bcom iii btp m 4

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    GOOD MORNING

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    NEGOTIABLE INSTRUMENTS

    CHEQUES

    The law relating to negotiable instruments is

    contained in the Negotiable Instruments Act,

    1881.

    The word Negotiable means Transferable by

    delivery in return for consideration and the

    word Instrumentmeans a written document

    by which a right is created in favor of someperson.

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    Meaning:

    NI is a written document which entitles a

    person to a sum of money and which is

    transferable by mere delivery or by

    endorsement and delivery.

    Defini t ion:

    According to Sec.13 of the NI Act, 1881, A NI

    means a promissory note, bill of exchange orcheques payable either to order or the

    bearer.

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    CHEQUES

    Meaning:

    It is an instrument in writing, containing an

    unconditional order, signed by the customer,

    directing his banker, to pay on demand acertain sum of money only to or to the order

    of a certain specified person or to the bearer

    of the instrument.

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    Defini t ion:

    According to Sec. 6 of the NI Act, 1881, A

    cheques is a bill of exchange drawn on a

    specified banker and not expressed to be

    payable otherwise than on demand.

    It is always drawn on a specified banker.

    It is always payable on demand.

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    Features:

    It must be in writing.

    It must always be drawn on a specified

    banker.

    It must contain an order to pay.

    The order must be unconditional.

    The order must be to pay money and money

    only.

    Money paid by the banker must be certain.

    On demand.

    Signed by the drawer.

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    Draw ing o f a Cheques:

    Date

    Payees name

    Amount

    Signature

    Payable to payee or order or bearer.

    Crossing

    Alterations

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    Part ies to a Cheques:

    Drawer

    Drawee

    Payee

    Holder

    Endorser

    Endorsee

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    DrawerIs a person who draws the cheque. He is also

    called the customer of the bank.

    Drawee

    Is always the banker on whom the cheque is

    drawn.

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    PayeeIs a person named in the cheque to whom the

    amount of the cheque is payable.

    Holder

    Is a person who is entitled in his own name to

    the possession of the cheque & who has the

    right to receive or recover the amount of the

    cheque from the banker.

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    Endorser

    Is a person who endorses the cheque to

    another person to entitle that person to

    receive the amount of the cheque.

    Endorsee

    Is a person to whom the cheque has been

    endorsed over by the endorser. He is entitledto receive the amount of the cheque in his

    own name.

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    Kinds of Cheques:

    Bearer Cheques &

    Order Cheques. OTHER TYPES - -

    Stale or Out-of-date Cheques

    Ante Dated Cheques Post Dated Cheques

    Lost Cheques

    Crossed Cheques

    Mutilated Cheques

    Marked Cheques

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    Bearer Cheques

    A cheque payable to a certain specifiedperson or bearer is called a Bearer Cheque.

    A bearer cheque is made payable to thebearer i.e. it is payable to the person who

    presents it to the bank for encashment. The

    language of such a cheque runs thus 'Pay toX or bearer'.

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    According to Eric Russell Watson in the book"The Law Relating to Cheques,"

    a bearer cheque is paid to its bearer, or the

    individual who presents it at the bank. It does

    not enclose the name of its payee, or the

    entity to whom the check is to be paid. Bearer

    checks are commonly paid over the counter

    at banks.

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    A bearer cheque can be transferred from one

    person to another by mere delivery and noendorsement is necessary.

    It is payable to anybody who presents it atthe counter, the bank is under liability to

    ascertain whether the payment is made to the

    right person.

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    If a man finds a bearer cheque lying in a

    street and gets it encased at the bank, the

    latter is liable for wrong payment.

    An order cheque when endorsed in blank

    becomes a bearer cheque.

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    Order Cheques -

    An order cheque on the hand is a chequemade payable to a certain person or order.

    The language of such a cheque runs thus

    'Pay to Mr. X or order Rupees five hundred

    only'.

    An order cheque can be transferred only by

    endorsement and delivery.

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    In other words, Order cheque can be defined

    as the cheque which is payable only to the

    person who is named in cheque or to his or

    her endorsee (One to whom ownership of anegotiable document is transferred by

    endorsement.)

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    In the case of an order cheque, the banker is

    required to make proper enquires about the

    identity of the person presenting the cheque

    for payment.

    An order cheque may be converted into a

    bearer cheque.

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    Stale or Out-of-date Cheques-

    Stale cheque refers to those cheques whichare presented to the bank after 6 months

    from the date of its original issue.

    For example if cheque of 1 January 2009 is

    presented on 1 August 2009 it will be treated

    as stale cheque and no payment will be

    made on it.

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    Post Dated Cheques -

    Postdated cheque is one which is written bythe maker to pay on a future date.

    For example while buying a car if buyer has topay the amount of car in 24 months then he

    can issue 24 cheques for the next 24 months

    to the supplier of the car and these are called

    postdated cheques.

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    Ante Dated Cheques

    A cheque which bears a date which hasalready passed. An ante-dated cheque does

    not become invalid, but if it becomes stale, it

    will be returned unpaid.

    Lost Cheques -

    When a holder of a cheque loses his cheque,

    he can comple the drawer to issue himanother cheque.

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    Crossed Cheques

    It is a cheque on which two transverse or

    straight parallel lines are drawn on its face at

    the left-top side of the cheque.

    The holder of a crossed cheque has to deposit

    it in his bank account or to the bank account

    of another person in order to collect theamount of the cheque.

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    Mutilated Cheques

    It is a cheque which has been torn into two or

    more pieces.

    Such a cheque, when presented for payment,

    is not honoured by the banker but is returned

    unpaid with the remarks that the cheque is

    mutilated.

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    CROSSING OF CHEQUES

    Crossing:

    It means drawing across the face of the

    cheques two transverse parallel lines with or

    with out words & co. or Not Negotiable or

    A/c Payee between the parallel transverselines.

    Crossing may be written or stamped or printed.

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    Crossed Cheque

    It is one on which two parallel transverse lines

    with or without the words & Co are drawn

    across the face of the cheque.

    A crossed cheque is always payable only

    through a banker and not directly in cash on

    the counter of the bank.

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    It is a direction to the paying (or drawee)

    banker to pay the amount of the crossed

    cheque through a banker so that the party

    who obtains the payment can be easilytraced.

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    Objects of Crossing:

    It affords security and protection to the true

    owner of a cheque.

    It is a direction to the paying banker to pay

    the amount of the crossed cheque through a

    banker so that the party who obt ains thepayment can be easily traced.

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    Cheques are crossed in order to avoid losses

    arising from open cheques falling into the

    hands of wrong persons.

    Crossing of a cheque does not affect itsnegotiability.

    Sections 123 to 131 of the NI Act contain

    provisions relating to crossing.

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    Types:

    General Crossing

    Special Crossing.General Crossing

    According to sec. 123Where a cheques

    bears across its face an addition of the wordsand company or any abbreviation thereofbetween two parallel transverse lines, or twoparallel transverse lines simply, either with or

    without the words not negotiable, thataddition shall be deemed a crossing, and thecheques shall be deemed to be crossedgenerally.

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    It may be noted from the above definition that

    the lines must be

    On the face of the cheque

    Parallel to each other and

    In cross direction i.e. transverse.

    Inclusion of the words is immaterial.

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    Special Crossing

    According to sec. 124Where a cheques

    bears across its face an addition of the name

    of a banker, either with or without the wordsnot negotiable, that addition shall be

    deemed a crossing, and the cheque shall be

    deemed to be crossed specially, and to becrossed to that banker.

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    Thus,

    The addition of the name of a banker across

    the face of a cheque constitute special

    crossing.

    Transverse parallel lines are not necessary in

    case of special crossing.

    The payment of a specially crossed cheque

    can be obtained only through the particularbanker whose name appears in the crossing.

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    What Does Not Constitute Crossing? A cheque bears the words Not Negotiable or

    Account payee without two paralleltransverse lines or the name of any bank.

    If the cheque bears single line across its face

    or simply an X mark, the cheque is not

    deemed as a crossed cheque.

    The inclusion of any other word/words within

    the two parallel lines is irrelevant and the

    cheque is still deemed to be crossed cheque.

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    Double Crossing

    When a cheque bears two separate special

    crossing, it is called double crossing and the

    cheque is said to have been doubly crossed.

    Here the cheque is crossed specially to more

    than one banker.

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    Important Points:

    Generally a cheque cannot have double

    crossing.

    The payment of the double crossed chequesis prohibited by section 127 of the NI Act

    1881.

    The paying banker should not honor such acheque.

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    However as per section 127

    A paying banker shall pay a cheque doublycrossed only when

    The second banker is acting as the agent of

    the first collecting banker and this has beenmade clear on the instrument.

    Where the banker in whose favour the

    cheque has been specially crossed does nothave a branch at the place where the cheque

    is to paid.

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    Cancelled or opened only by a drawer of a

    cheque.

    He can cancel by writing the words crossing

    cancelled, pay cash and by putting his fullsignature at that place.

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    Who May Cross Cheques?

    According to section 125 of NI Act 1881

    By the Drawer generally or specially.

    By the Holder generally or specially;

    crossed generally, he may cross it specially;

    crossed generally or specially, he may add

    the words.

    By the Banker crossed specially to the

    banker to whom it is crossed, he may againcross it specially to another banker as his

    agent for collection.

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    MARKING OF A CHEQUE

    It means making of a remark by the paying

    banker on the cheque testifying to theadequacy of funds to the credit of the drawer

    to meet the cheque.

    The paying banker while marking a cheque,

    simply initials the cheque or writes the words

    marked good for payment on the face of the

    cheque and initials under the seal of the

    bank.

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    It is method under which the paying banker

    indicates on the cheque, either by initialing

    the cheque or by writing the words marked

    good for payment and initialing it, that thecheque is drawn by the drawer in good faith

    and against sufficient funds in his account.

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    Effects of Marking:

    It indicates that the cheque is drawn by the

    drawer in good faith and against adequatefunds to his credit.

    It gives an enhanced status to the draweescheque by adding to the credit of the drawer

    the credit of the banker marking the cheque.

    It gives additional currency to the cheque.

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    Who Can Get The Cheque Marked By The

    Banker?At the request of the Drawer

    Cheque is drawn by the drawer in good faithand against sufficient funds in his account.

    Imposes an obligation on the paying banker

    to honour that cheque when presented for

    payment.

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    It must be paid even if the drawer expires or

    becomes insane or insolvent or even if the

    banker receives the garnishee order against

    the customer.

    It confers on the paying banker the right to

    set aside sufficient funds from the drawersaccount to honour the cheque so marked.

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    The drawer cannot countermand or stop the

    payment of the marked cheque.

    In case the drawer countermands thepayment, he will be liable to indemnify

    (protect/insure) the paying banker for any

    loss.

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    MATERIAL ALTERATION

    A material alteration is one

    Which changes the business effect of a

    cheque or

    Which causes the cheque to speak a

    language different from what it originally

    spoke or

    Which substantially changes the rights and

    liabilities of all the parties or any of the parties

    to the cheuqe or

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    Which changes the identity or the legal

    character of the cheque.

    In short

    A material alteration is an alteration whichalters i.e. changes materially or substantially

    the operation of a cheque, and thereby, the

    rights and liabilities of the parties thereto.

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    Alterations that amounts to a Material

    Alteration-

    To deem an alteration a material one

    It must affect the fundamental character ofthe instrument.

    It must substantially change the rights and

    liabilities of the parties to the instrument. It should change the legal character if the

    document.

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    It should speak a different language from

    what it spoke originally.

    It must have taken place without the

    knowledge of the drawer. It must have taken place after the cheque has

    been issued.

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    Examples of MA:

    As per banking customs Alteration of the date.

    Alteration of the sum payable.

    Alteration of the place of payment. Alteration of the name of the payee.

    Changing an order cheque into a bearer

    cheque by substituting the words. Cancellation of the crossing on a cheque etc.

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    Effect of MA:

    A cheque which contains a MA cannot be

    regarded as a cheque (under sec.87 of NI

    Act)

    However, such a cheque becomes valid if the

    MA is confirmed by the drawer under his full

    signature.

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    Alterations Which are not MA:

    Changing a bearer cheque into an ordercheque.

    Changing an open or uncrossed cheque into

    a crossed cheque. Changing a generally crossed cheque into a

    specially crossed cheque.

    Completing an inchoate i.e an incomplete

    cheque by filling up the blanks.

    Adding the words.

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    Protection Against Fraudulent Alterations:

    By the Banker Cheques prepared by good quality security

    papers.

    Use of ultraviolet lamps. By the Customers

    No blank space left.

    They also add the words -under rupees.only in the crossing.

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    THANK YOU