REVISION NI ACT

Objective: To boost the level of confidence in the Examination.

Points to remember at a glance:

1.Collecting Bank 2.Account payee crossing 3.Paying Bank 4.Minors account 5.Material alteration 6.Payment in due course 7.Forged Instrument 8.Forged Endorsement 9.Stolen Instrument 10.Not Negotiable crossing 11.Noting

Collecting Bank : (1)

Points to remember: BANKS RECEIVE CROSSED CHEQUES FROM THEIR CUSTOMERS BUT THEY STILL PUT THEIR OWN CROSSING STAMP. As per clearing house rules,banks are required to put their own crossing stamp failing which the cheques will not be honoured by the paying bank.

(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 duly introduced account of the customer.

(1) CONTD
Rationale: Banks put their own crossing stamps on cheques. Why? as a matter of precaution to ensure that the same is not misutilised in the event of loss of the cheques. With crossing of the bank,payment can be collected by only the bank mentioned in the special crossing.

(2)
ACCOUNT PAYEE CHEQUE IS SENT BY ORDINARY POST WHEN DESPATCHED: 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 cheque must 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 be endorsed. The person will not be able to credit the cheque in his account through any Bank.

(2) contd

Further, the person other than the payee will not 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.

Paying Bank:(3)
PAYING BANK IS NOT CONCERNED WITH THE ACCOUNT PAYEE CROSSING. 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 collecting bank that the cheque must be collected in the account of payee only. The resultant affect of the same is that all types of crossed cheque can be Endorsed. Account Payee cheques cannot be Endorsed because it is to be collected in the Account of the payee only.
ly.

(4)
BANKs SHOULD ENSURE NO OVERDRAFT IS CREATED IN MINORs ACCOUNT: Rationale: 1. Minor is not competent to enter any contract as a party. Overdraft created in the account even by mistake transforms his status to debtor (borrower). Person with capacity to enter into a contract is essential for the same. Minor is not one such person. Therefore, overdraft in minors account cannot be legally recovered.

Material alteration (5)

MATERIAL ALTERATION MAKES INSTRUMENTS VOID: Material alteration, not properly authenticated, alters the original intention of the signatory. It renders the instrument void. Authentication under full usual signature by the drawer rectifies this defect.

Material alteration (5) contd.

Examples of material alteration: 1. date 2. the time of payment 3. the place of payment 4. the sum payable 5. Opening a crossed cheque 6. Relationship between parties 7. Converting an order cheque into a bearer one

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 cheques 4. 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.

(6)
CHEQUES ARE NOT PAID OUTSIDE BANKING HOURS: The payment of a cheque after banking hours is not payment in due course. In case the payment of cheque is made after Banking hours, the bank is exposed to the following risks: the payment of the cheque may be stopped by the drawer. Drawer may be deceased or have become insolvent. Legal heirs can deny the liability. Attachment order may be served in the Account.

(7)
A bankers duty in paying a cheque is discharged by payment 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.

(7) contd
Examples of negligence on the part of Bank: 1. Payment of a post-dated cheque or a stale cheque. 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.

Forged Instruments(8)
FORGED SIGNATURE CANNOT CONVEY TITLE : Rationale: Where the signature on an instrument is forged, the signature will be inoperative. Title to the instrument will remain as the holder at that time. The holder of a forged instrument can not enforce payment on it . If money has been paid by mistake on a forged signature,true owner can recover the amount from the person who received it.

Protection to Paying Bank

1. Paying Bank knows the signature of his customer only. 2. If forgery is done by a third party,the paying Bank held liable to pay damages. 3. Protection available if payee or endorsee makes any forgery signatures. 4. Because the paying bank does not know the signature of endorsee or payee previous to that cheque.

Forged Endorsement (9)

IF ENDORSEMENT ON AN INSTRUMENT IS FORGED,DIFFERENT CONSEQUENCES WILL FOLLOW. In case, Endorsement is forged, a person claiming under that Endorsement will not acquire the rights of a holder in due course. For example: a bill is endorsed in full as follows: Pay Arun or order .. In such a case,the bill can be negotiated 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.

Stolen Instruments (10)

A person who obtains a negotiable instrument by theft cannot enforce payment against any party.
If he obtains payment on it, he is liable to the true owner. 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.

NOT NEGOTIABLE (11)

A CHEQUE CROSSED NOT NEGOTIABLE CAN BE TRANSFERRED BY ENDORSEMENT AND DELIVERY. Rationale: Not Negotiable crossing does not restrict 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,the title of the transferees is also good.

Not Negotiable (contd)

Not negotiable crossing not only protects the rights of the true owner of the cheque. It also serves as a warning to the endorsees to enquire thoroughly before taking the cheque. Why? They may have to be answerable to the true owner if the endorsers title is found defective.

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 is confirmed 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 and dishonoured.

HOW WAS IT ?

Unit II
1. A bill is drawn Pay to X or order the sum of one thousand rupees. In the margin the amount stated is Rs.100/. What is the 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?

Answers
1. Rs.1000 2. No.
3. No.