Bill of Exchange and Cheque
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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
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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
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"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
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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
AExchange
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 NonPayment
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Where an inland bill has been dishonoured, it may, if the
holder thinks fit, be noted for non-acceptance or nonpayment, 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.
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 nonacceptance, 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.
A bill which has been protested for non-acceptance may
be subsequently protested for non-payment.
Protest for Non-Acceptance and / or NonPayment
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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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At the end of the day, all cheques to be cleared
are added and printed with magnetic ink
characters the amounts of the cheques.
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Cheques from different branches are grouped at
the bank’s headquarters before they are delivered
to the Clearing House.
Process of clearing a cheque
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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)
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All cleared cheques and Clearing Reports are
delivered to the “zone” where each paying bank
will collect its cheques before 8:30 a.m.
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Paying banks have to verify the signatures of the
drawers on the cheques and examine any
irregularities in drawing the cheques.
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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
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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.