1. CHEQUES
By Maxwell Ranasinghe

2.  In business, we use many instruments to settle
payments
 should know the basics of these instruments if we are
to conduct our business effectively and efficiently
 Bill of Exchange Ordinance No 25 of 1927 covers law
as to Bills of exchange, Promissory notes and
cheques.
 Bills of exchange it self are used basically in
international trade and cheques are usually used in
domestic trade.
 Promissory Notes are not used in trading transactions
much as they are used mainly for loans etc
 Therefore, our focus is to have a brief knowledge of
cheques that we use very often in business

3.  A Cheque is a bill of exchange drawn on a
bank and payable on demand”
 Therefore we need to study the nature of Bill
of exchange before we deal in detail about
cheques as cheques are within the meaning
of Bills of exchange.

4.  Bill of exchange Ordinance No 25 of 1927)
Defines Bill of Exchange as follows:
 “an unconditional order, in writing,
addressed by one person to another,
signed by the person giving it,
requiring the person to whom it is
addressed to pay on demand or at a
fixed determinable future time, a sum
certain in money, to or to the order of
a specified person or to bearer.

5. Defines Cheque as follows:
 “A cheque is a bill of exchange drawn
on a bank payable on demand”
 When the above two are combined a
cheque could be further defined as
 “Unconditional order in writing, signed
by the drawer, requiring the drawer
bank to pay on demand a stated sum
to or to the order of a specified
person or bearer.”

6.  Basic elements of a cheque could be specifically
described as follows.
 It should be an unconditional order made by the
drawer ( Current Account Holder) to the Drawee (
The bank)
 It must be an order and not a request ( therefore
no such phrases as “please pay” or I shall be
pleased if you could make the payment” will not
appear in a cheque)
 In writing – It could be hand written or printed in
the specific cheque leave issued by the drawee
bank to the Current Account holder‟s specific
account. (It cannot be on any cheque of the same bank or
any other bank. In practice a cheque should written by a pen
not by pencil or otherwise.)

7.  It should be signed by the person giving it. ( it
should be signed by the Current Account Holder)
 It should be addressed by one person to another
(Current Account Holder to the Bank)
 A sum certain in money should be required to be
paid. ( the amount of money should be clearly and
specifically indicated. Cannot use terms like pay about Rs.
2500.00. The amount in figures as well as words should be
written and it should match)

8.  Pay on demand (it has to be paid on
demand when it is produced (non crossed
cheques) or deposited to the bank (crossed
cheques) within a reasonable time of the
issue of the cheque. It has to be before six
months unless a special restriction as presentation has
been made by the drawer. Example certain government
institutions issue cheques with a remark, “valid only for
60 days”.
 Pay to or to the order of a specified person
or to bearer ( the person named as payee or endorsee of
the payee or the bearer of the cheque as the case may be)

9.  Crossing of cheques
 If a cheque is crossed, it cannot be encahsed
over the counter of a bank and it has to be
deposited in to a bank account for
realization.
 In other words, payment for crossed cheques
will be made only to a banker and that bank
will credit that money to the depositors
account after receiving payment from the
paying bank.

10.  It could even be a cheque of a same bank that
the depositor operates his or her account.
 Usually cheques are deposited in Current
Accounts only and at times banks accept
cheques to be deposited in savings Accounts
provided that the bank is satisfied with the
ownership of the cheque.
 if not banks may run a risk of negligence in
collecting a cheque for a savings account.

11.  It makes it more difficult for a thief to obtain
proceeds of a cheque ( because crossed
cheques must go through a bank account)
 It increases the time available for discovering
the theft and stopping payment (however, this may
not be true with online crediting of the cheques of the same
bank)
 The thief and or his accomplice may be traced
backed to the collecting bank who will have the
details of the account holder who deposited the
cheque
 A „ Not negotiable” crossing and special
crossings have special protections

12.  Ordinary Crossing
 Two parallel lines across the face of the cheque,
with or without the words” & Co”. These cheques
can be deposited to any bank.
 Special Crossing
 Inside the parallel line a name of a bank is
written, then that cheque will be considered as
specially crossed cheque to be deposited in an
account of the bank that is indicated inside the
crossing. It cannot be deposited in any other
bank.

13.  In order to secure cheques more one could even cross a
cheque with bank name and branch too. Example “ Hatton
National Bank- Grandpass Branch” Then that cheque could
be deposited in an account at the Hatton National Bank‟s
Grandpas branch only.
 If the drawer wants to further secure the cheque and wants
it to be credited only to one particular persons Account ,
he could even cross with the Account No. example “
Hatton National Bank- Grandpass Branch- A/C No
23456788” That cheque could be deposited only to the
A/c No 23456788 at Hatton National Bank‟s Grandpass
Branch only.
 In modern system of computer networked banks, one can
deposit the cheque through any branch of the Hatton
National Bank but it should be deposited to the specific
account in the crossing.

14.  Not Negotiable Crossing
 When the words “ Not Negotiable” added inside the
crossing, it is called a “ Not Negotiable” cheque. It
restricts the cheque of its negotiability.
 Therefore a person taking a not negotiable crossed
cheque cannot give a better title than what he has. (If
the person giving the cheque has a good title and one
accepts a cheque there will not be a problem even if
the cheque is crossed
 “Not negotiable”. The problem arises only if
something like a stolen cheque is given then the
holder will not become the „holder in due course”, a
person who will have the right to sue any party in his
own name)

15.  Account Payee Crossing
 This is a direction given by the drawer to the
collecting bank, that the proceeds should be
credited to the account of the payee.
 If the collecting bank confirms that that the
proceeds are credited to the payee, then the
paying bank may safely pay the collecting
banker.
 If the collecting banker collects the proceeds to
another‟s account instead of the payee stated in
the cheque, it( bank) could be held negligent.


16.  A person who may cross a cheque
 Cheque may be crossed generally or specially by
the drawer
 Where a cheque is uncrossed, the holder may cross
it generally or specially
 Where a cheque is crossed generally, the holder
may cross it specially
 Where an uncrossed cheque or a cheque crossed
generally is sent to a banker for collection he may
cross it especially to himself.

17.  Holder in due course ( YathakaDharakaya)
 A holder in due course is a holder who has taken a
bill ( cheque) complete and regular on the face of it,
under the following conditions:
 (i) he must have given value
 (ii) he must have taken in good faith
 (iii) bill must not be overdue
 ( iv) he must have no notice of previous dishonor
 (v)he must have no notice of prior defect in title
 And there must be no forgery on the bill ( signature
of drawer or endorsers)
 It must not be crossed” Not negotiable”, “Not
transferable” or “ crossed “ Pay Maxwell only” because
it ceases to be a negotiable instrument.

18.  Privileges of the holder on due course
◦ He can sue on his own name
◦ He can enforce payment against all prior
parties
◦ He holds the bill free from defects in title
of prior parties
◦ He can pass on a perfect title.

19.  Drawer should have signed the cheque.
 Have the amount stated in both words and
figures which must agree.
 Possess all necessary endorsements.
 Not be stale. Bank will not pay a cheque older
than six months from the date of the cheque.
 Have had any alteration signed by the drawer.



20.  Be dated. If a cheque is presented undated
the bank will return the cheque. However, a
holder may insert the date what he considers
to be the true date.
 State the payees name or just cash as payee.
 If the payee is indicated as “cash” such a
cheque cannot be crossed as “A/C payee”.
 Cheque is not mutilated. ( such as crushed,
stained or torn)
 Company rubber stamp or any other
authorized signatory‟s stamp is placed.

21.  Where the customer‟s balance or limit is
insufficient to cover the cheque.
 Payment is stopped by the drawer.
 Cheque is stale. ( check is older than six
months)
 Cheque has not been properly drawn.
 Notice of customers death.

22.  Notice of presentation of a bankruptcy
petition against customer.
 Making of a bankruptcy order against the
customer.
 Order issued by the Commissioner of Inland
Revenue or Commissioner of Provincial Tax
Commissioner restraining the account.
 Notice of defect in presenter‟s title.
 Court order.

23.  Notice that the customer‟s signature is
forged.
 Post dated cheque.
 Cheque presented after business
hours.
 If alterations are unauthorized.

24. 1. He should draw cheques carefully.
 London Joint Stock Bank Vs. Macmillan (1918)
 A firm entrusted a clerk to write cheques for signature of the
partners. The clerk wrote the amount £ 2 and did not write the
amount in words. Presented the cheque to the partner for
signature and the partner signed the cheques without taking
notice or care to write the amount in words.
 The clerk altered the figure to £120 and wrote the amount in
words as One Hundred and twenty and obtained money.
 The firm filed a case against the bank for paying £118 more to
the clerk.
 The court held that the bank is not liable as there is duty casts
on the customer to take care in writing cheques and should not
leave room for fraud. The fraud has taken place mainly due to
customer not checking the completeness of the cheque before
he signs the cheque.

25.  2. The customer should reimburse the
expenses incurred by the bank on behalf of
the customer e.g. Cheque collection expenses
if any
 3. If the customer is aware about any forgery
it should be informed to the bank, if not
customer would be stopped from denying the
forgery

26.  Greenwood Vs. Martins Bank Ltd. (1933
 Wife who forged husband‟s signature obtained money
for more than 40 cheques amounting to £4000 in total.
Husband knew this but he did not inform the bank
about it. After the death of the wife, husband claimed
from the bank for the moneys paid by the bank to his
wife on his forged signature. The court decided that the
husband cannot claim money as he even after knowing
the forgery did not inform the bank.
 4. The customer should keep the cheque
books and leaves safely where unauthorised
will not have access.

27.  1. The bank should obey the instructions of the customer
 A. It should honour cheques if properly drawn and there is
sufficient funds or an arrangement for an overdraft to pay
 B. Bank should honour the standing orders given by the
customers such as payment of Insurance premium etc
 C. It should obey any command for stopping the payment of a
specific cheque or cheques
 2.It should not disclose any information about the account
to third parties unless customer has given authority to do
so.
 However, disclosure is possible under certain statutes like
Inland Revenue Act or by order of court.

28.  Under the Bills of exchange Ordinance, protection is given for
paying banks as well as collecting banks under section 60, 80
and 82 in paying and collecting cheques for customers.
 Protection available for paying banks
 When paying the bank pays to a cheque where the endorsement
has been forged.
If the bank has made the payment in good faith
Without negligence
During the course of ordinary business of the bank
Where a bank pays a crossed cheque in good faith without
negligence in accordance with the crossing, he is protected from
the true owner of the cheque, even though the payment has been
obtained by an unauthorized person.

29.  Protection available for collecting banks
 Where a collecting banker in good faith
 Without negligence receives payment
 For a customer of crossed cheque
 Bank is protected from the true owner even if
the customer did not have title to the cheque
or had a defective title.

30. 
 The best business practice would be to select
good partners to deal with and grant credit. If
that could be ensured at the initial stages you may not have a problem
of cheque returns as you would be dealing with credit worthy customers.
 The other step that you could take is to
educate all persons who collect cheques and receive
cheque payments from customers about what to check when a
cheque is received from a customer (as detailed in sec 8.)

31. 
 First thing you should do is to send a notice of
dishonor. Notice of dishonor is a condition precedent
to a right of action and therefore, without delay the “
Notice of dishonor” by registered post or some other
provable manner should be sent.
 Then you should try alternate modes of collecting
cash or value for the returned cheque before you
proceed with legal action.
 If there is no other option to collect you may proceed
with legal action, considering facts like, the amount
of the cheque, financial status of the customer,
weighing the cost of litigation, time and energy that
you will waste.

32.  As set out in section 703 of the Civil Procedure Code,
action under special summary procedure on liquid
claims could be instituted upon a cheque.
 Under the special summary procedure, holder can
institute action by presenting a Plaint in the form
prescribed by the Civil Procedure Code supported by
an affidavit to the effect that the sum which he claims
is „justly due to him” from the defendant.
 Defendant will have to deposit the money before he
can answer the plaint unless special leave is obtained
to answer
 Issuing cheques without funds is a criminal offence (
cheating) under penal code and Sec 25 of the Debt
Recovery Act of 1990 . There is a provision to remand
the drawer initially and a jail term later

33.  Holder must produce the cheque together
with the plaint.
(Under the electronic presentment of cheques for clearance by
banks under the Payment and Settlement System Act No 28 of
2005, you may not get the original cheque from the bank as
in the past. You will get a copy of a electronic image of the
cheque. This cheque is valid for filing with the plaint it is
considered as the original cheque for litigation purposes.
Therefore, it is very important to keep the copy of the
electronic image of the returned cheque for litigation.)