Payment and Collection of Cheques and Other Negotiable Instruments – CS Professional Study Material

Chapter 7 Payment and Collection of Cheques and Other Negotiable Instruments – CS Professional Banking Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Payment and Collection of Cheques and Other Negotiable Instruments – CS Professional Banking Law and Practice Study Material

Question 1.
Distinguish between ‘demand bill’ and ‘usance bill’. (Dec 2009, 3 marks)
Answer:
‘Demand bill’ and ‘Usance bill’

  1. A demand bill is due for payment immediately after presentation whereas a usance bill is due for payment after a certain specified period of time.
  2. A demand bill does not attract stamp duty, whereas the usance bill attracts stamp duty.
  3. Bank normally purchases demand bill whereas usance bill is discounted.
  4. A demand bill does not require acceptance whereas a usance bill has to be accepted.
  5. Days of grace are not allowed in case of demand bill as demand bill is payable immediately on the date of presentation. In case of usance bill three days of grace are allowed unless it is specifically disallowed.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Question 2.
Attempt the following:
What is ‘cheque truncation’ ? What type of cheques can be presented in the cheque truncation system? (June 2009, 5 marks)
Answer:
Cheque truncation:
Cheque truncation is the process of stopping the flow of the physical cheque issued by a drawer to the drawee branch. An electronic image of the cheque is sent to the drawee branch along with the relevant information like the MICR fields, date of presentment, presenting branch, etc. This reduces the time required for payment of cheques, the associated cost of transit and delay in processing etc.

All the local cheques can be presented in the cheque truncation system. Banks may also present cheques on banks situated outside the NCR as many banks have branches in the NCR region.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Question 3.
Attempt the following:
Explain the significance of endorsements. (June 2009, 5 marks)
Answer:
Significance of endorsements
Endorsement of a cheque refers to the signature, instructions, etc., placed on the reverse of the cheque, for the purpose of assigning the interest therein to another.
(a) Blank Endorsement: Specifies on endorsee and as such the cheque is payable to the bearer.
(b) Special Endorsement: Endorsee adds a direction to pay the amount to the order of a certain person.
(c) Restrictive Endorsement: This limits the further endorsement on the instrument.
(d) Conditional Endorsement: This limits the liability of the endorsee or creates some liability to the endorsee to receive payment.
(e) Endorsement Sans Recourse: The endorsee can endorse the instrument in such a manner as to escape his liability.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Question 4.
Attempt the following:
Discuss the effects of ‘account payee’ crossing and ‘not negotiable’ crossing of a cheque. (Dec 2009, 5 marks)
Answer:
‘Account payee’ crossing and ‘not negotiable’ crossing
Account payee crossed cheques can be collected only to the account of the payee and not to any other person. So the cheque cannot be negotiated further.

Not negotiable crossing gives protection to the true owner of the cheque by preserving the right against any subsequent holder. The transferee should know the previous endorsees and their title to the cheque.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Question 5.
“For a cheque payable to order purport to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course.” Commitment. (Dec 2009, 3 marks)
Answer:
For a cheque payable to order purport to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course.”
The statement is correct. Two conditions must be fulfilled to avail of such protection:
(i) Endorsement must be regular: Section 85(1) provides protection against the risk involved in the payment of cheques which bear endorsements. But it is essential that the endorsements are regular though not necessarily genuine or valid.

(ii) Payment must be made in due course: Section 10 defines a payment in due course as 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 mentioned therein. It is therefore essential that the banker pays the cheque in good faith and without negligence, otherwise statutory protection cannot be granted to the paying banker.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Question 6.
A cheque is an instrument used for almost all banking transactions. Explain the different type of cheques along with their legal implications. Also explain the legal provisions which allow the cheque to be transferred. (Dec 2014, 10 marks)
Answer:
A cheque gets its legal status under the Negotiable Instruments Act (NIA). Section 6 of the Act defines a cheque as:

  1. A bill of exchange;
  2. Drawn on a specified banker; and
  3. Payable on demand.

Under the Information Technology Act 2000, a truncated cheque (i.e the scanned image of the cheque) is recognized by law. Further an electronic instruction which is digitally signed or electronic transfer instructions which replace a cheque are also considered as valid.

The parties to the cheque are:

  1. Drawer: A customer who draws the cheque or writes/signs the cheque.
  2. The Drawee: Since the cheque is an order on the banker where the customer holds an account, the Banker on whom the cheque is drawn is the Drawee.
  3. Payee: He is the beneficiary of the cheque and the person to whom the drawer intends to make payment.
  4. Endorser: A person who has a right to the cheque and transfers this right to another person. He can be the drawer or any person (endorsee) to whom the cheque is transferred.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Cheques are classified into different categories based on the intent of the drawer. They are:
1. Open Cheque: It is a cheque which can be encashed over the counter. Usually such cheques are drawn on ‘self’, further the word “bearer” printed on the cheque has not been cancelled.

2. Crossed cheque: A crossed cheque is an order cheque which has further restrictions attached to it. This is done by putting 2 lines across the cheque (called crossing) or by writing certain words on the cheque. The restriction mentioned above will depend on the type of crossing.

Under simple crossing, 2 lines are drawn across the cheque and cheque is similar to an order cheque while under General Crossing, cheque has words like “and Company” or any such variations or words such as “not negotiable” and cheque can only be credited to the account of the payee or the endorsee of a valid endorsement.

3. Bearer Cheques: An open cheque or a cheque that is payable across the counter but has the name of the person to whom the drawer intends to make payment is a Bearer cheque.

4. Order Cheque: It is a cheque on which the word “Bearer” has been cancelled. The effect of such cancellation is that the cheque cannot be paid across the counter and has to be credited to a bank account. The payee whose name is written on the cheque can transfer the same at was payable to him or to any person to whom he has “ordered” the payment to be made.

5. Account Payee Cheques: This type of crossing is in practice in India only. Since the NIA was framed from the English law on the subject, the Indian NIA has no reference to this type of crossing. Thus, in order to standardize the practices adopted by the banks RBI has come out with directives on the subject.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

The NIA defines the rules for endorsement of all negotiable instruments. Thus, they become applicable to cheques also. Section 15 defines an endorsement as “when the maker or holder of a negotiable instrument signs the same, other than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto or signs for the same purpose a stamp paper intended to be completed as a negotiable instrument, he is said to have endorsed the same and is called endorser”. From the above it can be seen that a valid endorsement should have the following features:

  1. Can be made by the maker (drawer) or the holder;
  2. The maker or the holder must sign thereon;
  3. The intent of the maker or holder must be to negotiate the cheque;
  4. The signature or the written can be done on the face of the cheque or on the reverse or on a separate sheet of paper attached to the cheque (known as allonge) or on a stamp paper mentioning the negotiation;
  5. The person who signs the endorsement is called the endorser & the person in who’s favor the cheque is transferred is called the endorsee.

The important provisions of the NIA pertaining to endorsements are:
1. Effects of endorsements: Under Section 50 an endorsement of a cheque of a delivery transfers the ownerships as well as the right to negotiate Thus, the endorsee acquires the ownership & right of the cheque of the holder and can negotiate further if such a right is not restricted.

2. Endorser: An endorser can be the sole maker, drawer, payee or endorsee or all or some of them jointly. However this is subject to the restriction on the right to negotiate specified by the drawer or subsequent endorsees. (Section 51) The restriction should be specific and mentioned on the cheque and cannot be implied.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

3. Time: Section 60 of the NIA specifies that a negotiation can be done until payment has been made by the banker, drawer or acceptor at or after maturity but not thereafter. Since the possession of the cheque is essential for valid endorsement this rule which is applicable to other negotiable instruments, would not be applicable to cheques.

4. Endorsement of part amount: Section 56 provides that a endorsement made for part of the amount due is not a valid endorsement. However a bill of exchange or a promissory note or any other instrument is paid in part, the unpaid portion of the instrument can be negotiated further. However, this would not be applicable to a cheque as it cannot be paid in part.

5. Joint endorsement: An endorsement to two or more parties jointly is valid. However an endorsement intending to transfer the instrument separately is not valid.

6. If the endorsee is deceased all further negotiation are stopped as the heirs of a deceased person cannot endorse the same (Section 57). Similarly if the endorser dies after making the endorsement but before delivering the instrument to the endorsee, the legal representatives are barred from completion of the negotiation.

7. Order of endorsement Section 118 Provides that it is presumed that the endorsements appearing on the “instruments are made in the order they appear on the instruments. For this purpose the date mentioned on the endorsements would be considered. In case the date is not mentioned, the order in which they appear on the instrument would be considered.

8. Signature of the Endorser: An endorsement must be signed by the person making the endorsement or a person duly authorized to endorse on his behalf. If the cheque is payable to two persons both must sign the endorsement. Endorsees shall spell his name as it appears on the endorsement.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Question 7.
(i) Banks freely negotiate cheques drawn by public i.e., individuals, firms, companies, etc. and not negotiate cheques issued by Government departments. Explain. (June 2015) (4 marks)
(ii) Can an instrument be endorsed for the partial amount? Explain. (4 marks)
Answer:
(i) The cheques issued by public are negotiable instruments as per Negotiable Instrument Act, 1881, whereas the cheques issued by the Government Departments are not covered under Negotiable Instrument Act, 1881. Thus, negotiability of private cheques by the banks covers the bank’s rights to claim the amount from the drawer or endorsers as holders for value which is not in the case of the cheques issued by the Government Departments.

(ii) As per the provision of Section 56 of the Negotiable Instruments Act, 1881, no writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to transfer only a part of the amount appearing to be due on the instrument. So, the instrument is to be endorsed for the full amount and it cannot be endorsed for the partial amount.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Question 8.
Dishonour of a cheque is a criminal offence. Explain the relevant sections/provisions of Negotiable Instrument Act, 1881. (Dec 2020, 6 marks)
Answer:
Under section 138 of the Negotiable Instrument Act, 1881, dishonour of a cheque is a criminal offence liable to be punished with 2 year’s imprisonment or with the fine up to twice the amount of the cheque or both. The following are required to be satisfied to make the dishonour an offence under the provisions of the Nl Act, 1881:

  1. Existence of a legally enforceable debt or other liability by the drawer of the cheque towards another person (will be payee or holder of the cheque, as the case may be) and a cheque is drawn to discharge the debt or liability.
  2. Cheque is returned due to insufficient funds or exceeds the amount agreed upon to be paid by the bank. Cheque should be presented within its validity (i.e. 3 months from the date of issue),
  3. Notice in writing is sent within 30 days to the drawer along with the receipt of information form bank about failure of payment of cheque.
  4. The payee or holder does not receive the payment within 15 days of the receipt of the notice to the drawer.
  5. The complaint to be made within one month from the cause of action arising.
  6. Only payee or holder can lodge a complaint.
  7. The offence will be tried in Metropolitan magistrate court or judicial Magistrate of 1st class court.

Cheques issued towards payment of debt will only attract the provisions of Section 138 of the NI Act, 1881. Cheque given for donation or post dated cheques for security purposes or undated cheques will not be covered under this section.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Question 9.
Explain the following statement in brief on the point of reasoning :
‘Not Negotiable” Crossing does not mean “Not Transferable”. (Dec 2021, 1 mark)
Answer:

  • As per Negotiable Instruments Act, 1881, a Not Negotiable Crossing does not restrict the transferability o.f any instrument.
  • It means the holder does not get a better title than the transferor.

Question 10.
(i) “Payment in due course is one made in accordance with the apparent tenor of the instrument that is according to what appears on the face of the instrument to be intention of the parties”. Explain the conditions to qualify before the payment made to the customer by the Bank. (Dec 2021) (3 marks)
(ii) What are the duties of a Collecting Banker ? (3 marks)
Answer:
(i) In order to qualify as payment in due course, the payment will have to comply with the following:

  • There are sufficient funds in the account.
  • Funds are meant for payment of such cheque.
  • There is proper demand to make the payment.
  • Payment should be made to the person entitled to the payment as well as who is in possession of the instrument.
  • It should not be made before the due date.
  • It should not be made with the knowledge that it may impair the rights of the holder to receive moneys or under reasonable grounds for believing that the holder in due course is not entitled to receive payment and
  • The payment should be made in good faith and without negligence under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

(ii) The collecting banker is a banker who collects cheques drawn upon other bankers for and on behalf of his customer. He is called the collecting banker as he undertakes the work of collection of Cheques.

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 already collected.

As an agent: A collecting banker acts as an agent of the customer on crediting the account of the customer only after realizing the payment from the paying banker (drawee bank).

Duties and Responsibilities of a Collecting Banker:

  • Banker must take at most care while presenting the cheque for collection.
  • Collecting banker must present the cheque within reasonable time.
  • Serve Notice to /inform customer in case of dishonour of cheque.
  • The banker has to credit the proceeds of the cheque to the account of the customer.
  • Should undertake the collection of cheque only for customer and not for stranger.
  • Must receive the payment as an agent of the customer.
  • Cheque must be crossed to get the protection of Section 131 of Negotiable Instruments Act, 1881.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Question 11.
Answer briefly the following question:
What is the concept of ‘Legal Entity Identifier’ for Large Value Transactions in Centralised Payment Systems? (June 2022, 2 marks)

Question 12.
CTS brings elegance to the entire activity of cheque processing and clearing. How ? (June 2022, 4 marks)

Question 13.
What is the Positive Pay System for large value cheques? State briefly the procedure for its functioning. (June 2022, 4 marks)

Question 14.
Attempt the following:
Nav Bharat Fertilizers Ltd. (NBFL) has been enjoying temporary overdraft facility upto ₹ 5,00,000 with Kuber Bank for five years. No documents were executed nor nay security was furnished. The bank unilaterally, without notice, terminated the overdraft facility and a cheque drawn by NBFL was dishonoured on the grounds of insufficient balance in the account. NBFL claimed damages for wrongful dishonour of the cheque. Discuss the legal position in this case. (Dec 2007, 4 marks)
Answer:
If the overdraft facility has been communicated to the customer as a sanctioned limit, customer has a right to claim damages for wrongful dishonour of the cheque. However, if the overdraft has been granted as discretionary, bank is justified in denying continuance of the overdraft as each transaction of overdraft is a discretionary choice of the bank, and the bank in such circumstances shall not be liable for any damages claimed by the customer.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Question 15.
(a) A customer of your bank, who maintains term deposit of ₹ 100 crore, requests you to pay a cheque of ₹ 1,000 crossed in his favour, in cash across the counter. Will you pay this cheque? Give reasons for your answer. (June 2008) (4 marks)
(b) An officer of Sunder bank Ltd. passed a cheque for ₹ 5 lakh from the account of a partnership firm by overdrawing its account with ₹ 10,000. On scrutiny, it is observed that there was a credit balance of ₹ 50,000 in savings bank account of Raman, a partner in the said partnership firm. Whether the bank can exercise the option of setting-off debit balance in the account of partnership firm against credit balance in Raman’s savings bank account? (4 marks)
Answer :
(a) Crossed cheque should only be paid through clearing and it cannot be paid over the counter in cash. However, looking at the amount of deposit (₹ 100 crore) being maintained by the customer and the amount of the cheque ₹ 1000/- only. The Bank may take the risk and may take the decision of paying the cheque in cash, if the customer is very adamant. The Bank will not get any protection under Negotiable Instruments Act, 1881, if the cheque is found to be defective.

(b) Yes, the right of set-off can be exercised in this case, as the partners are jointly and severally liable for the debt raised by the partnership firm.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Question 16.
Bhumika received a cheque of ₹ 51,000 as a gift from Vivek. Later on, the cheque was dishonoured. State whether Bhumika can bring an action against Vivek for dishonour of the cheque. (June 2009, 4 marks)
Answer :
No action can be taken under Section 138 of the Negotiable Instruments Act for the dishonour of a cheque that was received as a gift. The payee cannot bring an action under Section 138 for the dishonour of the cheque received by him as a gift.

The provisions of the section apply only when the cheque which is dishonoured was issued for the payment of a debt or any other liability which is legally due. Hence Bhumika cannot bring an action against Vivek for dishonour of the cheque.

Question 17.
Neelima opened a savings bank account with Dhan Bank. She was handed over a copy of rules and regulations for operating the account. It provided that the cheque book should be kept under lock and key and for loss, if any, arising from not complying with requirement, the bank will not be responsible.

Neelima kept the cheque book in drawer and one of her office colleagues took off one cheque leaf and by forging her signature withdrew ₹ 2 lakh from the bank. She claimed refund of this amount from the bank. Bank refused to pay stating that the loss has been caused due to negligence on part of the customer. She has filed an appeal against the bank.

Give your decision on the case with reasons. (Dec 2016, 5 marks)
Answer:
In general, if someone forges a signature on a cheque, the person whose signature was forged is not bound to honor the cheque and their bank does not have to pay it. A cheque with a forged signature is simply a worthless piece of paper – a “nullity”.

In this given case, if Dhan bank pays out on the basis of a forged signature on a cheque, it does so without Neelima’s mandate and is required to make good any loss that the payment causes Neelima. It does not matter how good the forgery is; a skillful forgery is no more valid than a crude one. Dhan Bank is liable for payment of a forged cheque and will have to restore the amount to the credit of the account.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Question 18.
Vinayak maintains an account with the bank. A Court attachment order for ₹ 10,000 on the account is received. State the action that will be taken in the following situations:
(i) Vinayak also maintains a joint account with Geetha (his wife) and the Credit Balance in the account is ₹ 1,000.
(ii) Vinayak has tendered ₹ 5,000 for purchase of a draft.
(iii) A credit voucher for ₹ 3,000 being collection of cheque realized has been released.
(iv) Vinayak’s current account has been overdrawn by ₹ 2,500.
(v) Vinayak has tendered a clearing cheque for ₹ 2,000 which will be
presented in clearing on next day. (June 2018, 1 mark each = 5 marks)
Answer:
(i) As the attachment order is in the sole name of Vinayak, the joint account is not attached.

(ii) Only debts ‘owing and accruing due’ to the judgement debtor at the hands of the Bank are attached by a Garnishee order. The amount tendered for purchase of a draft is entrusted for a specific purpose, and therefore, cannot be considered a debt; hence it is not attachable.

(iii) If at the time of the receipt of the Garnishee Order, the proceeds of the cheque sent for collection have been realized, this amount would also have to be included in the balance.

(iv) In the instant case, as no amount is owed to Vinayak, the account is not attached.

(v) The clearing cheque will be presented in clearing only the next day, and, therefore, it is a future credit. Thus, is not attached.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Question 19.
Read the case below carefully and answer the questions given at the end: (Dec 2020)

A Negotiable Instrument (Nl) means a promissory note, bill of exchange or cheque payable either to order or to bearer. Negotiable Instrument may be made payable to two or more payees jointly, or in the alternative to one of the two, or one or some of several payees.
A Promissory Note is an instrument in writing containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.

A Bill of Exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument.

A Cheque is 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. The maker of a bill of exchange or cheque is called the drawer, the person thereby directed to pay is called drawee, when in the bill or in any endorsement there on the name of any person is given in addition to the drawee to be resorted to in case of need after the drawee of a bill has signed his assent upon the bill, or if there are more parts thereof than one, one of such parts and delivered the same, or given notice of such. Signing to the holder or to some person on his behalf, he is called the acceptor. The person name in the instrument, to whom or to whose order the money is to be paid is called payee.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

The ‘holder’ of Negotiable Instrument means any person entitled in his own name to possession thereof and to receive or recover the amount due thereon from the parties thereto. The ‘Holder in due course’ mean any person who for consideration became the possessor of Negotiable Instrument, if payable to bearer or the payee or endorsee thereof if payable to order, before the amount mentioned in it became payable and without having sufficient cause to believe his title of the person from whom he derived his title.

When banker dishonour a cheque of a customer, appropriate reason in writing, duly signed by its official must be given. Such cheque may either be returned across the counter or through clearing.

(a) What are the Negotiable Instruments in the banking? Explain types and presumptions of Negotiable Instruments. (10 marks)
(b) Define holder and holder in due course with their rights. Explain difference between them. (10 marks)
(c) Mr. Kunal draws a bill of exchange on ABC Ltd. in consideration of sale
of goods of ₹ 1,00,000 directing to pay on demand to M/s Bhagwan Das Ramlal. From above Bill of Exchange explain who is drawee, drawer and payee. Define the parties to a bill of exchange. (10 marks)
(d) X has issued a cheque of ₹ 1,00,000 in favour of Y, but when Y deposited the cheque in bank, it gets bounced. What are the common reasons behind the bouncing of a cheque? (10 marks)
Answer.
(a) Negotiable Instruments (Nl) has not been defined directly in the Nl Act, 1881 but as per Section 13, a Nl means and includes A Promissory Note, A Bill of Exchange, and A Cheque payable to order or Bearer. In this regard the following are the forms of Negotiable Instruments:

  • Promissory Note (PN) is an instrument in writing, containing an unconditional undertaking (or promise), signed by the maker, to pay a certain sum of money, to or to the order of a certain person or to the bearer of the instrument.
  • Bill of Exchange (BOE) is an instrument in writing, containing an unconditional order, signed by maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.
  • Cheque is a bill of exchange drawn on a specified bank and not expressed to be payable otherwise than on demand. It includes electronic image of a truncated cheque and also an electronic cheque.
  • Though directly not defined under Section 13 of the Nl Act, 1881, Demand Drafts are also considered for practical purposes included as a part of Negotiable Instruments by virtue of Section 85(A) and Section 131 (A) of the Nl Act, 1881.

It is to be noted that as per section 21 of the Indian Currency Act, 1861, a Currency Note is not a negotiable instrument.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Negotiable instruments under section 137 of the Transfer of Property Act, 1882, documents of title to goods such as Bill of lading, Dock warrant, GRs approved by IBA, Railway Receipts, Warehouse Receipt, Wharfinger Certificate. All the above examples are also the document of title to goods under Sale of Goods Act, 1930.

Presumption with regards to Negotiable Instruments:
Section 118 of the NI Act, 1881 provides certain presumptions regarding to NIS, until the contrary is provided:

  1. Nl was made, drawn, accepted, endorsed and negotiated or transferred for consideration.
  2. It bears the date on which it was made or drawn.
  3. It was accepted within a reasonable time after it’s date and before maturity.
  4. Every transfer of Nl was made before maturity.
  5. Endorsements appearing on NI were made in the order in which they appear thereon.
  6. It was duly stamped and stamp duly cancelled, when the Nl stands lost.
  7. Holder is holder in due course.

The burden of proof that the instrument is contrary to all/any of the above presumptions is with the person who challenges such presumptions.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

(b) Holder: As per section 8 of the Negotiable Instrument Act, 1881 the holder is a person who is entitled in his own name to the possession thereof (legal right to possess is also sufficient), to receive or recover the amount due thereon from the parties thereto. Finder of an instrument lying somewhere or a thief, cannot become holder by mere possession. Consideration is not compulsory to become a holder.

Rights of a holder

  1. He can obtain a duplicate of the lost instrument.
  2. He can cross the cheque if not already crossed, convert a general crossing to a special crossing and endorse and can negotiate, if the negotiation is not restricted.
  3. He can sue in his own name in relation to the instrument.
  4. He can complete an inchoate instrument.
  5. He can give proper discharge to the person making the payment.

Holder in due course: As per section 9 of the Negotiable Instrument Act, 1881 a holder in due course is a person (a bearer or endorsee or a payee) who must have instrument ih his possession. He must obtain possession of it for valuable and lawful consideration before its maturity. He must obtain it in good faith without any sufficient reason to believe that any defect existed in the title of the person from whom he obtained it. He gets a defect free title even when the transferor had defective title, provided transferee has no notice of defect in title of the transferor.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Right of Holder in due course

  1. If any inchoate/incomplete instrument has been handed over for a sum greater than what it was intended by maker, the maker cannot challenge the right of holder in due course to recover the amount mentioned.
  2. If a bill is drawn payable to the drawer’s order in a fictitious name, the acceptor is not relieved from liability to any holder in due course, provided endorsement and the drawer’s signatures are in the same handwriting.
  3. A person, liable on a Nl, cannot be relieved from his liability towards the holder in due course on the ground that the bill was lost or obtained by fraud or for unlawful consideration.
  4. Every prior party to a Nl is liable thereon to a holder in due course until the instrument is duly satisfied.

Difference between the holder and holder in due course:

Transaction Holder Holder and holder in due course
Right of Possession Compulsory Compulsory
Consideration Not Essential Essential
Possession of Instruments Not Essential Essential
Nature of Title Gets the same title as that of the transferor. Defective when defective. Gets good title even if transferor was having defective title.
Authority Can sue in his own name. Can sue in his own name.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

(c) Drawer : Mr. Kunal
Drawee : ABC Ltd.
Payee : M/s Bhagwan Das Ramial
i) The maker of a bill of exchange or cheque is called the “drawer”.

ii) The person thereby directed to pay is called “Drawee”. When in the bill or in any endorsement thereon the name of any person is given in addition to the drawee to the resorted to in case of need. Such a person is called “drawee in case of need”. In case of a cheque, drawee is always a branch of a bank on whom the cheque is drawn.

iii) After the drawee of a bill has signed his assent upon the bill or if there are more parts thereof than one, on one of such parts and delivered the same or given notice of such signing to the holder or to some person on his behalf. He is called “Acceptor”.

iv) The person named in the instrument to whom or to whose order the money is to be to be paid is called “Payee”.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

(d) Following are the common reasons for which the cheque are returned:
i) Refer to drawer: In the past, banks used to returned cheques with this reason. When there was no sufficient balance in drawer’s account to honour the cheque. However, after addition of section 138 of the Nl Act, 1881, it is now expected that no such reason for insufficiency of funds be given. When the drawer of the cheque becomes insane the cheque signed by him should be returned with the reason ‘refer to drawer’. Except this situation, the reason should not be used.

ii) Not arranged for: Basically, it means the drawer has not arranged funds in the account to honour the cheque.
iii) Effects not cleared, present again: Where drawer has deposited cheque which is sent for the clearing but not yet realised.
iv) Funds expected, present again: Where the drawer has submitted some bills for collection, the payment of which is expected to be received.
v) Exceed arrangements: When the overdraft/Cash Credit facility sanctioned to the drawer will exceed the limit if the cheque is honoured.
vi) Payments countermanded (stopped) by the drawer.
vii) Drawer signature differs/required.
viii) Cheque is outdated (stale)/Post dated.
ix) Amount in words and figures differs. Although in such cases Nl Act says that amount stated in words should be honoured, the general practice fallowed amongst bankers is to return such cheques.
x) Cheque crossed to two banks (unless the presenting bank is acting as an agent for another bank whose crossing appears on the cheque). Alteration is not authenticated by the drawer (In CTS cheques with alteration are not accepted).
xi) Cheque mutilated.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

Question 20.
What do you mean by endorsements? Explain the legal requirements of endorsements.
Answer:
Section 15 defines endorsement as follows:
“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 or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to have endorsed the same and is called endorser.

Thus, an endorsement consists of the signature of the maker (or drawer) of a negotiable instrument or any holder thereof but it is essential that the intention of signing the instrument must be negotiation, otherwise it will not constitute an endorsement. The person who signs the instrument for the purpose of negotiation is called the ‘endorser’ and the person in whose favour instrument is transferred is called the ‘endorsee’.

Legal Provisions regarding Endorsements
The following provisions are contained in the Act as regards endorsements:
(1) Effect of Endorsements. The endorsement of a negotiable instrument followed by delivery transfers the endorsed property therein with the right of further negotiation (Section 50). Thus the endorsee acquires property or interest in the instrument as its holder. He can also negotiate it further. (His right can, of course, be restricted by the endorser in case of a restrictive endorsement.) Section 50 also permits that an instrument may also be endorsed so as to constitute the endorsee an agent of the endorser:

  1. to endorse the instrument further, or
  2. to receive its amount for the endorser or for some other specified person.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

(2) Endorser. “Every sole maker, drawer, payee or endorsee or all of several join makers, payees or endorses of a negotiable instrument may endorse and negotiate the same.” This is subject to the condition that the right to negotiate has not been restricted or excluded (Section 51). Thus in case the instrument is held jointly by a number of persons, endorsements by all of them is essential. One cannot represent the other.

(3) Time. A negotiable instrument may be negotiated until its payment has been made by the banker, drawee or acceptor at or after maturity but not thereafter (Section 60).

(4) Endorsement for a part of the amount. The instrument must be endorsed for its entire amount. Section 56 provides that “no writing on a negotiable instrument is valid for the purpose of negotiable if such writing purports to transfer only a part of the amount appearing to be due on the instrument.” Thus an endorsement for a part of the amount of the instrument is invalid.

But in case an instrument has been partly paid, it may be negotiated for the balance of the amount provided a note to that effect is given on the instrument (Section 56). If the endorser intends to transfer the document to two or more endorsees separately, it will not constitute a valid endorsement.

Payment and Collection of Cheques and Other Negotiable Instruments - CS Professional Study Material

(5) The legal representative of a deceased person cannot negotiate by delivery only, a promissory note, bill of exchange or cheque payable to order and endorsed by the deceased but not delivered (Section 57). If the endorser dies after endorsing the instrument payable to order but without delivering the same to the endorsee, such endorsement shall not be valid and his legal representative cannot complete its negotiation by mere delivery thereof.

(6) Unless contrary is proved it is presumed under Section 118 that “the endorsements appearing upon a negotiation instrument were made in the order in which they appear thereon.” It means that the endorsement which appears on an instrument first is presumed to have been made earlier to the second one.

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