HISTORY AND LAWS RELATING TO CHEQUES

By
MRS. NAILA SABIR KHAN
L.L.M. Advocate High Court.
Part time Lecturer
B.Z.U. Gillani Law College, Multan

The origin of the word 'cheque' is unknown so far, but sits use dates back to the days when London goldsmiths made payment to a third party on an order addressed to them by the customer. These orders or 'drawn notes' were the earliest forms of cheques. Later, during the Stuart period in England, the Crown servants and pensioners were paid by means of 'Debentures', which after being encashed were kept as vouchers in proof of payment of money. The earliest known handwritten cheque is dated 14^th August, 1675, drawn on Mr. Thomas Fowles, a Fleet Street Goldsmith banker for S 9, Sh. 13, 6d. It is believed that printed cheque forms were for the first time issued between 1749 and 1759; but they were not very popular in the beginning. Likewise, cheques could not be very popular in India due to a number of reasons which include the small number of bank branches, requirement of the cheque to be drawn only in English, and also the Stamp Duty on cheques upto the year 1927. However, cheques have gained popularity in Pakistan ever since 1947, and their circulation has been expanding rapidly every day.

Definition: According to Section 6 of the Negotiable Instruments Act, 1881, "Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand". Since a cheque has been declared to be a Bill of Exchange, it must have all its characteristics as mentioned in Section 5 of the Negotiable Instruments Act. 1881. Therefore, one can say that a cheque can be defined as:

"An unconditional order in writing drawn on a specified banker, signed by the drawer, requiring the banker to pay on demand a sum certain in money to, or to the order of, a specified person or to the bearer, and which does not order any act to be done in addition to the payment of money." (Law of Banking by Dr. Hart, p. 327).

The Requisites of a cheque: There is no prescribed form of words or design of a cheque, but in order to fulfill the requirements mentioned in Section 6 above the cheque must have the following: -

(i) It should be in writing: Oral orders cannot be treated as cheques. Though the law does not prescribe any restriction on the writing material to be used for making out a cheque, the practice of banking has made it obligatory to draw the cheque either in printed character or by a typewriter or by a pen.

(ii) The unconditional order: The drawer of a cheque must not put any condition for the payment of the cheque. For instance, payment of the cheque will be conditional if the signing and dating a receipt of payment is desired before payment. If the drawer asks the banker to make the payment out of a particular fund, the order will be regarded as conditional hence it will not form cheque.

(iii) Drawn on a specified banker only: A cheque can be drawn only on a banker and none else. Moreover, the name of the banker must be specified so that there may be no mistake in demanding payment from the drawee banker. Bankers in Pakistan supply printed cheque forms to the account holders wherein the name of the drawee branch of the banker is printed or stamped specifically.

(iv) Payment on demand: A cheque is payable only on demand, and this demand can be lodged during a reasonable period which, at present, in Pakistan is 6 months from the date of its issue. After this period a cheque becomes 'stale'.

(v) Sum certain in money: The cheque must contain the order for the payment of a certain sum of money only, which means the amount referred to in order must not be ambiguous or disputable. The cheque forms issued by 'the bankers always contain spaces for writing the sum of money in words and figures both: If the amount stated in words and figures differ. Section 18 of the Negotiable Instruments Act, 1881, authorizes the bankers to take the amount stated in words as ordered or intended. However, the bankers in Pakistan usually return such cheques unpaid on the plea that due to this discrepancy the instrument cannot be treated as a cheque because the amount stated is not a sum certain in money.

(vi) Payable to a specified person: The cheque should be payable to or to the order of a certain person or bearer of an instrument. According to law, a 'person' may not necessarily be a human being. A 'person' can as well be one of the corporate bodies constituted by law to contract in accordance with recognized legal principles.

(vii) Signed by the drawer: In order to make the instrument a valid cheque, the drawer (account-holder) must sign it or he should somebody to sign it on his behalf because according to section 29-A of the Negotiable Instruments Act, 188 1, signature is essential to liability. In case the cheque has been signed by somebody on behalf of the customer, the banker must have prior information of this arrangement, and also, the account-holder must supply the specimen signature of his attorney beforehand.

PARTIES TO A CHEQUE

Sir John Paget says, "The normal cheque is one in which there is a drawer, a drawee banker and a payee, or no payee but bearer". Negotiable Instruments Act, 188 1, defines these parties as under:-

(1) The Drawer: Section 7 of the Act says that the maker of a cheque is called the drawer. He must be an account holder. In order to make the instrument a valid cheque the drawer must sign it exactly in accordance with the specimen signature supplied to the banker be forehand.

(2) The Drawee: Section 7 of the Act describes that the person directed to pay is called the 'drawee'. In case of a cheque it is always a banker with whom the drawer maintains an account so as to constitute him the customer. Section 3(b) of the Negotiable Instruments Act, 1881, defines that "Banker means a person transacting the business of accepting, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise, and with drawable by cheque, draft, order or otherwise, and includes any Post Office Savings Bank".

(3) The Payee: According to Section 7 of the Act, payee is the person named in the cheque to whom or to whose order the payment is to be made. There may be more than one payee on a cheque to whom it may be paid jointly or alternatively.

Types of cheques: Bankers in Pakistan deal with only two types of cheques: -

(i) OPEN CHEQUES: they are payable in cash at the counters of a banker in accordance with the practice of the bankers.

(ii) CROSSED CHEQUES: they are not payable in cash at the counters of a banker, but can be collected by only the banker who would credit the proceeds to his customer's account after realization.

PAYMENT OF CHEQUES

Payment in Due Course: It is a banker's primary contract to repay money received for his customer's account usually by honouring his cheques. Payment of money deposited by the customer is one of the root functions of banking. The acid test of banking is the receipt of money etc. from the "depositors, and its repayment to them. This paying function which is the distinguishing mark of a banker and differentiates him from other institutions which receive money the public. However, the banker gets legal protection hen payment is in 'Due Course'. According to Section 10 of the Negotiable Instruments Act, 1881, "Payment in Due Course means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground of believing that he is not entitled to receive payment of the amount therein mentioned". The responsibilities of the paying banker as regards payment or non-payment of cheques drawn on him is quite heavy. If the paying banker honours a cheque which should have been dishonoured, the paying banker may loose the money and if he dishonours it when it should have been paid, he is liable to pay damages for wrongful dishonour. The banker has either to honour the cheque or refuse its payment without delay at the time it is presented. Payment can be affected by cheques, drafts, pay orders, pay-slips, vouchers etc. The banker to whom the order to pay a cheque is addressed is called the 'paying banker'. It is a contractual obligation of a banker to honour his customer's cheques if the following essentials are fulfilled: -

(1) Cheque should be in a proper form.

In the McMillan case, Lord Haldane said, "The customer contracts reciprocally that in drawing his cheques he will draw them in such a form as will enable the banker to fulfill his obligations, and therefore, in a form which is clear and free from ambiguity". This means that the cheque should be drawn strictly in accordance with the provisions mentioned in Section 6 of the Negotiable Instruments Act, 1881. In Pakistan the customers use printed cheques supplied to them by the banker. There is, therefore, no likelihood of any difficulty arising in this connection. However, the banker must see that the customer or the holder has not changed the form of the cheque and made it a conditional one. If so, the cheque should be returned.

(2) Cheque should not be crossed.

A crossed cheque cannot be honoured over the counter to any person but a collecting banker. If the paying banker honours a crossed cheque contrary to the crossing, the true owner may require the banker to pay him such damages as he might have sustained by the banker's action.

In Madras Provincial Cooperative Bank Ltd. v. South

Indian Match Factory (AIR 1945, Madras 30) the bank was held negligent and liable to compensate the true owner for the loss due to encashment of a crossed cheque

(3) Cheques should be drawn on the particular. branch.

The payment of a cheque can be made only by the branch of the bank particularly mentioned on the cheque where the customer is maintaining his account. If arrangements have been made, encashment of a customer's cheque can be had at a branch other than the one where he maintains his account.

(4) Cheque should be payable to bearer or order.

The payment should be made to a person who' is in possession of it as a bearer or as per order. Section 3(c) of the Negotiable Instruments Act, 1881, dines a bearer as "a person who by negotiation comes into possession of a negotiable instrument which is payable to bearer". Therefore, the paying banker can make the

payment of such a cheque to a person who is in legal possession of it. When the bearer encashes a cheque be may be required to acknowledge receipt of money on the cheque by signing on the back of it. Section 13(1) Of the Act states that "Cheque is payable to order which is expressed to be so payable or which is expressed to be payable to a particular person. Therefore, banker must establish the identity of the payee before making payment to him on an order cheque.

(5) Cheque should not be mutilated.

When a cheque is tom, worn out or does not give sufficient evidence of the customer's intention, it is called a 'mutilated cheque'. The banker should see that the cheque presented for encashment is not mutilated, because if the banker this point, he becomes liable. However, mutilation by accident may be excused if the drawer declares about this fact. In Hong Kong and Shanghai Banking Corporation v. La Shi (A.1.R. 1928, Privy Council) it was rule that in of a note mutilated by accident, but which was identifiable, although its number was missing, the bank was liable.

(6)' No unauthorized material alterations.

Section 3 (f) of the Negotiable Instruments Act, 1881 defines that "material alteration in relation to a promissory note, bill of exchange or cheque includes any alteration of the date, the sum payable, the time of payment, the place of payment and where any such instrument has been accepted generally, the addition of a place of payment without the acceptor's assent." Further, Section 87 says, "Any material alteration of a negotiable instrument renders the same void against anyone who is a party thereto at the time of making such alteration and does not consent thereto, unless it was made in order to carry out the common intention of the original parties and any such alteration, if made by an endorsee, discharges his endorser from all liability to him in respect of the consideration thereof. "Therefore, a banker must not pay a cheque bearing apparent material alterations not duly authorised by the drawer under his full normal signature, specimen of which has been supplied to the banker beforehand.

(7) Funds must be sufficient and available.

The banker must see that there are sufficient funds are liable in customer's account to permit the honouring of the cheque presented. Section 3 1 of the Negotiable Instruments Act, 188 1, down that "The drawee of a cheque having sufficient words of the drawer in his hands, properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default". Quoting the decision in Murray v. Judah 1826) Mr. Morse writes in his 'Treatise on Banks and 3anking' that, "If the banker has no funds enough to the credit of the drawer to pay his cheque in full, he is not obliged to make payment in part". Sir John Paget quotes the decision of Atkin U. in Jaochimson v. Swiss Bank Corporation ( 1921) as follows: -

"The obligation of the banker to pay cheques drawn on him by his customer is subject to the condition that there are in his hand funds of that customer sufficient and available for the purpose, or that the customer has the right to overdraw upto a given limit not yet reached. If the banker has received from his customer certain cheques to be collected and credited to his account, and they have not been cleared and appropriated by the time a cheque against them has been drawn and presented, the banker is authorised to return it with the remark: "Effects not cleared, present again".

(8) The cheque should not be post-dated or stale.

A cheque is out-of-date when it is post-dated or stale, Post-dated cheques are those which are presented for payment before the due date. Sheldon says, "If a banker pays a post-dated cheque earlier than the due date, he loses the protection granted by'law, and shall have to bear any loss that may arise out of his action'. (Practice and Law of Banking, ed., p.6). Non-payment of a post-dated cheque by a banker is just for the following reasons: -

(a) A post-dated cheque is not a cheque payable on demand, rather it is like a bill of exchange payable at the future date. Thus paying it as a cheque could be violation of the Stamp Act also.

(b) The customer may stop the payment before the due date of the cheque by informing the banker formally. If the banker has already paid before the due date, he may lose his money.

(c) The customer may become insolvent, insane, or he may die before the cheque is due for payment. If the banker has already honoured the post-dated cheque, he I will not be entitled to debit the amount to his customer's account after the confirmation of any of the above states of the customer.

(d) Since the payment of a post-dated cheque is not regarded as "in due course", the banker paying such a cheque will not be entitled to statutory protection.

(e) The banker has no right to debit his customer's not a post-dated cheque. If he does so, it may have serious repercussions when a cheque drawn by the customer is presented for payment on due date and is dis-honoured on the ground of insufficiency of funds after the payment of the post-dated cheque. It is also the custom of bankers in Pakistan not to pay cheques which are presented after a period of six months has elapsed since their apparent date of issue. Such cheques are called 'Stale'. This custom is based on the practical application of Section 21 of the Negotiable Instruments Act, 1881 which says, "A promissory note or bill of exchange payable on demand shall be deemed to be overdue when it appears on the face of it to have been in circulation for an unreasonable length of time". In Alexander v. Burchfield (1842-7 M&G. 1061), it was held :hat if the drawee banker and the payee are in the same place, the cheque being a demand instrument should be presented for payment not later than the following day. In Pakistan, however, bankers allow payment within six months.

(9) Cheques should be presented during banking hours.

The banker must honour cheques drawn on him if they are presented on a working day and during the banking hours. In Baines v. National Provincial Bank (1927-32 Corn. I C 216), it was held that the banker should not pay a cheque after banking hours. In Pakistan, the banking hours &re fixed by custom established by the State Bank of Pakistan and changes in them are notified through all reliable public media for the information of all concerned.

(10) No. legal bar prohibiting payment.

The banker should see that none of the folio' clauses is applicable on the cheque presented for payment: -

(i) Payment stopped by' the drawer (customer) through notice in writing.

(ii) Knowledge of any defect in the title of the person is presenting the cheque for payment.

(iii) Notice of insolvency, insanity or death of the customer or in case of a company, notice of its winding-up received by the banker,

(iv) Notice of an assignment of the available credit balance in the account by the customer.

(v) Knowledge that the customer contemplates a breach of trust or an act of insolvency.

(vi) Notice of garnishee injunction or other court order restraining the customer from operating his account.

BOUNCING OF CHEQUES

(a) Until recently bouncing of cheques has been a civil offence in Pakistan for which the affectee could file a plaint in Civil Court under Section 37(2) of Summary Chapter.

(b) With the promulgation of amendments in 'The Financial Institutions (Recovery of Finances) Ordinance, 2001 bouncing of cheques has been made a banking offence also Section 20(4) of the Act prescribes the punishments also. According to Sub-section 4 if somebody dishonestly issues a cheque towards payment finance or fulfillment of a obligation which is dishonourkd on presentation a Banking Court can punish him with an imprisonment upto one year or with fine or with both unless he can establish that he had made arrangement with the bank to ensure the honouring of cheque and that the bank was at fault in not honouring the cheque. The amount of fine has been left at the discretion of the Banking Court. Sub-section 5 further declar- that in case the bounced cheque was issued by a company or body corporate, the Chief Executive by whatever name called and any director or of involved of that company or body corporate shall be to be guilty of offence and shall be liable to be proceeded against and punished accordingly. According to this law the burden of proof for dishonestly issuing the cheques has been left with the maker of the e. This has been done to reduce the period of legal proceedings. The Criminal Law (Amendment) Ordinance, 2002, has so made bouncing of cheques a criminal offence under Section 489. According to this section, "Whoever dishonestly issues a cheque toward repayment of a loan or fulfillment of an obligation which is dishonoured on presentation, shall be punishable with imprisonment which an end to three years, or with fine, or with both, unless establish, for which the burden of proof shall rest on that he had made arrangements with his bank that the cheque would be honoured and that the as at fault in not honouring the cheque". The priority to take legal action as above has been rested in magistrate of the first class. This amendment has provided the option to initiate action even under the Criminal Law in .Austin.

Pass Book. There is an implied term in contract between banker and customer .that the banker will supply his customer either with a Pass Book or a statement of account containing a copy of customers account with the banker. Pass Book is a book in which the banker maintains the record of his customer's account for latter's use, and is so called because it 'passes' periodically between the banker and his customer. In this connection, Sir John Paget says, "Its proper function is to constitute a conclusive and unquestionable record of the transactions between banker and customer, and it should recognized as such." (Paget's Law of Banking, 6th ed., p.81) The introduction of e-banking has brought the pass book system to a stop in urban areas but the use of pass book is quite popular in rural areas even now. Banks issue statements of accounts to each account holder at least twice 1 year in urban and rural areas both.

Entries from the customers stand-point. It is assumed that on the delivery of the Pass Book customer examines it and if there appears any error or omission, brings or sends it back to be rectified or, if not, his hence is regarded as an admission that the entries are correct." (Court of Chancery in Devaynes v. Noble. 1: 181 This position was however changed by subsequent decision and it was held that since that Pass Book entries are made by the banker, they can be used as evidence against him, "The Pass Book belongs to the customer, and the entries made in it by the bank are statements on which the customer is entitled to act" (Mawji v. National Bank of India, 1901125 Bombay, 499:s 15). "If the banker has erroneously drawn a larger credit balance in the Pass Book than is actually due to the customer, and who on relying upon these figures, draws a cheque accordingly, the banker has no right to dishonour such cheques. If he does so, he may be liable to pay damages for the wrongful dishonour of his customer's cheque. " (Holland v. Manchester and Liverpool District Banking Co. Ltd., 1909: 25. T.L.R. 386). To reduce the chance of any such situation, the banker should see that any item wrongly entered in the customer's favour is corrected immediately and the customer is informed accordingly. Further, unauthentic matter has been cleared up, the banker should not pay cheques that may have been drawn against the balance wrongly shown.

Entries from the banker's stand-point. In order to remain in. a secured position the banker should send the Pass Book to the customer as frequently as possible for his verificatio~l after making all the entries. In no case should the Pass Book remain at the bank for an case shculd period without giving the customer an opportunity of examining it. "The banker, upon the receipt of the Pass Book returned by his customer without objection from time to time, is not entitled to infer that the latter has accepted the entries as correct." (Lord Esher: Chatterton v. London and Country Bank. 189 1, London). Credits should be enterzd in the Pass Book after they have been posted in the ledger, and not before. This is because "a credit entry may be regarded as a representation binding the bank, if the customer can show he has altered his position in reliance thereon." (Mathew, J. in Deutsche Bank Benyo & Co.) Moreover, it is the duty of the banker to keep a customer correctly informed as to the position of his account and if he wants a settled account, open to him is to get a confirmation in writing. Initiated earlier, bankers send statements of account respective account holder after half yearly and annual using each year. In addition, the customer may ask for the statement of account as and when he needs it. These statements reflect the position of operations on the account, and the account holder may request for correction in the statement if needed.

Rectification of Errors. In the absence of any change of position, a mistaken credit entry may be rectified within a reasonable time, and the reversal entry must hold good. In Vaghand's case, the Court of Appea! observed that for their own protection the bankers should co-operate to formulate such customs establishing the status of the Pass Book as a settled account and affirming the duty of the customer to examine and compare it with the returned cheques and bills, and notify the bank of any errors appearing therein. In the Leather Manufacturers National Bank v. Morgan, the Supreme Court of the United States of America decided that "without impugning the general rule that an account rendered, which has become an account stated, is opened to correction for mistake of fraud, other principles come into operation where a party to a stated account, who is under a duty from the usages of business or otherwise, to examine it within a reasonable time after having an opportunity to do so and give timely notice of his objections thereto." (Paget's Law of Banking, 6th ed. p.92).

REVOCATION OF BANKER'S AUTHORITY

There are, however, certain circumstances in which the payment of a cheque can be refused by the banker. Section 122-A of the Negotiable Instruments Act, 1881, mentions least the following: -

1. Countermand of payment.

2. Notice of custornnr's death.

3. Notice of adjudication of customer as an involvement.

4. Notice of customer's insanity.

1. Countermand of payment (Payment stopped by drawer): It is an implied contract that the banker will deal with the customer's amount according to the latter's instructions. As such, if the customer stops payment of any of his cheques, the banker should take due notice of this. If the banker pays a cheque in spite of stop-payment instructions, he is liable for damages on the following two grounds: -

(a) for paying a stopped cheque, and

(b) for wrongfully dishonouring other cheques which should have been honoured if the stopped cheque was not paid. In Curtice v. London City and Midland Bank Ltd., it was held that the instructions regarding the stop-payment of a particular cheque should be in writing, signed by the drawer of the cheque and delivered to the drawee banker. Moreover, in Westminister Bank Limited v. Hilton (1926) it was also held that the number of the cheque, its amount, date ,and the name of the payee should also be mentioned in the countermand intimation. If stop-payment instructions are received by telegram or telephone, the banker should ask the customer to confirm his instructions in writing under his signature, because the banker is not bound by law to accept an unauthorised telegram or telephone message to this effect. But the travailing practice is that if a cheque is presented before confirmation of stop-payment instruction is received, the banker postpones payment of that cheque. When the payment of a cheque is postponed, the banker should be very careful not to damage his customer's credit. In such a case, the appropriate reason to be given for non-payment would be: "Payment countermanded by telegram/Payment postponed pending confirmation, present again." When instructions for stop2ing payment of a cheque are received, the time and date of receipt of the instructions should be immediately noted on the letter the customer and initialed by the officer concerned. signature of the of the customer on the letter should be verified from the specimen signature-cards. The letter of instructions is then passed to the ledger keeper, who immediately finds out whether the cheque has been already paid or not. If the cheque has not yet been paid, a rubber stamp of "stop- payment" is affixed on the ledger-folio and the number of the cheque, amount, date and name of payee entered on it. A letter of acknowledgement is prepared in triplicate. The original is sent to the customer the second copy is attached to the - respective ledger folio and the third copy along with the letter of the customer is filed in branch records. When the cheque of which the payment has been stopped is presented, the words "PAYMENT STOPPED BY THE DRAWER" should be written in red ink over the face of the cheque. The cheque is then returned with the Reason Memo as "Stop Payment instructions received." The stop-payment memo is then removed from the ledger and kept attached with the letter of the customer in the file. On stop-payment memo, a note should be made of the date of presentation of the cheque and its return. If a customer wishes to revoke his earlier instructions regarding stopping payment of a cheque he should give fresh instructions to that effect in writing. The signature on the letter should be verified and a note made in the ledger-folio, giving reference to the fresh instructions. This letter is then filed along with the previous letter.

2. Notice of customer's death: The death of a customer cancels his mandate to the banker. When the banker receives notice of the death of his customer he should hence-forth stop all operations including making payments from the deceased's account. The title of the account and the balance of the deceased then pass to his legal representatives but they should not be allowed any operation until the legal representatives produce Succession Certificate, Probate of the Will or Letter of Administration. However, if the banker is unaware of the death of his customer, he may honour cheques drawn by the customer before his death. The banker must make himself a fly certain about of his customer before and regarding his account taken.

The information about the death of a customer should be noted at the top of the ledger-folio of the account. The date and source of information should be mentioned and a closing line should be drawn immediately below the last entry in the account.

3. Notice of customer's insolvency: Insolvency means inability to pay or settle just debts. After the order of adjudication is made the property of the insolvent vests in the Official Assignee or Official Receiver. The debtor is then not free to deal with his property. As such, his banker should also refuse to honour the insolvent customer's cheques. If he has knowledge of the customer's Insolvency he will not be justified in honouring his cheques.

The banker may judge the customer's insolvency if the customer commits any of the following acts:

(i) Transfers all or a substantial part of his property to a third person for the benefit of his creditors generally.

(ii) Transfers his property or a part of it with an intention to defeat or delay his creditors.

(iii) Transfers his property or a part of it which would be void because of fraudulent preference, if he were adjudged an insolvent.

(iv) If he commits the following act to defeat or delay his creditors:

(i) departs from or remains out of the country.

(ii) departs from his residence or usual place of business or absents himself,

(iii) secludes himself with an intent to deprive his creditors of the means of communicating with him.

(v) Any of his property is sold in execution of the decree of a court for the payment of money.

(vi) He petitions to be adjudged an insolvent.

(vii) Gives notice to his creditors that he has or is about to suspend payment of his debts.

(viii) He is imprisoned in execution of the decree of any court for payment of money.

As soon as the banker comes to know of the adjudication of his customer as an insolvent he is bound to inform the Official Receiver or Assignee as to his bank's position with the insolvent.

If the insolvent customer's account is in credit and the banker has no claim on it by way of lien, the balance may be transferred to the Official Receiver or Assignee.

If the customer is a debtor to the banker the course of action will be quite different. If the customer had given certain securities against a debt the banker generally realizes his security and when it is insufficient to meet his claim he proves for the difference. In case the debts are unsecured the banker has no choice but to rely on the dividend from the in solvent's estate.

4. Notice of cclerfo'mer's insanity: Insanity of customer automatically terminate the banker's authority to act as his customers’ agent, as in Young v. Toynbee (1910, 1 K.B. 215). If the customer develops an unsound mind or becomes insane, and the banker has knowledge of this he should not honour his customer's cheques anymore but a cheque which is known to have been drawn when the customer was capable of transacting business can be honoured. When the banker finds it difficult to adjudge his customer's mental state, he should get in touch with the customer’s family or his lawyer.

When a banker comes to know about the insanity of his customer or the banker receives notice that the customer that the customer has been declared instance, he should take the following steps:

(a) If any cheque of the customer is received, it should returned with the remark “REFER TO DRAWER”.

(b) A careful note of the lunacy Order should be made in the account of the customer.

(c) The account of the customer should then be conducted according to the instructions of the Lunacy Order.

(d) Unless the customer is certified by the court to has become sane again, the operations upon hi saccount should remain suspended.

If the customer is reported to be suffering temporary mental derangement, it is permissible in law to allow customer’s spouse or next of kin to operation the account, as in Re: Beawan, Davies Bank & Co V. Beawan (1912 1. Ch.196).

However, in such a situation a certificate in the form of statutory declaration from two registered medical practitioners should be obtained, to confirm the temporary derangement. In addition banker must obtain security, indemnifying him against any claim that may be afterwards made by the customer to recover any amount withdrawn from the account while he was incapable.

5. Legal orders attaching customer’s account (Garnishee Order). Under section 60 and order 21 of the Criminal Procedure Code a court is authorized to issue a Garnishee Order to a banker. A Garnishee Order is the judgment order of a court by which a creditor can get funds in the hands of a third party belonging to the debtor attached. They are two kinds: Garshee Nisi and Garnishee Absolute. Usually the courts first issue a Garnishee Nisi Order directing the banker to hold all the operation on the customer’s account till further orders. A Garnshee Order Absolute orders the bank to pay the money from the garnished account as directed by the court.

As a result of a Garnishee Order the banker is stopped me honouring the cheques either for the whole amount of customer’s account or a part thereof. Whether the whole balance of the client is attached or only a part of it dependes upon the tems of the order. If the order does not specify and amount, it is assumed to be applicable to the whole of the account,

For an account to be attachable by a Garnishee Order it be a debt which is due, or accruing due, at a definite at a definite date. The debt should actually be due and not a claim that become due at a further date. It must be:

(i) a deposit on demand;

(ii) a deposit repayable on the fixed expiry of a fixed notice;

(iii) a deposit repayable at a fixed future date of after the lapse of a, specified time.

A credit balance of Joint account, even if payable to either of them, cannot be attached by a Garnishee Order, but if issued on joint names, it covers even the private accounts of either party. The debts which did not exist when the Garnishee Order. Therefore, the usual practice is to open a fresh account for all subsequent transactions. On receipt of a Garnishee Order the concerned banker should take the following measures:

(i) mark the date and time of receipt of the Order.

(ii) trace out the deposits in the name of the person named in the Order;

(iii) if the entire amount of the balance is attached, the balance in the account is encircled and a note for its reservation made by the officer;

(iv) right of set-off should be used if there is any claim of the bank on the customer;

(v) the attached amount is deposited according to the instructions of the court;

(vi) the customer is also intimated about the attachment Order, and is requested not to issue cheques against the amount that has been attached.

Care should be taken while dealing with a Garnishee Order. The name, account number, address and other relevant particulars should be correctly identified before communicating with the court regarding the Order. If the

Garnishee Order does not correctly identifies the account to be attached, the banker must report the fact to the court issuing the Garnishee Order. Similarly, other legal orders are also dealt with according to their specific requirements.

6. Notice of assignment by the customer: When banker receives notice from a customer about assignment the credit balance of his account, all cheques drawn upon that credit account after that date should be returned.

7. Breach of trust in Trust Account: If the .banker comes to know that the trustee of a Trust Account intends to misuse the funds, he should refuse payment of the cheques.

8. Defect in title: If the banker has knowledge of any defect in the title of the person presenting the cheque, he has the right to refuse payment of the cheque.

9. Insufficient Funds: A common reason for which cheques may be returned is that the credit balance in the customer’s account is not enough to pay the cheque. Before the cheque is returned for this reason, an inquiry Memo should be circulated in the branch to all the departments concerned to find out if any credit has been departments concerned to find out if any credit has been receive, for that customer’s account. If no credit has been received then it is at the discretion of the banker concerned to pay the cheque or if at the account holder’s request it is decided to pass the cheque, a temporary overdraft is created. An entry to this effect is made in the Temporary overdraft Register. Markup is charged for the period the overdraft remains outstanding.

If a cheque has to be returned for want of funds the return memo, should mention the reason “Insufficient funds”. If some amount is awaiting credit to the account on the following day or the day after the cheque should be returned with reason 'Effects not cleared. May be presented again'. This clearly mentioning of reason will help maker and both in settlement of claims on each other in accordance with section 20(4) of Financial Institution (Recovery Finance) Ordinance, 2001.

10. Other reasons for which the bankers generally return the cheques unpaid are as under:

(a) Not arranged for, where the customer has no prior arrangements to overdraw the account.

(b) Effects not cleared, may be presented again, where other instruments have been sent for collection, but fate is not known as yet.

(c) Exceeds arrangements, in case the amourxt is more than the limit on overdraft facility.

(d) Full cover not received, in case of bills lodged for collection.

(e) Payee’s endorsement irregular/Illegible/required where the collecting banker is asked to correct the irregularity.

(g) Drawer's signature differs/required.

(h) Alterations in date/ figure/ words require drawer's full signature.

(i) Cheque is post-dated/out of date.

(j) Cheque is mutilated, where material parts of cheque are doubtful.

(k) Amount in words and figures differs.

(l) Cheque crossed must be presented through a bank.

(m) Clearing stamp required / requires cancellation.

(n) Addition to bank discharge should be authenticated.

(o) Cheque crossed Account Payee only, while it is being presented for collection in favour of someone else.

(p) Collecting bank's discharge irregular/ required.

(q) Cheque should not contain extraneous matter

(r) No advice of draft.

(s) Clearing stamp required on back/on front/to be cancelled.

(t) Payee's discharge on revenue stamp required.

'MONEY PAID BY MISTAKE

If a banker has made a payment by mistake he should naturally endeavour to rectify the mistake and recover the amount. The law with regard to it is not well

defined, and the matter of recovery of the amount paid by mistake rests on certain conditions as mentioned below:

(i) Mistake of facts: The mistake under which the money has been paid must be one of 'fact' and not of general law so as to enable the banker to recover the same. If for instance the money payable to Mr. Shahid has been paid to Mr. Raees this will be treated as a 'mistake of fact'. If however a person happens to pay a debt in ignorance of the Law of Limitation, the money thus paid cannot be recovered. In Holt v. Maukham (1923), Messrs Holt & Co. the army agents, overpaid £ 744 into defendant's account due to misunderstanding regarding certain War Office orders. It was held in this case that the payment was not made due to a mistake of fact. However, in Sinclair v. Brougham (19 14), it was said; "The familiar case in the paying by A to B -under the mistaken impression is 'fact' that a debt was due, when in truth there was no debt due."

(ii) Money received malafide: If a person is aware of the fact that he is not entitled to the money which he is receiving it is payable to the payer on his claiming it. However, if the money has been paid on the strength of .a Pass Book entry the payer cannot recover the amount. In Holt v. Maukham (1923), it was held that the amount overpaid to an Air Force Officer by a mistaken interpretation of certain War Office regulation was not to be refunded, for it was the contractual duty of the plaintiff not to have made the mistake.

(iii) Mistake between the parties: A mistake must pertain to some matter between the party paying and the party receiving the money. In Chambers v. Miller a bank paid a cheque on presentation but immediately afterwards discovered that the customer (the drawer) had no sufficient balance to meet it. It was held that the money was not recoverable because it was a mistake between the bank and its own customer, "You cannot recover back money because you have paid it in ignorance of some fact, which had you known it would have influenced you not to pay it, the fact being one with which the payee has nothing to do."

However, recovery of money paid by mistake is allowed in the following cases:

(a) When the money is paid on a negotiable instrument: In London & River Plate Bank v.Bank of Liverpool (1876), Mathew J., expressed the view that "money paid on a negotiable instrument to an innocent holder could not be recovered if such an interval of time had elapsed as to prejudice his right against previous parties."

In a similar case of Raghunath, Rithharam v.The Imperial Bank of India (1925:27-Bornhay), the plaintiffs had accepted and paid by mistake the defendant banker a Hundi which was not drawn on them. After about a year they discovered the mistake and claimed the refund of the amount from the banker. The Bombay High Court observed that since the plaintiffs had accepted the position as drawee of the Hundi, and thus accepted the relationship between themselves and the bank the plaintiffs were disenhitled to recover the money from the bank.

(b) When the money is paid to and received by the people, not as Principal but as an Agent who had paid the money over to the principal, or had otherwise materially prejudiced his position by relying on the payment before he noticed the mistake. No claim, if money is paid by mistake by a third party: A banker cannot set up a lien or claim of set-off against the money paid by mistake by a third party even where the money is paid to the banker as an Agent for the customer. The banker can extend his lien to the customer's money or securities, but not to the money which is paid by a mistake of fact by a third person to whom it belongs.

RULE IN CLAYTON'S CASE

The “Rule Clayton's Case" is based on the principle accounts by means of chronological entries in the debit and credit side. This Rule came into being was passed in 18 16 in Deveynes v. Noble. of the case are as under: -

“C” had a Current Account with a firm of bankers. One of partners in the firm died, and later on the bank The banker was maintaining "C"s Current in chronological order. On the date of the death, the hangers had a balance of £X in favour which he was entitled against all the partners. But between that date and the failure of the bank, "C" had drawn out more than this sum, and he paid in further - exceeded those received. "C" claimed that his sums which exceed from the date of the partner's death must be treated as if they had been paid out of his payments-in Since that date, leaving £X still due from the banker's firm as constituted when the partner died. He claimed to recover an mount from the estate of the deceased partner.

It was held that since "c" had an operative Current Account, the payments-in on one side were intended to the payments-out on the other in the sequential order in which they took place, so chat at the time of the failure of the firm of bankers the balance of X had been paid away.

Application. This rule is applied where a dispute arisen over reducing or extinguishing liabilities by setting-off of items on one side of the account against Items on the other. It means that it is first item on the debit side of the account that is discharged or reduced by the first item on the credit side and balance, if any, is carried forwarded to the next item and the with in the same way lord Chorley in his book, Law of Banking (5^th ed., p.148) says, Money may reach the account in cash or bank-notes, or in the form of credit from the proceeds of the securities on the behalf or in the form or in the form of credit from the proceeds of the securities on the customer’s behalf by the banker, or the discounting of his bills or from the collection of cheques and other negotiable instruments by the banker acting as the customer’s agent or from the receipt of dividends or interest on debenture whether directly or on presentation customer’s coupons.”

This Rule is also important in connection with guarantees, where it may operate the same way to reduce or even extinguish the guaranteed advance.

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