NEGOTIABLE INSTRUMENTS-CHEQUES AND PROMISORY

1.0. INTRODUCTION

In the last Unit we introduced you to a brief discussion of Negotiable Instruments and went further into a detailed description of Bills of Exchange noting the importance in today’s business of this negotiable instrument. We were able to learn that examples of Negotiable Instruments include: cheques, bills of exchange, bearer bonds, bearer debentures, treasury bills, promissory notes, Banker’s draft, dividend warrants, Bank Notes etc. In this Unit we shall examine, in detail, cheques and promissory notes as they represent very important instruments you will be using frequently as students and as future managers of business.

2.0. OBJECTIVES

After going through this unit, you should be able to:

1.  List the features of a cheque; 
2. Explain the differences between cheques and bills of exchange. 
3. Determine a Bearer cheque from an Order cheque. 
4. Know the significant of crossing on a cheque. 
5. Explain the various types of cheques. 
6. Define a Promissory Note 
7. Explain the difference between a promissory and a bill of exchange. 

3.0. MAIN CONTENTS

3.1 CHEQUES

A Cheque is defined by Section 73 of the Bill of Exchange Act 1990 as a bill of exchange, drawn on a banker, payable on demand. In a broader sense, cheques can also be defined as an unconditional order in writing addressed by one person to a banker, signed by the person giving it, requiring the banker to pay on demand, a sum certain in money to or to the order of a specified person or bearer.
From this definition, it is pertinent to note that the person given the order must be a current account holder with the bank and for his instruction to be carried out he must have enough money in his account to cover the cheque. Alternatively, he must have made adequate necessary arrangement with his bank for overdraft increase (his account is not in fund) the credit balance on his current account is not sufficient to cover the cheque.

3.2 PARTIES TO A CHEQUE

The parties to a cheque are the same as the parties to a bill as discussed above. These parties are:
Drawer: This is the person that has drawn and signed the cheque. He is the customer that ordered the bank to pay the face value of the cheque out of is money with the bank to the person named on the cheque.
Drawee: This is the bank in which the order to pay directed. It is the paying bank in which order to pay is directed. It is the paying banker, that is the bank that hold the customer’s money.

Payee: This is the beneficiary of the proceed of the cheque i.e. the person who will receive the face value of the cheque. Normally the holder of cheque (if not the drawer) has no rights against the drawee banker since there is no fiduciary relationship between them. For example, if a cheque is dishonoured the holder of the cheque (if not the drawer) cannot take any legal action against the banker but can only exercise his right against the drawer of the cheque.

Collecting Bank: This is the bank in which the payee deposits the cheque for collection if the is presented through clearing.

3.3 FEATURES OF A CHEQUE

The name of the payee (order)

1. The amount certain in money and payable on demand 
2. Date: The cheque must be dated. An undated or post dated cheque must not honoured. 
3. Signature: The person must sign, as unauthorised signature will amount to forgery ab initio. 
4. Number/Serial Numbers: A cheque must bear the registered serial number, a cheque that does not have number will be dishonoured. 
5. It must be an unconditional order to a banker to pay. 
6. It must be in writing. 
7. It must be addressed to a banker. 
8. It must be made payable to or to the order of, a specified person or to bearer. 

3.4. DIFFERENCES BETWEEN CHEQUE AND BILLS OF EXCHANGE

The following distinct differences exist between Cheques and Bill of Exchange:

1. Cheque is only drawn on a banker while a bill may be drawn to a person, firm or company. 
2. Cheque is normally payable on demand except where it is post-dated whereas a bill may be payable on demand or at affixed or determinable future time. 
3. Bills of Exchange Act provides for cheques to be crossed but there is o provision for bills to be crossed. 
4. A cheque does not need to be accepted prior to payment as it is payable on demand but a bill need to be accepted prior to payment even if payable at sight. 
5. Immediately a cheque is drawn and signed, the drawer becomes primarily liable on it whereas the acceptor of a bill becomes full liable on the bill after he might have signed across the bill or written the word accepted on the bill thereby indicating his acceptance of the bill. 
6. Section 77(2) Bills of Exchange At 1990 subject to certain conditions protects the collecting banker when collecting cheques for customers, there is no such protection for a bank which collects the proceeds of bills of exchange. 
7. Cheque is commonly used in domestic trade while Bill Of Exchange is commonly used in international trade. 

3.5. TYPES OF CHEQUE

A cheque may be a bearer or order cheque

Bearer Cheque: A bearer cheque is one drawn payable to bearer or indorsed “in blank”. A cheque payable to a non-existing payee is treated as payable to bearer. A non-existing person is one of whose existence the drawer is not aware of, or who does not exist at all. Bearer cheque is transferable by mere delivery i.e. there is no need of endorsement although, in practice Banker still insists on indorsement as a means of protection and as evidence that the payee actually receive the proceeds of the cheque.





Order Cheque: A cheque is an order cheque if the drawer or subsequent indorser instructs that it is to be paid to a specific person or to his order without prohibiting further transfer by him. A transfer by that person requires that he shall add his endorsement (sign at the back).

3.6. CROSSING ON CHEQUES

A cheque is crossed where it bears across its face, two parallel transverse lines with or without the words “and company” between the two parallel transverse lines. On the other hand an open cheque neither bears across its face two transverse lines nor word(s).

3.6.1. TYPES OF CROSSINGS

A cheque may be crossed generally or specially and in either case may or may not include the words “not negotiable”.

1.  General Crossing: A cheque is generally crossed where: (i) A cheque bears across its face two parallel transverse lines and addition of the words “and company” or any abbreviation thereof between two parallel transverse lines, either with or without the words ‘not negotiable’, or (ii) Two parallel transverse lines simply, either with or without the words “not negotiable”. From the above definition, it should be noted that two parallel transverse lines constitute a general crossing. The effect of such a crossing is to make the cheque payable only to a collecting banker, that is, it precludes the paying banker from paying cash for the cheque across the counter. 
2.  Special Crossing: A cheque is specially crossed where a cheque bears across its face an addition of the name of a banker either with or without the words ‘not negotiable’. The addition of the name of the collecting banker constitutes a special crossing, with the effect that the paying banker must pay the cheque only to the collecting banker named on the crossing or to his appointed agent for collection. 
3.  Restrictive Crossing: A cheque is restrictively crossed where a cheque is specially crossed to a named banker with the addition of the word ‘only. The effect of this is that only the named collecting banker can collect such cheque but not an appointed agent i.e. no appointed agent can collect such cheque on behalf of the named bank. 

Self-Assessment Exercise:

1.  List and explain the various types of crossing on a cheque. 

3.6.2. ADVANTAGES OF CROSSING

1. It makes it more difficult for a fraudulent party to obtain the proceeds of the cheque because a crossed cheque cannot be cashed across the counter but has to be collected through the payee’s current account. 
2. It increases the time available to discover any fraud on the transaction because clearing of the cheques takes come days depending on the type of clearing. For example, a local clearing takes three (3) working days. 
3. The fraudulent part and/or his collaborator(s) could be traced back to the collecting banker since the cheque cannot be cashed across the counter. 
4. The drawer has more time to stop payment of the cheque while passing through clearing process if he has cause to stop the cheque e.g. if the payee has defrauded him. 

3.6.3 Effects of “Not Negotiable” and “Account Payee Only” crossings on cheques and Holders:

1. “Not Negotiable”: when these words are written across a cheque, it deprives the cheque of its negotiability, and it becomes an ordinary transferable chose in action. (a chose in action s an intangible right which can be enforced only by action in the courts and are not capable of physical possession). These words destroy negotiability of cheque and serve as a warning to the person taking it (i.e. hold that he will not acquire a better title than that of the person who transfers it to him. In legal term, the payee or any transferee takes it subject to equities i.e. the instrument is assignable but not negotiable. However, ‘not negotiable’ does not mean, as is often mistakenly thought, that the cheque cannot be transferred from one person to another, but that a person taking such a cheque shall not have and shall not be capable of giving a better title to the cheque than that of the person who transferred it to him (transferor). In Wilson and Meeson v. Pickering (1946), and employer (M) drew a blank cheque which was already crossed “Not Negotiable”. He left the cheque to his clerk to complete it by filling in the amount and name of the payee. The clerk filled in the amount and name of the payee. The clerk filled in a sum in excess of the amount required, and then handed the cheque to Pickering (P) in payment of her own personal debt to P. Held: that the employer could recover the value of the cheque from P (who had obtained cash), since the clerk had no title to the cheque and P could get no better title than the clerk had. Therefore W. was not liable on the cheque. 
2.  “Account Payee Only”: This type of crossing has no statutory significant and non-binding on the paying banker and do not affect the transferability or negotiability of the cheque. However, case law established that it is an instruction to the collecting banker to collect the proceeds of the cheque and credit the account of the named payee. If the collecting banker credits the proceeds of the cheque to a different account other than that of the payee, he will be liable for negligence and will have to compensate the true owner(s) for the amount of the cheque. 

Self-Assessment Exercise: 

1. What is the significance of crossing on an order cheque?
2.  Is this affected in any way if the words ‘not negotiable’ are included? 

3.7 PROMISSORY NOTES

A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time a sum certain in money, to or to the order of a specified person or to bearer.

3.7.1. Differences between a Promissory Note and a Bill of Exchange.

1. Unlike a bill of exchange, Promissory Note has two parties- Drawer or maker and Payee. 
2.  Acceptance of a note is never necessary, since there is no drawer. 
3.  Unlike a bill, a promissory can be drawn in a set. 
4. The maker is the person liable to pay. Whereas in a bill, the drawer is only liable until the drawee accept to pay. 
5. A promissory note must contain an unconditional promise to pay. While the acceptor of a bill may make a conditional promise to pay. 
6.  A promissory note is a promise to pay while a bill is an order to pay.
7. A bill may be treated as a promissory note where: 
8.  drawer and drawee are the same person 
9. the drawee is fictitious or lack capacity. 

3.7.2. Holder

Holder means the payee, or endorser of a Bill or Note, who is in possession of it or bearer thereof S.2 B.E.A. 1990. Thus to be a holder of a negotiable instrument, one must be in possession of it. However, a person holding a bill or note for example, under a forgery or one who has stolen a bill payable to order of another person is not a holder, but a wrongful possessor.