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GOOD MORNING
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NEGOTIABLE INSTRUMENTS
CHEQUES
The law relating to negotiable instruments is
contained in the Negotiable Instruments Act,
1881.
The word Negotiable means Transferable by
delivery in return for consideration and the
word Instrumentmeans a written document
by which a right is created in favor of someperson.
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Meaning:
NI is a written document which entitles a
person to a sum of money and which is
transferable by mere delivery or by
endorsement and delivery.
Defini t ion:
According to Sec.13 of the NI Act, 1881, A NI
means a promissory note, bill of exchange orcheques payable either to order or the
bearer.
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CHEQUES
Meaning:
It is an instrument in writing, containing an
unconditional order, signed by the customer,
directing his banker, to pay on demand acertain sum of money only to or to the order
of a certain specified person or to the bearer
of the instrument.
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Defini t ion:
According to Sec. 6 of the NI Act, 1881, A
cheques is a bill of exchange drawn on a
specified banker and not expressed to be
payable otherwise than on demand.
It is always drawn on a specified banker.
It is always payable on demand.
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Features:
It must be in writing.
It must always be drawn on a specified
banker.
It must contain an order to pay.
The order must be unconditional.
The order must be to pay money and money
only.
Money paid by the banker must be certain.
On demand.
Signed by the drawer.
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Draw ing o f a Cheques:
Date
Payees name
Amount
Signature
Payable to payee or order or bearer.
Crossing
Alterations
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Part ies to a Cheques:
Drawer
Drawee
Payee
Holder
Endorser
Endorsee
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DrawerIs a person who draws the cheque. He is also
called the customer of the bank.
Drawee
Is always the banker on whom the cheque is
drawn.
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PayeeIs a person named in the cheque to whom the
amount of the cheque is payable.
Holder
Is a person who is entitled in his own name to
the possession of the cheque & who has the
right to receive or recover the amount of the
cheque from the banker.
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Endorser
Is a person who endorses the cheque to
another person to entitle that person to
receive the amount of the cheque.
Endorsee
Is a person to whom the cheque has been
endorsed over by the endorser. He is entitledto receive the amount of the cheque in his
own name.
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Kinds of Cheques:
Bearer Cheques &
Order Cheques. OTHER TYPES - -
Stale or Out-of-date Cheques
Ante Dated Cheques Post Dated Cheques
Lost Cheques
Crossed Cheques
Mutilated Cheques
Marked Cheques
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Bearer Cheques
A cheque payable to a certain specifiedperson or bearer is called a Bearer Cheque.
A bearer cheque is made payable to thebearer i.e. it is payable to the person who
presents it to the bank for encashment. The
language of such a cheque runs thus 'Pay toX or bearer'.
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According to Eric Russell Watson in the book"The Law Relating to Cheques,"
a bearer cheque is paid to its bearer, or the
individual who presents it at the bank. It does
not enclose the name of its payee, or the
entity to whom the check is to be paid. Bearer
checks are commonly paid over the counter
at banks.
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A bearer cheque can be transferred from one
person to another by mere delivery and noendorsement is necessary.
It is payable to anybody who presents it atthe counter, the bank is under liability to
ascertain whether the payment is made to the
right person.
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If a man finds a bearer cheque lying in a
street and gets it encased at the bank, the
latter is liable for wrong payment.
An order cheque when endorsed in blank
becomes a bearer cheque.
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Order Cheques -
An order cheque on the hand is a chequemade payable to a certain person or order.
The language of such a cheque runs thus
'Pay to Mr. X or order Rupees five hundred
only'.
An order cheque can be transferred only by
endorsement and delivery.
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In other words, Order cheque can be defined
as the cheque which is payable only to the
person who is named in cheque or to his or
her endorsee (One to whom ownership of anegotiable document is transferred by
endorsement.)
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In the case of an order cheque, the banker is
required to make proper enquires about the
identity of the person presenting the cheque
for payment.
An order cheque may be converted into a
bearer cheque.
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Stale or Out-of-date Cheques-
Stale cheque refers to those cheques whichare presented to the bank after 6 months
from the date of its original issue.
For example if cheque of 1 January 2009 is
presented on 1 August 2009 it will be treated
as stale cheque and no payment will be
made on it.
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Post Dated Cheques -
Postdated cheque is one which is written bythe maker to pay on a future date.
For example while buying a car if buyer has topay the amount of car in 24 months then he
can issue 24 cheques for the next 24 months
to the supplier of the car and these are called
postdated cheques.
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Ante Dated Cheques
A cheque which bears a date which hasalready passed. An ante-dated cheque does
not become invalid, but if it becomes stale, it
will be returned unpaid.
Lost Cheques -
When a holder of a cheque loses his cheque,
he can comple the drawer to issue himanother cheque.
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Crossed Cheques
It is a cheque on which two transverse or
straight parallel lines are drawn on its face at
the left-top side of the cheque.
The holder of a crossed cheque has to deposit
it in his bank account or to the bank account
of another person in order to collect theamount of the cheque.
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Mutilated Cheques
It is a cheque which has been torn into two or
more pieces.
Such a cheque, when presented for payment,
is not honoured by the banker but is returned
unpaid with the remarks that the cheque is
mutilated.
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CROSSING OF CHEQUES
Crossing:
It means drawing across the face of the
cheques two transverse parallel lines with or
with out words & co. or Not Negotiable or
A/c Payee between the parallel transverselines.
Crossing may be written or stamped or printed.
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Crossed Cheque
It is one on which two parallel transverse lines
with or without the words & Co are drawn
across the face of the cheque.
A crossed cheque is always payable only
through a banker and not directly in cash on
the counter of the bank.
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It is a direction to the paying (or drawee)
banker to pay the amount of the crossed
cheque through a banker so that the party
who obtains the payment can be easilytraced.
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Objects of Crossing:
It affords security and protection to the true
owner of a cheque.
It is a direction to the paying banker to pay
the amount of the crossed cheque through a
banker so that the party who obt ains thepayment can be easily traced.
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Cheques are crossed in order to avoid losses
arising from open cheques falling into the
hands of wrong persons.
Crossing of a cheque does not affect itsnegotiability.
Sections 123 to 131 of the NI Act contain
provisions relating to crossing.
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Types:
General Crossing
Special Crossing.General Crossing
According to sec. 123Where a cheques
bears across its face an addition of the wordsand company or any abbreviation thereofbetween two parallel transverse lines, or twoparallel transverse lines simply, either with or
without the words not negotiable, thataddition shall be deemed a crossing, and thecheques shall be deemed to be crossedgenerally.
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It may be noted from the above definition that
the lines must be
On the face of the cheque
Parallel to each other and
In cross direction i.e. transverse.
Inclusion of the words is immaterial.
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Special Crossing
According to sec. 124Where a cheques
bears across its face an addition of the name
of a banker, either with or without the wordsnot negotiable, that addition shall be
deemed a crossing, and the cheque shall be
deemed to be crossed specially, and to becrossed to that banker.
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Thus,
The addition of the name of a banker across
the face of a cheque constitute special
crossing.
Transverse parallel lines are not necessary in
case of special crossing.
The payment of a specially crossed cheque
can be obtained only through the particularbanker whose name appears in the crossing.
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What Does Not Constitute Crossing? A cheque bears the words Not Negotiable or
Account payee without two paralleltransverse lines or the name of any bank.
If the cheque bears single line across its face
or simply an X mark, the cheque is not
deemed as a crossed cheque.
The inclusion of any other word/words within
the two parallel lines is irrelevant and the
cheque is still deemed to be crossed cheque.
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Double Crossing
When a cheque bears two separate special
crossing, it is called double crossing and the
cheque is said to have been doubly crossed.
Here the cheque is crossed specially to more
than one banker.
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Important Points:
Generally a cheque cannot have double
crossing.
The payment of the double crossed chequesis prohibited by section 127 of the NI Act
1881.
The paying banker should not honor such acheque.
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However as per section 127
A paying banker shall pay a cheque doublycrossed only when
The second banker is acting as the agent of
the first collecting banker and this has beenmade clear on the instrument.
Where the banker in whose favour the
cheque has been specially crossed does nothave a branch at the place where the cheque
is to paid.
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Cancelled or opened only by a drawer of a
cheque.
He can cancel by writing the words crossing
cancelled, pay cash and by putting his fullsignature at that place.
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Who May Cross Cheques?
According to section 125 of NI Act 1881
By the Drawer generally or specially.
By the Holder generally or specially;
crossed generally, he may cross it specially;
crossed generally or specially, he may add
the words.
By the Banker crossed specially to the
banker to whom it is crossed, he may againcross it specially to another banker as his
agent for collection.
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MARKING OF A CHEQUE
It means making of a remark by the paying
banker on the cheque testifying to theadequacy of funds to the credit of the drawer
to meet the cheque.
The paying banker while marking a cheque,
simply initials the cheque or writes the words
marked good for payment on the face of the
cheque and initials under the seal of the
bank.
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It is method under which the paying banker
indicates on the cheque, either by initialing
the cheque or by writing the words marked
good for payment and initialing it, that thecheque is drawn by the drawer in good faith
and against sufficient funds in his account.
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Effects of Marking:
It indicates that the cheque is drawn by the
drawer in good faith and against adequatefunds to his credit.
It gives an enhanced status to the draweescheque by adding to the credit of the drawer
the credit of the banker marking the cheque.
It gives additional currency to the cheque.
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Who Can Get The Cheque Marked By The
Banker?At the request of the Drawer
Cheque is drawn by the drawer in good faithand against sufficient funds in his account.
Imposes an obligation on the paying banker
to honour that cheque when presented for
payment.
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It must be paid even if the drawer expires or
becomes insane or insolvent or even if the
banker receives the garnishee order against
the customer.
It confers on the paying banker the right to
set aside sufficient funds from the drawersaccount to honour the cheque so marked.
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The drawer cannot countermand or stop the
payment of the marked cheque.
In case the drawer countermands thepayment, he will be liable to indemnify
(protect/insure) the paying banker for any
loss.
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MATERIAL ALTERATION
A material alteration is one
Which changes the business effect of a
cheque or
Which causes the cheque to speak a
language different from what it originally
spoke or
Which substantially changes the rights and
liabilities of all the parties or any of the parties
to the cheuqe or
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Which changes the identity or the legal
character of the cheque.
In short
A material alteration is an alteration whichalters i.e. changes materially or substantially
the operation of a cheque, and thereby, the
rights and liabilities of the parties thereto.
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Alterations that amounts to a Material
Alteration-
To deem an alteration a material one
It must affect the fundamental character ofthe instrument.
It must substantially change the rights and
liabilities of the parties to the instrument. It should change the legal character if the
document.
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It should speak a different language from
what it spoke originally.
It must have taken place without the
knowledge of the drawer. It must have taken place after the cheque has
been issued.
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Examples of MA:
As per banking customs Alteration of the date.
Alteration of the sum payable.
Alteration of the place of payment. Alteration of the name of the payee.
Changing an order cheque into a bearer
cheque by substituting the words. Cancellation of the crossing on a cheque etc.
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Effect of MA:
A cheque which contains a MA cannot be
regarded as a cheque (under sec.87 of NI
Act)
However, such a cheque becomes valid if the
MA is confirmed by the drawer under his full
signature.
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Alterations Which are not MA:
Changing a bearer cheque into an ordercheque.
Changing an open or uncrossed cheque into
a crossed cheque. Changing a generally crossed cheque into a
specially crossed cheque.
Completing an inchoate i.e an incomplete
cheque by filling up the blanks.
Adding the words.
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Protection Against Fraudulent Alterations:
By the Banker Cheques prepared by good quality security
papers.
Use of ultraviolet lamps. By the Customers
No blank space left.
They also add the words -under rupees.only in the crossing.
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THANK YOU