Chapter 15: Provisions Relating to Cheques-Theory

Question 1

Define Cheque.

Answer 1

A “cheque” is a bill of exchange drawn on the specific banker and payable only on demand.

Question 1

List down essential elements of cheque. (9)

Answer 1

1. It must be in writing.
2. It is an order to pay (not a request).
3. It must be definite and unconditional.
4. It must be signed by a drawer.
5. Parties (drawer, drawee and payee) must be certain.
6. Amount should be certain.
7. Order must be to pay money only.
8. It is always drawn on a specific banker.
9. It is always payable on demand only.
   A cheque in itself, is not an assignment of funds unless it is presented and paid/credited by bank.

Question 2

A cheque can be either open or crossed. Describe both open and crossed cheque.

Answer 2

1. Open Cheque:
   This is a cheque without two parallel lines on it. This is payable in cash at counter of bank.
2. Crossed Cheque:
   - This is a cheque with two parallel lines on its top left corner. This cheque is credited into account only (not payable in cash at counter of bank).
   - Purpose of crossing is to direct the banker to pay the amount of cheque only to another banker (i.e. in which receiving party has account) so that payee can be traced easily.

Question 3

List down three types of crossings.

Answer 3

1. General crossing.
2. Restrictive crossing.
3. Special crossing.

Question 4

Explain general crossing.

Answer 4

1. How it is done:
   When two parallel lines are drawn on a cheque (with or without words “& Co”). It is called general crossing.
2. Effect:
   Generally, a crossed cheque is credited into account only, and is not paid in cash. (It is still negotiable).
3. Example:
   Book Page No 247

Question 5

Explain special crossing.

Answer 5

1. How it is done:
   When name of a banker that is added on the face of a cheque, it is called special Crossing. Parallel lines are not necessary.
2. Effect:
   A specially crossed cheque can be collected from drawee only by that bank whose name appears on face of cheque (or by his agent for collection).
3. Example:
   Book Page No 247

Question 6

What is the effect of adding words “Not Negotiable” on a cheque? (3)

Answer 6

1. It does not restrict further transferability of a cheque.
2. However, a holder with a defective title cannot transfer a good title to a subsequent holder, even if subsequent holder gets it for consideration in good faith.
3. Objective of not negotiable crossing is to give protection against miscarriage or dishonesty.

Question 7

How a cheque can be crossed “By Holder” after issue?

Answer 7

Crossing By Holder:
- If a cheque is uncrossed, holder may cross it generally or specially or restrictive.
- If a cheque is crossed generally, holder may cross it specially by adding the name of banker.
- If a cheque is crossed generally or specially, holder may also add words “not negotiable” on cheque.

Question 8

How a cheque can be crossed “By Banker” after issue?

Answer 8

Crossing By Banker:
If a cheque is sent to bank for collection,
- Banker may cross it specially to himself.
- If cheque is crossed specially, banker cannot cross it again specially (except to another banker as his agent for collection).

Question 9

Under rules relating to payment of cheque, explain.
1. Protection to Paying bank.

Answer 9

A paying bank shall not be liable to true owner of the cheque for loss if banker makes payment in due course.

Question 10

Under rules relating to payment of cheque, explain.
2. Protection to a collecting banker in case of defective title. (4 Points)

Answer 10

If a collecting banker has collected a crossed cheque on behalf of a person whose title was defective, banker will not be liable to true owner if:
- He acted in good faith and without negligence.
- He received a payment on behalf of customer (i.e. as agent), and not on his own account.
- Cheque was already crossed before coming into his hands.
- If bank credits/pays to customer account provisionally (i.e. before receiving payment of cheque), bank does not become holder in due course and protections shall still be available.

Question 11

Under rules relating to payment of cheque, explain.
3. Protection to a Collecting Banker in case of Account Payee Cheque.

Answer 11

If an account payee cheque is credited to any account other than payee, bank will be responsible.
However, if a cheque is actually “account payee” but is altered and does not appear to be account payee, a collecting bank shall not be responsible if it collects payment in good faith without negligence and credits to customer’s account.

Question 12

Under rules relating to payment of cheque, explain.
4. Payment of Cheque Crossed Specially More than Once.

Answer 12

If a cheque is crossed specially and banker crosses it again specially (except to another banker as his agent for collection), drawee bank shall refuse its payment.

Question 13

Under rules relating to payment of cheque, explain.
5. Revocation of Banker’s Authority.

Answer 13

A bank shall not make payment of a cheque issued by his customer in following cases:
1. Countermand of payment i.e. customer ordered to stop the payment of cheque.
2. On receiving notice of customer’s death (irrespective of actual date of death/cheque).
3. On receiving notice of adjudication of the customer as insolvent (irrespective of actual date of insolvency/cheque).

Question 14

What is a bank draft?

Answer 14

A bank draft is an order issued by a bank to another bank ordering to pay specified money to a specified person or his order.

Question 15

Write down differences between cheque and bank draft.

Answer 15

A bank draft is like a cheque, except that:
1. It is always issued by a banker (not by an individual).
2. It cannot be payable to bearer.
3. It cannot be dishonored due to insufficient funds.
4. It’s permanent, cannot be stopped easily.

Question 16

Difference b/w Cheque and bill of exchange.

Answer 16

Book Page No 250