[Banking Notes, AHSEC, Class 12, Chapter wise Notes, Cheque - Collections and Payments, Revised Syllabus]
AHSEC CLASS 12 NOTES FOR 2022 - 23 EXAM
SUBJECT: BANKING
Unit – 6: Cheque – Collection and Payments
Short Answer type Questions and
Answers (1/2 Marks)
Q.1. Name various types of cheques.
Ans: 1) Open cheque which is divided into two parts: Bearer and
order cheque. 2) Crossed cheque which are of various types general, special,
account payee and not-negotiable.
Q.2. What is open cheque? What are its
types?
Ans: An open cheque is one which is presented and paid by the
banker over the banks counter in a direct way. An open cheque may be two
types: Bearer cheque and Order cheque.
Q.3. What is bearer cheque?
Ans: Bearer cheque is one which is payable to any payee who
present it for payment over the counter of the bank.
Q.4. What is order cheque? 2013
Ans: Order cheque is a cheque which is payable to a certain person
named in the cheque by the drawer or to the order of the payee.
Q.5. What is open and crossed cheque?
Ans: An open cheque is payable across the counter and crossed
cheques are paid through bank accounts.
Q.6. What is post-dated cheque? 2012, 2018
Ans: If a cheque bears a date later than the date of issue it is
termed as post dated cheque.
Q.7. What is ante-dated cheque?
An ante-dated cheque is one which bears a date earlier than the
one on which the cheque is actually drawn.
Q.8. What is stale cheque?
Ans: A cheque which is more than 3 months old is called a stale
cheque.
Q.9. What is mutilated cheque?
Ans: Mutilated cheque is a cheque which is turn into two or more
pieces.
Q.10. What do you mean by conversion
of money?
Ans: Conversion of money means wrongful and unlawful interferences
with other person’s property or collecting cheque which is not consistent with
the owner’s right of possession.
Q.11. What is Double Crossing?
Ans: Where a cheque bears across its face two separate special
crossing i.e. the name of two banks, is termed as double crossing. A specially crossed cheque is required to be
collected through the banker specified in the crossing.
Q.12. Collecting banker can claim
protection only in case of crossed cheque. True 2016
Q.13. What is forged instruments and
forgery of drawer’s signature?
Ans: A cheque is called forged instrument when forgery takes place in signature of the drawer, signature of the endorser, and alteration in name of the payee, alteration in amount, alteration in date etc. validated by forged signature. Forgery of drawer’s signature is void and payee will not be able to enforce payment. In case such payee gets payment by mistake such payment can be claimed back from him/her.
Long Answer type Questions and Answers (3/5/8 Marks)
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Also Read:
1. HS 12 Banking Chapter wise Notes
2. AHSEC Class 12 Banking Question Papers From 2012 Till Date
3. AHSEC Class 12 Banking Solved Question Papers From 2012 Till Date
4. Banking Chapter wise MCQs
5. Class 12 Banking Important Questions and Question Bank
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Q.1. What is bearer cheque? Mention
its features, advantages and disadvantages.
Ans: Bearer cheque is one which is payable to any payee who present
it for payment over the counter of the bank. In other words, it is payable by
the banker to the person named on the cheque or any other bearer. For example,
“pay to X or bearer” is a bearer cheque transferable.
The features of bearer cheque are as follows:
a) It is
freely transferrable from one person to another by simple delivery.
b) Bearer
Cheques does not need endorsement for their negotiation.
c) In case of
lost or stolen, the banker shall not be responsible for the payment made to an
unauthorized person.
The main
advantages of bearer cheques are:
a) It is
quite easy to obtain the payment of bearer cheque at the counter.
b) It is easy
to negotiate a bearer cheque as it does not need endorsement for its
negotiations.
c) It is
suitable for making small payments.
d) A person
who does not have any bank account can collect the payment of the cheque easily
from the bank without any verification and attestation of sign adores.
e) A bearer
cheque can be easily converted into order cheque.
The
disadvantages of bearer cheque are:
a) A bearer
cheque is not safe because payment of bearer cheque may be made to any person
whoever he may be, genuine payee or a thief.
b) A bearer
cheque is not suitable for big payment due to their lots of risk.
c) Bearer
cheque passes freely from hand to hand, so there is no record of its movements.
Q.2. What is order cheque? Mention its
features, advantages and disadvantages.
Ans: Order cheque is a cheque which is payable to a certain person
named in the cheque by the drawer or to the order of the payee. For example,
“pat to X or order”.
The features of order cheque are:
a) Order
cheque may be transferred from another by making endorsements on the cheque.
b) Order
cheque is paid by the banker only when he is satisfied about the identity of
the payee.
The advantages
of order cheque are:
a) Order
cheques are safe because payment is made by the bank only. When the bank is
satisfied about the identity of the payee.
b) An order
cheque cannot be transferred without the signature of the transferor. So, there
is record of movement and it can be easily traced.
c) It is
suitable for making big payment.
The
disadvantages of order cheque are:
a) Order
cheque cannot pass freely from hand to hand.
b) Order
cheque is not easily incashable. The banker makes payment only when the bank is
satisfied about the identity of the payee.
c) Order
cheque cannot be converted into bearer cheque.
Q.3. Write down the difference between
bearer cheque and order cheque?
Ans: The main difference between bearer cheque and order cheque
are:
a) Bearer
cheque is payable to the person named on the cheque or to any bearer. But an
order cheque is payable to the person named on the cheque or to his order.
b) Bearer
cheque may be negotiated by more delivery of cheque. But order cheque needs to
be endorsed for the purpose of negotiation.
c) The risk
is more in case of bearer cheque as it can be encashed by anybody, even a
thief. But, the degree of risks is less in case of order cheque as it is
payable to a particular person.
d) Bearer
cheque is suitable for making small payments. But, order cheque is suitable for
making big payments.
e) There is
no record of movement of bearer cheque as it is transferred without
endorsement. But there is a record of movement of order cheque because it bears
endorsement.
f) Bearer
cheque can be converted into order cheque. But order cheque cannot be converted
into bearer cheque.
Q.4. Distinguish between open cheque
and crossed cheque.
Ans: The difference between open cheque and crossed cheque are:
a) Open
cheque is payable across the counter of the bank. But crossed cheque is payable
only through a bank account.
b) Open
cheque does not require any parallel lines on the face of the cheque. But
crossed cheque requires two parallel lines or some other indicators signifying
crossing.
c) Open
cheque may be a bearer or order cheque. But crossed cheque is not a bearer or
order cheque.
d) The degree
of risk is more in case of open cheque as it can be encashed by anybody across
the bank’s counter. But, the degree of risk is less in case of crossed cheque
as it cannot be encashed by any unauthorized person.
e) Open
cheque is used by the drawer to withdraw money for himself. But crossed cheque
is not used by the drawer to withdraw money for his own use.
f) Open
cheque can be easily converted into crossed cheque. But crossed cheque cannot
be converted into open cheque except by the drawer of the cheque.
Q.5. What
do you mean by Crossing of cheque? Who can cross a cheque? Explain briefly
about the different types of crossing and their significance. 2012, 2014, 2016
Ans: Crossing of a cheque: A cheque is said to
be crossed when two parallel transverse line with or without any words are
drawn on the left hand corner of the cheque. It is simply a direction to the
paying banker that the cheque should be paid only to a banker. Crossing of
cheque is very safe because the holder of the cheque is not allowed to encashed
it across the counter of the bank. A crossed cheque provides protection not
only to the holder of the cheque but also to the receiving and collecting
bankers.
The
following parties can cross a cheque: 2012,
2014, 2016, 2019
a) The
Drawer: The drawer of a cheque may cross a cheque before issuing it. He may
cross it generally or specially.
b) The
Holder: The holder of a cheque can cross in the following way:
Ø The holder
may cross an open cheque generally or specially.
Ø The holder
may specially cross a generally crossed cheque.
Ø The holder
may add the words “Not-Negotiable” in a generally or specially crossed cheque.
c) The
Banker: The banker to whom the cheque is crossed specially may again cross it
especially to another banker's agent, for collection. This is called double
special crossing.
Types of
crossing: 2018
1. General crossing: A general
crossing is a crossing where a cheque simply bears two parallel lines with or
without any words and without any specification. According to Sec. 123 of the
Negotiable Instrument Act, 1881, “When a cheque bears across its face an
addition of the words. “and company” or any abbreviations thereof between two
parallel transverse line or of two parallel transverse lines simply either or
without the words, “Not Negotiable” that addition shall be deemed a general
crossing. Simplify, In case of General crossing words such as “and company”,
“not Negotiable”, “Account payee” etc. may be inserted between the lines.
A general crossing cheque protects the drawer
and also the payee or the holder thereof. Whenever a drawer desires to make
payment to an outstation party, he can cross the cheque so that even if the
cheque is lost, it means only a piece of paper is lost and nothing beyond that.
If by any chance, it is encashed by a third and unauthorized person, it is
possible to find out to whose account the amount is credited and the
unauthorized person can be identifies and suitable action taken against him.
(Specimen - 2012
2. Special crossing: Section 124 of the
Negotiable Instruments Act, 1881 defines special crossing as “where a cheque
bears across its face, an addition of the name of a banker 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.”
Thus, in case of
special crossing, the name of a particular bank is written in between the
parallel lines. The main implication of this type of crossing is that the
amount of the cheque will be paid to the specified banker whose name is written
in between the lines. Special crossing is in a particular bank and
by special crossing, he is assured of double safety, safety to the drawer and
safety to the payee.
3. Account payee crossing: This type of crossing is done by adding
the words ‘Account Payee’. This can be made both in general crossing and
special crossing. The implication of this type of crossing is that the
collecting banker has to collect the amount of the cheque only for the payee.
If he wrongly credits the amount of the cheque to another account, he will be
held responsible for the same.
4. Not negotiable crossing: When the words ‘not negotiable’ is added
in generally or specially crossed cheques, it is called not negotiable
crossing. A cheque bearing not negotiable crossing cannot be transferred. If a
cheque bearing ‘Not negotiable crossing’ is transferred, care must be taken
regarding the ownership of title of both the transferor and transferee.
Q.6. Write the differences between
General and Special crossing?
Ans: The difference between General and Special crossing are:
a) In case of
general crossing drawing two parallel transverse lines on the face of the
cheque is must. But, in case of special crossing drawing two parallel lines is
not necessary.
b) In case of
general crossing writing the name of a bank across the face of the cheque is
not required. But in case of special crossing the name of a bank must be
mentioned across the face of the cheque.
c) Generally
crossed cheque is payable through any bank account. But specially crossed
cheque is payable only through the specific bank mentioned in the crossing.
d) A
generally crossed cheque is safer as compared to open cheque. But a specially
crossed cheque is safer than open cheque as well as generally crossed cheque.
e) General
crossing can be easily converted into special crossing by inserting the name of
a bank in between the two lines. But special crossing is not convertible into
general crossing except by the drawer.
Q.7.
Explain the meaning of Material Alteration of cheque with illustrations. 2015
Ans: An alteration is considered as material
alteration if it affects the operation of the instrument substantially and the
liability of the parties concerned is changed significantly. Any change in the
name or place or amount of the cheque is termed as material alternation because
it makes the instrument void and same cannot be enforced against the prior
parties of the instrument.
Examples of material alterations are
as follows: 2014
a)
Alteration of the date of the cheque.
b)
Alteration of the place of payment.
c)
Alteration of amount of the cheque.
d)
Alteration in the names of the parties or the
relationship between them or affecting their legal status.
e)
The substitution of the word “bearer” in place
of “order” in the cheque.
f)
An alternation of the crossing on a cheque.
Q.8. Who
is a collecting banker? Discuss the duties and responsibility of a collecting
banker.2012, 2014, 2015, 2018, 2020
Ans: A collecting banker is one who collects
the cheques and other negotiable instruments deposited by his customers and
places the amount to the credit of the customer’s account. A collecting banker
acts as an intermediary between the paying banker and his customer in collecting
the proceeds of a cheque from the paying banker and crediting the same to the
customer’s account.
The duties of a collecting banker
towards his customers are as follows:
a) Due care
and Diligence in the collection of cheques: The collecting banker is bound to
show due care and diligence in the collection of cheques presented to him. In
case a cheque is entrusted with the banker for collection, he is expected to
show it to the drawee banker within a reasonable time.
b) Presentation
of cheque for payment within reasonable time: The collecting banker should
present the cheque of his customer to the drawee banker within a reasonable
time. If the banker makes undue delay in presentation of cheque and the
customer suffers a loss then the banker will be held responsible for the loss
and shall be required to reimburse the loss.
c) Remittance
of proceeds to the customer: It is the duty of the collecting banker to inform
his customer immediately about the collection of the cheques. When the proceeds
are collected, the banker may debit his customer’s account in respect of his
commission and credit the gross proceeds to the customer’s account.
d) Serving
Notice of Dishonour: When the cheque is dishonoured, the collecting banker is
bound to give notice of the same to his customer within a reasonable time. If
he fails to give such a notice, the collecting banker will be liable to the
customer for any loss that the customer may have suffered on account of such
failure.
Q.9. What are the conditions to be
fulfilled by the collecting banker to avail of statutory protection? What are
the legal protections granted to a collecting banker? 2016
Ans: The following conditions are to be fulfilled by the
connecting banker to avail of statutory protection (Precaution of the paying
banker):
a) He should
receive the payment of the cheque only for a customer and not for a stranger.
b) He should
collect only crossed cheque.
c) He should
collect cheque in his capacity as an agent of his customer and not as a holder
for value.
d) He should
closely examine the title of the customer to the cheque verifying the
regularity of endorsement and other contents of the cheque.
e) He should
act in good faith and without negligence.
Legal Protections Granted to a Collecting
Banker: The Negotiable Instrument Act 1881 provides legal or statutory
protection to the collecting banker against the risk of conversations. The
collecting banker gets statutory protections in the following ways:
a) The cheque
must be a crossed cheque: The statutory protection is available to the banker only
in case of cheques crossed generally or specially to him. He cannot avail of
this protection in case of an uncrossed cheque. It is essential that the cheque
is a crossed one before it is deposited with the collecting banker, otherwise
the banker will be liable for conversion if the title of the customer proves to
be defective or the endorsement thereon is forged one.
b) The
payment must be received for a customer: The statutory protection is available
only when the banker collects the cheque on behalf of a customer. The
protection cannot be availed of in case of cheques sent to the banker by a
person who is not a customer of the banker.
c) Collection
as an agent: The collecting banker can avail the statutory protection only if
he collects the cheque as an agent of the customer. This protection is not
available when he collects cheques as a holder for value.
d) Payment
must be received in good faith and without negligence: The most essential
prerequisite for availing of the statutory protection is that the banker must
receive payment in good faith and without negligence. He should not be
negligent in receiving payment. It must be carefully noted that ordinarily a
banker owes duty to his own customer but the law makes him responsible to the
true owner of the cheque also. Thus the privilege of statutory protection can
be availed of by the banker if he fulfils his statutory duty towards the true
owner of the cheque and exercises due care in safeguarding the latter’s
interest.
Q.10. Explain the position of collecting banker as holder for value and as an agent of the customer.
Ans: The collecting banker may collect the cheques of his customers either as:
1. A holder for value or,
2. An agent of the customer.
The legal position of the collecting banker depends upon the capacity in which he collects the cheques.
1.
Collecting
banker as a holder for value: When to oblige a customer a banker pay the
amount of the cheque before the collection of the cheque drawn upon another
banker, the collecting banker is deemed to be its holder for value. The
collecting banker shall be deemed to be the holder for value:
a) If he pays the amount of cheque in cash or in the account of the customer before it is actually realised,
b) If he lends money on the strength of the cheque,
c) If he accepts the cheque drawn on other bank to reduce the amount of existing debt or
d) If he pays cash over the counter at the time the cheque is paid in for collection.
As a holder for value he bears the liability and enjoys all the rights of a holder in due course. If the cheque is dishonoured, the collecting banker as a holder in due course can sue all the prior parties after giving a notice of dishonour.
2. Collecting banker as an agent: A
collecting banker is said to be acting as an agent of the customer if he
credits the customer’s account with the amount of the cheque after it is
actually realised from the drawee banker. Only when the amount of cheque is
collected, the customer is allowed to withdraw the amount. While collecting the
cheque as an agent, the collecting banker gets the same title on the cheque as
that of his customer. If the customer has no title or defective title, the
collecting banker cannot have good title to the cheque. In case the cheque
collected by the banker does not belong to the customer, he will be held liable
for ‘conversion of money’ i.e. illegally interfering with the rights of the
true owner of the cheque.
Q.11. Who is known as paying banker?
Mention his duties and liabilities. 2013,
2020
Ans: The term paying banker refers to the drawee banker who pays
the amount of cheques to his customer. The paying banker is defined as the
“banker to whom the order is made to pay, where the order is issued as the form
of a cheque”.
Duties of paying banker:
a) Prescribed
form: Before payment, the paying banker must ensure that the cheque presented
must be in prescribed form. The banker has every right to dishonor a customer’s
cheque if they are not submitted in the prescribed form.
b) Sufficient
funds: The paying banker must pay the cheque if there is sufficient balance in
the account of the drawer. If the funds are not enough, the cheque cannot be
honoured.
c) Genuine
Payee: Before payment, the paying banker must ensure that the payee is genuine.
d) Material
Alternation: Materially altered cheque should not be honoured by the banker as
such alteration is done without the knowledge or consent of the drawer.
However, such a cheque can be honoured if the alteration is confirmed by the
drawer by affixing his full signature at the place of alteration.
e) No payment
if restriction imposed: The paying banker should not pay the cheque if there is
restriction imposed on the payment by the drawer or by the law.
f) Payment on
behalf of customer only: Another important duty of a paying banker is to pay on
behalf of his customer of the bank and he has account in the bank.
g) Drawee’s
signature: The signature of the drawer or his authorised agent should agree or
tally with the signature on the cheque. Only if the signature tallies, the
banker has the right to debit the customer’s account.
h) Payment
through ban k account only: The paying banker should not make payment of
crossed cheques over the counter of the bank.
i)
Must be presented within reasonable time: The
paying banker must pay the cheque when it is presented within reasonable time
and during banking hours.
Liabilities of paying banker:
a)
The paying banker will be liable if he
wrongfully refused to honour the cheques In spite of sufficient balance.
b)
The paying banker will be liable if he
wrongfully refused to pay the cheque when it is presented within reasonable
time and during banking hours.
c)
The paying banker will be liable if he pay the
cheque contravening the legal provisions laid down by the Negotiable Instrument
Act.
d)
If overdraft facility is granted and the
paying banker refused to honour the cheque on the basis of this overdraft, the
paying banker will be liable.
e)
If a customer is allowed to draw cheques
against the cheque deposited and cheques are issued against such deposit then
the paying banker will be liable if he refused the honour the cheque.
Q.12. What are the precautions to be taken by
the paying banker before payment of cheques? 2015,
2016
Ans: The
paying banker should take precautions on the following points:
a) Form of
cheque: The Negotiable Instrument Act 1881 has not given the form of a cheque.
In India every bank has right to use separate form for withdrawals, be it a
cheque or withdrawal form. The paying bank must ensure that the withdrawal form
or cheque presented must be in proper format.
b) Date of
cheque: In case an undated cheque is presented for payment, the banker should
refuse to honour it. Before presenting a cheque for payment, the drawer should
mention the date of issuing the cheque. But if he has not done so, the
instrument does not become invalid. The holder must fill in the date.
c) Amount of
the cheque: The amount of the cheque must be certain and expressed both in
words and figures. In case of any discrepancy between the amount expressed in
words, and figures, the paying banker may refuse to honour the cheque.
d) Drawer’s
signature: Every banker maintains a specimen copy of the signature of his
customer which he verifies with the signature on the cheques presented for
payment. In case of mismatch, the banker must not honour the cheque otherwise
the paying banker will be liable for the loss.
e) Material
alterations: Before honouring a cheque, the paying banker must ensure that
there is no material alteration in the cheque. In case of material alteration,
the banker should see that IT is confirmed by the signature of the drawer. If a
cheque is signed by more than one person, material alteration should be
confirmed by all the persons.
f) Sufficiency
of funds: It is a legal duty of a customer to keep sufficient funds in his
account for payment of the cheque. The cheque is to be paid in full and not in
part and therefore, inadequate funds in the customer’s account will result in
the dishonour of the cheque unless there are arrangements for granting of loans
or an overdraft. The paying banker has to be very careful regarding the
sufficiency of funds in the account of a customer on which a cheque is drawn.
g) Banking
hours: The banker should make payment of only such cheques which have been
presented to it for payment during its banking hours. Any payment of cheques
which was presented after banking hours will not be taken as a payment in due
course and banker will be liable in case of loss, if any.
h) Crossing
of cheques: If the cheque is a crossed one, it should not be paid on the
counter but through a collecting banker only.
i)
Mutilated Cheques: The banker must not honour
any mutilated cheque. Mutilated cheques are those which are torn into two or
more pieces.
Q.13.
Explain the statutory protection available to the paying banker. 2017
Ans: The negotiable instruments Act provides
statutory protection to the paying banker under the following circumstances:
a) Protection
in case of Bearer cheque: Bearer cheques are those which are paid by the banker
to the bearer. If a banker pays any bearer cheque, the banker will be
discharged of his obligation and will be provided protection under Sec. 85(2).
Protection to paying banker is given in case of bearer cheque on the basis that
a bearer cheque always remains a bearer instrument whether or not it is
endorsed. The banker need not verify the regularity of the endorsements.
b) Protection
in case of order cheque: In case of order cheque, the paying banker gets
protection only when payment is made to the genuine payee. In case the payment
is made to a person other than the payee, the paying banker does not get any
protection under the negotiable instruments Act. If the endorsement is regular
and payment in made in due course, the paying banker gets the protection under
Section 85 (i). In case of irregular endorsement, if payment is made to a wrong
person due to forged signature, the protection is also given to a banker
because it is not possible for a banker to know each of the endorser and their
signatures.
c) Protection
in case of crossed cheque: In case of crossed cheque, statutory protection
shall be available to the paying banker when the two below mentioned conditions
are satisfied:
1. The
payment must be made in due course i.e., in good faith and without negligence
and according to the apparent tenor of the cheque.
2. The
payment must be made through any banker in case of general crossing and through
the specified banker in case of special crossing.
d) Protection
in case of Drafts: In case of Demand drafts drawn by one branch of a bank upon
another branch of the same bank, the banker gets protection under section 85 of
the Negotiable Instruments Act if he pays to the holder of the draft on
presentation. If the draft was endorsed and payment is made accordingly by the
banker, then the banker will be discharged from his obligations.
Q.14.
Under what conditions banker must pay a cheque? 2014
Ans: The Paying banker is bound to pay the
cheque if the following conditions are satisfied
a) When the
cheque has been drawn on the proper form i.e. on the forms supplied by the
banker.
b) When the
cheque bears a date and which is due.
c) When there
is sufficient fund in the account of the customer to pay the cheque in full.
d) When the
fund is properly applicable for the payment of the cheque.
e) When the
amount of the cheque is mentioned in both words and figures and they are same.
f) When the
banker has no doubt regarding the signature of the drawer i.e. it has not been
forged.
g) In case of
joint account, when all the account holders have signed the cheque.
h) When the
cheque has been drawn on the particular bank and branch in which the account
has been opened by the customer.
Q.15.
Explain the circumstances under which a banker can dishonour a cheque? 2013, 2015, 2017, 2019
Ans: The bank may dishonour a cheque for the
following cases.
a) When the
cheque is post dated and it is presented for payment before the date it bears.
b) When there
are insufficient funds to the credit of the drawer.
c) When the
cheque is presented for payment at branch where the drawer of the cheque has no
account.
d) When a
cheque is not duly, presented, as for example a cheque presented outside banking
hours.
e) When the
cheque is ambiguous, mutilated, materially altered or irregular.
f) When the
cheque has become stale, that is it is not presented within six months of the
issue of the cheque.
g) When the
signatures of the drawer of a cheque do not tally with the specimen signatures
in the records of the bank.
h) When the
amount in figures and in words is not the same in a cheque.
i)
When the cheque is crossed and it is not
presented through a bank.
j) Where the bank receives a notice of the insolvency or insanity of the customer.