Payment and Collection of Cheques and Other Negotiable Instruments: Jaiib Paper 1 (Module B)-Unit 5
As we all know that is Payment and Collection of Cheques and Other Negotiable Instruments for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Payment and Collection of Cheques and Other Negotiable Instruments (Unit-5), FUNCTIONS OF BANKS (Module B), Principle & Practice of Banking JAIIB Paper-1.
♦Negotiable Instruments Act 1881
- The Negotiable Instruments Act, 1881 deals with three kinds of instruments which are widely used in commercial transactions. They are promissory notes, bills of exchange and cheque. Of these instruments, a cheque is used in day to day banking transactions. The Act contains numerous provision about cheques.
- A Negotiable Instrument means Promissory Note, Bill of exchange or Cheque payable either to order or to the bearer.
◊Seaction 6 defined a cheque as follows
- A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it include the electronic image of a truncated cheque and a cheque in the electronic form.
There is a statutory obligation on the part of a banker to make payment of cheque if:
- The cheque is properly drawn
- There is sufficient balance in the account
- There is no legal restraint on the bank’s duty to pay.
When a cheque is presented for payment, the following aspects should be looked into:
- Promissory Note: A promissory note is a financial instrument that contains a written promise by one party (the note’s issuer or maker) to pay another party (the note’s payee) a definite sum of money, either on demand or at a specified future date
- Bill of Exchange: A bill of exchange is a binding agreement by one party to pay a fixed amount of cash to another party as of a predetermined date or on demand.
- Drawee: The maker of Bill of Exchange or cheque is called the drawer, the person thereby directed to pay is called the Drawee.
- Holder: A holder is a person who legally obtains the negotiable instrument, with his name entitled on it, to receive the payment from the parties liable.
- Holder in Due Course: A holder in due course (HDC) is a person who acquires the negotiable instrument bonafide for some consideration, whose payment is still due
- Payment in Due Course: Payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.
- Negotiation: It depends on what form of negotiation you are referring to. If it is negotiating a cheque for example you are referring to a negotiable instrument.
- Endorsement: The act of a person who is a holder of a negotiable instrument in signing his or her name on the back of that instrument, thereby transferring title or ownership is an endorsement. An endorsement may be in favour of another individual or legal entity. An endorsement provides a transfer of the property to that other individual or legal entity. The person to whom the instrument is endorsed is called the endorsee. The person making the endorsement is the endorser.
The Branch on which it is drawn:
- Date: A Cheque may bear a future date (Post-dated), current date or an antedate. If a cheque bears a date 3 months prior to the date of presentation. It is considered to be stale cheque which cannot be paid without revalidation by the drawer. A post-dated cheque cannot be paid because in such cases, the bank runs the risk of getting stop payment instructions.
- Payee: A payee is a person or organization that receives a payment. Payment can be in any form, including cash, a check, a money order, or an electronic transfer of funds. The payee receives the payment from the payer (or “payor” if you prefer), which is the person or organization that makes the payment.
- Order cheque or bearer cheque: In simple words a cheque which is payable to any person who presents it for payment at the bank counter is called ‘Bearer cheque’. When the word “or bearer” printed on the cheque is cancelled, the cheque is called an order cheque. An order cheque is one which is payable to a particular person.
- Crossing a Cheque: A crossing is an instruction to the paying banker to pay the amount of cheque to a particular banker and not over the counter. The crossing of the cheque secures the payment to a banker.
Section 126– Cheque bears across its face an addition of two parallel transverse lines. The banker on whom it is drawn shall not pay it otherwise than to a banker.
Section 129- Banker paying a cheque crossed generally otherwise than to a banker shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.
Section 128: Banker will lose the protection as given in section 128 of the act.
Section 124: Where a cheque bear across its face an addition of the name of a banker, either with or without the words “Not negotiable”.
Section 126: When a cheque is crossed specially, the banker on whom it is drawn shall not pay of otherwise than to the banker to whom it is crossed or his agent for collection.
Section 129: Banker paying a cheque crossed specially otherwise than to a banker to whom it is crossed or his agent for collection shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.
Section 128: Payment will not be regarded as payment in due course and the banker will loss protection as given in section 128 of the Act.
Section 127: Where a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collection the paying banker shall refused payment thereof.
- Instrument contains any endorsement: According to section 15 of the N.I act, when the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, he is said to endorse the same.
- Any alteration: According to section 87 of the N.I Act, any material alteration of a negotiable instrument renders the same void as against anyone who is a party thereto at the time of making such an alteration and does not consent thereto, unless it was made in order to carry out the common intention of the original parties.
- Signature of the Drawer: The signature of the drawer on the cheque is an authority given by the account holder to debit his account with the amount of the cheque.
- Stop- Payment instruction: Before making payment of the cheque, the bank should see that is no stop payment instruction with respect to the cheque.
♦Payment in Due Course- Section 10 (N.I Act 1881)
- “Payment in due course” means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.
- Protection is available to the paying banker in case of forgery of endorsement in an order cheque under section 85(1), forgery of endorsement in a banker cheque under section 85(2), in case of a materially altered cheque under section 89 and in case of a crossed cheque under section 128 if the N.I act. The condition for getting protection is that the payment made of the cheque should be in due course.
♦Liability of the Paying Bank –Section 31
- As per section 31 of the N.I act, the drawee bank is under a liability to honour a cheque drawn on its account that is having a sufficient balance.
- Sufficient and adequate funds: Following are the circumstance when funds are sufficient and adequate, but not properly applicable.
- (a)When payment of a cheque is stopped
- (b)When drawer is dead and its intimation received
- (c)When funds under a garnishee order/income tax officer/ sales tax department are attached.
- (d)When the funds are earmarked for specific purpose.
- (e) When the funds are set off by the bank.
- (f) When the balance is not a clear balance.
Protection available to the paying banker: A paying banker is entitled for protection under the NI Act in the following cases:
- (a)Forged endorsements in an order cheque under Section 85(1)
- (b)Forged endorsements in a bearer cheque under section 85(2)
- (c)Forged endorsements in a draft under section 85(A)
- (d)Material alteration in a cheque under section 89
- (e) Payment of a crossed cheque under section 128.
♦Crossing of Cheque
- Crossing of a cheque is nothing but instructing the banker to pay the specified sum through the banker only, i.e. the amount on the cheque has to be deposited directly to the bank account of the payee.
♦Types of Crossing a cheque
- General Crossing: When across the face of a cheque two transverse parallel lines are drawn at the top left corner, along with the words & Co., between the two lines, with or without using the words not negotiable. When a cheque is crossed in this way, it is called a general crossing.
- Restrictive Crossing: When in between the two transverse parallel lines, the words ‘A/c payee’ is written across the face of the cheque, then such a crossing is called restrictive crossing or account payee crossing. In this case, the cheque can be credited to the account of the stated person only, making it a non-negotiable instrument.
- Special Crossing: A cheque in which the name of the banker is written, across the face of the cheque in between the two transverse parallel lines, with or without using the word ‘not negotiable’. This type of crossing is called a special crossing. In a special crossing, the paying banker will pay the sum only to the banker whose name is stated in the cheque or to his agent. Hence, the cheque will be honoured only when the bank mentioned in the crossing orders the same.
- Not Negotiable Crossing: When the words not negotiable is mentioned in between the two transverse parallel lines, indicating that the cheque can be transferred but the transferee will not be able to have a better title to the cheque.
- Double Crossing: Double crossing is when a bank to whom the cheque crossed specially, further submits the same to another bank, for the purpose of collection as its agent, in this situation the second crossing should indicate that it is serving as an agent of the prior banker, to whom the cheque was specially crossed.
♦Bouncing (Dishonour) of Cheuqes
- This Notice is a Notice which shall be given by the unpaid Creditor (Payee) to the defaulting Debtor (Drawer) through an Advocate in case of dishonour of Cheque under section 138 of Negotiable Instrument Act.
- The Notice here is a sample Legal Notice issued by the Advocate of the Payee specifying a 15 days time given to the Drawer in fault to pay the unpaid Cheque amount. It further specifies that if the amount is not paid within 15 days from the receipt of the Notice, the unpaid Payee has right to file legal complaint and initiate Legal Proceeding against the defaulting Drawer.
Due to following reason, the balance in the customer account is considered not available or application for payment:
- Payment is stopped by the customer
- Death of the Customer
- Garnishee order/ attachment orders from courts and/ or revenue authorities
- Set- off rights to recover debts due to bank from the customer.
When a cheque is returned unpaid by the bank for reasons:
- Insufficient funds
- No Arrangement
- Exceeds arrangement
- Payment stopped
- Refer to drawer
- Closure of account by drawer
Dishonour of a cheque for Insufficiency of funds/exceed arrangement in the Account- Section 138
- The cheque has been presented within 3 months of its validity period.
- A demand for payment is made by notice within 30 days of the return of cheque
- The Drawer fails to make payment within 15 days of receipt of notice
Case Reference in Regards to Dishonor/Bouncing of cheque
- Section 141- Offences by Companies
- Section 143- Summary Trial by Court
- Section 144- Made of service of summons
- Section 145- Evidence on Affidavit
- Section 146- Bank’s slip Prima facie Evidence of certain facts
- Section 147- Offences to Compoundable
♦Endorsement of Cheques
Endorsement means signing at the back of the instrument for the purpose of negotiation. The act of the signing a cheque, for the purpose of transferring to the someone else, is called the endorsement of Cheque. Section 15 of the Negotiable Instrument Act 1881 defines endorsement. The endorsement is usually made on the back of the cheque. If no space is left on the Cheque, the Endorsement may be made on a separate slip to be attached to the Cheque.
♦There are six Kinds of Endorsement
- Endorsement in Blank / General: An endorsement is said to be blank or general when the endorser puts his signature only on the instrument and does not write the name of anyone to whom or to whose order the payment is to be made. (Section 16)
- Endorsement in Full / Special: An endorsement is ‘special’ or in ‘full’ if the endorser, in addition to his signature also mention the name of the person to whom or to whose order the payment is to be made. There is direction added by endorse to the person specified called the endorsee, of the instrument who now becomes its payee entitled to sue for the money due on the instrument. (Section 16)
- Conditional Endorsement: The conditional endorsement is negotiation which takes effect on the happening of a stated event, or not otherwise. Section 52 of the Negotiable Instrument Act 1881 provides – The endorser of a negotiable instrument may, by express words in the endorsement, exclude his own liability thereon, or make such liability or the right of the endorsee to receive the amount due thereon depend upon the happening of a specified event, although such event may never happen.
- Restrictive Endorsement (Section 50): Restrictive endorsement seeks to put an end the principal characteristics of a Negotiable Instrument and seals its further negotiability. This may sound a little unusual, but the endorsee is very much within his rights if he so signs that its subsequent transfer is restricted. This prevents the risk of unauthorized person obtaining payment through fraud or forgery and the drawer losing his money.
- Endorsement Sans Recourse (Without liability Section 52): Sans Recourse which means without recourse or reference. As such a when the property in a negotiable instrument is transferred sans recourse, the endorser, negatives his liability and excludes himself from responsibility to all subsequent endorsees. It is one of the commonest form of qualified endorsement and virtually prohibits negotiation since the endorser says in effect.
- Facultative Endorsement: Faculatative Endorsement is an endorsement where the endorser waives some right to which he is entitled. For example, the endorsee is liable to give notice of dishonor to the endorser and normally failure to give notice will absolve the endorser from his liability.