We have already briefly discussed this topic towards the end of Lecture no. 9, we will again go through it in some more details. The origin of cheque is unknown, however the London goldsmiths of the 17th and 18th centuries used to pay to third parties by orders or “drawn notes” were the earliest form of cheques.
The Crown servants and pensioners were paid by Debentures, which after being encashed were kept as vouchers in proof. The earliest known handwritten cheque is Dated 14th August, 1675, drawn on Mr. Thomas Fowlers, a fleet street goldsmith banker for ₤9. Sh. 13, 6d. Is believed to the first written cheque. It is believed that printed cheques were first issued between 1749 and 1759. However, cheques were not popular for number of reasons. There was stamp duty on cheques also till 1927.
Definition and Requisition of A Cheque:
Definition”
According to section 6 of the Negotiable Instruments Act 1881, “Cheque is a bill of exchange, drawn on a specified banker and not expressed to be payable otherwise than on demand”. As a bill of exchange it must have all its characteristics as mentioned in section 5 of the Negotiable Instruments Act 1881.
A cheque can also be defined as, “An unconditional order in writing drawn on a specified banker, signed by the drawer, requiring the banker to pay on demand, a certain sum in money to, or to the order of, a specified person or to the bearer and which does not order any act to be done in addition to the payment of money”. (Law of Banking by Dr. Hart, p. 327)
The requisition of a Cheque:
Irrespective of any prescribed form or designed, the cheque should fulfill all the requirements mentioned in Section 6 of the Negotiable Instruments Act 1881, which says,
(i) It should be in writing:
Cheques are restricted by law to be hand written or typed. Oral order cannot be entertained as cheques in any circumstances.
(ii) The Unconditional Order:
Customer cannot attach or put any conditions with cheque payment, e.g. signing and dating a receipt of is desired before payment or if customer desires to make payment out of a particular fund.
(iii) Drawn on a Specified Banker Only:
the cheque can only be drawn on the customer's bank and none else. The name of the banker must specified to avoid any mistake in paying a cheque.
(iv) Payment on Demand:
Payable only on demand from the customer and should be lodged during a reasonable period, at present, in Pakistan it is 6 months from the date of its issue. After this time period the cheque becomes “stale”.
(v) Sum Certain in Money:
The cheque must show a certain sum of money only. No ambiguity or dispute in the amount be tolerated. Section 18 of the Negotiable Instruments Act 1881, authorizes the bankers to take the amount in words as ordered or intended.
(vi) Payable to A Specified Person:
The cheque should be payable to or to the order of a certain person or bearer of an instrument. According to Law, a person may not be necessarily a human being. A person can as well be one of the corporate bodies constituted by Law to contract according to the recognized legal principles.
(vii) Signed by the Drawer:
All or any cheque must be duly signed according to Section 29-A of the Negotiable Instruments Act 1881.
Parties To A Cheque
Sir John Paget (Siddiqui 2007, p. 172) says, “The normal cheque is one in which there is a Drawer, a Drawee banker, and a payee, or Payee but Bearer”. The Negotiable Instruments Act 1881, defines these parties as under;
1) The Drawer:
section 7 of the Act says, “the maker of the cheque is called the drawer and must be an account holder. And he shall sign it exactly in accordance with specimen signature”.
2) The Drawee:
Again in section 7, the Drawee is the person, directed to pay and in the case of cheque, it is always a banker where the customer maintains his account. Section 3(b) of the Act says, “Banker means a person transacting the business of accepting, for the purpose of lending, or investment, deposits of money from the public, repaying on demand or otherwise, and include any Post Office Saving Banks.
3) The Payee:
Section 7 of the Act says, “Payee is the person named in the cheque to whom or to whose order the payment has to be made. There may be more than one payee to whom the cheque may be paid jointly or alternatively”.
Types of Cheques:
Bankers in Pakistan deal with only two types of cheques.
i. Open Cheques:
They are payable in cash at the counters of a banker in accordance with the practice of the bankers.
ii. Crossed Cheques:
They are not payable in cash at the counters of a banker, but can be collected only by the banker who would credit the proceeds to his customer's account after realization.
Payment of Cheques
Payment in Due Course:
❖ It is banker's primary contractual duty to repay the money received for his customer's account usually by honoring his cheques.
❖ Payment of money deposited is one of the root functions of banking.
❖ The Acid Test of banking is the receipt of money etc., from the depositors and its repayment to them.
❖ This paying money function is one the distinguishing mark of a banker and differentiates it from other financial institutions.
❖ However, the banker gets legal protection only when payment is in “Due Course” According to section 10 of the Act, “Payment in due course means, payment in accordance with the apparent tenor of the Instrument in good faith without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground of believing that he is not entitle to receive payment of the amount therein mentioned”.
The responsibility of a paying banker is like a “Two-edged sword” as a banker has to decide quickly with regard to payment or non-payment of cheques. The banker has either to honor the cheque or refuse its payment without delay at the time it is presented. Payment can be affected by cheques, pay orders, drafts, pay-slips, vouchers etc.. It is a contractual obligation of a banker to honor his customer's cheques if the following essentials are met.
1) Cheque should be in a proper Form:
In the McMillan case, Lord Haldane said, “the customer contracts reciprocally that in drawing his cheques, he will draw them in such a form as will enable the baker to fulfill his obligations, and therefore, in a form which is clear and free from ambiguity”. This means that the cheque should be drawn in accordance with the provisions mentioned in section 6 of the NE Act 1881.
2) Cheques should not be Crossed:
A crossed cheque cannot be honored over the counter to any customer but a collecting banker. And if it honored, the true owner of the cheque may ask the banker to pay for the damages.
3) Cheques should be drawn on the Particular Branch:
The payment of the cheque can be made only by the branch, particularly mentioned on the cheque. But if arrangements have been made then the payment can also be made in other branch.
4) Cheque should be payable to Bearer or Order:
Payment should be made to a person who is in possession of it as a bearer or as per order. Section 3(c) of the Act defines a bearer as, “A person who by negotiation comes into possession of an Instrument which is payable to bearer”. The bearer may be required to acknowledge the money by signing on the back of the cheque. Section 13(1) of the Act states, that “Cheque is payable to order which is expressed to be so payable or which is expressed to be payable to a particular person.
5) Cheque should not be Mutilated:
➢ when a cheque is torn, worn out, or does not give sufficient evidence of customer's intentions, it is called a “mutilated cheque”.
➢ If such cheque is honored, the banker will be held responsible. However, mutilation by accident may be excused if the drawee declares about this fact.
➢ In HSBC v La Hee Shi (A.I.R. 1928, Privy Council, cited in Siddiqui 2007, p. 175) it was ruled that in case of a note mutilated by accident, but it was identifiable, although its number was missing, the bank was liable.
6) No Unauthorized Material Alterations:
➢ Section 3(f) of the Act says,
➢ “Material alteration in relation to a PN, BE, or Cheque, includes any alteration to the date, the sum payable, the time of payment, the place of payment, and where any such Instrument has been accepted generally, the addition of a place of payment without the acceptor's assent”.
The banker must not pay the cheque bearing apparent alteration unless authorized by the drawer under his duly specimen signature.
7) Funds must be Sufficient and Available:
The banker must make sure, there are sufficient funds available in customer's account to honor the cheque presented. Section 31 of the Act says, “The drawer of a cheque having sufficient funds of the drawer in his hands, properly applicable to the payment of such cheque must pay it when duly required so to do, and in default of such payment, must compensate the drawer for any loss or damage caused by such default”.
This statement has further been strengthen by (Pager's Law of Banking, 5 th Ed., p. 249), cited in Siddiqui 2007, p. 176-177. This view holds, “if customer has sufficient and available funds for the purpose, or the customer has the right to overdraw up to a given limit, not yet reached, the banker is obliged to pay the customer in that case”. If any cheque deposited into the account not yet cleared, and the is presented for payment, the banker is authorized to return it with the remark, “Effects not cleared, present again”.
8) The Cheque should not be Post-dated or Stale:
When cheques are presented for payment before the due date. Shelton (Practice and Law of Banking 9th Ed., p. 6), says, “If a banker pays a post-dated cheque earlier than the due date, he loses the protection granted by Law, and shall have to bear any loss that may arise out of his action”. Non-payment of a post-dated cheque by a banker is justified for the following reasons:
a. Post-dated cheque is like a BE, payable at a future date and paying such cheque could be violation of the Stamp Act also.
b. The customer may stop the payment before the due date by informing the banker informally.
c. The customer may become Insolvent, Insane, or may die before the cheque is due for payment.
d. A post-dated cheque is not regarded as “in due course”, the banker paying such a cheque will not be entitled to statutory protection.
e. The banker has no right to debit his customer's account on a post-dated cheque. It may incur serious repercussions.
In Pakistan, it is customary that cheques presented after six months of the since their apparent date of issue. Such cheques are called “Stale”. This custom is based on the practical application of Section 21 of the NI Act 1881, which says, “A PN or BE payable on demand shall be deemed to be overdue when it appears on the face of it to have been in circulation for an unreasonable length of time”.
9) Cheques Should be Presented During Banking Hours:
The cheques should be presented on working days and during the working hours. In Pakistan, banking hours are fixed by custom established by the State Bank of Pakistan.
10) No Legal Bar Prohibiting Payment:
The banker must be well aware that none of the below clauses of the law is applicable to the cheques presented for payment.
I. Payment stopped by the drawer(customer) through a notice in writing.
II. Knowledge of any defect in the title of the person who is presenting the cheque for payment.
III. Notice of Insolvency, Insanity or death of the customer or in case of a company, notice of its winding-up received by the banker.
IV. Notice of an assignment of the available credit balance in the account by the customer.
V. Knowledge that the customer contemplates a breach of trust or an act of Insolvency.
VI. Notice of Garnishee injunction or other court order restraining the customer from operating his account.
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