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Business Law - Bankers and Cheques


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Business Law - Bankers and Cheques

  1. 1. Bankers & Customers Dishonour of Cheques Group 6
  2. 2. Bankers and Customers <ul><li>What is a bank? </li></ul><ul><ul><li>As per Oxford Dictionary, Bank is </li></ul></ul><ul><ul><ul><li>An organization offering financial services, especially the safekeeping of customers’ money until required and making loans at interest. </li></ul></ul></ul><ul><ul><li>As per Wikipedia </li></ul></ul><ul><ul><ul><li>A bank is a business that borrows from its customers on current accounts repayable to its customers' cheques and collects cheques for its customers' accounts. Banks may also issue bank notes , and lend money to customers on current account (called overdraft), accept term deposits and make term loans and provide other financial services. </li></ul></ul></ul><ul><li>Receiving or Collecting Banker – A Banker who collects cheque from the customer (drawee) and collects payment on the customer’s behalf </li></ul><ul><li>Paying Banker – A Banker who holds the account of the drawer of the cheque and is obliged to make payment, if the funds of the customer are sufficient to cover the amount of he cheque drawn or if overdrawing facility is given to the customer </li></ul>
  3. 3. Cheque clearance CitiBank (Paying Bank) ICICI Bank (Receiving Bank) Suresh Amit Payment Done Credits Payment Issues Cheque Asks for payment Debits Payment Submits cheque
  4. 4. Negotiable Instruments. Act, Sec 131 <ul><li>A banker receives payment of a crossed cheque for a customer, notwithstanding that he credits his customer’s account with the amount of the cheque before receiving payment thereof. It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima-facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care. </li></ul>
  5. 5. Protection to collecting or receiving banker <ul><li>The Negotiable Instruments. Act, Sec 131 gives protection to the banker while receiving and making payments. </li></ul><ul><ul><li>Liable </li></ul></ul><ul><ul><ul><li>Collecting banker when receiving payment should act in good faith and without negligence. Any doubt or suspicion in the mind of banker must be inquired otherwise it will constitute negligence. </li></ul></ul></ul><ul><ul><li>Not Liable </li></ul></ul><ul><ul><ul><li>If the customer’s title turns out to be defective, the banker that receives the payment will not be liable to the true owner. </li></ul></ul></ul><ul><ul><ul><li>When a customer deposits a third party cheque and the banker credits the account with the proceeds immediately. Subsequently, if the cheque is dishonored, the banker can rightfully debit the customer’s account. </li></ul></ul></ul><ul><ul><ul><li>Mere crediting of customer’s account does not deprive the banker of protection. </li></ul></ul></ul>
  6. 6. Paying  banker – Notes on Safeguard <ul><li>The responsibility and liability of the paying banker is far greater than that of the receiving banker. </li></ul><ul><li>Payment of cheque crossed generally: (Sec. 126) Not to pay anyone than a banker </li></ul><ul><li>Payment of cheque crossed specially: (Sec. 126) Not to pay anyone than a banker, or his agent for collection </li></ul><ul><li>Payment made in due course of crossed cheques: (Sec. 128) When the paying banker, makes payment in the due course, </li></ul><ul><ul><li>It is discharged from liability if </li></ul></ul><ul><ul><ul><li>The cheque is forged due to customer’s default </li></ul></ul></ul><ul><ul><ul><li>Endorsement of the payee or the indorsee subsequently turns out to be forged and the banker has paid in good faith and without negligence </li></ul></ul></ul><ul><ul><li>It is liable if </li></ul></ul><ul><ul><ul><li>The customer’s signature is forged and hence cannot debit the amount to the customer’s account </li></ul></ul></ul><ul><ul><ul><li>Endorsement of the payee or the indorsee subsequently turns out to be forged and there is apparent irregularity in endorsement </li></ul></ul></ul><ul><li>Payment of bearer cheques: Payment of these cheques at the counter on presentation discharges the banker from liability </li></ul><ul><li>Payment of order cheques: The banker is discharged from liability if the payment is made in due course. </li></ul>
  7. 7. Effect of paying otherwise than in due course <ul><li>What if the paying banker does not pay in due course? </li></ul><ul><li>Liable </li></ul><ul><ul><li>In paying a cheque crossed generally or specially, if pays otherwise than to a banker, or his agent for collection (Sec. 129) </li></ul></ul><ul><ul><li>In case of transmission of an electronic image of a truncated cheque, it is the responsibility of the paying bank to verify the party from which the image has been transmitted and the image so transmitted to it and received by it are exactly the same [Sec. 89(3)] </li></ul></ul><ul><ul><li>The drawee of a cheque (always a banker) having sufficient funds of the drawer in his hand, properly applicable to the payment of such cheque must pay the cheque when duly required to do so and, in default of such payment, must compensate the drawer for any loss or damages caused by such default [Sec. 31] </li></ul></ul><ul><li>Not Liable </li></ul><ul><ul><li>In case of payment, done at the time of presentation, to cheque which is not crossed or have had a crossing which has been obliterated [Sec. 89(1)] </li></ul></ul><ul><ul><li>In case of an alteration between the electronic image and the truncated cheque. It is the liability of the clearing house/bank [Sec. 89(2)] </li></ul></ul>
  8. 8. When can a holder proceed against the bank? <ul><li>Who is a holder? </li></ul><ul><ul><li>Suppose A writes a cheque for Rs. 5000 in favor of B </li></ul></ul><ul><ul><li>It’s a Citibank cheque </li></ul></ul><ul><ul><li>A becomes the drawer of the cheque </li></ul></ul><ul><ul><li>B becomes the holder of the cheque </li></ul></ul><ul><li>There is no contract between the banker and the holder of the cheque, i.e., between Citibank and B </li></ul><ul><li>The holder (B) has a remedy against the drawer (A) of the cheque only </li></ul>
  9. 9. Continued… <ul><li>However, the holder can proceed directly against the bank only when </li></ul><ul><ul><li>The drawer is discharged because the holder of the cheque does not present it for payment within a reasonable time of its issue and suffers actual damage through the delay. Under Sec. 84(3), the holder becomes a creditor and the banker a debtor </li></ul></ul><ul><ul><ul><li>Suppose A draws a cheque in favor of B </li></ul></ul></ul><ul><ul><ul><li>There are enough funds in A’s account </li></ul></ul></ul><ul><ul><ul><li>But the bank fails before B presents the cheque </li></ul></ul></ul><ul><ul><ul><li>A is discharged; B can proceed against the bank </li></ul></ul></ul><ul><ul><li>The banker makes payment of crossed cheque out of due course, i.e., where the cheque is generally crossed, it makes payment to someone other than a banker, or where the cheque is crossed specially, it makes payment to a different banker than specified (Sec. 129) </li></ul></ul><ul><ul><ul><li>Suppose A deposits a cheque drawn on Bank B at Bank C </li></ul></ul></ul><ul><ul><ul><li>B makes payment to anyone other than C </li></ul></ul></ul><ul><ul><ul><li>A can now proceed against B </li></ul></ul></ul>
  10. 10. Honouring of cheques <ul><li>A banker SHOULD honor a cheque if </li></ul><ul><ul><li>The funds of the drawer are sufficient and </li></ul></ul><ul><ul><li>The cheque is properly presented </li></ul></ul><ul><li>Except in some special circumstances such as </li></ul><ul><li>Funds are not properly applicable to the payment of the cheque </li></ul><ul><ul><li>A draws a cheque in favor of B </li></ul></ul><ul><ul><li>But A’s bank account funds are in lien </li></ul></ul><ul><li>Cheque is irregular or ambiguous </li></ul><ul><li>Death, lunacy, or insolvency of customer </li></ul><ul><ul><li>The bank should have notice of the same </li></ul></ul><ul><li>Post-dated cheque is presented before its ostensible date </li></ul><ul><ul><li>A draws a cheque in favor of B and dates it October 1 st , 2006 </li></ul></ul><ul><ul><li>B presents the cheque any time before October 1 st , 2006 </li></ul></ul>
  11. 11. Continued… <ul><li>Cheque presented beyond a period of 6 months from the date of issue and not presented within normal working hours </li></ul><ul><li>Signature on cheque does not match specimen signature </li></ul><ul><li>Insufficient funds in drawer’s account unless an agreement of overdraft exists </li></ul><ul><li>Customer countermands payment and communicates the same to the bank properly and on time </li></ul><ul><ul><li>Notice should be in writing </li></ul></ul><ul><ul><li>Correct particulars of the cheque </li></ul></ul><ul><ul><li>Telegraphic message is not sufficient </li></ul></ul><ul><li>Holder gives notice to the bank of loss of cheque </li></ul><ul><li>Garnishee order has been issued by the court attaching customer’s balance </li></ul>
  12. 12. Dishonour Of Cheques <ul><li>Governed by Negotiable Instruments Act of 2000. (effective from 06.02.2003) </li></ul><ul><li>Dishonour of Cheques implies the concept of inability to obtain payment and that the funds are not forthcoming </li></ul>
  13. 13. Presumption of Dishonour <ul><li>If the cheques issued by the payer returns for the following reason </li></ul><ul><ul><li>Insufficient funds in the account </li></ul></ul><ul><ul><li>Stop payment on the cheque </li></ul></ul><ul><li>The payment shall be for the discharge of any debt or liabilities, which is legally enforceable </li></ul>
  14. 14. Conditions <ul><li>Cheques must be presented to drawee bank within six months or the period of its validity </li></ul><ul><li>Issue notice to make payment to payer within 30days of the return of the cheque </li></ul><ul><li>The drawer fails to make payment within 15days of the receipt of the said notice </li></ul><ul><li>File a complaint in writing before a Metropolitan Magistrate or a Judicial Magistrate of the first class within a month after issuing the notice </li></ul>
  15. 15. Penalty (Sec 138) <ul><li>Reference case </li></ul><ul><li>Modi Cements Ltd. vs Kuchil Kumar Nandi </li></ul><ul><li>Kuchil Nandi carries on business in the name and style of &quot;Dubey Construction, M/s Nandi Traders, M/s Nandi Concerns” etc. and is sole proprietor of all these business concerns. </li></ul><ul><li>He purchased from Modi cement on credit. After taking accounts it was found that on 23.2.1994 the respondent incurred a liability/debt of Rs. 1,10,53,520.30 payable to Modi. </li></ul><ul><li>In partial discharge of the said liability/debt the respondent drew three cheques in favor of Modi cement on 23.2.94, 26.2.94 and 28.2.94 for a sum of Rs.2,00,000/- each. </li></ul><ul><li>Modi cement presented these cheques on 9.8.1994; on 6.9.94 the Bank returned the said cheques as unpaid with an endorsements &quot;payment stopped by the drawer&quot;. </li></ul><ul><li>Nandi in his letter dated 8.8.94 had given such instruction. </li></ul><ul><li>Modi on 13.9.94 sent a legal notice in terms of Section 138 of the Act to the respondent demanding payment of the aforesaid amounts under the cheques. </li></ul><ul><li>The said notice was duly served on the respondent on 17.9.94. Nandi failed and neglected to make the payment of the amount of the aforesaid three cheques within the stipulated period of 15 days which expired on 2.10.94. Modi filed three criminal complaints against Nandi. </li></ul>
  16. 16. Continued… <ul><li>Situation </li></ul><ul><li>Stop-Payment same as dishonor of cheque </li></ul><ul><li>Closed account same as dishonor of cheque </li></ul><ul><li>Not to pay above specific limit </li></ul><ul><li>Punishment </li></ul><ul><li>Failure to pay within 15 days period </li></ul><ul><li>Deemed to commit offence </li></ul><ul><li>Punishable with imprisonment for maximum two years, fine twice of cheque amount or both </li></ul>
  17. 17. Offences by Companies <ul><li>Offenders </li></ul><ul><li>Company which committed the offence </li></ul><ul><li>People in charge and responsible for business of the company </li></ul><ul><li>Director, manager, secretary with whose connivance or neglect company has committed the offence </li></ul><ul><li>Avoidance </li></ul><ul><li>Person not liable for punishment if he proves offence was committed without his knowledge or he exercised due diligence to prevent the offence. </li></ul>
  18. 18. Power of Court to try cases summarily SEC 143 <ul><li>Judicial Magistrate of first class or Metropolitan Magistrate can try case summarily and pass sentence not more than 1 year and fine not more than 5000 </li></ul><ul><li>Every trial shall be conducted as fast as possible to conclude the trail within six months of filing the complaint </li></ul><ul><li>If during the course of such trial, if it appears to the magistrate that imprisonment may be exceed 1 yr or it is undesirable to try the case summarily magistrate shall record an order to that effect </li></ul><ul><li>After that he may recall any witness and rehear the case as per the procedures mentioned in Code of Criminal Procedure, 1973 </li></ul>
  19. 19. <ul><li>A summons is a legal document issued by a court addressed to a defendant in a legal proceeding. Typically, a summons will announce to the person to whom it is directed that a legal proceeding has been started against them, a file has been started in the court records and it announces a date by which the defendant (s) must either appear in court, or respond in writing to the court or the opposing party or parties </li></ul><ul><li>Mode of Service of Summons [ Sec. 144 ] </li></ul><ul><li>A Magistrate issuing a summons to an accused or a witness may direct a copy of summons to be served at the place where such accused or witness ordinarily resides or carries on business or personally works for gain, by speed post or by any such courier as are approved Court of Summons </li></ul><ul><li>An Acknowledgement purporting to be signed by the accused or the witness or an endorsement purported to be made by any person authorized by the postal department or the courier service that the accused or the witness refuse to take delivery of the summons have been received, the Court using the summons may declare that the summon has been duly served. </li></ul><ul><li>Illustration </li></ul><ul><li>If the Magistrate sends a Summon to “Viky” informing about the case filed by “Ronny” and if “Viky” refuses to accept this document delivered to him through an authorized delivery channel. Then the Court declares the summons has been duly served </li></ul>
  20. 20. <ul><li>An affidavit is a formal sworn statement of fact, signed by the declarant (who is called the affiant), and witnessed (as to the veracity of the affiant's signature) by a taker of oaths, such as a notary public. </li></ul><ul><li>One use of affidavits is to allow evidence to be gathered from witnesses or participants that may not be available to testify in person before the court. </li></ul><ul><li>Evidence of Affidavit [ Sec. 145 ] </li></ul><ul><li>The evidence of a compliant can be given on an affidavit </li></ul><ul><li>Affidavit may be read in evidence in any enquiry, trial or other proceedings under the Code of Criminal Procedure, 1973. (Subject to all the exceptions) </li></ul><ul><li>The court may, if it thinks fit, and shall, on the application of the prosecution or the accused, summon, and examine any person given evidence on affidavit as to the facts contained therein. </li></ul><ul><li>Illustration </li></ul><ul><li>Ronny is a witness for Vicky’s case. Due to some reason Ronny is not in a position to present himself in the court. His formal affidavit (if made) can be presented in the court as an evidence of witness </li></ul><ul><li>Offenses to be Compoundable [ Sec. 147 ] </li></ul><ul><li>Offence Compoundable-- open to compromise as a private matter between two parties </li></ul><ul><li>Government granted permission to compound after the O. P. Dholakia v. State of the Haryana & Anr. (2000) SCC 762 case – considering the nature of the offense and the fact of the complainant, the accused had already entered into a compromise </li></ul><ul><li>As a statutory sanction Supreme court allowed compounding of offense on the basis of parties settling their dispute and set – aside the sentence imposed in the case of Anilkumar Haritwal & Anr, v. Alka Gupta & Anr. (2004) 4 SCC 366 and in the case of B.C Seshadri v. B.N. Suryanarayana Rao (2004) 11 SCC 510 </li></ul><ul><li>Illustration </li></ul><ul><li>Ronny and Vicky are fighting a legal case against each other. Ronny finally decides to negotiate an off the court deal with Vicky and settle the issue. </li></ul>