Thursday, July 19, 2012

Cheque

Cheque and its essentials:
A Cheque is a special type of Bill of Exchange. It is drawn on banker and is required to be made payable on demand. A “cheque” is defines as “a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.” [Section 6]
‘Cheque’ includes electronic image of a truncated cheque and a cheque in electronic form. The definition is amended by Amendment Act, 2002, making provision for electronic submission and clearance of cheque. The cheque is one form of Bill of Exchange. It is addressed to Banker. It cannot be made payable after some days. It must be made payable ‘on demand’.

The essentials of a Cheque are :-
a.       Essentials of Bill of Exchange:  As a cheque is a bill of exchange, it must contain the essentials of a bill of exchange. In addition there are few more essentials as below.
b.      Drawn on a specified banker:  The drawee in case of a cheque is always a specified banker.
c.       Payable on demand: The cheque is always payable on demand.
d.      No Stamp:  A Cheque does not require a stamp.
e.      Acceptance:  No acceptance is necessary by the draw before the demand for payment.
f.        Payable to bearer:  A cheque can be made payable to bearer.

When a banker is justified in dishonouring the cheque?
The banker is justified in dishonouring the customer’s cheques in the following cases :-
a)      The signature of the drawer on the cheque does not match with the speciment signature in the records of the Bank.
b)      Funds are not properly applicable to the payment of cheque. For eg. Funds are subject to lien, or banker is entitled to set-off.
c)       Customer becomes insolvent.
d)      Death, lunacy or insolvency of the customer and the banker has notice of the same.
e)      Cheque presented beyond a period of 6 months from the date of issue.
f)       If the banker is not holding sufficient funds of the drawer, unless the banker has agreed to honour the cheque without sufficient funds.
g)      If the customer countermands payment and communicates the same to the bank properly.
h)      Holder gives notice to the banker of loss of cheque.
i)        If the cheque is not presented within the usual banking hours.
j)        Where the cheque is drawn on another branch office of the same bank where the customer does not have an account.
k)      Where a garnishee order has been issued by the Court attaching customer’s balance.

Endorsement:
Endorsement is the act of signing a cheque for the purpose of transferring it to somebody else. Under Negotiable Instruments Act it means the writing of one’s name on the back of the instrument or any paper attached to it with the intention of transferring the rights therein.
 A bearer cheque can be transferred by mere delivery but an order cheque is transferred by endorsement and delivery. Endorsements are usually made on the back of the cheque, though they can be made on its face as well. If, however, no space is left on the instrument, it may be made on a separate paper attached to it.

Endorsements are of various kinds, the most important being as follow:
a.       Blank or general endorsement: A blank or general endorsement is one in which the endorser simply puts down his signature. The name of the endorsee, it should be noticed is not put down. The effect of such an endorsement is to make the cheque a bearer cheque. The property in the cheque can now be transferred by mere delivery, no endorsement being required. Thus an order cheque can be made a bearer cheque by putting down a blank endorsement.
b.      Special endorsement: Special or full endorsement is that which contains not only the name of the endorser but also the name of the endorsee. The effect of special endorsement is that the endorse must endorse it again if he wants to transfer the property in the cheque to somebody else.
c.       Restrictive endorsement: When an endorsement restricts the negotiability or transferability of proprietorship of a cheque, it is known as restrictive endorsement.
d.      Partial endorsement: A partial endorsement is one which means to transfer the cheque only for a part of its value. For instance a cheque for Rs. 500 may be endorsed only for Rs.300. Legally such an endorsement is invalid.

Difference Between Bill of Exchange and Promisory Note.
Basis
Bill of Exchange
Promissory Note
Parties
There are 3 parties – drawee, drawer and payee.
There are 2 parties – maker or promisor and payee or promisee.
Drawer
It is drawn by the creditor
It is drawn by the debtor
Order or Promise
It contains an order to make payment. There can be three parties to it, viz. the drawer, the Drawee and the payee.
It contains a promise to make payment. There are only two parties to it, viz. the drawer and the payee.
Acceptance
It requires acceptance by the Drawee or someone else on his behalf.
It does not require any acceptance.
Payee
Drawer and payee can be the same party
Drawer cannot be the payee of it
Set
A bill of exchange can be drawn in sets.
Promissory note cannot be drawn in sets.

Notice
The maker of the bill of exchange is
secondarily and conditionally liable to payee. He becomes liable to pay only when the drawee refuses to honour the bill. Drawer stands in immediate relation to the drawee or acceptor and not the payee.
The maker of the Promissory note is primarily and absolutely liable to payee. Promisor stands in the immediate relation to the payee.
Notice
In case of its dishonour due notice of dishonour is to be given by the holder to the drawer
No notice needs to be given in case of its dishonour

Difference between cheque and bills of exchange:
Basis
Cheque
Bills of Exchange
Drawee
A cheque is always drawn on a bank or banker.
A bill of exchange can be drawn on any person including a banker.

Acceptance
A cheque does not require any acceptance.
A bill must be accepted before the Drawee can be made liable upon it.
Payment
A cheque is payable immediately on demand without any days of grace.
A bill of exchange is normally entitled to three days of grace unless it is payable on demand.

Stamp
A cheque does not require any stamp.

A bill of exchange must be stamped.
Protection
A banker is given statutory protection with regard to payment of cheques in certain circumstances.
No such protection is available to the Drawee or acceptor of a bill of exchange.

Crossing
A cheque may be crossed.
Bill can never be crossed.
Presentment
If not presented to the banker for payment, it does not discharge the drawer unless he suffers injury or damages.
Drawer is discharged, if bill is not presented for payment to the acceptor.

 Noting and Protesting
A cheque is not required to be noted or protested for dishonour.
A bill of exchange may be noted or protested for dishonour.

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