Sunday, November 27, 2016

AHSEC - Class 12: Banking Notes - Cheque and Its Collection & Payments

Unit – 6: Cheque – Collection and Payments
Short Answer type Questions and Answers (1/2 Marks)
Q.1. Name various types of cheques.
Ans: 1) Open cheque which is divided into two parts: Bearer and order cheque. 2) Crossed cheque
Q.2. What is open cheque? What are its types?
Ans: An open cheque is one which is presented and paid by the banker over the banks counter in a direct way. An open cheque may be two types:  Bearer cheque and Order cheque.
Q.3. What is bearer cheque?
Ans: Bearer cheque is one which is payable to any payee who present it for payment over the counter of the bank.
Q.4. What is order cheque?
Ans: Order cheque is a cheque which is payable to a certain person named in the cheque by the drawer or to the order of the payee.
Q.5. What is open and crossed cheque?
Ans: An open cheque is payable across the counter and crossed cheques are paid through bank accounts.
Q.6. What is post-dated cheque?
Ans: If a cheque bears a date later than the date of issue it is termed as post dated cheque.
Q.7. What is stale cheque?
Ans: A cheque which is more than 3 months old is called a stale cheque.
Q.8. What is mutilated cheque?
Ans: Mutilated cheque is a cheque which is turn into two or more pieces.

Q.9. What is ante-dated cheque?
An ante-dated cheque is one which bears a date earlier than the one on which the cheque is actually drawn.
Q.10. What do you mean by conversion of money?
Ans: Conversion of money means wrongful and unlawful interferences with other person’s property or collecting cheque which is not consistent with the owner’s right of possession.
Long Answer type Questions and Answers (3/5/8 Marks)
Q.1. What is bearer cheque? Mention its features, advantages and disadvantages.
Ans: Bearer cheque is one which is payable to any payee who present it for payment over the counter of the bank. In other words, it is payable by the banker to the person named on the cheque or any other bearer. For example, “pay to X or bearer” is a bearer cheque transferable.
The features of bearer cheque are as follows:
a)      It is freely transferrable from one person to another by simple delivery.
b)      Bearer Cheques does not need endorsement for their negotiation.
c)       In case of lost or stolen, the banker shall not be responsible for the payment made to an unauthorized person.
The main advantages of bearer cheques are:
a)      It is quite easy to obtain the payment of bearer cheque at the counter.
b)      It is easy to negotiate a bearer cheque as it does not need endorsement for its negotiations.
c)       It is suitable for making small payments.
d)      A person who does not have any bank account can collect the payment of the cheque easily from the bank without any verification and attestation of sign adores.
e)      A bearer cheque can be easily converted into order cheque.
The disadvantages of bearer cheque are:
a)      A bearer cheque is not safe because payment of bearer cheque may be made to any person whoever he may be, genuine payee or a thief.
b)      A bearer cheque is not suitable for big payment due to their lots of risk.
c)       Bearer cheque passes freely from hand to hand, so there is no record of its movements.
Q.2. What is order cheque? Mention its features, advantages and disadvantages.
Ans: Order cheque is a cheque which is payable to a certain person named in the cheque by the drawer or to the order of the payee. For example, “pat to X or order”.
The features of order cheque are:
a)      Order cheque may be transferred from another by making endorsements on the cheque.
b)      Order cheque is paid by the banker only when he is satisfied about the identity of the payee.
The advantages of order cheque are:
a)      Order cheques are safe because payment is made by the bank only. When the bank is satisfied about the identity of the payee.
b)      An order cheque cannot be transferred without the signature of the transferor. So, there is record of movement and it can be easily traced.
c)       It is suitable for making big payment.
The disadvantages of order cheque are:
a)      Order cheque cannot pass freely from hand to hand.
b)      (Order cheque is not easily in cashable). The banks makes payment only when the bank is satisfied about the identify of the payee.
c)       Order cheque cannot be converted into bearer cheque.
Q.3. Write down the difference between bearer cheque and order cheque?
Ans: The main difference between bearer cheque and order cheque are:
a)      Bearer cheque is payable to the person named on the cheque or to any bearer. But an order cheque is payable to the person named on the cheque or to his order.
b)      Bearer cheque may be negotiated by more delivery of cheque. But order cheque needs to be endorsed for the purpose of negotiation.
c)       The risk is more in case of bearer cheque as it can be encashed by anybody, even a thief. But, the degree of risks is less in case of order cheque as it is payable to a particular person.
d)      Bearer cheque is suitable for making small payments. But, order cheque is suitable for making big payments.
e)      There is no record of movement of bearer cheque as it is transferred without endorsement. But there is a record of movement of order cheque because it bears endorsement.
f)       Bearer cheque can be converted into order cheque. But order cheque cannot be converted into bearer cheque.
Q.4. Distinguish between open cheque and crossed cheque.
Ans: The difference between open cheque and crossed cheque are:
a)      Open cheque is payable across the counter of the bank. But crossed cheque is payable only through a bank account.
b)      Open cheque does not require any parallel lines on the face of the cheque. But crossed cheque requires two parallel lines or some other indicators signifying crossing.
c)       Open cheque may be a bearer or order cheque. But crossed cheque is not a bearer or order cheque.
d)      The degree of risk is more in case of open cheque as it can be encashed by anybody across the bank’s counter. But, the degree of risk is less in case of crossed cheque as it cannot be encashed by any unauthorized person.
e)      Open cheque is used by the drawer to withdraw money for himself. But crossed cheque is not used by the drawer to withdraw money for his own use.
f)       Open cheque can be easily converted into crossed cheque. But crossed cheque cannot be converted into open cheque except by the drawer of the cheque.
Q.5. What do you mean by Crossing of cheque? Who can cross a cheque? Explain briefly about the different types of crossing and their significance.
Ans: Crossing of a cheque: A cheque is said to be crossed when two parallel transverse line with or without any words are drawn on the left hand corner of the cheque. The negotiability of a cheque doesn’t affect for crossing. Crossing of a cheque refers to the instruction to the banker relating to the payment of the cheque. A crossing is the direction to the paying banker that the cheque should be paid only to a banker. Crossing of cheque is very safety because the holder of the cheque is not allowed to cash it across the counter. A crossed cheque provides protection not only to the holder of the cheque but also to the receiving and collecting bankers.
The following parties can cross a cheque:
a)      The Drawer: The drawer of a cheque may cross a cheque before issuing it. He may cross it generally or specially.
b)      The Holder: The holder of a cheque can cross in the following way:
Ø  The holder may cross an open cheque generally or specially.
Ø  The holder may specially cross a generally crossed cheque.
Ø  The holder may add the words “Not-Negotiable” in a generally or specially crossed cheque.
c)       The Banker: The banker to whom the cheque is crossed specially may again cross it especially to another banker's agent, for collection. This is called double special crossing.
Types of crossing:
1. General crossing: A general crossing is a crossing where a cheque simply bears two parallel lines with or without any words and without any specification. According to Sec. 123 of the Negotiable Instrument Act, 1881, “When a cheque bears across its face an addition of the words. “and company” or any abreactions thereof between two parallel transverse line or of two parallel transverse lines simply either or without the words, “Not Negotiable” that addition shall be deemed a general crossing. Simplify, In case of General crossing words such as “and company”, “not Negotiable”, “Account payee” etc. may be inserted between the lines.
A general crossing cheque protects the drawer and also the payee or the holder thereof. Whenever a drawer desires to make payment to an outstation party, he can cross the cheque so that even if the cheque is lost, only a piece of paper is lost and nothing beyond that. If by any chance, it is encashed by a third and unauthorized person, it is possible to find out to whose account the amount is credited and the unauthorized person can be identifies and suitable action taken against him.
2. Special crossing: Section 124 of the Negotiable Instruments Act, 1881 defines special crossing as “where a cheque bears across its face, an addition of the name of a banker with or without the words “not negotiable”, that addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially and to be crossed to that banker.”
Thus, in case of special crossing, the name of a particular bank is written in between the parallel lines. The main implication of this type of crossing is that the amount of the cheque will be paid to the specified banker whose name is written in between the lines. Special crossing is in a particular bank and by special crossing, he is assured of double safety, safety to the drawer and safety to the payee.
3. Account payee crossing: This type of crossing is done by adding the words ‘Account Payee’. This can be made both in general crossing and special crossing. The implication of this type of crossing is that the collecting banker has to collect the amount of the cheque only for the payee. If he wrongly credits the amount of the cheque to another account, he will be held responsible for the same. 
4. Not negotiable crossing: When the words ‘not negotiable’ is added in generally or specially crossed cheques, it is called not negotiable crossing. A cheque bearing not negotiable crossing cannot be transferred. If a cheque bearing ‘Not negotiable crossing’ is transferred, care must be taken regarding the ownership of title of both the transferor and transferee.
Q.6. Explain the meaning of Material Alteration of cheque with illustrations.
Ans: A alteration is considered as material alteration if it affects the operation of the instrument substantially and the liability of the parties concerned is changed significantly. Any change in an instrument which causes to speak a different language in legal effect from that which it originally spoke or which changed the legal identity or character of the instrument either in its terms or in the relation of parties thereto is a material alteration.
Examples of material alterations are as follows:
a)      Alteration of the date of the cheque.
b)      Alteration of the place of payment.
c)       Alteration of amount of the cheque.
d)      Alteration in the names of the parties or the relationship between them or affecting their legal status.
e)      The substitution of the word “bearer” in place of “order” in the cheque.
f)       An alternation of the crossing on a cheque.
Q.7. Write the differences between General and Special crossing?
Ans: The difference between General and Special crossing are:
a)      Incase of general crossing drawing two parallel transverse lines on the face of the cheque is must. But, in case of special crossing drawing two parallel lines is not necessary.
b)      Incase of general crossing writing the name of a bank across the face of the cheque is not required. But incase of special crossing the name of a bank must be mentioned across the face of the cheque.
c)       Generally crossed cheque is payable through any bank account. But specially crossed cheque is payable only through the specific bank mentioned in the crossing.
d)      A generally crossed cheque is safer as compared to open cheque. But a specially crossed cheque is safer than open cheque as well as generally crossed cheque.
e)      General crossing can be easily converted into special crossing by inserting the name of a bank in between the two lines. But special crossing is not convertible into general crossing except by the drawer.
Q.8. Who is a collecting banker? Discuss the duties and responsibility of a collecting banker.
Ans: A collecting banker is one who collects the cheques and other negotiable instruments deposited by his customers and places the amount to the credit of the customers account. A collecting banker acts as an intermediary between the paying banker and his customer in collecting the proceeds of a cheque from the paying banker and crediting the same to the customer’s account.
The duties of a collecting banker towards his customers are as follows:
a)      Due care and Diligence in the collection of cheques: The collecting banker is bound to show due care and diligence in the collection of cheques presented to him. In case a cheque is entrusted with the banker for collection, he is expected to show it to the drawee banker within a reasonable time.
b)      Presentation of cheque for payment within reasonable time: The collecting banker should present the cheque of his customer to the drawee banker within a reasonable time. If the banker makes undue delay in presentation of cheque and the customer suffers a loss then the banker will be held responsible for the loss and shall be required to reimburse the loss.
c)       Remittance of proceeds to the customer: It is the duty of the collecting banker to inform his customer immediately about the collection of the cheques. When the proceeds are collected, the banker may debit his customer’s account in respect of his commission and credit the gross proceeds to the customers account.
d)      Serving Notice of Dishonour: When the cheque is dishonoured, the collecting banker is bound to give notice of the same to his customer within a reasonable time. If he fails to give such a notice, the collecting banker will be liable to the customer for any loss that the customer may have suffered on account of such failure.
Q.9. What are the conditions to be fulfilled by the collecting banker to avail of statutory protection? What are the legal protections granted to a collecting banker?
Ans: The following conditions are to be fulfilled by the connecting banker to avail of statutory protection (Precaution of the paying banker):
a)      He should receive the payment of the cheque only for a customer and not for a stranger.
b)      He should collect only crossed cheque.
c)       He should collect cheque in his capacity as an agent of his customer and not as a holder for value.
d)      He should closely examine the title of the customer to the cheque verifying the regularity of endorsement and other contents of the cheque.
e)      He should act in good faith and without negligence.
Legal Protections Granted to a Collecting Banker: The Negotiable Instrument Act 1881 provides legal or statutory protection to the collecting banker against the risk of conversations. The collecting banker gets statutory protections in the following ways:
a)      The cheque must be a crossed cheque: The statutory protection is available to the banker only in case of cheques crossed generally or specially to him. He cannot avail of this protection in case of an uncrossed cheque. It is essential that the cheque is a crossed one before it is deposited with the collecting banker, otherwise the banker will be liable for conversion if the title of the customer proves to be defective or the endorsement thereon is forged one.
b)      The payment must be received for a customer: The statutory protection is available only when the banker collects the cheque on behalf of a customer. The protection cannot be availed of in case of cheques sent to the banker by a person who is not a customer of the banker.
c)       Collection as an agent: The collecting banker can avail the statutory protection only if he collects the cheque as an agent of the customer. This protection is not available when he collects cheques as a holder for value.
d)      Payment must be received in good faith and without negligence: The most essential prerequisite for availing of the statutory protection is that the banker must receive payment in good faith and without negligence. He should not be negligent in receiving payment. It must be carefully noted that ordinarily a banker owes duty to his own customer but the law makes him responsible to the true owner of the cheque also. Thus the privilege of statutory protection can be availed of by the banker if he fulfils his statutory duty towards the true owner of the cheque and exercises due care in safeguarding the latter’s interest.
Q.9. Who is known as paying banker? Mention his duties and liabilities.
Ans: The term paying banker refers to the drawee banker who pays the amount of cheques to his customer. The paying banker is defined as the “banker to whom the order is made to pay, where the order is issued as the form of a cheque”.
Duties of paying banker:
a)      The paying banker should take interest for the collection of customer’s cheque. In this connection the paying banker must examine the cheque before its collection.
b)      The second duty of the paying banker is to send the cheque for clearance immediately.
c)       The collecting bank can refuse to pay the payment of the cheque. In this regard the paying banker should immediately inform it to the customer.
d)      Another important duty of a paying banker is to pay the payment of a cheque if he is a customer of this bank and has his account in this bank.
e)      The paying banker should not make payment of crossed cheques over the counter of the bank.
Liabilities of paying banker:
a)      The paying banker will be liable if he wrongfully refused to honour the cheques Inspite of sufficient balance.
b)      The paying banker will be liable if he pay the cheque contravening the legal provisions laid down by the Negotiable Instrument Act.
c)       If overdraft facility is granted and the paying banker refused to honour the cheque on the basis of this overdraft, the paying banker will be liable.
Q.10. What are the precautions to be taken by the paying banker before payment of cheques?
Ans: The paying banker should take precautions on the following points:
a)      Form of cheque: The Negotiable Instrument Act 1881 has not given the form of a cheque. In India every bank has right to use separate form for withdrawals, be it a cheque or withdrawal form. The banking practice requires that the cheque must be drawn in the printed forms supplied by the banks and the banks reserve the right of dishonouring a cheque if it is not in the prescribed form.
b)      Date of cheque: In case an undated cheque is presented for payment, the banker should refuse to honour it. Before presenting a cheque for payment, the drawer should mention the date of issuing the cheque. But if he has not done so, the instrument does not become invalid. The payee of the cheque or any subsequent holder thereto may fill in the date.
c)       Amount of the cheque: The amount of the cheque must be certain and expressed both in words and figures. In case of any discrepancy between the amount expressed in words, and figures, sec 18 provides that the amount in words shall be the amount undertaken or ordered to be paid. The banker may therefore pay the amount written in words without incurring any liability for the same.
d)      Drawer’s signature: A banker is expected to known the signatures of his customers and therefore, if the drawer’s signatures have been forged, and the banker makes the payment it shall not be entitled to debit the customer’s account with the payment. The loss will be borne by banker.
e)      Material alterations: A cheque contains an order of the drawer to his banker to pay a specified sum of money to the bearer or the person mentioned therein or to his order. Before honouring a cheque, the paying banker should see that material alteration is confirmed by the initials or by signature of the drawer. If a cheque is signed by more than one person, material alteration should be confirmed by all the persons.
f)       Sufficiency of funds: It is a legal duty of a customer to keep sufficient funds in his account for payment of the cheque. The cheque is to be paid in full and not in part and therefore, inadequate funds in the customer’s account will result in the dishonour of the cheque unless there are arrangements for granting of loans or an overdraft. The paying banker has to be very careful regarding the sufficiency of funds in the account of a customer on which a cheque is drawn.
g)      Banking hours: The banker should make payment of only such cheques which have been presented to it for payment during its banking hours. Any payment of cheques which was presented after banking hours will not be taken as a payment in due course and banker will not be entitled to debit the customer’s account.
h)      Crossing of cheques: If the cheque is a crossed one, it should not be paid on the counter but through a collecting banker.
Q.11. Explain the statutory protection available to the paying banker.
Ans: The negotiable instruments Act provides statutory protection to the paying banker under the following circumstances:
a)      Protection in case of Bearer cheque: Section 85 (2) of the negotiable instruments Act 1881 states, “whereas a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereon, not withstanding any endorsement whether in full or in blank appearing thereon, notwithstanding that any such endorsement purports to restrict or exclude further negotiation.” In case a bearer cheque is crossed, the paying banker has no right to pay it across the counter in disregard of the crossing.
b)      Protection in case of order cheque: In case the payment is made to a person other that the payee, the paying banker does not get any protection under the negotiable instruments Act. If the endorsement is regular and payment in made in due course, the paying banker gets the protection under Section 85 (i) of the negotiable Instrument Act 1881.  In case, payment is made to a wrong person whose signature is not according to specimen signature, the protection is given to a banker under sec. 16 (2) of the negotiable instruments Act. It is not possible for a banker to know each of the endorser and their signatures.”
For getting the protection, the banker should note the following:
Ø  Regular endorsement.
Ø  Payment in due course.
c)       Protection in case of crossed cheque: regarding payment of crossed cheque, the paying banker gets the protection under section 128 of the Negotiable Instrument Act 1881. “whereas the banker on whom a crossed cheque is drawn has paid the same in due course, the banker paying the cheque and the drawer thereof shall be entitled respectively to the same rights and placed in the same position if the amount of the cheque has been paid to and received by the true owner thereof.” In case the payment is made on the instruction of the drawer in good faith without any negligence, the paying banker gets the statutory protection under the Negotiable Instrument Act, 1881.
d)      Protection in case of Drafts: In case of Demand drafts drawn by one branch of a bank upon another branch of the same bank, the banker gets protection under section 85 of the Negotiable Instruments Act. The section states “whereas any draft, that is an order to pay money drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand purports to be endorsed by or on behalf of the payee, the bank is discharged by payment in due course.”
Q.12. Under what conditions banker must pay a cheque?
Ans: The Paying banker is bound to pay the cheque if the following conditions are satisfied
a)      When the cheque has been drawn on the proper form i.e. on the forms supplied by the banker.
b)      When the cheque bears a date and which is due.
c)       When there is sufficient fund in the account of the customer to pay the cheque in full.
d)      When the fund is properly applicable for the payment of the cheque.
e)      When the amount of the cheque is mentioned in both words and figures and they are same.
f)       When the banker has no doubt regarding the signature of the drawer i.e. it has not been forged.
g)      Incase of joint account, when all the account holders have signed the cheque.
h)      When the cheque has been drawn on the particular bank and branch in which the account has been opened by the customer.
Q.13. Explain the circumstances under which a banker can dishonour a cheque?
Ans: The bank may dishonour a cheque for the following cases.
a)      When the cheque is post dated and it is presented for payment before the date it bears.
b)      When there are insufficient funds to the credit of the drawer.
c)       When the cheque is presented for payment at branch where the drawer of the cheque has no account.
d)      When a cheque is not duly, presented, as for example a cheque presented outside banking hours.
e)      When the cheque is ambiguous, mutilated, materially altered or irregular.
f)       When the cheque has become stale, that is it is not presented within six months of the issue of the cheque.
g)      When the signatures of the drawer of a cheque do not tally with the specimen signatures in the records of the bank.
h)      When the amount in figures and in words is not the same in a cheque.
i)        When the cheque is crossed and it is not presented through a bank.
j)        Where the bank receives a notice of the insolvency or insanity of the customer.

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