Collection and Payment

Acceptance and Payment

Acceptance may be by payment or by commitment to pay on the designated future date, as the instrument provides. In the case of a cheque, the bank effectively accepts, it by making payment on it

Where the bill provides for payment after a period, the drawee bank may accept it and thereby undertake to pay it on the due day.  A bill accepted by a bank has the full force and credit of the bank behind it and can be itself discounted or sold to a third party, as is   This is encountered in international trade.

The named payee or its assignee is the person ultimately entitled to payment. The person who must make payment on the bill is the acceptor or drawee.  The drawee would usually be the debtor’s bank. Once it is accepted, it is binding unconditionally on the drawee. The debtor/drawer remains liable if the drawee does not accept or does not pay.

Presentation and Discharge

A bill of exchange must be presented for acceptance or payment. A Bill must be presented within a reasonable time after its issue.  The practice of the trade concerned is looked at.   Banking practice is generally that a cheque must be presented within six months of the date or will be returned as stale.  If the bill cannot be presented then his may be excused and the holder may be entitled to sue without failure to accept.

A cheque will be presented for payment. The payee or its bank will generally present the bill to the payee or drawer’s bank.  A cheque or other bill may be endorsed by the original payee. The person who finally holds the bill/cheque may present it and to the drawee.  When it is immediately due, it will be presented simultaneously for acceptance and payment.

A bill is discharged in a number of ways. The normal course is that payment in due course by on behalf of the drawee or acceptor (the third party bill i.e. bank) is made and this discharges the bill.  A bill may be discharged by the acceptor becoming a holder. Alteration of the bill will discharge it, except as against parties who have authorised or assented to the alterations or who endorsed after alteration.

Dishonour

A bill may be dishonoured by the drawee or acceptor. It can be dishonoured by non-payment or non-acceptance.  If this happens, the holder or payee has an immediate right against the drawer and or endorsers.  The drawer is the person originally wrote the bill e.g. the person writing a cheque. The endorsers are any persons who have endorsed the bill / cheque in the chain of to the persons who endorse the bill to him.

When a bill is dishonoured the holder (payee or the person to whom he has endorsed it) must give notice to the drawer and the endorsers. Failure to give notice within the relevant time means that they are discharged.  Notice may be given in writing or personally.   It must reach them within a reasonable time. Delay is excused if it is caused by circumstances beyond the control of the holder.

If a bill or cheque is dishonoured, liquidated damages may be awarded.  The holder can sue the acceptor in the case of an accepted bill, the drawer and endorsers for the promised amount together with expenses and interest.  Any of the endorsers may be sues.  The endorser who is compelled to pay, may in turn sue the drawer, the acceptor and all previous endorsers.

Liability of Endorsers

If the cheque or bill is payable to bearer, it can be transferred by delivery.  Where it is payable to a specified person, it is transferred by being endorsed.  This is done by signing on the back of the bill.  Endorsement must be of the entire bill. As long as the endorsement appears to be regular on its face, a  simple signature will suffice.  If the endorsement does not appear to be regular, then they will not be a holder in due course, with the right to sue all the relevant parties.

A person who endorses a cheque becomes fully liable on it.  Even if a false cheque is dishonoured an endorser is obliged to pay the bill / cheque in accordance with its terms and compensate the holder and subsequent endorsers.  The person cannot rely on the fraud irregularity of previous endorsements or the cheque / bill itself.  A person who endorses a cheque is liable on it if it is dishonoured.  He must compensate the holder and subsequent holders.

Holder in Due Course

The holder is the person who holds the cheque and to whom it has been last endorsed. The holder in the case of a bearer cheque is the person who holds it. In order to be a holder in due course and enjoy these rights. The bill must be completed regular on its face including the back.  It must be complete.  The person must become a holder before it became overdue, without notice of any previous dishonour.

The bill or cheque must be held in good faith without notice of any defect.  This generally means actual knowledge.  The instrument must have been transferred to the holder.  If it has not been endorsed, then the holder must have given value for the instrument.  .

A holder of a bill in due course, takes it free from any defect of the title of the prior holder.  A defect in title could include obtaining the bill through fraud, duress, fear, unlawful means and illegal consideration.  It is also taken free of any personal defences that may arise on the underlying transaction between parties to the cheque.

There are some defects which invalidate the bill.  If the apparent drawer or endorser did not sign the bill or is a minor, there is no recourse.  Where a signature on a bill or a cheque is forged or unauthorised it is inoperative.  The person concerned is not bound.  A forged endorsement does not pass rights.

Protections

Special protections exist for banks in relation to forged endorsements. Where a bill is accepted, the person accepting cannot deny the existence of the drawer, the genuineness of his signature or his capacity to authorise the bill. Where it is payable to the drawer’s order, the capacity of the drawer to endorse or genuineness of endorsement cannot be challenged.

An endorser cannot deny to the holder in due course, the genuineness of the drawer’s signature and all previous endorsements.  Therefore a holder can enforce the bill against an endorser, even it is a forgery.  Where a bill is payable to a fictitious payee or on a non-existant person, it may be treated as payable to bearer.  Therefore if the drawer makes out a bill to a fictitious person the holder will be valid as against the drawer.

Crossing

The crossing of cheques and bills of exchange restricts their negotiability.  Crossing may reduce the chances of fraud.  A cheque may be crossed by drawing two parallel lines on its face.  This is general crossing.  The words “& Co” may be included but this is not necessary.  Crossing means that the cheque may only be lodged to a bank account, though not necessarily that of the payee.

A bank which does not obey the crossing may be liable for loss sustained as a result.  A cheque may be marked non-negotiable and be accompanied by a general crossing.  This means that the cheque cannot be endorsed.  The holder gets the same title as the transferor.  The cheque remains transferable but the holder gets the same title as the transferor.  Therefore the transferor’s entitlement can be challenged.

Cheques may be crossed and have the words “Account Payee” inserted or “account only” or account of q named persons.  The purpose is to restrict payment to the account of the payee.  This has no recognised legal effect.  However in practice, a collecting bank which ignores the crossing may not be able to rely on the usual protections.  Non-negotiability has been recognised in the UK.

Role of Banks

The collecting bank is generally the payee’s bank.  Once the cheque has been lodged with the collecting bank, it is sent for payment to the paying bank. It is possible for the one bank to be collecting and paying bank.  Different branches of the same bank are treated as different entities for the purpose of the rules protecting the bank.  The collecting bank is effectively is an agent of the payee.  It may itself be a holder if it has taken the cheque in good faith, for value.  This may occur by payment of money or crediting of the customer’s account.

The paying bank must honour properly drawn cheques.  It also has a duty not to pay out on improper cheques or those on which the drawer does not wish payment to be made.  The bank’s authority to pay ends with the drawer’s death or where he has become bankrupt or ceased to be of sound mind. It is possible for the one bank to be collecting and paying bank.  Different branches of the same bank are treated as different entities for the purpose of the rules protecting the bank.

The drawer of the cheque has a right to countermand.  It does not matter if the countermand is irregular or even a criminal offence.  The banks need only verify that it is effective and originates from the drawer.  The bank must have notice of the instruction and it must be authenticated.  It may be written or oral.

A countermand must be ambiguous and the cheque must be identified.  The countermand must be given to the relevant branch within a reasonable time before presentation for payment.  If there is an agreement that the payment will not be countermanded as occurs with cheque cards, the right to countermand does not apply

Payment on the underlying transaction may be deemed to take place when the cheque is delivered to the payee or when the proceeds of the cheque are received.  The general principle is that payment takes place on delivery of the cheque unless it is specifically provided that cash must be paid. In other cases, the delivery of the cheque is not payment and actual payment must be received.

Cheque guarantee card guarantees payment by the bank within the limit stated, regardless of the position with the account.  The conditions are determined by the terms of the card.  Typically the signature and card must correspond with the cheque, cheque must be drawn in the presence of the payee by the drawee.  The cheque must be presented before the expiry date on the card. The number of the card must be written on the back of the cheque and payments must be below the limit.  The cardholders will have obligations such as to report a lost card or stolen card.

Wrongful Payment

If a wrongful payment is made, the collecting or paying bank may be liable.  Payment contrary to the drawer’s mandate is wrongful.  A forged signature is ineffective to pass the title to a cheque.  The paying bank may be subject to civil action for conversion if something is done with the cheque which denies the true owner’s rights to it. If a bank were to pay on a stolen cheque, this could in principle amount to conversion, because it is contrary to the true owner’s rights.

A collecting bank that collects money on a forged cheque may be liable to the true owner in conversion.  If the collecting bank collects payment on behalf of someone other than the true owner, it may be liable to the true owner for converting the cheque.

Customers have duties not to draw cheques so as to facilitate fraud.  They should report fraud when they find it.  However, overly stringent duties are not placed on customers.

The above principles of the customer having to take care and subrogation limit this.

Bank Protection

There are special rules in relation to cheques that are designed to protect banks against the risk of liability. Where a bank acts in good faith in the ordinary course of business, the bank is entitled to accept as genuine, all signatures and endorsements on a cheque.  It is not obliged to enquire as to whether they are forgeries.  Where a cheque is paid in good faith in accordance with its crossing and the bank has acted in good faith and without negligence, the paying bank is deemed to have paid it to the true owners.

The protection does not apply if the endorsement is irregular e.g. the names do not match. A further provision in the Cheques Act provides that where a banker acts in good faith in the ordinary course of business in relation to a cheque that is not endorsed or irregularly endorsed, it does not incur liability by reason of the absence or regularity of endorsement.  If the surrounding circumstances are suspicious or there are obvious mismatches in the name the bank may not be held to have acted in the ordinary course of business.

The collecting bank also enjoys certain protection.  Where a collecting banker in good faith without negligence receives payment for a customer of an instrument and the customer has no title or defective title, the banker has no liability to the true owner of the instrument by reason of receiving payment.  The recipient must be a customer.  The Cheques Act provides the banker is not to be deemed negligent by reason only of failure to concern himself with the absence or irregularity of endorsements.