John makes out a cheque in favour of Thabo and crosses and marks it “not negotiable”. This is a general crossing // but the words “not negotiable” have been added. What is the effect of that/ Refer to ed lecture notes for lecture 8. (Remember do not refer to textbook for chapters 8 to end, only to the ed lecture notes). Thabo Mbeki John Smith 30 September 2011 One thousand Rand only

Effect: 1) it must be paid to a bank (any bank) (i.e. into a bank account not over counter) 2) drawee bank (Generic) protected if they paid to a bank, in good faith & were not negligent. Drawer (John) also protected if his bank acted correctly, and he had handed cheque to payee (Thabo). They are in the position as if the true owner had been paid. Additional 2 effects from adding “not negotiable” 3) it can be transferred but no one can ever become a HIDC (holder in due course) 4) if it did get lost or stolen, the true owner (Thabo) can recover his loss (up to the amount of the cheque) from anyone who had it in his/her possession after it was lost or stolen.

Application Thabo has received a bearer cheque from John but it is crossed // and marked “not negotiable”. 1.IF IT WERE TO BE STOLEN FROM THABO BY HIS ASSISTANT MARY, WHO GIVES IT TO SIYABONGA WHAT WILL HAPPEN? a.Thabo is the true owner and can recover his loss from either Mary or Siyabonga as they both had possession of the cheque after it was stolen. b.Thabo should have been more careful with the cheque. c. Thabo is the true owner and will have to sue his personal assistant for fraud. d.Siyabonga is the true owner of the cheque as he has received delivery of a bearer cheque. 2.IF SIYABONGA DEPOSITS THE CHEQUE AND THE DRAWEE BANK (this is John’s bank- Generic) PAYS SIYABONGA’s BANK (who then put the money in Siyabonga’s account) IS THE DRAWEE BANK AT FAULT? a.No. The bank is never liable for these kinds of losses. b. No. The bank paid another bank in good faith and was not negligent. c.No. There was no stop payment on the cheque so the bank had to pay even if it suspected a fraud. d.No. The drawee bank is not a party to the cheque so this dispute must be resolved between John, Thabo and Siyabonga. 3.IF YOU LOOK AT THE FACTS HOW IS JOHN PROTECTED BY THE FACT THAT HE CROSSED THE CHEQUE

If John were to draw the same cheque but write “NOT TRANSFERABLE” -This would be the safest way to write out the cheque because now it cannot be transferred to anyone other than Thabo NOTE: if no crossing lines, it doesn’t matter- the words NOT TRANSFERABLE have the same effect as a crossing. - see lecture notes for lecture 8 1)This cheque must be paid to a bank (not over the counter) 2)Drawee bank and drawer are protected 3)Thabo can’t be a HIDC and cannot transfer the cheque at all 4)True owner (Thabo) could recover his loss if the cheque was lost or stolen from anyone who had it in his possession after the theft/loss. Thabo Mbeki 30 September One thousand Rand only John Smith

SHAM MAGAZINE CENTRE CASE See “cases for week 2” -Drawer put the words “ACCOUNT PAYEE ONLY” on the cheque and argued that this meant the payee could not transfer the cheque to someone else. -COURT HELD the words do not affect transferability at all, and are not a crossing.

Application NEDBANK LIMITED / /NOT NEGOTIABLE ACCOUNT PAYEE ONLY Pay THABO MBEKI or order the sum of One Thousand Rand only R John Smith Compare this to the first cheque (slide 1) John has written out a cheque just like the first one but has added the words “ACCOUNT PAYEE ONLY” ADDING THOSE WORDS has no effect. This cheque can still be transferred as a cheque crossed and marked “not negotiable”-> review the 4 effects of crossing (slide 1). In this case the cheque is “to order” not “to bearer” - no problem.->you can cross either kind of cheque (bearer or order). This cheque can therefore be transferred by endorsement (Thabo’s signature on the back of the cheque) and delivery. Common mistake- how would you make this cheque a bearer cheque -> you can’t just cross out “or order” : a cheque remains an order cheque when it is made out to a specified payee. You would have to strike out “or order” and write on “or bearer”.

Application cont. A cheque is a negotiable instrument which means that normally it can be transferred to another person very simply and free of equities. See: Kopel, Guide to Business Law, chapter 30, section 3 – two characteristics of negotiable instruments. “Free of equities” means the holder can become a HIDC (and get stronger rights than the person who gave them the cheque). 4.HOW DOES CROSSING A CHEQUE AND MARKING IT “NOT NEGOTIABLE” AFFECT THE NORMAL POSITION? a.The cheque cannot be transferred to anyone else as it is not negotiable. b.The cheque can be transferred in the normal way but the holder cannot become a holder in due course as this is one of the effects of adding “not negotiable” to a crossing. c.The cheque is crossed so it must be deposited into a bank account. It cannot be paid over the counter. d.Both B and C are correct.

5.THABO WANTS TO TRANSFER THE CHEQUE ON SLIDE 6 TO SOMEONE ELSE – CAN HE DO THAT? See Sham Mag Centre Case. a.Its marked “ACCOUNT PAYEE ONLY” so as payee only Thabo can deposit it into his bank account. b.Thabo can transfer the cheque to someone else but they may be hesitant to take it as it will not be free of equities and also has to be deposited into a bank account. c.Thabo can transfer the cheque by delivering it and he will ask the creditor to sign on the cheque that they accept it. d.Thabo can transfer the cheque by delivery alone as it is a bearer cheque. 6.TO MAKE SURE THABO COULD NOT TRANSFER THE CHEQUE THE DRAWER (JOHN) SHOULD HAVE: a.Issued the cheque just like this as it is not transferable to anyone other than the payee (Thabo). b.Marked the cheque “NOT TRANSFERABLE” c.Either A or B d.Crossed out the words “or order” – then Thabo can’t endorse the cheque. 7.IF THE DRAWER (JOHN) INTENDED TO MAKE A BEARER CHEQUE WHAT SHOULD HE HAVE DONE? a. Nothing – in the format above it is a bearer cheque. b.Crossed out the words “or order”. c.Written on the words “or bearer” instead of “or order” d.He could have done either B or C.

1 October 2011 Gareth Cliff Twenty Thousand Rand only Mbali Moloi 8.HOW CAN GARETH TRANSFER THIS CHEQUE TO LEE-ANNE a.He can endorse it and write “Pay Lee-Anne” b.He can endorse it simply by signing it and giving it to Lee-Anne c.He can endorse it “Pay Lee-Anne only” and give it to Lee-Anne d.B and C are both valid options. Review textbook chapter 7 on indorsements Remember you can transfer a cheque marked “not negotiable”.

9.IF GARETH RECEIVED THE CHEQUE WITHOUT A CROSSING CAN HE ADD IT? (remember the “crossing” on this cheque is //not negotiable) a.No as that is altering the cheque and makes it invalid b.Yes as he is the payee c.Yes as holder of the cheque (payee in possession) he can cross it. d.Yes but only if Mbali signs next to the change. Review Test 1, first question 10.IF GARETH DEPOSITS THE CHEQUE AT HIS BANK AND THEY STAMP IT THAT IS A SPECIAL CROSSING. WHAT IS THE EFFECT OF THAT a.Now the only bank that can be paid b.It only means they acknowledge receipt of the cheque c.It means they have paid the amount of the cheque out to Gareth d.It means the cheque cannot be deposited again by anyone. 11.WOULD GARETH GET ANY ADDITIONAL PROTECTION IF HE ADDED “& CO” TO THE CROSSING? a.No – these words do nothing b.No – these words will make the whole crossing invalid c.Yes- these words are needed to make sure it cannot be transferred d.Yes- these words are required by the Bills of Exchange Act.

1.A 2.B 3.In the same position as if the true owner had been paid. 4.D 5.B 6.B 7.C 8.D 9.C 10.A - C is incorrect because it is the drawee bank that will pay. Hence it takes 7 working days for a cheque to clear (even if a provisional credit is given to you as depositor, your bank can revoke that if the cheque “bounces”) 11.A