NEGOTIABLE INSTRUMENTS

CHEQUES By Maxwell Ranasinghe

In business, we use many instruments to settle payments

should know the basics of these instruments if we are to conduct our business effectively and efficiently

Bill of Exchange Ordinance No 25 of 1927 covers law as to Bills of exchange, Promissory notes and cheques.

Bills of exchange it self are used basically in international trade and cheques are usually used in domestic trade.

Promissory Notes are not used in trading transactions much as they are used mainly for loans etc

Therefore, our focus is to have a brief knowledge of cheques that we use very often in business

A Cheque is a bill of exchange drawn on a bank and payable on demand”

Therefore we need to study the nature of Bill of exchange before we deal in detail about cheques as cheques are within the meaning of Bills of exchange.

Bill of exchange Ordinance No 25 of 1927) Defines Bill of Exchange as follows:

“an unconditional order, in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed determinable future time, a sum certain in money, to or to the order of a specified person or to bearer.

Defines Cheque as follows: “A cheque is a bill of exchange drawn on a bank payable on demand”

When the above two are combined a cheque could be further defined as

“Unconditional order in writing, signed by the drawer, requiring the drawer bank to pay on demand a stated sum to or to the order of a specified person or bearer.”

Basic elements of a cheque could be specifically described as follows.

It should be an unconditional order made by the drawer ( Current Account Holder) to the Drawee ( The bank)

It must be an order and not a request ( therefore no such phrases as “please pay” or I shall be pleased if you could make the payment” will not appear in a cheque)

In writing – It could be hand written or printed in the specific cheque leave issued by the drawee bank to the Current Account holder’s specific account. (It cannot be on any cheque of the same bank or any other bank. In practice a cheque should written by a pen not by pencil or otherwise.)

It should be signed by the person giving it. ( it should be signed by the Current Account Holder)

It should be addressed by one person to another (Current Account Holder to the Bank)

A sum certain in money should be required to be paid. ( the amount of money should be clearly and specifically indicated. Cannot use terms like pay about Rs. 2500.00. The amount in figures as well as words should be written and it should match)

Pay on demand (it has to be paid on demand when it is produced (non crossed cheques) or deposited to the bank (crossed cheques) within a reasonable time of the issue of the cheque. It has to be before six months unless a special restriction as presentation has been made by the drawer. Example certain government institutions issue cheques with a remark, “valid only for 60 days”.

Pay to or to the order of a specified person or to bearer ( the person named as payee or endorsee of the payee or the bearer of the cheque as the case may be)

Crossing of cheques If a cheque is crossed, it cannot be

encahsed over the counter of a bank and it has to be deposited in to a bank account for realization.

In other words, payment for crossed cheques will be made only to a banker and that bank will credit that money to the depositors account after receiving payment from the paying bank.

It could even be a cheque of a same bank that the depositor operates his or her account.

Usually cheques are deposited in Current Accounts only and at times banks accept cheques to be deposited in savings Accounts provided that the bank is satisfied with the ownership of the cheque.

if not banks may run a risk of negligence in collecting a cheque for a savings account.

It makes it more difficult for a thief to obtain proceeds of a cheque ( because crossed cheques must go through a bank account)

It increases the time available for discovering the theft and stopping payment (however, this may not be true with online crediting of the cheques of the same bank)

The thief and or his accomplice may be traced backed to the collecting bank who will have the details of the account holder who deposited the cheque

A ‘ Not negotiable” crossing and special crossings have special protections

Importance of crossing cheques

Ordinary Crossing Two parallel lines across the face of the cheque,

with or without the words” & Co”. These cheques can be deposited to any bank.

Special Crossing Inside the parallel line a name of a bank is

written, then that cheque will be considered as specially crossed cheque to be deposited in an account of the bank that is indicated inside the crossing. It cannot be deposited in any other bank.

Types of crossings

In order to secure cheques more one could even cross a cheque with bank name and branch too. Example “ Hatton National Bank- Grandpass Branch” Then that cheque could be deposited in an account at the Hatton National Bank’s Grandpas branch only.

If the drawer wants to further secure the cheque and wants it to be credited only to one particular persons Account , he could even cross with the Account No. example “ Hatton National Bank- Grandpass Branch- A/C No 23456788” That cheque could be deposited only to the A/c No 23456788 at Hatton National Bank’s Grandpass Branch only.

In modern system of computer networked banks, one can deposit the cheque through any branch of the Hatton National Bank but it should be deposited to the specific account in the crossing.

Not Negotiable Crossing When the words “ Not Negotiable” added inside the

crossing, it is called a “ Not Negotiable” cheque. It restricts the cheque of its negotiability.

Therefore a person taking a not negotiable crossed cheque cannot give a better title than what he has. (If the person giving the cheque has a good title and one accepts a cheque there will not be a problem even if the cheque is crossed

“Not negotiable”. The problem arises only if something like a stolen cheque is given then the holder will not become the ‘holder in due course”, a person who will have the right to sue any party in his own name)

Account Payee Crossing This is a direction given by the drawer to the

collecting bank, that the proceeds should be credited to the account of the payee.

If the collecting bank confirms that that the proceeds are credited to the payee, then the paying bank may safely pay the collecting banker.

If the collecting banker collects the proceeds to another’s account instead of the payee stated in the cheque, it( bank) could be held negligent.

A person who may cross a cheque Cheque may be crossed generally or specially by

the drawer Where a cheque is uncrossed, the holder may

cross it generally or specially Where a cheque is crossed generally, the holder

may cross it specially Where an uncrossed cheque or a cheque crossed

generally is sent to a banker for collection he may cross it especially to himself.

Holder in due course ( YathakaDharakaya) A holder in due course is a holder who has taken a bill

( cheque) complete and regular on the face of it, under the following conditions:

(i) he must have given value (ii) he must have taken in good faith (iii) bill must not be overdue ( iv) he must have no notice of previous dishonor (v)he must have no notice of prior defect in title And there must be no forgery on the bill ( signature of drawer

or endorsers) It must not be crossed” Not negotiable”, “Not transferable” or

“ crossed “ Pay Maxwell only” because it ceases to be a negotiable instrument.

Privileges of the holder on due course◦He can sue on his own name◦He can enforce payment against all prior

parties◦He holds the bill free from defects in title

of prior parties◦He can pass on a perfect title.

Drawer should have signed the cheque. Have the amount stated in both words and

figures which must agree. Possess all necessary endorsements. Not be stale. Bank will not pay a cheque older

than six months from the date of the cheque. Have had any alteration signed by the drawer.    

What to check in a cheque before you accept

Be dated. If a cheque is presented undated the bank will return the cheque. However, a holder may insert the date what he considers to be the true date.

State the payees name or just cash as payee. If the payee is indicated as “cash” such a

cheque cannot be crossed as “A/C payee”. Cheque is not mutilated. ( such as crushed,

stained or torn) Company rubber stamp or any other

authorized signatory’s stamp is placed.

Where the customer’s balance or limit is insufficient to cover the cheque.

Payment is stopped by the drawer. Cheque is stale. ( check is older than six

months) Cheque has not been properly drawn. Notice of customers death.

Banks will not pay cheques under following circumstances. 

Notice of presentation of a bankruptcy petition against customer.

Making of a bankruptcy order against the customer.

Order issued by the Commissioner of Inland Revenue or Commissioner of Provincial Tax Commissioner restraining the account.

Notice of defect in presenter’s title. Court order.

Notice that the customer’s signature is forged.

Post dated cheque. Cheque presented after business hours.

If alterations are unauthorized.

 

1. He should draw cheques carefully. London Joint Stock Bank Vs. Macmillan (1918) A firm entrusted a clerk to write cheques for signature of the partners.

The clerk wrote the amount £ 2 and did not write the amount in words. Presented the cheque to the partner for signature and the partner signed the cheques without taking notice or care to write the amount in words.

The clerk altered the figure to £120 and wrote the amount in words as One Hundred and twenty and obtained money.

The firm filed a case against the bank for paying £118 more to the clerk.

The court held that the bank is not liable as there is duty casts on the customer to take care in writing cheques and should not leave room for fraud. The fraud has taken place mainly due to customer not checking the completeness of the cheque before he signs the cheque.

Duties of a customer of a bank

2. The customer should reimburse the expenses incurred by the bank on behalf of the customer e.g. Cheque collection expenses if any

3. If the customer is aware about any forgery it should be informed to the bank, if not customer would be stopped from denying the forgery

Greenwood Vs. Martins Bank Ltd. (1933 Wife who forged husband’s signature obtained money for

more than 40 cheques amounting to £4000 in total. Husband knew this but he did not inform the bank about it. After the death of the wife, husband claimed from the bank for the moneys paid by the bank to his wife on his forged signature. The court decided that the husband cannot claim money as he even after knowing the forgery did not inform the bank.

4. The customer should keep the cheque books and leaves safely where unauthorised will not have access.

1. The bank should obey the instructions of the customer

A. It should honour cheques if properly drawn and there is sufficient funds or an arrangement for an overdraft to pay

B. Bank should honour the standing orders given by the customers such as payment of Insurance premium etc

C. It should obey any command for stopping the payment of a specific cheque or cheques

2.It should not disclose any information about the account to third parties unless customer has given authority to do so.

However, disclosure is possible under certain statutes like Inland Revenue Act or by order of court.

Duties of the bank towards customers

Under the Bills of exchange Ordinance, protection is given for paying banks as well as collecting banks under section 60, 80 and 82 in paying and collecting cheques for customers.

Protection available for paying banks When paying the bank pays to a cheque where the

endorsement has been forged. If the bank has made the payment in good faithWithout negligenceDuring the course of ordinary business of the bankWhere a bank pays a crossed cheque in good faith without negligence in accordance with the crossing, he is protected from the true owner of the cheque, even though the payment has been obtained by an unauthorized person.

Protections available for banks

Protection available for collecting banks

Where a collecting banker in good faith Without negligence receives payment For a customer of crossed cheque Bank is protected from the true owner even

if the customer did not have title to the cheque or had a defective title.

The best business practice would be to

select good partners to deal with and grant credit. If that could be ensured at the initial stages you may not have a problem of cheque returns as you would be dealing with credit worthy customers.

The other step that you could take is to educate all persons who collect cheques and receive cheque payments from customers about what to check when a cheque is received from a customer (as detailed in sec 8.)

How to minimize cheque returns

  First thing you should do is to send a notice of dishonor.

Notice of dishonor is a condition precedent to a right of action and therefore, without delay the “ Notice of dishonor” by registered post or some other provable manner should be sent.

Then you should try alternate modes of collecting cash or value for the returned cheque before you proceed with legal action.

If there is no other option to collect you may proceed with legal action, considering facts like, the amount of the cheque, financial status of the customer, weighing the cost of litigation, time and energy that you will waste.

What can you do when a cheque is returned?

As set out in section 703 of the Civil Procedure Code, action under special summary procedure on liquid claims could be instituted upon a cheque.

Under the special summary procedure, holder can institute action by presenting a Plaint in the form prescribed by the Civil Procedure Code supported by an affidavit to the effect that the sum which he claims is ‘justly due to him” from the defendant.

Defendant will have to deposit the money before he can answer the plaint unless special leave is obtained to answer

Issuing cheques without funds is a criminal offence ( cheating) under penal code and Sec 25 of the Debt Recovery Act of 1990 . There is a provision to remand the drawer initially and a jail term later

Holder must produce the cheque together with the plaint.

(Under the electronic presentment of cheques for clearance by banks under the Payment and Settlement System Act No 28 of 2005, you may not get the original cheque from the bank as in the past. You will get a copy of a electronic image of the cheque. This cheque is valid for filing with the plaint it is considered as the original cheque for litigation purposes. Therefore, it is very important to keep the copy of the electronic image of the returned cheque for

litigation.)