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Title: Commercial Law for Accountants for 2nd Years
Description: Negotiable Instrument are the most complex chapter when doing accounting courses in your second semester, but with this note work load will decrease,
Description: Negotiable Instrument are the most complex chapter when doing accounting courses in your second semester, but with this note work load will decrease,
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(1) GLOSSARY
Terms used in connection with negotiable instruments :
1
...
2
...
A cheque is an unconditional
order in writing addressed by a person to the banker,
requiring the banker to pay on demand a sum certain in
money to a specified person or to his order or to the
bearer of the cheque
...
Drawer – is the person who gives the instruction to
make payment
...
4
...
In the case of a cheque the drawee is always a banker
and is called the ‘drawee bank
...
Payee – is the person to whom payment is to be made
...
Bearer instrument – The name of the payee is not stated eg
...
A bearer instrument is negotiated by
delivery only
...
Order instrument – The name of the payee is stated eg
...
An order instrument is negotiated by endorsement and
delivery
...
Payable on demand – the cheque must be payable on the date
of its presentation to the bank
...
Issue – (a cheque) When a drawer writes out a bill for the first
time and delivers it to the payee, or bearer
...
Negotiation – Refers to the transfer of the right to receive
payment on an instrument
...
Endorsement – Refers to their signature on a cheque
(normally on the reverse side) with the intention to
transfer the right to receive payment
...
Crossing – A crossing refers to two transverse parallel
lines on the face of the cheque
...
i
...
13
...
Hence the holder may be the person
in possession of a bearer instrument, or the payee or
endorsee in the case of an order instrument
...
Indorser is the person who signs an order cheque – for
the purpose of transferring the right to receive payment
15
...
This person will receive payment
...
Delivery – instrument must be delivered to payee
/ bearer to be valid
17
...
Holder is defined as a payee or indorsee or bearer
of an instrument who is in possession thereof
...
Holder in due course is a holder who becomes the
true owner of a negotiable instrument, with an
indisputable title to payment
...
An indorser is a holder who negotiates an instrument
by putting indorsement (signature) on the reverse
side thereof and delivering it to another person, the
indorsee
20
...
The relationship between the accommodation
party and the person accommodated has been
described as that of surety and principal debtor
...
21
...
He must attach his signature
to the bill
...
Normally when making payment a person
has a choice to use various form of payment
...
A negotiable instrument is a legal document
entitling the holder to a specified sum of
money
...
b) The right sum is transferred from one
person to another
...
d) It is a legal contract
e) It avoids the difficulties of handling cash
Cheques, promissory notes and bills of
exchange are examples of negotiable
instruments
...
A negotiable instrument is a legal document
entitling the holder to payment of a specific
sum of money
...
The name of the payee
is not stated) or by endorsement and delivery
(if payable to orders ie
...
Who is a
holder in due course?
A person who has an indisputable title to the
payment
...
Order/Promise – The instrument must contain an
instruction to pay
...
A mere acknowledgement of
indebtedness will not constitute a valid
negotiable instrument
...
g
Pay X R500 if he sells my car
...
If anything further is ordered then this
would amount to a condition
...
The Drawer and Drawee cannot be the same
person
...
A cheque that is
not signed is invalid
...
Van Tonder en Andere v Voster , a man
authorized his son to sign a cheque on his
behalf
...
The son signed the cheque and also
wrote his name at the back of the cheque
...
...
R1000
...
Payment must be :
On demand
...
e
...
In the case of a bill
...
A date for payment could
be made for the future on condition it is clearly
expressed eg
...
Addressed to a specified person or payable to
BEARER
...
Pay ‘Joe Soap’ or ‘Pay cash’
Does this instrument satisfy the
requirements for a negotiable instrument?
Substantiate your answer
...
First National Bank
Pay Cash____________________________
The sum of Five Thousand Rand
26/08/10
R5000-00
__T
...
In writing,
2
...
And for a specified sum of money
4
...
It is a bearers cheque, because the name of
the payee is not specified
...
However Cathy also
owes Lulu R500
...
Who are parties to the instrument?
Tandi (A)
=
the drawer → she gives
the instruction to pay
Cathy (B)
=
the drawee → she makes
payment (pays out)
Lulu (C)
=
the payee →she receives
payment
Questions:
1
...
A bill may be drawn, payable to
the drawee or the drawer but there must be
at least 2 persons
...
How is the cheque different from a bill of
exchange?
Answer: A cheque is always payable by the
drawee bank, whereas a bill of exchange can
be paid by any other person
A Cheque is always payable on demand
...
11/01/2010
To Cathy………………………………………
...
- made by one person to another
- signed by the promisor
- making him/her bound to pay
...
Valjee
Two thousand Rand only 09/09/2009)
D
...
How is a bill (ie
...
2
...
Diya can give Shreeya a
promissory note to acknowledge her indebtedness
...
Who are the essential parties?
Diya = the maker or promissory (she makes the promise via a
promissory note to acknowledge her (indebtedness/debt)
Shreeya = the payee →( the amount is due to her) she is to receive
payment
Questions :
1
...
When does payment take place?
Answer: Either on demand or at a
determinable/future date
...
He banks with ‘Ace
National Bank’
...
John asks Tina whether he could pay her via a
cheque and she agrees
...
The cheque is reflected below
...
Ace National Bank (B)
Date
Pay Tina (C)
Two Thousand Rand Only
R2000-00
Signed
John Smith (A)
1
...
2
...
The bank is never liable to pay from its own
funds
...
C – Payee – Person to whom payment is to
be made
...
ACE National Bank and
payable on demand
...
A Cheque is always payable on demand
...
2
...
The instruction to pay is given to
a bank
...
• Negotiation refers to the ability to transfer
the right to receive payment on an
instrument
...
• “Negotiation” is when the payee or the
indorsee transfers the instrument to another
person in such a manner that the transferee
becomes the holder
...
• An order instrument is negotiated by “indorsement “
and delivery
...
• An order instrument means that the drawer named the
person to get paid out; e
...
“Pay Linda Dlamini”
...
• “OR ORDER” means that the instrument can be
transferred to a person nominated by Linda Dlamini
...
After this occurs, Linda Dlamini will be regarded as the
“indorser”, and the person he named at the back is called
the “indorsee”
...
• “OR BEARER” means that the drawer or maker
did not name a specified person as payee
...
• The bearer is the person in possession of the
bill
...
• The bearer can transfer the instrument to
someone else
...
• He does not have to name the indorsee on the
back of the instrument if he wants it to remain a
bearer instrument
...
How to terminate negotiability
The negotiability of a cheque is terminated in 2 ways
1
...
By adding the word “only”
after the name of payee
2
...
When the negotiability on a cheque is terminated the cheque is not
transferable and it must be paid to the named payee only
...
The bank will be liable to the true owner of the cheque for
any loss suffered if it acted negligently eg
...
This principle is illustrated in the case of Kwa
Mashu Bakery Ltd V Standard Bank of South
Africa Ltd
In this case, the bank tried to raise a defence
that it is difficult to be liable to the true
owner of the cheque for any loss suffered as
the volume of cheques handled by the banks
in South Africa were excessive
...
The Court held
that the bank owes the owner a legal duty to
take responsibility when a cheque is
stolen/lost is avoid causing the owner any
harm
...
• Indorser delivers the instrument to
indorsee who becomes entitled to payment
• Indorsee now becomes ‘the holder’
• If the indorsee takes the instrument ‘in
Goodfaith’ and ‘for value’, he can become a
‘holder in due course’
John Smith
(Note: This instrument is just signed by the holder on the reverse side without
specifying the name of the indorsee
Special Indorsement The name of the
indorsee is specified (Person to receive
payment after negotiation
Effect : When the name of the indorsee is
stated the instrument is then an order
instrument
...
Pay Linda Dlamini
John Smith
Linda = indorsee
(1) Restrictive Indorsement
a
...
The indorsee’s right to transfer the instrument is restricted by the word
‘only’
b
...
d) If payees name is misspelt or wrongly stated, he must indorse as designated AND
THEN add his proper signature
...
MARKINGS ON CHEQUES
‘Not Negotiable” – If the cheque is crossed, the
cheque can still be transferred, but holder takes it
with defects
...
“Account Payee Only” – does not affect negotiability
of a cheque
...
‘Not Tranferable” or “Pay__________ Only” –
instrument cannot be transferred
...
These
words may not be cancelled
...
Certain
words may be included in the crossing
...
What is the general effect of crossing a
cheque?
Drawee banker must pay the cheque to
another bank
The holder must pay it into his banking
account
The cheque cannot be cashed over the
counter
2
...
What is the difference between a “General
Crossing” and a “Special Crossing”?
General Crossing – must be paid into the
holder’s banking account
...
Following are some specimen samples
of general crossings on a cheque:
•
•
•
•
•
Non transferable
Non negotiable
...
Payees account
...
Definition : Two lines across the face of a cheque with the
name of the payee’s bank written in between lines (eg
...
Dhaka bank ltd A/c Arif
...
Dhaka bank ltd payee’s A/c
Who is a Holder?
In order to be a holder, the person must be in
possession of the instrument
In the case of an order instrument, the holder will be
the named payee or indorse in possession of the
instrument
In the case of a bearer instrument, the bearer
(person in possession of the instrument) is the holder
A holder is therefore :
Either the payee/indorsee or
bearer of the instrument who is in possession thereof
However being a holder does not
automatically entitle one to payment on the
instrument
eg
...
Although Tom is the holder because he is in
possession of the cheque, he is not entitled to
payment
...
He gives value for the instrument
...
He does not receive the instrument gratuitously eg
...
If the instrument is dishonoured then the transferor
will be liable to the holder on the basis of a breach of
warranty
...
Why? Because he holds the bill free from any
defect in the title of prior parties ie
...
Not entitled to
payment) A holder in due course is more or
less guaranteed of payment
...
He is always entitled to payment
...
Tanya purchases a motor vehicle from
Ronald
...
Ronald thereafter negotiates the cheque to Peter
...
Tanya later discovers that the motor vehicle is
seriously defective and she decides to stop
payment on the cheque ie
...
However, Peter is the holder in due course so
Tanya will be obliged to pay Peter as her defence
that the motor vehicle is defective cannot be
raised against Peter
...
An example of an absolute defence would be
a material alteration, where the amount
payable has been altered/changed
...
The Cheque must be complete and regular – no
blanks and alternations/
2
...
stale)
3
...
The person must take the cheque for value (give
something in return) Not as a gift or donation
5
...
6
...
Therefore the payee cannot be a holder in due
course
7
...
Duties of the Holder
To present the instrument for acceptance
To present the instrument for payment
...
If the holder fails to present the bill for payment, the
drawer and indorsers are discharged from their liability
...
In order for the holder to
acquire a right of recourse against the drawer and
indorsers when a bill is dishonoured, the holder must give
notice of dishonour
...
To protest upon dishonour
...
Protest serves as formal proof of the facts and the
circumstances of the dishonour
...
“Drawee Bank” - When a drawer makes out a cheque, he instructs his
bank (drawee bank) by means of his signature to pay the cheque to the
payee or indorsee
...
If the bank’s client has a cheque book which is stolen and a cheque
is fraudulently drawn and the incorrect person is paid out, the drawee
bank is not protected if it pays on a forged signature in terms of Section
22
...
If a bank pays a crossed cheque over the counter – it is liable to the true
owner (person entitled to payment) see Kwamashu’s case
...
However, if the indorsement is that of the customer of the bank at the
branch at which the cheque is drawn then in that instance the bank will
be liable
...
If a cheque is stolen
and the customer’s signature is forged, the bank could refuse to
reimburse the customer if the customer was negligent and failed to
exercise reasonable care
...
The Drawee bank is
placed in the same position as if payment has been made to the true
owner
...
A
thief (T) steals the cheque from C and forges C’s indorsement on the
reverse of the cheque so that T can obtain payment
...
D
Bank presents the cheque for payment to B Bank and T’s account is
credited with the payment
...
If T presented the
cheque to B Bank and B Bank had paid T over the counter, it would
not be protected by section 79 because it did not pay in terms of the
crossing; payment was not made to a banker
...
Section 81: If a cheque that is marked “ Not
Negotiable” is stolen or lost Section 81 allows
the true owner to sue any person who came
into possession of the cheque after it has
been stolen even if the person in possession
acted in good faith
...
The bank makes payment to the client up to the
amount the clients account is in credit or up to
the amount agreed upon if overdraft facilities
have been granted
...
How would the bank breach its duty?- By
dishonouring a cheque while sufficient funds are
available in the clients account
...
Express Waiver – When the holder renounces
his rights against the maker unconditionally
in writing
...
Title: Commercial Law for Accountants for 2nd Years
Description: Negotiable Instrument are the most complex chapter when doing accounting courses in your second semester, but with this note work load will decrease,
Description: Negotiable Instrument are the most complex chapter when doing accounting courses in your second semester, but with this note work load will decrease,