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Cheque, Postdated, Stale and Obligation

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    Common Characteristics of Negotiable Instruments,

    1. Act Apply: Negotiable instruments act 1881.

    2. A negotiable instrument means a promissory note, Bill of Exchangeor cheque payable either to order or bearer,Sec (13)(1).

    3 Essential features of Negotiable instrument:(a) Transferability: Ownership of the property in the instrument. if

    payable to bearer then by delivery only and if payable to then orderthen endorsement and delivery)

    (b) Title: Confers absolute and good title on the transferee:Holder in Due Course, Who take it in good faith, for value and

    without notice of the fact that the transferor had defective titlethereto.(c) Negotiabilitydiffers from transferability: Transferor cannot transfer

    title better than what he himself possesses.(d) Money: Its for consideration in value for Money only.(e) Its presumed there is a consideration is for value received. & Every

    Holder is presumed to be Holder in due Course.1presented by atul parikh

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    Types and exceptions

    (a) Types of Negotiable Instruments:

    (i) Negotiable instruments by statute: Cheque, bill of exchange and promissory notes

    (ii) Negotiable instrument by custom or usage: Governmentpromissory notes, shah jog hundis, delivery orders andrailway receipts.

    Exceptions:

    1. If a cheque is payable to a specified persons only and not

    to his order or the bearer, it cannot be transferred to anyother person and hence it loses its negotiability.

    2. If a cheque is crossed not negotiable it can be transferredbut without conferring on the transferee absolute andgood title in all cases.

    2presented by atul parikh

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    Promissory note(Pro Note) Sec.4

    Rs. 5000

    NewDelhi

    7thJanuary,08

    Three months after the date I promiseto pay X the sum of Rupees fivethousand, for value received.

    To XRajkotStamp

    Sd.Y

    y promissory noteis drawn andsigned by thedebtor whopromises to paythe creditor acertain sum of money.

    3presented by atul parikh

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    Bill of Exchange:N I act Sec.5

    Rs.10000Ahmedabad

    16thAug.2010Three months after date pay to X ororder the sum of ten thousand rupees,for valued received.

    To Z Accepted Stamp

    Z Sd Y

    y Section 5, A bill of exchange isan instrument in writingcontaining an unconditionalorder, signed by the maker,

    directing a certain person to paya certain sum of money only to,or to order of a certain personor to the bearer of theinstrument.

    y 1. An order from the creditor tothe debtor

    y 2. maker is called drawer andwho has been directed to pay iscalled drawee and who isentitled to receive money iscalled payee.

    y 3. Drawer can be the payee

    4presented by atul parikh

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    CHEQUE: NI Act Sec 6

    Date:...

    Pay..orBearer

    Rupee.

    Axis bankVastrapurAhmedabad Signature

    478162 110013005 10

    A cheque is a bill of exchange which is alwaysdrawn on a specified

    banker and payable ondemand .

    Eg.D/W or Share R/O or I Tax R/Oare cheques but Bank Draft isBOE.

    Rs...

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    Difference of P N & B O E.y DP Note: (i) In writing,

    y (ii) Signed by the maker(Debtor)

    (iii)Unconditional undertaking

    to payy (iv) A certain sumof money

    y (v) Pay to or to the order ofcertain person or to the berear ofP Note.

    (vi)Demand Pro Note /Usance P N,

    y (vii) Needs to be stamped whichis uniform in India.

    y (viii) May be drawn on any form.

    y B O E: (1) In writing,

    y (ii) Signed by the maker(Creditor),

    y (iii)Containing unconditional

    order,y (iv) A certain sum of money only,

    y (v) Pay to the order of certainperson or to the bearer of B E.,

    y

    (vi) Payable on sight / or UsanceBill,

    y (vii) No Stamp duty if payable upto 90 days period,

    y (viii)May be drawn in any form.

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    MICRCheque or Draft1. MICR ( Magnetic Ink Character Recognition) for his speedy

    processing.

    2. Special quality paper and printing instruments specifications.

    3. Code line at the bottom containing information printed in magneticink.

    4. The code line contains the following information:(i) First six numbers indicate the cheque number.

    (ii) Next three numbers indicate city code

    (iii) Next three numbers indicate bank code

    (iv) Next three numbers indicate branch code

    (v) After some space there is a number for transaction code ( SB or CA) 7presented by atul parikh

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    Obligations of a bankery 1. Obligation to honour the cheques: Section 31 of

    the negotiable instruments Act, 1881 lays down

    that:y The Drawee of a cheque having sufficient funds

    of the drawer in his hands, properly applicable tothe payment of such cheque, must pay the cheque

    when duly required to do so and in default of such payment must compensate the drawer forany loss or damage caused by such default

    8presented by atul parikh

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    Conditions for honoring cheques1. There must be sufficient funds of the drawer in

    the hands of the drawee: Equal or more thanthe amount of cheque presented.

    (a) Cheque sent for collection by the customer hasbeen realised.

    (b) Credit balances in other accounts at otherbranches.

    (c) Immediate credit of cheques of Rs. 15000 asinstructed by RBI if there is no adverseexperience.

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    F

    unds applicable to the payment of the cheque

    y 1.Several bank accounts in his various capacities.

    2. Funds are earmarked for some specific purposes.

    y

    3. Has debit balance in his current accounty 4. Cannot draw a cheques on the basis of his fixed deposit

    with the banker as the latter is deposited under a separateagreement for a specific period.

    y 5. if bank has sanctioned a overdraft to the customer and

    without informing him withdraw the limit.y Duly required to Pay:Cheque must be presented before

    the banker at the proper time. Not stale ( six month) orpost dated.

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    Garnishee order1. The obligation of a banker to honour his customerscheques is extinguished on receipt of an order of thecourt, known as the ganishee order, issued under Order21, Rule 46 of the code of civil Procedure, 1906. If adebtor fails to pay the debt owed by him to his creditor,the latter may apply to the court for the issue of aGarnishee Order on the banker of his debtor. Suchorder attaches the debts not secured by a negotiableinstrument, by prohibiting the creditor from recoveringthe debt and debtor from making payment thereof.

    2. The account of the customer with the banker, thus,becomes suspended and the banker is under anobligation to make any payment thereof.

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    Garnishee ordery 1. The creditor at whose request the order is issued iscalled judgment creditor, the debtor whose money isfrozen is called judgment debtor and banker who is thedebtor of the judgment debtor is called garnishee.

    y 2.First court directs the banker to stop payment out of theaccount of the judgments debtor. Such order is calledorder nisi. Explanation from the bank why funds cannot

    be used for creditor. Bank should inform the customer

    y 3. After explanation, court issue final order which iscalled order absolute whereby the entire balance or aspecified amount is attached and handed over to the

    judgment creditor.

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    Special points1. Amount attached by the order: entire or specified plus cost of

    legal proceedings.2. Order of the court restrains the banker from paying the debts

    or accruing due: if the account is overdrawn banker has nomoney to the customer and order becomes ineffective.

    3. Bank has right to set off any debt which is real and notcontingent.

    4. Two accounts in the same name can be combined.5. Only limited to the balance in the account. Cheque sent for

    collections or sales proceeds from the securities are not

    applicable. It is not applicable to the amount deposited lateron.6. Not applicable for the payment made before the order.7. Not applicable to money held abroad by the judgment debtor

    and securities held in the safe custody of the banker.

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    Attachment order issued by income tax authorities

    y 1. Section 226(3) of the Indian Income tax Act, 1961authorizes the ITO to require by notice in writing anyperson from whom money is due or may become due to

    the assesses or any person who holds or may subsequently hold money for or account of assesses, topay ITO an amount equal to the amount of the arrears oftax or whole amount.

    y 2. If it is joint account then prorata amount will be

    attached until contrary in proved.y 3. After making payment as required under this section,

    the banker shall be fully discharged from his liability tothe assesses to the extent of the amount so paid. But if hefails to make payment, he shall be deemed to be assesses

    in default. 15presented by atul parikh

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    Liability of the banker in case of wrongful dishonour of cheque

    y 1. Section 31 of NI act: the bank is liable to compesate thedrawer for any loss or damage caused by default on hispart in dishonouring the cheques without sufficientreason.

    y

    2. Causes of wrongful dishonour: Mistake or negligenceon the part of the banker or any of its employees.

    y Liability includes;

    y (i) The monetary loss suffered by the customer.

    y (ii) The loss of credit or reputation in the market.( in caseof traders and businessman.

    Amount of chques: small the cheque larger the liability o fthe bank.

    Liability towards the drawee and not the third party.

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    Post dated and stale cheque

    Post dated cheques: Bear a date later than that on which the holderpresents it at the bank. Bank should not honor for following reasons:

    1. Customer may stop the payment before due date.

    2. Paid the cheque and hold it untill it matures, the customer maybecome insolvent, insane or die.

    3. Not statutory protection to the bank as payment is due course.Example: Cheque of Rs. 1000 of dated 31jan,2008 paid and later onthe customer issued a cheque of Rs. 500 dated 18th Jan,2008 but dueto insufficient balance, it is returned. Bank will be liable fordishonoring the cheque.Process of encashing post dated chques or discounted post datedcheques is a fraud or indirect lending which is not permissible.

    Stale cheque: Outstanding for more than six month ( in case ofdividend warrants it is 3 months). Can be honoured after gettingconfirmation by the drawer ( change of date or revalidation)

    17presented by atul parikh


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