November 28, 2012

MA0037 [Banking Related Laws and Practices] Set1 Q1

Q.1  a Who is a “holder”? How does a holder differ from a “holder in due course”?

Ans:

Holder : Section 8 of the Negotiable Instruments Act  states that “The ‘holder’ of a promissory note, bill of exchange or cheque means “any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.”

Holder in due course: A person who for consideration becomes the possessor of a promissory note, bill of exchange or cheque (if payable to bearer).

The rights of a holder in due course of a negotiable instrument are qualitatively, as matters of law, superior to those provided by ordinary species of contracts:

The rights to payment are not subject to set-off, and do not rely on the validity of the underlying contract giving rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer is still liable on the cheque).

No notice need be given to any party liable on the instrument for transfer of the rights under the instrument by negotiation. However, payment by the party liable to the person previously entitled to enforce the instrument "counts" as payment on the note until adequate notice has been received by the liable party that a different party is to receive payments from then on. 

Transfer free of equities—the holder in due course can hold better title than the party he obtains it from (as in the instance of negotiation of the instrument from a mere holder to a holder in due course).

Negotiation often enables the transferee to become the party to the contract through a contract assignment (provided for explicitly or by operation of law) and to enforce the contract in the transferee-assignee’s own name. Negotiation can be effected by endorsement and delivery (order instruments), or by delivery alone (bearer instruments). In addition, the rights and obligations accruing to the transferee can be affected by the rule of derivative title, which does not allow a property owner to transfer rights in a piece of property greater than his own.

A bill of exchange may be endorsed by the payee in favour of a third party, who may in turn endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the amount of the bill against the drawee and all previous endorsers, regardless of any counterclaims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable.

Q1 b. What precautions should a banker take in making payment of the cheque?

Ans:

In the case of collection of cheques, a banker is:
i. A Holder for Value: In the case of uncrossed or open cheques, he occupies exactly the same position as any other person who so acquires them.
Ii .An agent: A banker, while collecting a cheque for a customer, cannot assert any right of a holder for value, for he is acting only as an agent. In doing so, he gets the same title on the cheques as that of his customer.

Statutory Protection
According to Section 131 of the Negotiable Instruments Act, 1881, “a banker, who has in good faith and without negligence received payment for a customer on a cheque crossed generally or specially to himself, shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reasons only of having received such payment.”

The onus of proving good faith and absence of negligence is on the banker claiming protection under Section 131.

Conversion
Conversion may be defined as the lawful talking, using, depositing or destroying of goods, which is inconsistent with the owner’s right of possession. It may be noted that if there were no statutory protection, a banker would be liable for conversion if he paid a cheque on a forged endorsement.

Collecting Banker’s Duties and Responsibilities
1. It is the duty of the collecting banker to exercise the same care and precaution in the interests of the true owner of a cheque as a reasonable businessman would exercise in his own interests.

2. Solicitor Terrington drew cheques on Reckitt’s account pursuant to the power of attorney and paid them into his private account with the Midland Bank who collected them for him.

3. The Chief Accountant of Lloyds bank in Bombay was authorized to draw cheques on the account kept by the Lloyds Bank with the then Imperial bank of India.

4.The sole director of one-man co company endorsed, in the name of the company, cheques drawn by third parties in favour of the company which collected them on his behalf and credited his account with their proceeds

5.A cheque, which was made payable to a partnership firm, was endorsed by one partner on behalf of the firm and was paid into his private account for collection with the defendant bank.
In collecting third party cheques, a banker should take extra precautions to safeguard the interests of the true owner.

The banker should present a bill for acceptance to the following:

i. Drawee
ii. Authorized agent of the drawee
iii. Legal representative, if the drawee is dead
iv. Official Receiver, when the drawee has been declared an insolvent
v. All the drawees, if there are several drawees, unless any one of them has the proper authority to accept it on behalf of all

RESERVE BANK’S INSTRUCTION TO BANKS

1. Immediate Credit of Cheques
Banks are required to give in the normal course immediate credit up to Rs.5,000 to a customer for local as well as outstation cheques, subject to the satisfactory operation of the customer’s account. 

2. In case of State capitals and other centers with more than100bank offices, credit to the customer’s A/c should be given within 10 days and customer allowed withdrawing the amount. These facilities are to be provided to the customer even if the collection advices are not received by the banks concerned.

Reserve Bank has advised the banks to extend the facility of giving credit to the accounts for outstation cheques only to (i) satisfactory operated accounts and (ii) up to a maximum amount of Rs.10,000. 

Reserve Bank has further authorized the banks to ensure that where delay occurs, the account holders should be paid penal interest without their requesting for it.

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