BANKING THEORY AND PRACTICE

Seminar by:• Adithya BR• Balakrishna Kini• Dhanush Urs• Ganesh Kuruvadi• Iliyaz Ahamed

2nd Sem B.Com ‘C’, SBRR MFGC, Mysore.

SEMINAR ON“CHEQUES”

03/04/2013

CONTENTS 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

MEANING AND DEFINITION

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”.

MEANING AND DEFINITION 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 truncated cheque and also a cheque in electronic form. In other words, "Cheque is an instrument in writing containing an unconditional order, addressed to a banker, sign by the person who has deposited money with the banker, requiring him to pay on demand a certain sum of money only to or to the order of certain person or to the bearer of instrument."

SPECIMEN OF A CHEQUE

ESSENTIALS OF A CHEQUEThe 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.

TYPES OF CHEQUES

Different types of cheques are: Bearer Cheque Order Cheque Uncrossed/Open Cheque Crossed Cheque Anti-Dated Cheque Post-Dated Cheque Stale Cheque

TYPES OF CHEQUES 1. Bearer ChequeWhen the words "or bearer" appearing on the face of the cheque are not cancelled, the cheque is called a bearer cheque. The bearer cheque is payable to the person specified therein or to any other else who presents it to the bank for payment. However, such cheques are risky, this is because if such cheques are lost, the finder of the cheque can collect payment from the bank.

TYPES OF CHEQUES 2. Order ChequeWhen the word "bearer" appearing on the face of a cheque is cancelled and when in its place the word "or order" is written on the face of the cheque, the cheque is called an order cheque. Such a cheque is payable to the person specified therein as the payee, or to any one else to whom it is endorsed (transferred).

TYPES OF CHEQUES 3. Uncrossed / Open ChequeWhen a cheque is not crossed, it is known as an "Open Cheque" or an "Uncrossed Cheque". The payment of such a cheque can be obtained at the counter of the bank. An open cheque may be a bearer cheque or an order one.

TYPES OF CHEQUES 4. Crossed ChequeCrossing of cheque means drawing two parallel lines on the face of the cheque with or without additional words like "& CO." or "Account Payee" or "Not Negotiable". A crossed cheque cannot be encashed at the cash counter of a bank but it can only be credited to the payee's account.

TYPES OF CHEQUES 5. Anti-Dated ChequeIf a cheque bears a date earlier than the date on which it is presented to the bank, it is called as "anti-dated cheque". Such a cheque is valid upto three months from the date of the cheque.

TYPES OF CHEQUES 6. Post-Dated ChequeIf a cheque bears a date which is yet to come (future date) then it is known as post-dated cheque. A post dated cheque cannot be honoured earlier than the date on the cheque. 7. Stale ChequeIf a cheque is presented for payment after six months from the date of the cheque it is called stale cheque. A stale cheque is not honoured by the bank.

ENDORSEMENT OF CHEQUES 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.

ENDORSEMENT OF CHEQUESKinds 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

ENDORSEMENT OF CHEQUES Blank EndorsementIt is an endorsement in which the endorser merely signs his name on the back of the instrument without mentioning the name on the back of the instrument without mentioning the name of the person to whom the instrument is endorsed.  Special Enorsement It is an endorsement in which the endorser writes not only his name, but also the name of the person to whom the instrument is endorsed on the back of the instrument.

ENDORSEMENT OF CHEQUES Restrictive EnorsementA restrictive endorsement is one which, limits the further negotiation of an instrument. The endorsee in such cases, cannot further endorse it. Generally, the word ‘only’ is added after the endorsee’s name. Sans Recourse EndorsementIt is an endorsement which limits the liability of the endorser. The effect of this endorsement is, to render the endorser free from all liability to any subsequent holder.

ENDORSEMENT OF CHEQUES Conditional EndorsementIt is an endorsement in which the endorser makes his liability on the instrument or the right of the endorsee to receive the payment of the instrument depend upon the happening of a specified event. Faculative EndorsementIt is an endorsement whereby , the endorser waives 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 no one should incur any expense on his account in respect of the negotiable instrument.

PAYING BANKER Meaning:The banker on whom the cheque Is drawn or the banker who is required to pay the cheque drawn on him by a customer is called the Paying Banker or Drawee Banker.

PAYING 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.

PAYING BANKER6. 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.

PROTECTION TO PAYING BANKER The paying 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 TO PAYING BANKER 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.

DISHONOUR OF CHEQUES 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 can be 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.

DISHONOUR OF CHEQUES4. 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.

DISHONOUR OF CHEQUES8. 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.

DISHONOUR OF CHEQUES16. 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.

STATEMENT OF REASONS FOR DISHONOUR 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

STATEMENT OF REASONS FOR DISHONOUR 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

COLLECTING BANKER 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 be collected.

Then, he presents that cheque to the drawee or paying banker either through clearing or thrrough post for payment.

If the cheque presented to the paying banker is honoured or realised, he credits the amount realised to his customer’s account, and informs the customer about it.

If the checque is dishonoured, he gives notice to his customer about the dishonour of the cheque.

COLLECTING BANKERLegal Status of a collecting banker: Collecting Banker as a Holder for Value: A Collecting banker becomes a holder for value, if he has paid the value of the cheque to the customer before the cheque is actually collected. In other words, a collecting banker becomes a holder for value, when he collects his customer’s cheque for himself, and not for the customer. Collecting Banker as an Agent of His

Customer: A Collecting banker collects a cheque as an agent of his customer, he has no rights of his own. His rights or tilte to the cheque will be the same as that of the customer. If his customer has a good title to the cheque, he too will have a good title to the cheque.

PROTECTION TO COLLECTING BANKER 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, received payment for a customer, of a cheque crossed generally or specially to himself, shall not, in case the tilte to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment.”

It means, “A banker recieves payment of a crossed cheque for a customer within the meaning of this section not withstanding that he credits his customer’s account with the amount of the cheque before receiving the payment thereof”.

PROTECTION TO COLLECTING BANKER 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 customer

4. This protection can be claimed only if the collecting banker has collected the cheque in good faith and without negligence.

PROTECTION TO COLLECTING BANKER Protection in respect of Bank Drafts:Section 131A of the Negotiable Instruments Act of 1981 gives protection to the collecting banker in respect of a draft, bearing a forged endorsement or in respect of a draft to which the customer has no title or defective title. The protection given under Section 131A can be claimed by the banker only if all the conditions 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 and bank drafts under Section 131 and 131A of the Negotiable Instruments Act, 1881 is not extended to the bills of exchange. The reason for this is simple. Unlike cheques and bank drafts, bills of exchange are not crossed. As bills of exchange are not crossed, there isno obligation on the part of a collecting banker to undertake the work of collection of bills on behalf of customers. As the the collecting banker is not charged with the responsibility of collecting bills for customers, he is not given the statutory protection provided under the Act.

THANK YOU! We would like to thank our lecturer Mr

Karun Sharma for the guidance and support!

The soft copy of this presentation is available at www.chintana.in/btpnotes.

SOCIAL MESSAGE We would like to use this oppurtunity to

convey social message.

“If you are eligible, Please Cast your vote in the

elections!”