Revision Ni Act

8/3/2019 Revision Ni Act

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REVISION NI ACT

Objective:

To boost the level of confidence in the

Examination.


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Points to remember at a glance:

1.Collecting Bank

2.Account payee crossing

3.Paying Bank

4.Minors account5.Material alteration

6.Payment in due course

7.Forged Instrument

8.Forged Endorsement9.Stolen Instrument

10.Not Negotiable crossing

11.Noting


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Collecting Bank : (1)

Points to remember:

BANKS RECEIVE CROSSED CHEQUES FROMTHEIR CUSTOMERS BUT THEY STILL PUTTHEIR OWN CROSSING STAMP.

As per clearing house rules,banks are required

to put their own crossing stamp failing whichthe cheques will not be honoured by thepaying bank.


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(1) contd

Sec.131 of NI Act: protection is available if the

following conditions are satisfied:

the cheque collected must be crossed.

the bank must act in good faith and without

negligence.

the bank has collected the cheque in the dulyintroduced account of the customer.


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(1) CONTD

Rationale: Banks put their own crossingstamps on cheques. Why?

as a matter of precaution to ensure that thesame is not misutilised in the event of loss ofthe cheques.

With crossing of the bank,payment can becollected by only the bank mentioned in thespecial crossing.


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(2)

ACCOUNT PAYEE CHEQUE IS SENT BY ORDINARY POST WHENDESPATCHED:

Rationale:Account payee cheque can be credited in the account of payee only.

They cannot be Endorsed.Account payee crossing is a direction to collecting banker that the chequemust be collected in the account of payee only.

On failing, bank will not get the protection u/s 131 of NI Act.

It will be liable for conversion.

If the account payee cheque comes in the wrong hands,it cannot beendorsed.

The person will not be able to credit the cheque in his account throughany Bank.


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(2) contd

Further, the person other than the payee willnot become the holder in due course.

Drawer will not be liable for the payment.Therefore, there is no risk in sending the

Account Payee cheque through ordinary post.


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Paying Bank:(3)

PAYING BANK IS NOT CONCERNED WITH THE ACCOUNT PAYEECROSSING.

Rationale:

All types of crossings are direction to the paying bank that

payment of the cheque to be made to through a banker only.Account payee crossing has not been defined in the NI Act .

However,legally recognised as a direction to the collectingbank that the cheque must be collected in the account ofpayee only.

The resultant affect of the same is that all types of crossedcheque can be Endorsed.

Account Payee cheques cannot be Endorsed because it is tobe collected in the Account of the payee only. ly.


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(4)

BANKs SHOULD ENSURE NO OVERDRAFT IS CREATED INMINORs ACCOUNT:

Rationale:

1. Minor is not competent to enter any contract as a party.

Overdraft created in the account even by mistaketransforms his status to debtor (borrower).

Person with capacity to enter into a contract is essential forthe same.

Minor is not one such person.

Therefore, overdraft in minors account cannot be legallyrecovered.


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Material alteration (5)

MATERIAL ALTERATION MAKES INSTRUMENTSVOID:

Material alteration, not properly authenticated,

alters the original intention of the signatory.It renders the instrument void.

Authentication under full usual signature by thedrawer rectifies this defect.


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Material alteration (5) contd.

Examples of material alteration:

1. date

2. the time of payment

3. the place of payment4. the sum payable

5. Opening a crossed cheque

6. Relationship between parties

7. Converting an order cheque into a bearer one


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Material alteration (5)contd.

Following do not amount to material alteration:

1. filling blanks of the instrument

2. conversion of blank endorsement into

endorsement in full.

3. crossing of cheques4. altering a general crossing into special

crossing.

5. addition of the words Account Payee

to a crossing.6. cancelling the word bearer

7. alteration made with consent of the parties.


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(6)

CHEQUES ARE NOT PAID OUTSIDE BANKING HOURS:

The payment of a cheque after banking hours is notpayment in due course.

In case the payment of cheque is made after Bankinghours, the bank is exposed to the following risks:

the payment of the cheque may be stopped by thedrawer.

Drawer may be deceased or have become insolvent.Legal heirs can deny the liability.

Attachment order may be served in the Account.


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(7)

A bankers duty in paying a cheque is discharged bypayment in due course.

1. Apparent tenor of the instrument.

2. Payment in good faith and without

negligence.

3. Payment to a person entitled to receive

payment.


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(7) contd

Examples of negligence on the part of Bank:

1. Payment of a post-dated cheque or a stalecheque.

2. Payment of a mutilated or torn cheque

3. Payment of a materially altered cheque.

4. Payment made to a cheque forged.

5. Payment made to a crossed cheque at

counter etc.


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Forged Instruments(8)

FORGED SIGNATURE CANNOT CONVEY TITLE :

Rationale:

Where the signature on an instrument is forged, thesignature will be inoperative.

Title to the instrument will remain as the holder at thattime.

The holder of a forged instrument can not enforcepayment on it .

If money has been paid by mistake on a forged

signature,true owner can recover the amount from theperson who received it.


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Protection to Paying Bank

1. Paying Bank knows the signature of his customeronly.

2. If forgery is done by a third party,the paying Bankheld liable to pay damages.

3. Protection available if payee or endorsee makesany forgery signatures.

4. Because the paying bank does not know thesignature of endorsee or payee previous to thatcheque.


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Forged Endorsement (9)

IF ENDORSEMENT ON AN INSTRUMENT ISFORGED,DIFFERENT CONSEQUENCES WILL FOLLOW.

In case, Endorsement is forged, a person claiming underthat Endorsement will not acquire the rights of a holder indue course.

For example: a bill is endorsed in full as follows:

Pay Arun or order .. In such a case,the bill can benegotiated further only if it is endorsed by Arun.

In case, Aruns Endorsement is FORGED:,

the bill will be Invalid and will not convey a good title.So also in the case where the Bill is stolen.


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Stolen Instruments (10)

A person who obtains a negotiable instrument by theftcannot enforce payment against any party.

If he obtains payment on it, he is liable to the trueowner.

If it is payable to bearer & negotiates it to a bonafide

transferor, he acquires a good title.

Not in the case of order Instruments acquires no title.


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NOT NEGOTIABLE (11)

A CHEQUE CROSSED NOT NEGOTIABLE CAN BETRANSFERRED BY ENDORSEMENT ANDDELIVERY.

Rationale: Not Negotiable crossing does notrestrict the transferability of the cheques i.e.such crossing does not restrict further transfers.

Endorsee will not get a clean title.

So long as the title of the transferors is good,thetitle of the transferees is also good.


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Not Negotiable (contd)

Not negotiable crossing not only protects therights of the true owner of the cheque.

It also serves as a warning to the endorseesto enquire thoroughly before taking thecheque. Why?

They may have to be answerable to the trueowner if the endorsers title is found

defective.


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NOTING (12)

NOTING IS NOT NECESSARY FOR CHEQUE AND DRAFT

BUT IT IS ESSENTIAL FOR BILLS:

Rationale :In case of dishonour of cheque/draft,the dishonour isconfirmed by the cheque return memo.

In the case of bill,the same is required to be done by

Notary evidencing the bill was duly presented anddishonoured.


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HOW WAS IT ?


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Unit II

1. A bill is drawn Pay to X or order the sum of one thousandrupees. In the margin the amount stated is Rs.100/. What isthe amount of the bill for?

2. A bill of exchange is addressed to Ganguli.Anil Banerjee writes an acceptance on it.

Can Anil Banjerjee bind himself by such acceptance?

3. A is the holder of a bill payable to A or order.

A by simple delivery transfers the bill without endorsing to B.

Can B deemed to be a holder in due course?


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Answers

1. Rs.1000

2. No.

3. No.

Revision Ni Act

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