Bill of Exchange and Cheque To define Bill of Exchange and Cheque To explain the functions of the crossings on a cheque To explain the bank’s duties in paying and collecting cheques To explain the situations not to pay a cheque To describe the process of clearing a cheque

Negotiable Instrument The Uniform Commercial Code (UCC) defines a negotiable instrument as an unconditioned writing that promises or orders the payment of a fixed amount of money. Drafts and notes are the two categories of instruments. A draft is an instrument that orders a payment to be made. An example is a cheque. A note is an instrument that promises that a payment will be made. Certificates of deposit (CD's) are notes. Drafts and notes are commonly used in business transactions to finance the movement of goods and to secure and distribute loans.

United Nations Convention on International Bills of Exchange A bill of exchange is a written instrument which: contains an unconditional order whereby the drawer directs the drawee to pay a definite sum of money to the payee or to his order; is payable on demand or at a definite time; is dated; and is signed by the drawer.

United Nations Convention on International Bills of Exchange "Drawee" means a person on whom a bill is drawn and who has not accepted it; "Payee" means a person in whose favour the drawer directs payment to be made; "Holder" means a person in possession of an instrument: and "Maturity" means the time of payment.

Hong Kong Bill of Exchange Ordinance A bill of exchange is 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 or determinable future time a sum certain in money to, or to the order of, a specified person or to bearer.

Time of Payment of a Bill of Exchange A bill is payable on demand - (a) which is expressed to be payable on demand, or at sight, or on presentation; or (b) in which no time for payment is expressed. Where a bill is accepted or indorsed when it is overdue, it shall, as regards the acceptor who so accepts or any indorser who so indorses it, be deemed a bill payable on demand.

Time of Payment of a Bill of Exchange A bill is payable at a determinable future time within the meaning of the Bill of Exchange Ordinance which is expressed to be payable - (a) at a fixed period after date or sight; (b) on or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening may be uncertain. An instrument expressed to be payable on a contingency is not a bill, and the happening of the event does not cure the defect.

Acceptance of a Bill of Exchange The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. An acceptance is invalid unless it complies with the following conditions, namely- (a) it must be written on the bill and be signed by the drawee. The mere signature of the drawee, without additional words, is sufficient; (b) it must not express that the drawee will perform his promise by any other means than the payment of money.

Acceptance of a Bill of Exchange The acceptor of a bill, by accepting it - engages that he will pay it according to the tenor of his acceptance.

Holder for Value Valuable consideration for a bill may be constituted by- (a) any consideration sufficient to support a simple contract; (b) an antecedent debt or liability. Such a debt or liability is deemed valuable consideration whether the bill is payable on demand or at a future time.

Holder for Value Where value has at any time been given for a bill, the holder is deemed to be a holder for value as regards the acceptor and all parties to the bill who became parties prior to such time. Where the holder of a bill has a lien on it, arising either from contract or by implication of law, he is deemed to be a holder for value to the extent of the sum for which he has a lien.

Holder in due course A holder in due course is a holder who has taken a bill, complete and regular on the face of it, under the following conditions, namely- (a) that he became the holder of it before it was overdue, and without notice that it had been previously dishonoured, if such was the fact; (b) that he took the bill in good faith and for value, and that at the time the bill was negotiated to him he had no notice of any defect in the title of the person who negotiated it.

Holder in due course In particular, the title of a person who negotiates a bill is defective within the meaning of the Bill of Exchange Ordinance when he obtained the bill, or the acceptance thereof, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith or in such circumstances as amount to a fraud. A holder (whether for value or not) who derives his title to a bill through a holder in due course, and who is not himself a party to any fraud or illegality affecting it, has all the rights of that holder in due course as regards the acceptor and all parties to the bill prior to that holder.

Negotiation of a Bill of Exchange (1) A bill is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder of the bill. (2) A bill payable to bearer is negotiated by delivery. (3) A bill payable to order is negotiated by the indorsement of the holder completed by delivery.

Negotiation of a Bill of Exchange (4) Where the holder of a bill payable to his order transfers it for value without indorsing it, the transfer gives the transferee such title as the transferor had in the bill, and the transferee in addition acquires the right to have the indorsement of the transferor. (5) Where any person is under obligation to indorse a bill in a representative capacity, he may indorse the bill in such terms as to negative personal liability.

Dishonour of a Bill of Exchange A bill is dishonoured by non-acceptance- (a) when it is duly presented for acceptance, and such an acceptance as is prescribed by the Bill of Exchange Ordinance is refused or cannot be obtained; or (b) when presentment for acceptance is excused and the bill is not accepted.

Dishonour of a Bill of Exchange A bill is dishonoured by non-payment- (a) when it is duly presented for payment and payment is refused or cannot be obtained; or (b) when presentment is excused and the bill is overdue and unpaid.

Protest for Non-Acceptance and / or Non- Payment (1) Where an inland bill has been dishonoured, it may, if the holder thinks fit, be noted for non-acceptance or non- payment, as the case may be; but it shall not be necessary to note or protest any such bill in order to preserve the recourse against the drawer or indorser. (2) Where a foreign bill, appearing on the face of it to be such, has been dishonoured by non-acceptance, it must be duly protested for non-acceptance, and where such a bill, which has not been previously dishonoured by non- acceptance, is dishonoured by non-payment, it must be duly protested for non-payment. If it is not so protested, the drawer and indorsers are discharged. Where a bill does not appear on the face of it to be a foreign bill, protest thereof in case of dishonour is unnecessary. (3) A bill which has been protested for non-acceptance may be subsequently protested for non-payment.

Protest for Non-Acceptance and / or Non- Payment A protest must contain a copy of the bill, and must be signed by the notary making it, and must specify- (a) the person at whose request the bill is protested; (b) the place and date of protest, the cause or reason for protesting the bill, the demand made, and the answer given, if any, or the fact that the drawee or acceptor could not be found.

Compensation of a Dishonoured Bill of Exchange Where a bill is dishonoured, the measure of damages, which shall be deemed to be liquidated damages, shall be as follows - the holder may recover from any party liable on the bill, and the drawer who has been compelled to pay the bill may recover from the acceptor, and an indorser who has been compelled to pay the bill may recover from the acceptor, or from the drawer, or from a prior indorser-

Compensation of a Dishonoured Bill of Exchange (i) the amount of the bill; (ii) interest thereon from the time of presentment for payment, if the bill is payable on demand, and from the maturity of the bill in any other case; and (iii) the expenses of noting, or when protest is necessary and the protest has been extended, the expenses of protest.

Definition of cheque A cheque is a bill of exchange drawn on a banker payable on demand. The drawer is the person who has signed the cheque, the drawee is the bank on which the cheque is drawn and the payee is the person to whom the cheque is payable and who is to receive the money. The drawee is also the paying bank, while the bank at which the payee pays in the cheque is the collecting bank. The drawer can draw a cheque payable to himself, then both the drawer and the payee are the same person.

Functions of the crossings on a cheque An open cheque is an uncrossed cheque, which is written in a plain bank form, implying that the cheque can be exchanged for cash at the paying bank.

Functions of the crossings on a cheque A general crossing refers to two parallel lines across the face of a cheque, with or without the words in the parallel lines “Account Payee” and / or “Not Negotiable”. The effect of a general crossing is that the cheque must be paid into a bank account and must not exchange for cash. The words in the parallel lines have the following meaning :

Functions of the crossings on a cheque The words “Account Payee” implies that only the named payee is to receive the payment of the cheque. However, it is not binding on the paying bank and does not affect the transferability or negotiability of the cheque. When a bank is asked to collect a cheque with such a crossing, and if the payee is not the “named payee” on the cheque, the bank has to make enquiries and to obtain a satisfactory answer from the payee who pays in the cheque.

Functions of the crossings on a cheque The words “Not Negotiable” implies that the cheque cannot be negotiated or transferred from one person to another free from equities. But it could still be transferred between people subject to equities, which means the transferee cannot acquire a better title to the cheque than that of his transferor.

Functions of the crossings on a cheque A special crossing refers to two parallel lines across the face of a cheque with the name of a bank (sometimes and a branch). The cheque is then specially crossed to the bank. The effect is that the cheque can only be paid into an account with the specified bank (and the specified branch) indicated on the crossing. All collecting banks cross cheques paid in by customers specially to themselves by means of a rubber stamp which bears the name of the collecting bank (and the branch) together with its sorting code number, so that if the cheques were lost in transit, they could not be paid into other banks.

Presentation for Payment Where a cheque is not presented for payment within a reasonable time of its issue, and the drawer or the person on whose account it is drawn had the right, at the time of such presentment, as between him and the banker, to have the cheque paid and suffers actual damage through the delay, he is discharged to the extent of such damage, that is to say, to the extent to which such drawer or person is a creditor of such banker to a larger amount than he would have been had such cheque been paid; and in determining what is a reasonable time, regard shall be had to the nature of the instrument, the usage of trade and of bankers, and the facts of the particular case.

Duties of a paying bank The bank is not justified in paying a cheque in a manner inconsistent with the directions contained in the crossing. So if the crossing is such that the bank is left in doubt what to do, it should return the cheque.

Duties of a paying bank When a cheque is crossed specially to more than one bank, the bank on which the cheque is drawn must refuse payment, except when crossed to an agent for collection and the agent is a bank. The bank is liable to the true owner of the cheque for any loss he may sustain owing to the cheque being paid. So the banking practice is to pay the cheque on condition that the bank which receives the proceeds has to give an indemnity to the paying bank.

Duties of a paying bank A crossed cheque drawn by one customer in favour of another customer of the same bank should be passed through the payee’s account except if the bank manager know the payee very well.

Duties of a paying bank Where a cheque is presented for payment which does not appear to be crossed, or to have had a crossing obliterated, or to have been added to or altered, the bank paying the cheque in good faith and without negligence is not responsible and does not incur any liability.

Duties of a collecting bank The bank may be liable for conversion if it collects money on a cheque for someone other than the true owner. But the bank incurs no liability to the true owner of the cheque if the customer has no title or a defective title to the cheque, whereas the bank receives the payment or has credited the amount to the customer’s account in good faith, without negligence and in the ordinary course of business.

Duties of a collecting bank The bank has to make reasonable enquiries about the use of a trading name, obtain the name of the customer’s employer or references when opening an account for a customer.

Duties of a collecting bank The collecting bank should also have been put on enquiry into unusual circumstances such as a large cheque being paid into an account inconsistent with the size of normal credits, a cheque crossed “Account Payee” is paid in for the credit of an account other than the payee’s, an endorsement is clearly irregular, etc.

Situations not to pay a cheque The paying bank is obliged to honour its customer’s cheques up to the limit of the balance of the customer’s account or up to the limit of an agreed overdraft, provided that the cheques are properly drawn. But the following situations allow the paying bank to stop paying from the customer’s account :

Situations not to pay a cheque On receipt of countermand of payment, which means a stop payment instruction given by the customer. A verbal instruction is sufficient to postpone payment pending a signed confirmation from the customer. On notice of the customer’s death or mental disorder On notice of a bankruptcy petition or order

Situations not to pay a cheque On notice of a petition for compulsory winding up, a resolution for voluntary winding up or an administration order of a limited company On service of a garnishee order from the court, which means a court has previously ordered the customer to make a payment to a third party but it has not be paid

Process of clearing a cheque Day 1 The collecting bank receives a cheque paid in by a customer. After checking the information on the cheque, such as the date, name of the payee, the amounts in words and figures, the signature, etc., the teller crosses the cheque with a clearing chop. At the end of the day, all cheques to be cleared are added and printed with magnetic ink characters the amounts of the cheques. Cheques from different branches are grouped at the bank’s headquarters before they are delivered to the Clearing House.

Process of clearing a cheque Usually the cheques to be cleared arrive at the Clearing House before 5 p.m. on week day and before 2:15 p.m. on Saturday. The cheques at the Clearing House will be decoded and sorted according to the bank / branch numbers. A Clearing Report will be produced for each bank.

Process of clearing a cheque Day 2 (the next working day) All cleared cheques and Clearing Reports are delivered to the “zone” where each paying bank will collect its cheques before 8:30 a.m. Paying banks have to verify the signatures of the drawers on the cheques and examine any irregularities in drawing the cheques. Following the Clearing Reports, a paying bank will decide what to do if some customers’ accounts do not contain sufficient funds to be claimed by the payees.

Process of clearing a cheque If the paying banks decide not to pay the cheques with insufficient funds in the accounts, the cheques will be returned to the Clearing House before 1 p.m. with cover slips stating the reasons. The Clearing House will re-adjust the entries and return the uncleared cheques to the collecting banks by 2:30 p.m. Technically, all cleared cheques can be drawn at about 2:30 p.m. on the next working day after they have been presented. The collecting bank will return the dishonoured cheque to the customer who has paid in the cheque.