What Precautions to honor Cheque
What Precautions to honor Cheque
The relation between a banker and his customer is that of a debtor and creditor. Money deposited with a banker is always belongs to the customer and the bank obliged to return its equivalent to the customer or to any person to his order on demand. This obligation has been imposed on the bank by sec. 31 of the N.I. Act. 1881. Wherein it is stated that “The drawee of a cheque having sufficient funds of drawer in his hands, properly applicable to the payment of such, must pay the cheque when duly required to do so, and in default of such payment, must compensate the drawer for any loss or damage caused by such default”.
Precautions to honor Cheque
Analysis of sec.31 of the N.I.Act.1881 reveals that a banker should be very cautious both at the time of honoring as well as dishonoring his customer’s cheque. Thus, in order to safeguard it’s as well as the customer’s interests, the paying banker has to observe the following precautions before honoring a cheque:
1. Precaution regarding “Form of the Cheque”
The cheque should be in proper form. According to banking practice the cheque must be drawn in the printed forms supplied by the banks and the bank reserve the right of dishonoring a cheque in case it is not in the prescribed form. Beside this, the cheque should not contain any condition, as a cheque is an unconditional order to pay on a specified banker.
2. Precaution regarding “Branch”
The paying banker should see whether the cheque is drawn on the branch where the account is maintained. If it is drawn on another branch, without any prior arrangement, the banker can safely return the cheque.
3. Precautions regarding “Account”
Even in the same branch, a customer might have opened two or more accounts. For each account, a separate checkbook would have been issued. Hence, the paying banker should see that the cheque of one account is not used for withdrawing money from another account.
4. Precaution regarding ‘Date’
Before honoring a cheque, the paying banker must see whether there is a date on the instrument. If it is undated it cannot be regarded as a valid instrument. If a cheque is ‘ante dated’, it may be paid if it has not become stale by that time. A cheque becomes stale after six months of its issue and requires drawer’s revalidation/confirmation. The paying banker should also not honor a cheque containing future date. A future dated cheque is known as post-dated cheque and it should not be honored before its ostensible date.
5. Precaution regarding ‘Amount’
The banker should see whether the amount stated in the cheque, both in words and figures, agree with each other. If the amount is stated only in figures the banker should not honor it. However, if the amount is stated only in words, the banker may honor it. If there is any difference between the amount in figures and words, the banker can return the cheque, since, the amount is not certain. On the other hand, sec. 18 of the N.I. Act, 1881 permits the banker to honor the cheque to the extent of the amount stated in words. However, in practice, if the difference is insignificant, payment of the smaller amount sometimes made. But, usually the paying banker returns the cheque under such circumstance with a return memo containing the remarks “words and figures differ” since, there is an audit objection to the practice of honoring such cheque.
6. Precaution regarding “Funds of the Customer”
There should be sufficient balance/funds in the account of the customer to meet the cheque. Cheque has to be paid in full and not in part and therefore, if the funds are not sufficient to honor the cheque in full, the paying banker is justified in returning it. The paying banker, however, honor the cheque if he has an O/D arrangement with the customer to that extent or more than the amount of deficit.
The cheque should be paid in chronological order of their receipt by the bank. The date of their issue or serial number is not significant in this respect. Therefore, in case of inadequacy of funds, the cheque will be paid in the order in which they are received by the bank to the extent of the funds permit and the rest will be dishonored. When several cheque are received at the same time (for example, cheque received by post) the usual practice is to honor the cheque of bigger amount unless it is for tax liability etc. where the cheque is honored first though it must be of a smaller amount. In case of two or more cheque of equal amount, the bank has the discretion to honor any of them to the extent the funds of the drawer permit.
7. Precaution regarding “Drawer’s Signature”
Before honoring any cheque, a paying banker is required to compare the drawer’s signature on the cheque with that of his specimen signature. If the banker fail to do so and pays a cheque containing forged signature of the drawer, then, the payment will not be a ‘payment in due course. When there is a joint account, both or all the signatures on the cheque should be genuine. If any one of the signatures is forged the bank should not make payment.
If the signature has been too, skillfully forged for the banker to find it out, even then the banker is liable. However, if the customer facilitates the forgery of his signature by his conduct, then the banker will be relieved from his liability.
8. Precaution regarding “Material Alteration”
A paying banker should be very cautious in finding out the alterations that may appear on a cheque. A banker will be held liable for paying any materially altered cheque. If there is any material alteration, the banker should return it with a memorandum “Alteration requires drawer’s confirmation”. A materially altered cheque can only be honored if the alteration is confirmed by the drawer by means of his full signature. However, in case a cheque is materially altered and the banker makes payment, he shall be discharged form liability only when he proves the following:
(i) The alteration could not be detected with reasonable care, prudence & scrutiny, and
(ii) The payment had been made in due course.
9. Precaution regarding “Crossing”
Before honoring any cheque the paying banker must find out whether the cheque is open or crossed. If it is an open one, the payment may be made at the counter. If the cheque is a crossed one, the payment should be through a collecting banker. If it is specially crossed, the payment must be specifically made to that banker in whose favor it has been crossed. If there are ‘A/C payee’ and ‘Not Negotiable’ crossing, the paying banker need not worry, as they are directions to the holder and to the collecting banker.
10. Precaution regarding “Endorsement”
Before honoring a cheque, the banker must verify the regularity of endorsement, if any, that appears on the instrument. An order cheque requires endorsement for delivery as well as payment. If there is ‘per pro endorsement’, the banker must find out the existence of authority. Failure to do so constitutes negligence on the part of the paying banker.
11. Precaution regarding “Mutilated Cheques”
A cheque is said to be mutilated when it is torn into two or more pieces. Such a cheque should not be paid unless the banker is satisfied that mutilation was unintentional and it also requires confirmations of the drawer.
12. Precaution regarding “Legal Bar”
The existence of legal bar like garnishee order limits the duty of the banker to pay a cheque. So, the paying banker should be cautious while paying cheque against any account on which any legal bar is imposed.
13. Precaution regarding “banking hours”
The paying banker should make payment of only such cheques which have been presented (to it for payment) during the banking hours on a business/working day. Payment outside the banking hours does not amount to payment in due course. However, a banker is justified in extending the time during peak days, for those, who are still waiting for enchasing a cheque.
- 14. Minor Precautions
A paying banker should look into the following minor details also, before honoring a cheque:
a) He must see whether there is any order of the customer not to pay a cheque.
b) He must see whether there is any evidence of misappropriation of money. If so, the cheque should be returned.
c) He must see whether he has got any information about the death or bankruptcy or insanity of his customer. Failure to note those instructions will land him on trouble.
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