E-QUESTION BANK: GENERAL BANKING

Transcription

1 E-QUESTION BANK: GENERAL BANKING TRAINING INSTITUTE, ONE BANK LIMITED House No. 21, Road No. 08, Dhanmondi Residential Area, Dhaka

2 GENERAL BANKING: Important Aspects of Negotiable Instruments Act 1881 Developed & Edited by: S.M. Hafizur Rahman SVP & Head of Training

3 1. What is Bill of Exchange? Bill of exchange: As per NI Act 1881, Sec - 5: A "bill of exchange" is an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay [on demand or at a fixed determinable future time] a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument. The sum payable may be "certain", within the meaning of this section and section 4, although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an installment, the balance unpaid shall become due. The person to whom it is clear that the direction is given or that payment is to be made may be a "certain person", within the meaning of this section and section 4, although he is miss-named or designated by description only. The specimen of an ordinary form of a Usance bill of exchange: 1,00,000 London, 1st January Three months after date pay to the order of Mr. J. Jones the sum of one hundred pounds for value received. To Messrs. Smith & Sons, Liverpool. Brown & Co.

4 2. What are the fundamentals of a Bill of Exchange a) A "bill of exchange" is an instrument in writing, b) containing an unconditional order, c) signed by the maker, d) directing a certain person to pay e) Payable on demand or at a fixed determinable future time f) a certain sum of money in certain currency g) only to, or to the order of, a certain person or to the bearer of the instrument h) Payable at a certain Place. Bills of Exchange are widely used in international trade; where the trade is facilitated by the Letter of Credit. This is drawn by the Exporter / Beneficiary on the importer/ buyer or importer s Bank with a claim to pay a certain sum of money. These Bills of Exchange may payable at sight (i.e. on demand). Or payable after specified period; say 30 days, 60 days, 90 days, 180 days and so on, these Bills of Exchange are called Usance Bill of Exchange. These Bills of Exchanges are required to be accepted by the importer/ buyer or importer s Bank ; this is called Acceptance and payment must be released by the buyer on maturity. These Bills of Exchange are internationally called Drafts.

5 3. What is a Cheque? As per NI Act 1881, Sec 6: A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. So all Cheques are Bill of Exchange but all Bill of Exchange are not Cheque. So a Cheque is a "bill of exchange" in writing, containing an unconditional order, signed by the maker, directing a specified banker to pay a certain sum of money payable on demand only to, or to the order of, a certain person or to the bearer of the instrument. That means when a bill of exchange is drawn on a specified bank and only payable on demand (not expressed to be payable otherwise) out of the credit balance of an Account Holder is called a Cheque. A Cheque Leaf will not be considered as a Cheque until it is signed by the Drawer. The Cheque may be either fully filled in; wholly blank or having written thereon an incomplete negotiable instrument, in order that it may be made, or completed into a negotiable instrument he thereby gives prima facie authority to the person who receives that paper to make or complete. A wholly blank, incomplete Cheque is a valid one but it must be properly filled in before presentation. A Cheque Leaf

6 4. What are the fundamentals of a Cheque? N I Act 1881 a) Cheque is a "bill of exchange" b) an instrument in writing, c) containing an unconditional order, d) signed by the maker, e) drawn on a certain Bank/ Banker to pay f) payable not otherwise than on demand (i.e. only payable on demand) g) a certain sum of money in certain currency h) payable only to, or to the order of, a certain person or to the bearer of the instrument i) payable at a certain Bank. 5. What is the difference between a Cheque and a Bill of Exchange (BE)? a) All cheques are "bill of exchange" b) All "bill of exchanges" are not cheque (BE only drawn on Banks are cheque). c) Cheques are drawn in single copy but BE is generally issued in duplicate. d) Cheque is drawn against credit balance of Bank Account; but BE is drawn by the Exporter or Seller against value received by the Importer or buyer. e) BE is payable on demand or at a fixed determinable future time; but Cheque is only payable on demand. f) BE may be issued at Sight or Usance; but Cheque is of Sight only. g) In case of BE there is 3 days of grace for honouring payment but Cheque has no day of grace rather payment is to be made on demand. h) Considering the security reasons, the Cheques are designed and printed by the Bank under Central Bank Guidelines but BE is drawn by the Exporter or Seller against credit sale.

7 6. What are the different parties to a Cheque? 1 Drawer: Who draws, makes and signs. (Section -9) 2 Drawee: The Bank or person who is directed to pay. 3 Payee: Person named in the Instrument who is directed to be paid. 4 Bearer: Means the person in possession of an instrument which is payable to bearer. 5 Endorser: For the purpose of Negotiation, on the back or face thereof or on a slip of paper annexed thereto, or signs for the same purpose a stamped paper intended to be completed as negotiable instrument he is said to endorse the same and is called the endorser. 6 Endorsee: The person whose favour instrument is endorsed is called endorsee or payee. 7 Delivery: Means transfer of possession actual or constructive, from one person to another. 8 Issuer: Issue means the first delivery of a negotiable instrument by the Maker/Drawer to a person so as to constitute him the holder thereof. Who issues, is called the issuer. 9 Holder: The holder of a negotiable instrument means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereof. 10 Holder in due course: "Holder in due course" means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee thereof, if [payable to order,] before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

8 7. What is a Payment in due course of a Negotiable Instrument? Payment in Due Course: (NI Act 1881, Sec - 10) Payment in due Course means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned. It may also be said, according to what appears on the face of the instrument to be the intention of the parties. A payment cannot be a payment in due course if it is made: 1. to a person not entitled to receive it 2. before the due date, 3. on a forged cheque, 4. even after countermanded by the drawer. Apparent Tenor refers to the intention of the parties as it is evident from the face of the instrument and all parts of the same are apparently all right. A payment must be made by a person who has the right, authority and capacity to make it. Payment means payment of money only, nothing else, Money means cash, or anything recognized as legal tender, such as, currency notes. The payer must act in good faith and without negligence. The words good faith and without negligence are explained as under: The word good faith is used in the sense of honesty. A payment may be honestly but still it may be without care & caution. Inadequate Care & Caution seem to be negligence on the part of the payer.

9 8. What are the steps to be followed in Payment in due course of a Negotiable Instrument? In order to constitute Payment in due course of a Negotiable Instrument; the payment must be made: a) In accordance with the apparent tenor of the instrument. b) In good faith and without negligence. c) Ensuring that no reasonable ground for believing that the person in possession thereof is not entitled to receive payment of the amount therein mentioned. d) Payment must be made to the person, entitled to receive payment thereon. e) Payment must be made in money. 9. What is Post-dated cheque? What are the risks in making payment of a post dated cheque? A cheque which bears a future date i.e. subsequent to the date of presentation is called postdated cheque. Example, a cheque dated presented on A bankers should refuse to pay a cheque before the ostensible date and such refuse does not amount to dishonors of the cheque, bank runs the following risks on honoring such cheque: a) The Cheque may be countermanded by the drawer. b) Drawer s A/c may run short of fund for honouring valid cheques. c) The drawer may die or become insolvent or insane before the ostensible date arrives. d) The banker loses statutory protection, as the payment is not according to the apparent tenor of the instrument. e) The Bank acts against the intention of the Customer. f) A Garnishee order of the court may not be executed on actual balance.

10 10. What is Stale Cheque? When a Cheque will be stale? A cheque which bears a date earlier to the date on which the cheque is drawn/ presented is called an ante- dated cheque. Example, a cheque drawn / presented on 8 th January 2015 but baring the date 1 st January 2015 is an ante-dated cheque. The banker can pay such cheques, but should be presented for payment within a reasonable time. If the same is not presented within a reasonable time depends on banker s usage in the locality, is said to be stale. As per practice in Indian sub-continent a cheque becomes stale after the expiry of 6(Six) months from the date of the cheque, if otherwise is not mentioned. Say, a cheque dated 1 st January 2015 is not considered valid for payment on 1 st July The Cheque issued by Account and Comptroller General of Bangladesh and Bangladesh Bank Cheques will normally be stale after 3 months from the date of the cheque.

11 11. What is Negotiability and Negotiation? What is indorsement? What instruments are called Negotiable Instruments? Negotiability: Unlike immovable property a bonafide transferee of a Cheque gets a good title, even if the title of transferor is defective, such peculiar characteristics of a cheque is called negotiability. Negotiation: when a negotiable instrument (Promissory note, bills of exchange & cheque ) is transferred to any person to make that person the holder thereof,then the instrument is considered to be negotiated (Section 14). Negotiation of Bearer Instruments: A promissory Note bill of exchange or cheque payable to bearer is negotiated by delivery thereof provided the instruments are not defective (As per sec.58 defective means possessing of any instrument through illegal & unlawful consideration). Negotiation of Order Instruments: In case of a promissory Note, bill of exchange or cheque payable to order is negotiated by indorsement and delivery. Who may negotiate:- Every sole maker, drawer, payee or endorsee or all of several joint makers drawers, payees or endorsees, of a negotiable instrument may indorse and negotiate, if the negotiability of such instrument has not been restricted. Indorsement: When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same, -and is called the "Indorser". (Section 15) Negotiable Instruments: As per NI Act 1881, Section 13: A "negotiable instrument" means a promissory note, bill of exchange or cheque payable either to order or to bearer. As per NI Act 1881, Section 85a of the NI Act 1881, the Draft is also treated as Negotiable Instrument. The Payment Order, Dividend Warrant, Refund Warrant etc. are not Negotiable Instruments as per NI Act 1881.

12 12. What is Material Alterations? What alterations are called Material Alterations? Any change in an instrument which changes the legal effect i.e. the legal identity or business character of the instrument, either in its terms or in the legal relations of the parties thereto it is a material change or a material alteration. The Material Alteration must be authenticated by the full signature of the Drawer or Maker. The stipulation in section in 87 of the negotiable instruments Act 1881, which reads as Any material alteration of a negotiable instrument renders the same void against anyone who is a party thereto at the time of making such alteration and does not consent thereto, unless it was made in order to carry out the common intention of the original parties; and any such alteration, if made by an indorsee, discharges his indorser from all liability to him in respect of the consideration thereof A material alterations may be by change of (i) the date, (ii) the time of payment, (iii) the place of payment, ( iv) the sum payable, (v) the number of parties, (vi) the relationship between parties or (viii) the legal character of the instrument. In addition the following alterations in respect of cheques are also material alterations: I. Conversion of an endorsement in blank to and endorsement in full. II. Crossing of a open cheque. III. Canceling the word bearer and making the cheque payable to order IV. Altering a general crossing into a special crossing, addition of the words account payee or not negotiable to a crossing and where a cheque is crossed specially the banker to whom it is crossed,crossing it specially to another banker, his agent for collection.

13 13. How does a paying banker discharge his duties? When the Bank refuses payments? The duty of paying banker to pay all cheques properly drawn on him by a customer, except under certain circumstances or if the necessary funds are not available. A paying banker must discharge his duties in good faith and without negligence ensuring Payment in due course of a Negotiable Instrument. Banker loses the right of statutory protection, if the payment is not made in due course ( payment in due course defined earlier ). Example, even a payment other than outside banking hours is not payment in due course. A paying banker shall not make payment of cheques in case of the following: 1 When customer countermands payment 2 When customer has become insolvent 3 On receipt of notice of customer s death 4 On receipt of notice of customer s insanity 5 On receipt of Garnishee order 6 Word and figures of cheque differs 7 Drawer s signature differs 8 Drawer s signature incomplete 9 Cheque is post- dated 10 Cheque is out of date 11 Materially altered cheque without authentication by the drawer/ maker.

14 14. What is General and Special Crossing of a Cheque? What will be the payment status of a Cheque crossed more than once? Cheque crossed generally: Where a cheque bears across its face an addition of the words "and company" or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words "not negotiable," that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally (NI Act Section 123). Cheque crossed specially: Where a cheque bears across its face an addition of the name of a banker, either with or without the words "not negotiable," that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker (NI Act Section 124). Payment of cheque crossed specially more than once: Where a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof (NI Act Section 127) How will you make payment of an Account Payee Cheque? Payment of Account Payee Cheques NI Act 1881, Section 123A: (1) Where a cheque crossed generally bears across its face an addition of the words account payee between the two parallel transverse lines, constituting the general crossing, the cheque, besides being crossed generally, is said to be crossed account payee. (2) When a cheque is crossed account payee : (a) (b) it shall cease to be negotiable; and it shall be the duty of the banker collecting the payment of the cheque to credit the proceeds thereof only to the account of the payee named in the cheque.

15 16. What is the position of a Bank in receiving payment of an Account Payee Cheque? Non-liability of banker receiving payment of cheque (Section 131): Subject to the provisions of this Act relating to cheques crossed account payee where a banker in good faith and without negligence receives payment for a customer of a cheque crossed generally or specially to himself, and the customer has no title or defective title thereto, the banker shall not incur any liability to the true owner of the cheque by reason only of having received such payment. 1[Explanation.-A banker receives payment of a crossed cheque for a customer within the meaning of this section notwithstanding -that he credits his customer's account with the amount of the cheque before receiving payment thereof.] The provisions of this Chapter shall apply to any draft, as defined in section 85A, as if the draft were a cheque. [Sec. 131A.] 17. Who may Cross a Cheque? The Drawer or Account Holder may cross a Cheque before delivering to the payee. If the Drawer does not cross a Cheque the following persons/ institutions may cross the cheque after being issued by the Drawer: Crossing after issue: (Section 125) Where a cheque is uncrossed, the holder may cross it generally or specially. Where a cheque is crossed generally, the holder may cross it specially. Where a cheque is crossed generally or specially, the holder may add the words"' not negotiable". Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker his agent, for collection.

16 18. What is Holder and Holder in due course? Holder: The holder of a negotiable instrument means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereof. Holder in due course: "Holder in due course" means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee thereof, if 2[payable to order,] before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. 19. How the Bank is protected in crediting cheques crossed account payee (Sec 131 B): Where a cheque is delivered for collection to a banker which does not at the time of such delivery appear to be crossed account payee or to have had a crossing account payee which has been obliterated or altered, the banker, in good faith and without negligence collecting payment of the cheque and crediting the proceeds thereof to a customer, shall not incur any liability by reason of the cheque having been crossed account payee or of such crossing having been obliterated or altered, and of the proceeds of the cheque having been credited to a person who is not the payee thereof. In this case the Account Opening formalities will have to be observed properly; and the Bank has to ensure that all necessary steps are undertaken to confirm the customer due diligence.

17 20. What are the different types of Cheques used in Banking Business? 1 Bearer Cheque and Order Cheque 2 Open Cheque and Crossed Cheque 3 1st Payee, second or third payee cheque 4 Specially Printed Cheque for Scheme A/c and for valued Clients 5 Credit Card Cheques 6 Blank Cheque and Filled in Cheque 7 Loose Cheque and Cheque issued in the form of cheque book 8 Cheque Crossed generally: i) Cheque Crossed having a transversed parallel line with or without the words & Co. or any other abbreviations ii) Cheque Crossed Account Payee, Account Payee only or A/c Payee or Payee s A/c only or words of similar meaning. iii) Cheque Crossed Not negotiable or Not Transferable 9 Cheque Crossed Specially 10 Cheque Crossed specially more than once 11 Undated, on-dated, anti-dated, stale and post dated cheque 12 Cash, transfer, clearing cheque 13 Cancelled, paid, unpaid and returned cheque 14 Mutilated, soil, tampered, forged and stolen cheque 15 Cheque meant Good for Payment 16 Cheque against Effect 17 Under collection (OBC) Cheques 18 Purchased Cheque 19 Online cheque 20 Savings, Current, S.T.D., SOD and Foreign Currency Cheques 21 Cheques issued by Accounts and Comptroller General (AGB) and Bangladesh Bank 22 Banker s Cheque or Draft (DD) 23 Travelers Cheque 24 Cashier s Cheque 25 GIRO Bank Cheque (British Post Office Cheque) 26 Stop payment Cheque 27 Instruction in lieu of Cheque 28 MICR (Magnetic Ink Character Recognition) Cheque.

18 21. Under what circumstances the Banks must refuse payment of the cheques/ draft? a) When the Customer countermands payments. b) On receipt of garnishee order. c) Receipt of notice of Customer's death. d) Customer's insolvency. e) Notice of assignment of credit balance as per section 130 of Transfer of Property Act, f) Breach of Trust. g) Defective title of the Party. As per Section 122A of NI Act 1881 the Bank must refuse payments on the grounds: (1) Countermand of payment; (2) Notice of customer s death; (3) Notice of adjudication of the customer as an insolvent 22. What is a Promissory Note? Promissory note (NI Act 1881 Sec - 4): A "promissory note" is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument. Only the acknowledgement of debt is not sufficient to be considered as a Promissory Note; it must be accompanied by unconditional undertaking to pay. While getting loan from Bank the Borrowers sign the Promissory Note as an acknowledgement of debt accompanied by unconditional undertaking to pay. As the loan amount is payable back to the lending Bank on demand; the Borrower promises to pay on demand that s why the same is called Demand Promissory Note; in brief DP Note.

19 23. What is At Sight, On Presentment, Days of Grace and Maturity? How will you calculate the maturity of the Bill of Exchange or Note payable so many months after date or sight? In calculating the date at which a promissory note or bill of exchange, made payable a stated number of months after date or after sight, or after a certain event, is at maturity, the period stated shall be held to terminate on the day of the month which corresponds with the day on which the instrument is dated, or presented for acceptance or sight, or noted for non-acceptance, or protested for non-acceptance, or the event happens, or, where the instrument is a bill of exchange made payable a stated number of months after sight and has been accepted for honour, with the day on which it was so accepted. If the month in which the period would terminate has no corresponding day, the period shall be held to terminate on the last day of such month, Section - 23 of NI Act "At sight" & "On presentment": In a promissory note or bill of exchange the expressions "at sight" and "on presentment" mean on demand (Section 21). A Cheque is always payable on demand. "Maturity": The maturity of a promissory note or bill of exchange is the date at which it falls due. Days of grace: Every promissory note or bill of exchange which is not expressed to be payable on demand, at sight or on presentment is at maturity on the third day after the day on which it is expressed to be payable (Section 22). Illustrations: a) A negotiable instrument, dated 29th January 1878, is made payable at one month after date. The instrument is at maturity on the third day after the 28 th February b) A negotiable instrument, dated 30th August 1878, is made payable three months after date. The instrument is at maturity on the 3rd December c) A promissory note or bill of exchange, dated 31st August 1878, is made payable three months after date. The instrument is at maturity on the 3rd December, 1878.

20 24. What are the steps to be undertaken in case of dishonour of cheque for insufficiency, etc. of funds in the account? Section- 138 of NI Act 1881: Dishonour of cheque for insufficiency, etc. of funds in the account Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to one year, or with fine which may extend to thrice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless- (a) The cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier; (b) The payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid, and (c) The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within thirty days of the receipt of the said notice. NI Act Section- 140: If the person committing an offence under section 138 is a company; it shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. NI Act Section- 141: No court shall take cognizance of any offence punishable under section 138 except upon a complaint, in writing, made by the payee or by the holder in due course of the cheque; and complaint is made within one month of the date on which the cause of action arises.

21 25. What is Public Holiday? How Government declares Public Holiday? The expression "public holiday" includes Fridays, Saturdays and the days declared by the Government, by notification in the Official Gazette, to be public holidays. As per Section - 25 of NI Act 1881 the Government of Bangladesh declares "public holiday" including Fridays, Saturdays and the days declared by notification in the Official Gazette, to be considered public holidays.