CS Professional · Banking and Insurance - Laws and Practice

Payment and Collection of Cheques and Other Negotiable Instruments

This chapter covers how negotiable instruments work and how cheques are crossed, paid, collected and discharged, plus what happens on dishonour. To solve a question, name the section, test it against the facts (crossing, apparent tenor, due course, notice), then conclude whether the banker or party is protected or liable.

What this chapter covers

This chapter sits in the Banking Laws part of Paper 7.4, Banking and Insurance - Laws and Practice. It deals with the instrument a banker handles every day: the cheque. It starts with what a negotiable instrument is, then moves to crossing, the banker's duty and protection when paying, discharge of parties, and the criminal consequences of a dishonoured cheque.

The core idea is simple. A negotiable instrument can pass from person to person, and the law gives the banker and holders rules to follow so that payment is safe. Under section 13, a negotiable instrument is a promissory note, bill of exchange or cheque payable either to order or to bearer. Everything else in the chapter builds on that.

The chapter connects to the rest of the paper through the banker-customer relationship, collecting and paying banker duties, and the bank's statutory protections. Questions are written and case-based. You are given facts, and you must state the provision, analyse the facts and reach a conclusion.

Cheque law is concrete and rule-based, so it is one of the easier places to score full marks in a written paper. Each section has a clear condition and a clear result, which suits the provision, analysis and conclusion format. The chapter also feeds practical drafting and compliance work, since dishonour of cheques is a common dispute in business. Students who learn the exact conditions of each section can handle problem questions with confidence, while those who rely on general ideas lose marks on missing details.

Payment and Collection of Cheques and Other Negotiable Instruments: topics in the order to study them

1Negotiable Instruments: Meaning and FeaturesStart here because every later rule depends on what counts as a negotiable instrument and what order and bearer instruments mean under section 13.
2Crossing of ChequesCrossing is the base for the banker's payment duties, so learn general and special crossing and the 'not negotiable' words before payment rules.
3Payment of Cheques and Statutory ProtectionOnce you know crossing, you can apply sections 126, 127 and 89 to decide when a paying banker must refuse payment and when it is protected.
4Discharge and Payment of Negotiable InstrumentsThis covers how parties are released from liability and when an instrument stops being negotiable, which links payment to the end of the instrument's life.
5Dishonour of Cheques and Procedure for ProsecutionStudy this last because it needs the earlier ideas and adds procedure: dishonour, defences, evidence on affidavit and the court where complaints are filed.

How to prepare Payment and Collection of Cheques and Other Negotiable Instruments

Treat this chapter as a set of short rules, each with conditions. Learn the rule, then practise applying it to facts.

Read each section from the Act itself and underline the conditions, such as who must pay, to whom, and in what form.
Make a one-page table for crossing: general, special, 'not negotiable', and what the holder may add under section 125.
Learn the banker's duty in sections 126 and 127 in your own words, then pair each with the situation where the banker must refuse payment.
Study section 89 on payment where alteration or crossing is not apparent, and note the extra rules for truncated cheques in electronic image form.
Learn discharge under section 82 by its three heads: cancellation, release and payment, and link it to sections 59 and 60.
Learn dishonour under section 92, the no-defence rule in section 140, evidence on affidavit in section 145, and the pending-case rule in section 142A.
Write three or four case-style answers in the order of provision, analysis, conclusion, and check them against the Act.

Common mistakes in Payment and Collection of Cheques and Other Negotiable Instruments

Saying a specially crossed cheque can be paid to any banker.
Fix: Remember: general crossing means payment to a banker; special crossing means payment only to the named banker or his agent for collection.
Writing that a banker is always protected when paying a cheque.
Fix: State the conditions: payment according to apparent tenor, in due course, and where the alteration or obliterated crossing was not apparent.
Confusing section 126 with section 127.
Fix: Link 126 to who may be paid, and 127 to a cheque crossed specially to more than one banker, where payment is refused.
Mixing up the three ways of discharge in section 82.
Fix: Learn each head with its effect: cancellation of a name with intent to discharge, release by the holder, and payment in due course for bearer or blank-indorsed instruments.
Ignoring the position of a holder who gets an instrument after dishonour or maturity.
Fix: Apply section 59: such a holder has only the rights of the transferor, subject to the accommodation instrument proviso.
Giving a general answer on dishonour without using procedure provisions.
Fix: Cite the specific provisions: sections 140, 145 and 142A, and structure the answer as provision, analysis and conclusion.

Last-day revision: Payment and Collection of Cheques and Other Negotiable Instruments

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).

Payment and Collection of Cheques and Other Negotiable Instruments practice questions

Payment and Collection of Cheques and Other Negotiable Instruments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Payment and Collection of Cheques and Other Negotiable Instruments: frequently asked questions

Is this chapter theory or problem-based in the exam?

Both. The paper is written and case-based, so you may be asked to explain a rule or to apply it to given facts. Always state the provision, analyse the facts and then conclude.

What is the difference between general and special crossing?

In general crossing, the cheque is paid only to a banker. In special crossing, it is paid only to the banker named, or that banker's agent for collection. Under section 125, the holder can move from uncrossed to general or special crossing, and from general to special.

Can a negotiable instrument be negotiated after maturity?

Under section 60, it can be negotiated until payment or satisfaction by the maker, drawee or acceptor at or after maturity, but not after that. The maker, drawee or acceptor cannot negotiate it after maturity.

Can a drawer defend a cheque dishonour case by saying he did not expect dishonour?

No. Section 140 says it is not a defence in a section 138 prosecution that the drawer had no reason to believe the cheque might be dishonoured for the reasons stated in that section.