CS Professional · Banking and Insurance - Laws and Practice

Payment and Collection of Cheques and Other Negotiable Instruments: formula sheet

Full chapter guide

Key formulas

Definition of negotiable instrument (Section 13(1)): Negotiable instrument = promissory note OR bill of exchange OR cheque, payable to order or to bearer; Both conditions matter: it must be one of the three types and it must be payable to order or bearer.
Promissory note (Section 4): Writing + unconditional undertaking + signed by maker + certain sum only + to a certain person, his order, or bearer; Not a bank-note or currency-note. Two parties: maker and payee.
Bill of exchange (Section 5): Writing + unconditional order + signed by maker (drawer) + directing a certain person (drawee) + certain sum only + to a certain person, his order, or bearer; Three parties: drawer, drawee, payee, though one person may fill two roles.
Payable to order (Section 13, Explanation (i)): Expressed to be so payable, OR payable to a particular person with no words prohibiting transfer; Words like 'not transferable' or 'pay B only' prohibiting transfer take it out of this class.
Payable to bearer (Section 13, Explanation (ii)): Expressed to be so payable, OR only or last indorsement is in blank; Section 54 also says an instrument indorsed in blank is payable to the bearer.
Negotiation (Section 46): Bearer: delivery. Order: indorsement + delivery; Making, acceptance or indorsement is complete only on delivery, actual or constructive.
Payable on demand (Section 19): No time specified (note or bill), or a cheque = payable on demand; A cheque is always payable on demand.
Key presumptions (Section 118): Consideration, date, time of acceptance, time of transfer, order of indorsements, stamp on lost instrument, holder in due course; Rebuttable: they apply until the contrary is proved.
General crossing (s. 123): Two parallel transverse lines, or 'and company' between two lines, with or without 'not negotiable'; No banker's name. Drawee banker pays only to a banker (s. 126).
Special crossing (s. 124): Name of a banker across the face, with or without 'not negotiable'; Drawee banker pays only to that banker or his agent for collection (s. 126).
Crossing after issue (s. 125): Uncrossed: holder may cross generally or specially. Generally crossed: holder may cross specially. Any crossing: holder may add 'not negotiable'. Specially crossed: that banker may cross specially to another banker, his agent, for collection; A special crossing cannot be changed back to general.
Cheque crossed specially more than once (s. 127): Crossed specially to more than one banker, except to an agent for collection: drawee banker shall refuse payment; The agent-for-collection exception comes from s. 125.
Payment out of due course (s. 129): Paid generally crossed cheque otherwise than to a banker, or specially crossed cheque otherwise than to the named banker or his agent for collection: liable to true owner for loss; Liability is for loss the true owner sustains.
Payment in due course (s. 128): Paying banker and drawer are placed as if the true owner had been paid; Applies where the crossed cheque is paid in due course; the drawer's protection applies if the cheque has reached the payee.
Not negotiable (s. 130): Transferee gets no better title than his transferor had; Applies to generally or specially crossed cheques bearing the words.
Collecting banker protection (s. 131): Good faith + without negligence + received payment for a customer + cheque crossed to himself = no liability to true owner if title is defective; Crediting the customer's account before receiving payment still counts as receiving payment for the customer.
Uncrossed-looking cheque (s. 89): Cheque does not appear crossed at presentation, or crossing obliterated: payment per apparent tenor in due course discharges the banker; Protects a banker who could not see the crossing.
Payment in due course (s. 10): Apparent tenor + good faith + no negligence + to a person apparently entitled; All elements must be present. Quote them in this order in the answer.
Cheque crossed generally (s. 126): Pay only to a banker; Paying a non-banker presenter is payment out of due course.
Cheque crossed specially (s. 126): Pay only to the banker named, or his agent for collection; Special crossing is the addition of a banker's name (s. 124).
Special crossing to more than one banker (s. 127): Refuse payment, unless the second is an agent for collection; The exception is the case of s. 125, where the named banker crosses again to his agent.
Payment in due course of crossed cheque (s. 128): Banker and drawer treated as if the true owner was paid; The drawer's protection applies where the cheque has come to the payee's hands.
Payment out of due course (s. 129): Banker liable to the true owner for loss sustained; Liability is to the true owner, not to the drawer by this section.
Unapparent crossing or alteration (s. 89(1)): Payment per apparent tenor at the time of payment, in due course, discharges the banker; Applies if the crossing or alteration is not apparent at presentation.
Section 60 - negotiable till payment: Negotiable until payment or satisfaction by maker, drawee or acceptor, at or after maturity; Exception: the maker, drawee or acceptor cannot negotiate after maturity. No negotiation after payment or satisfaction.
Section 82 - discharge of maker, acceptor or indorser: (a) cancellation; (b) release; (c) payment; Cancellation needs intent to discharge. Under (c), payment in due course discharges all parties only if the instrument is payable to bearer or indorsed in blank.
Section 78 - to whom payment is made: Payment must be made to the holder to discharge maker or acceptor; Subject to Section 82(c).
Section 40 - indorser's discharge: Holder destroys or impairs indorser's remedy against prior party without consent = indorser discharged as if paid at maturity; Illustration: striking out prior indorsements discharges the last indorser.
Section 83 - time to accept: Drawee given more than 48 hours (excluding public holidays) to accept = non-consenting previous parties discharged; Applies to a bill of exchange.
Section 89 - payment where alteration not apparent: Payment per apparent tenor, in due course = payer or banker discharged; Covers material alteration not apparent, and a crossing not apparent at presentation.
Cognizance (Section 142(1)): Written complaint by payee or holder in due course + within 1 month of cause of action + court not inferior to Metropolitan Magistrate or JMFC; Delay can be condoned if the complainant shows sufficient cause.
Jurisdiction: cheque delivered for collection through an account (Section 142(2)(a)): Court where the payee's or holder's account branch is situated; Delivery at any branch of the payee's bank is deemed delivery to the branch where the account is held.
Jurisdiction: cheque presented otherwise than through an account (Section 142(2)(b)): Court where the drawer's account branch of the drawee bank is situated; Applies to presentment by the payee or holder directly at the drawee bank.
Section 142A(2): Pending complaint in the Section 142(2) court → later complaints against the same drawer go to that same court; Applies irrespective of where those cheques were delivered or presented.
Section 142A(3): Multiple prosecutions by the same payee against the same drawer pending on the 2015 Act's commencement → transfer to the court of the first case; The transfer follows once the court is told of the fact.
Interim compensation (Section 143A): Interim compensation ≤ 20% of the cheque amount, payable within 60 days (extendable by up to 30 days on sufficient cause); Ordered when the drawer pleads not guilty in a summary trial or summons case, or on framing of charge in other cases.
Deposit pending appeal (Section 148): Deposit ≥ 20% of the fine or compensation awarded, in addition to any interim compensation; Deposit is within 60 days of the order, extendable by up to 30 days.

Quick revision

A negotiable instrument is a promissory note, bill of exchange or cheque payable to order or to bearer (section 13).
An instrument is payable to order if so expressed or payable to a named person without words prohibiting transfer.
An instrument is payable to bearer if so expressed or if the only or last indorsement is in blank.
It may be payable to two or more payees jointly, or in the alternative.
If a cheque is uncrossed, the holder may cross it generally or specially (section 125).
If crossed generally, the holder may cross it specially or add 'not negotiable'.
A specially crossed cheque may be crossed again by the collecting banker to another banker as agent for collection.
A banker must pay a generally crossed cheque only to a banker (section 126).
A specially crossed cheque is paid only to the banker named or his agent for collection (section 126).
If a cheque is crossed specially to more than one banker, other than an agent for collection, the paying banker must refuse payment (section 127).
Under section 89, payment by apparent tenor, in due course, discharges the banker even if the cheque was altered or crossing was obliterated without being apparent.
Dishonour by non-payment occurs when the drawee of a cheque makes default after being duly required to pay (section 92).
In a section 138 prosecution, it is no defence that the drawer did not expect dishonour (section 140).

Common mistakes

Defining a negotiable instrument without the words 'payable to order or to bearer'. Fix: Write the full Section 13(1) wording every time.
Treating a document with a condition as a promissory note. Fix: Read the promise closely. A promise tied to an uncertain event, such as 'on D's death provided D leaves enough money', is not a note.
Saying a 'not negotiable' cheque cannot be transferred. Fix: State s. 130: it can be transferred, but no transferee gets better title than his transferor had.
Treating 'account payee' as a crossing defined in s. 123 or 124. Fix: Describe it as a banking practice and direction that proceeds go to the payee's account, separate from the statutory crossings.
Applying s. 131 to the paying banker. Fix: Section 131 protects a banker who receives payment for a customer, the collecting banker. Paying banker protection comes from ss. 10, 89 and 128.
Saying a banker must refuse every cheque crossed specially twice. Fix: State the exception: crossing to a second banker as an agent for collection does not require refusal.
Writing that an instrument stops being negotiable at maturity. Fix: Section 60 ends negotiability only on payment or satisfaction. An overdue instrument can still be negotiated, but the transferee cannot be a holder in due course of it.
Saying any payment discharges all parties. Fix: All parties are discharged only if the instrument is payable to bearer or indorsed in blank, and the maker, acceptor or indorser pays in due course.
Choosing the court by where the cheque was issued or where the drawer lives. Fix: Use only Section 142(2): the payee's account branch or the drawer's drawee-bank branch.
Saying the one-month limit is absolute. Fix: State that the court may take cognizance after the period if the complainant shows sufficient cause.

Exam tips

Begin every answer with the exact Section 13(1) definition. It earns easy marks.
In case questions, use the sequence provision, analysis of facts, conclusion. Tie each fact to a requirement of Section 4 or 5.
Learn the Section 4 illustrations (a) to (h). Examiners often adapt them with new names and amounts.
For note versus bill, set out parties, nature of the instrument (promise or order) and who is primarily liable in two columns of points, and conclude in a line.
Mention Section 118 presumptions when the question touches on consideration or the holder's rights.
Define general and special crossing with the section number and the exact marks of each: two lines, 'and company', or banker's name.
In case questions, always name the section and state the conclusion: who is liable and to whom.
For s. 127 answers, mention the agent-for-collection exception and link it to s. 125.