter of abank but it can only be credited to the payeesaccount.
5. Anti-Dated ChequeIf a cheque bears a date earlier than the dateon which it is presented to the bank, it iscalled as "anti-dated cheque". Such a cheque isvalid upto three months from the date of thecheque.
6. Post-Dated ChequeIf a cheque bears a date which is yet to come(future date) then it is known as post-datedcheque. A post dated cheque cannot behonoured earlier than the date on the cheque. 7. Stale ChequeIf a cheque is presented for payment after sixmonths from the date of the cheque it is calledstale cheque. A stale cheque is not honouredby the bank.
Endorsement of a cheque means sisgning one‟s name either on the back of a cheque or on its face or on a slip of paper called the allonge for the purpose of transferring the interest, right, property or title in the cheque to another person. The person who endorse the cheque is called the endorser of the cheque. The person to whom the cheque is endorsed is called the endorsee of the cheque.
Kinds of endorsement: Blank Endorsement or General Endorsement Full endorsement or Special Endorsement Restrictive Endorsement Sans Recource Endorsement Conditional Endorsement or qualified Endorsement Faculative Endorsement Sans Frais Endorsement
Blank EndorsementIt is an endorsement in which the endorser merelysigns his name on the back of the instrumentwithout mentioning the name on the back of theinstrument without mentioning the name of theperson to whom the instrument is endorsed. Special EnorsementIt is an endorsement in which the endorser writesnot only his name, but also the name of the personto whom the instrument is endorsed on the back ofthe instrument.
Restrictive EnorsementA restrictive endorsement is one which, limitsthe further negotiation of an instrument. Theendorsee in such cases, cannot further endorseit. Generally, the word „only‟ is added afterthe endorsee‟s name. Sans Recourse EndorsementIt is an endorsement which limits the liabilityof the endorser. The effect of thisendorsement is, to render the endorser freefrom all liability to any subsequent holder.
Conditional EndorsementIt is an endorsement in which the endorser makeshis liability on the instrument or the right of theendorsee to receive the payment of the instrumentdepend upon the happening of a specified event. Faculative EndorsementIt is an endorsement whereby , the endorserwaives some of his rights on the instrument. Sans Frais EndorsementIt is an endorsement in which by writing the words“Sans Frais”, the endorser makes it clear that noone should incur any expense on his account inrespect of the negotiable instrument.
Meaning:The banker on whom the cheque Is drawn orthe banker who is required to pay the chequedrawn on him by a customer is called thePaying Banker or Drawee Banker.
Precautions to be taken by a paying banker:1. He should see that the cheque is drawn in proper form and satisfies all the requirements of a valid cheque.2. He Should verify whether the cheque is dated or not.3. He should satisfy himself that the amount payable is certain.4. He should see whether there is sufficient amount in the bank account.5. The banker should see whether the cheque is signed by the drawer.
6. The banker should see whether the cheque is drawn on the same branch of the bank in which the drawer has his account.7. When a cheque is presented to him at the counter, the paying banker must verify whether it is an open (i.e., Uncrossed Cheque or Crossed Cheque).8. The Banker should see whether there is any material alteration in the cheque.9. When a cheque presented for payment is mutilated, he should check whether it is intentional or accidental.
Thepaying banker is given some statutory protection in respect of risks or difficulties faced by him. The protection to the paying banker is laid down in Section 85(1), 16(2), 85(2), 85A, 89 and 128 of the Indian Negotiable Instruments Act of 1881.
Protection in respect of an Order Cheque Bearing Forged Endorsement of the Payee. (1) The endorsement of the payee must be regular or correct. (2) The payment must be a payment in due course. Protection in respect of an Order Cheque Bearing Forged Endorsement of the Endorsee: (1)The endorsement of the endorsee must be regular or correct, but not necessarily be genuine. (2)The payment must be a payment in due course. Protection in respect of a Bearer Cheque. (1)There is nothing to arouse suspicion about the bearer of the cheque. (2)The payment is made to the bearer in due course. Protection in respect of an Order Draft Bearing Forged Endorsement. (1) The endorsement on the draft must be regular or correct. (2) The payment must be a payment in due course.
A cheque is said to be dishonoured when it is not paid by the paying banker on presentation.Circumstances under which a customer’s Cheque canbe Dishonoured:1. When the cheque is a conditional one, the paying banker can dishonour that cheque.2. When the customer countermands the payment of any cheque, the banker must refuse to make the payment for that cheque.3. When the banker receives a notice from the holder about the loss of the cheque, he cannot ignore that notice and make the payment.
4. On receipt of a notice of the drawer‟s death, the banker must stop the payment of cheques issued by the drawer. This is because the order of the drawer to the banker to pay any cheque ceases to operate after his death.5. When the banker receives a notice of the drawer‟s insolvency, he must dishonour the cheque issued by the customer. This is because after a customer is declared insolvent, his properties, including his bank balance, vest in the official assignee or official receiver, as the case may be.6. When a garnishee order is served on the banker by a court attaching the customer‟s funds, the banker is bound to comply with the garnishee order.7. If the bank account is a trust account and if the banker comes to know that the customer, who is operating the trust account, intends to use the funds in the trust account in breach of trust for his personal use, the banker must stop payment for the cheques issued by the said customer or trustee.
8. If a cheque is presented for payment after the customer‟s account is closed, the banker must refuse payment for a cheque.9. When a cheque is not signed by the drawer, the banker must not make the payment for such a cheque.10. When a crossed cheque is presented at the counter for payment, the banker must not make the payment for that cheque.11. If the drawer is a foreigner, and if there is an outbreak of war with the drawers‟s, country, the banker must refuse payment for the cheques issued by that customer during the time of war.12. When the funds to the credit of a drawer are insufficient to meet the cheque issued by him, the banker may refuse payment.13. When the drawer‟s signature on the cheque differs from his specimen signature, the banker may refuse payment for the same.14. When a cheque is undated, the banker may refuse payment.15. Where a cheque bears an incomplete date, the banker may refuse payment.
16. Where a cheque bears an incomplete date, payment may be refused by the banker.17. If a cheque has become stale, payment may be refused.18. If a cheque is presented for payment outside banking hours, payment may be refused.19. When the endorsement of the payee or the endorsee on a cheque is irregular, the banker may refuse payment.20. If the amount of the cheque stated in words differs from the amount stated in figures, the banker may refuse payment.21. If the amount of a a cheque is stated only in figures, payment may be refused.22. If a cheque is not drawn in proper form, the banker may refuse payment.23. If the cheque is ambiguous, i.e., not clearly written, payment may be refused.24. If a cheque bears any material alteration, the banker may refuse the payment.
N.S (Not Sufficient): The answer means that the funds to the credit of the drawer are not sufficient to meet the cheque. N.F (No Funds): This anwer means that there are no funds in the drawer‟s account to pay the cheque. N.A.F (Not Arranged For): This answer means that the cheque has been drawn against an overdraft which has not been arranged. E.A (Exceeds Arrangement): This answer means that the payment of the cheque would result in the overdraft exceeding the limit sanctioned. D.R (Discharge Required): This means that endorsement is required. D.D (Drawer Deceased) Drawer Insolvent Drawer Insane No Account Account Closed
Cheque irregularly drawn Cheque is post dated Cheque is stale or out of date Cheque is mutilated Payment stopped under court order Drawer‟s signature differs Alteration requires drawer‟s signature
The collecting banker is the banker who collects cheques drawn upon other bankers for and on behalf of his customers. He is called the collecting banker, as he undertakes the work of collection of cheques.Procedure Followed in collection of cheques:First, he recieves from his customer the cheque which is required to becollected.Then, he presents that cheque to the drawee or paying banker eitherthrough clearing or thrrough post for payment.If the cheque presented to the paying banker is honoured or realised, hecredits the amount realised to his customer‟s account, and informs thecustomer about it.If the checque is dishonoured, he gives notice to his customer about thedishonour of the cheque.
Legal Status of a collecting banker: Collecting Banker as a Holder for Value: A Collecting banker becomes a holder for value, if he has paidthe value of the cheque to the customer before the cheque isactually collected. In other words, a collecting banker becomesa holder for value, when he collects his customer‟s cheque forhimself, and not for the customer. Collecting Banker as an Agent of His Customer: A Collecting banker collects a cheque as an agent of hiscustomer, he has no rights of his own. His rights or tilte to thecheque will be the same as that of the customer. If his customerhas a good title to the cheque, he too will have a good title tothe cheque.
The protection to the collecting banker is laid down in Sections 131 & 131A of the Indian Negotiable Instruments Act of 1881. The Section 131 states: “A banker who has in good faith and without negligence, receivedpayment for a customer, of a cheque crossed generally or speciallyto himself, shall not, in case the tilte to the cheque provesdefective, incur any liability to the true owner of the cheque byreason only of having received such payment.”It means, “A banker recieves payment of a crossed cheque for acustomer within the meaning of this section not withstanding that hecredits his customer’s account with the amount of the cheque beforereceiving the payment thereof”.
The protection given under section 131 can be claimed by the collecting banker only if the following conditions are satisfied:1. This protection is available only for a crossed cheque. No protection is granted for an open or uncrossed cheque, as it need not be collected through a banker.2. This protection can be claimed only for that cheque which has been crossed before it reaches the collecting banker.3. This protection can be claimed only when the collecting banker has collected the cheque as an agent for his customer4. This protection can be claimed only if the collecting banker has collected the cheque in good faith and without negligence.
Protection in respect of Bank Drafts:Section 131A of the Negotiable Instruments Act of 1981 gives protection to thecollecting banker in respect of a draft, bearing a forged endorsement or inrespect of a draft to which the customer has no title or defective title. Theprotection given under Section 131A can be claimed by the banker only if all theconditions laid down in section 131 are satisfied. Protection is respect of Bills of Exchange:The statutory protection given to a collecting banker in respect of cheques andbank drafts under Section 131 and 131A of the Negotiable Instruments Act, 1881 isnot extended to the bills of exchange. The reason for this is simple. Unlikecheques and bank drafts, bills of exchange are not crossed. As bills of exchangeare not crossed, there isno obligation on the part of a collecting banker toundertake the work of collection of bills on behalf of customers. As the thecollecting banker is not charged with the responsibility of collecting bills forcustomers, he is not given the statutory protection provided under the Act.
Wewould like to thank our lecturer Mr Karun Sharma for the guidance and support!The soft copy of this presentation is availableat www.chintana.in/btpnotes.
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