COLLECTION AND PAYMENT OF CHEQUE

CHAPTER=6

COLLECTION AND PAYMENT OF CHEQUE

Very short-Answer type Question

Q.1. 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 is may be two types:- Bearer cheque and Order cheque.

Q.2. What is Order cheque?

Ans:- Order cheque is a cheuqe which is payable to a certain person named in the cheque by the drawer or to the order of the payee.

Q.3. What is Bearer cheque?

Ans:- A 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 crossed cheque?

Ans:- A crossed cheque is one which bears two parallel transverse lines across the face of the cheque with or without any words.

Q.5. What is Post-dated cheque, and Stale cheque, and Mutilated cheque?

Ans:- Post-dated cheque:- If a cheque bears a date later than the date of issue it is termed as post dated cheque.

Stale cheque:- A cheque which is more than 3 months old is called a stale cheque.

Mutilated cheque:- Mutilated cheque is a cheque which is turns into two or more pieces.

Q.6. What do you mean by conversion of money?

Ans:- Conversion means wrongful or unlawful interferences with other person’s property which is not consistent with the owner’s right of possession.

Q.7. Give an Example of material alteration of cheque?

Ans:- Alteration of the date o the cheque.

Q.8. Can crossed cheque be enchased at the bank Counter?

Ans:- No, Crossing cheque is not cash across the bank Counter.

Q.9. Who can cross a cheque?

Ans:- The drawer, The holder, The Banker.

Q.10. What is General crossing?

Ans:- A general crossing where a cheque simply bears two parallel lines with or without any words and without any specification for payment.

Q.11. What is special crossing?

Ans:- Special crossing drawing two parallels transverse line are not necessary but the name of a bank should be written on the face of the cheque.

Short and Long Answer type Question

Q.1. What is a cheque? What are the two types of cheque?

Ans:-  A cheque is an instrument in writing containing an unconditional order made by a depositor of a bank directing the banker to pay on demand a certain sum of money.

The two types of cheque are as follows:-

        i.            Open cheque.

       ii.            Crossed cheque.

Q.2. What is bearer cheque? Mention its features?  What are the advantages and disadvantages of bearer cheque?

Ans:-  A 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 other cheque or any other bearer. For example, “pay to Mr. X or bearer” is a bearer chaque.

The following are the features of Bearer cheques:-

        i.            It is freely transferrable from one person to another by simple delivery.

      ii.            A bearer cheque does not need endorsement for their negotiation.

    iii.            In case a bearer cheque is lost or stolen, the banker shall not be responsible for the payment made to an authorized person.

The following are the advantages of bearer chaques are:-

        i.            It is quite easy to obtain the payment of bearer cheque at the counter of the bank.

      ii.            It is easy to negotiate a bearer cheque as it do not need endorsement for its negotiations.

    iii.            It is suitable for making small payments.

    iv.            A bearer cheque can be easily converted into order cheque.

The following are the Disadvantages of bearer cheques:-

        i.            A bearer cheque is not safe because payment of bearer cheque may be made by the bank to any person whoever he may be, genuine payee or a thief.

      ii.            Bearer cheque passes truly from one person to another and hence there is no record of its movement.

    iii.            A bearer cheque is not suitable for big payment due to their lots of risk.

Q.3. What is order cheque? Mention its features?  What are the advantages and disadvantages of Order cheque?

Ans:-  An order cheque is one which is payable to the person named in the cheque by the drawer or to the order of the payee. For Example, “pay to Mr. Y or order”.

The following are the features of Order cheques:-

        i.            Order cheque may be transferred from one person from another by making endorsement on the cheque.

      ii.            Order cheque is paid by the banker only when he is satisfied about the identity of the payee.

Advantages of order cheque are as follows:-

        i.            Order cheques are safe because payment is made by the bank only. When the bank is satisfied about the identity of the payee.

      ii.            Being safe, order cheque is particularly suitable for making big payments.

    iii.            An order cheque cannot be transferred without the signature of the transferor. So, there is record of movement and it can be easily traced.

Disadvantages of Order cheques are as follows:-

        i.            An order cheque is not easily transferrable from one person another. It needs endorsement by the payee.

        I.            It is not easy to get the payment of order cheque at the counter of the bank. The bank makes payment only when the bank is satisfied about the identity of the payee.

      II.            Order cheque cannot be converted into bearer cheque.

Q.4.What are the difference between Bearer cheque and order cheque?

Ans:-  The differences between Bearer cheque and order cheque are as follows:-

        i.            It is payable to the person named on the cheque or to any bearer. But Order cheque is payable to the person named on the cheque or to his order.

      ii.            Bearer cheque may be negotiated by mere delivery of the cheque. But order cheque needs to be endorsed for the purpose of negotiation.

    iii.            Bearer cheque is suitable for making small payments. But order cheque is suitable for making big payments.

    iv.            Bearer cheque can be easily converted into order cheque. But order cheque cannot be converted into bearer cheque.

      v.            There is no record of movement f bearer cheque as it is transferred without endorsement. But there is a record of movement of order cheque because it bears endorsement.

    vi.            The degree of risk is more in case of bearer cheque. But the degree of risk is less in case of order cheque.

Q.5. What is crossed cheque? Who can cross a cheque? Discuss about the different types of crossing and their significance?

Ans:-A Crossed cheque is one which bears two parallel transverse lines across the face of the cheque with or without any words. Crossing of a cheque may be defined as an instrument from the drawer of the cheque to the banker that he is only to pay the cheque provided certain conditions are fulfilled. Through crossing, a direction is given to the paying banker to pay the cheque through a bank account and not across the counter of the bank. Crossing of cheque is very safety because the holder of the cheque is not allowed to cash it across the counter.

The following parties can cross a cheque:

        i.            The drawer:- The drawer of a cheque may cross  a cheque before issuing it. He may cross it generally or specially.

      ii.            The holder:- The holder of a cheque can cross it in the following ways;

a)      The holder may cross a open cheque generally or specially.

b)     The holder may specially cross a generally crossed cheque.

c)      The holder may add the words ‘Not-Negotiable’ in a generally or specially crossed cheque.

    iii.            The banker:- The banker to whom a cheque is crossed ay again cross it specially to another bank to work as its agent for the purpose of collection of cheque.

The followings are the different types of crossing:-

        i.            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 for payment. Sec 123 of the Negotiable Instrument Act, 1881 defines general crossing as follows,” where a cheque bears across its face an addition of the words, “and Company” or any abbreviations thereof, between two parallel transverse lines or of two parallel transverse lines simply, either with or without the words, “Not Negotiable” that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally”.

                           In case of general crossing words such as “and Company”, “Not Negotiable”, “Account payee” etc may be inserted in between the lines.

      ii.            Special Crossing:- A special crossing is a crossing where a cheque bears across its face the name of a banker. Sec 124 of the Negotiable Instrument Act, 1881, defines special crossing as follows, “where a cheque bears across its face an addition of the name of a banker, either with or without the words “not negotiable”, the addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially and to be crossed to the banker”.

    iii.            Account Payee Crossing:- Account payee crossing is a crossing where a cheque bears across its face the words such as “Account Payee” or “Payee’s Account only” along with general or special crossings. It may be noted here that the words “Account Payee” or “payee’s Account” are not recognized by the Negotiable Instrument Act, but are being used due to the practice prevalent in the business community.

    iv.            Not-Negotiable Crossing:- A not negotiable crossing is a crossing where a cheque a cheque bears across its face the words “Not Negotiable: along with general or special crossing. According to sec 123 and 124 of the Negotiable instrument act, 1881, a cheque may be crossed either generally or specially with the words “not negotiable”.

Q.6. What are the differences between General crossing and special crossing?

Ans:- The differences between general crossing and special crossing are as follows:-

         i.            Parallel lines:-In case 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.

       ii.            Payment:-Generally crossed cheque is payable through any bank account. But specially crossed cheque is payable only through the specific bank mentioned in the crossing.

     iii.            Conversion:-Generally 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.

      iv.            Name of Bank:-In case of general crossing writing the name of a bank across the face of the cheque is not required. But in case of special crossing the name of a bank must be mentioned across the face of the cheque.

        v.            Safety:-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.

Q.7. What are the differences between open cheque and cross cheque?

Ans:- The differences between Open cheque and Cross cheque are as follows:-

        i.            Open cheque payable across the counter of the bank. But crossed cheque is payable only through a bank account.

      ii.            It does not require any parallel lines on the face of the cheque. But it requires two parallel lines some other indicates signifying crossing.

    iii.            It may be a bearer on order cheque. But it is not a bearer or order cheque.

    iv.            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.

      v.            Open cheque is used by drawer to withdraw money for himself. But Crossed cheque is not used by the drawer to withdraw money for his own use.

Q.8. Who is known as collecting banker? Discuss the duties and responsibilities of a collecting banker?

Ans:- The term collecting banker refers to the function of receiving cheques by a banker from his customers for the purpose of collecting the proceeds of the cheques and crediting the amount to the respective customers account. Collection of cheques and other instruments is one of the important functions of modern banks. A bank collecting cheques of its customers is termed as collecting banker. Thus, the collecting banker is the link between the payee and the drawee of a cheque i.e. paying banker.

The Duties of collecting banker are as follows:-

        i.            Due care and diligence in collection of cheque:- The collecting banker is bound to show due care and diligence in the collection of cheque given to him. If the banker fails in this regards and as a consequence the customer suffers loss, the collecting banker shall be required to compensate the loss.

      ii.            Presentation 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.

    iii.            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 customer’s account.

    iv.            Serving notice of Dishonored:- When the cheque is dishonored, 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?

Ans:- The collecting banker can avail of the statutory protection subject to the fulfillment of the following conditions:-

        i.            Collection for a customer:- The statutory protection is available to the collecting banker only if he collects payment for his customers. The customer is one who has an account with the banker and is engaged in banking transaction with the banker.

      ii.            Collection of crossed cheques:- Section 131 provides protection to the collection banker only when he collects crossed cheques. The cheques may be crossed generally or specially. This protection is not available to the banker in case he collects uncrossed or open cheques.

    iii.            Collection as an agent:- The collecting banker can avail of the statutory protection only if he collects the cheques as an agent of the customer. This protection is not available when he collects cheque as a holder for value.

    iv.            Collection in good faith and without negligence:- To avail the statutory protection the collecting banker must collect the payments in good faith and without negligence. This is the most important condition to be fulfilled by the banker. Collecting in good faith means, collection of cheque honestly. Negligence means lack of care which should be taken in any circumstances.

Q.10. Who is known as  paying banker? Write the duties and liabilities of Paying banker?

Ans:- The term paying banker refers to the drawee banker who pays the cheques of his customers. The primary relation between a banker and his customer is that of a debtor and a creditor. In other words, When the banker pays his customers cheques he is termed as paying banker.

The Paying banker has the following duties:-

        i.            The paying banker is expected to pay the cheque to the genuine payee as per the direction of the drawer.

      ii.            The paying banker should pay cheque when there is no restriction imposed on the payment by the drawer or by the law.

    iii.            The 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.

    iv.            The paying banker should of make payment of crossed cheques over the counter of the bank.

Liabilities of Paying banker:-

        i.            When there is sufficient fund in the account of the customer applicable for the payment of cheques the paying banker shall be liable to pay damage if he wrongfully dishonors the cheques.

      ii.            When the customer has been granted overdraft facility, the banker will be held liable if he dishonors cheques drawn by the customer on the basis of the overdraft.

    iii.            The paying banker shall b liable if he pay the cheques contravening the legal provision laid down by the Negotiable Instrument Act.

Q.11. What are the precautions to be taken by the paying banker at the time of payment of a cheque?    2000, 2005, 2011   

Ans:- The following Precaution to be taken by the paying banker:-

         i.            Form of cheque:- The cheque drawn by the customer must satisfy all the requites of a valid cheque. The Negotiable Instrument Act has not given the form of a cheque. However, all the banks provide in their rules of operating accounts that the cheque mist be drawn in the printed forms supplied by the banks themselves. The bank also reserves the right to refuse payment of any cheque drawn otherwise. Thus, it is essential that cheque forms supplied by the banker must be used by the customers.

       ii.            Date of cheque:- A cheque must bear a date without which it is incomplete. The date of the cheque is important because the order of the customer to the banker given through the cheque becomes legally effective on the date mentioned on the cheque. The date on the cheque should be complete i.e. it must include the year, name of the month and the number of the day.

      iii.             Amount of cheque:- The amount should be mentioned on the cheque both in words and in figures. It should be written as distinctly as possible and in a way to prevent insertions or alterations. it should commence as near the printed words “Rupees’ and Rs as possible ans should add the words only or draw a line after the amount in words and figure.

      iv.            Fund of the customer:- The banker should see whether there is sufficient fund in the account of the customer to pay the cheque. It may be noted that the cheque has to be paid in full and not in part and therefore, inadequacy of fund of the customer will result in the dishonor of the cheque unless the banker has granted loan or overdraft facility to the customer.

        v.            Material alteration:- Alteration in negotiable instrument means making changes in the negotiable instrument. The alterations in a negotiable instrument which affects or introduces basic changes in the instrument or its legal character are known as material alterations.

      vi.            Drawer’s signature:- A cheque must contain the signature of the drawer to be legally valid. The paying banker should carefully ascertain whether the cheques bear the genuine signature of the drawer or not. In case of doubt regarding the signature, he should compare the signature with the specimen signatures of the drawer.

    vii.            Banking hours:- the banker should make payment only such cheques which has been presented 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 account.

  viii.            Crossing of cheques:- If the cheques is a crossed one, it should not be paid on the counter but through a collecting banker.

Q.12. Discuss the statutory protection available to the paying banker?

Ans:- The following are the statutory protection available to the Paying banker :-

        i.            Protection in case of order cheque:- section 85 (1) provides protection to the paying banker in case of payment of order cheques. “Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course”.

         According to this section, protection is granted to paying banker if he makes payment of an order cheque with forged endorsement on behalf of the payee. This protection has also been made available to the payee banker by sec 16 (2) in respect of payment of cheques with other endorsement.

      ii.            Protection in case of bearer cheques:- Section 85 (2) provides protection to the paying banker in respect of bearer cheques Sec 85(2) provides that,

        “Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing thereon, and notwithstanding that any such endorsement purports to restrict or exclude further negotiation”.

    iii.            Protection in case of crossed cheques:- section 128 of the negotiable instrument Act, provides protection to the paying banker in respect of payment of crossed cheques. Section 128 says,

                           “where the banker on whom a crossed cheques is drawn has paid the same in due course, the banker paying the cheque and the drawer thereof shall respectively be entitled to the same right and be placed in the same position in all respects as they respectively be entitled to be placed in if the amount of the cheque had been paid to and received by the true owner thereof”.

    iv.            Protection in case of Drafts:- Section 85(A) protects the paying banker in case of payment of bank draft or demand draft. According to this Section, where any draft payable to order on demand is endorsed by the payee and the banker pays it accordingly, he shall be discharged of his obligation.

Q.13. Under what circumstance a banker must pay a cheque?   2002, 2004

Ans:- The paying banker is bound to pay the cheque if the following conditions are satisfied:-

        i.            When the cheque has been drawn on the proper from i.e. on the forms supplied by the banker.

      ii.            When the cheque bears a date and which is due.

    iii.            When there is sufficient fund in the account of the customer to pay the cheque in full.

    iv.            When the fund is properly applicable for the payment of cheque.

      v.            When the banker has no doubt regarding the signature of the drawer.

    vi.            In case of joint account, when all the account holders have signed the cheque.

Q.14. Under what circumstance a banker may dishonor a cheque? 

Ans:- The banker may dishonor a cheque under following circumstance:-

        i.            When cheque is not drawn on the forms supplied by the banker.

      ii.            When the cheque is post dated.

    iii.            When the cheque is materially altered.

    iv.            When the cheque is mutilated.

      v.            When the signature of the drawer is forged one or does not match with the specimen signature.

    vi.            When there is defect in the title of the person presenting the cheque.

  vii.            When he has been informed about the loss of cheque.

Q.15. Briefly explain material alterations of cheque?

Ans:- The alternations is a negotiable instrument which affects on introduces basic changes in the instrument or its legal character are known as material alternations.

The examples of material alternations are given below:-

        i.            Alternation of the date of the cheque.

      ii.            Alternation of the amount of the cheque.

    iii.            Alternation of the place of payment.

    iv.            Alternation is the name of the parties or their relationship.

      v.            Alternation of the crossing on a cheque.