13.3 Types; Cheques, promissory notes, bills of exchange

Cheques

A cheque is a widely used negotiable instrument that allows an account holder (the drawer) to make a written order to their bank (the drawee) to pay a specified sum of money to a named payee or to the bearer (the person holding the cheque).

Types / classification of cheques

1. Bearer cheque: This is a cheque whose proceeds are payable to the holder.
2. Order cheque: This is a cheque whose proceeds are payable to specified person or his order.

Whereas a bearer cheque is negotiable by delivery an order cheque is negotiable by endorsement or delivery.

3. Open cheque: This is a cheque whose proceeds are payable across the counter.
4. Crossed cheque: Is a cheque that contains two parallel transverse lines on its face with or without account. A crossing is an instruction to the banker not to pay the proceeds across the counter.

 

It differs from a bill of exchange in various ways: –

• It can only be drawn on a banker.
• It is payable on demand.
• It does not require acceptance.
• Non-presentation does not discharge it
• It is less negotiable.
• It may be crossed generally or specially.
• Notice of dishonour is not necessary.

 

Duties of the customer

1. Duty of care
2. Notice of irregularities

 

Duties of the banker

1. Duty of care
2. Professional advice
3. Duty to honour cheques: The banker is bound to honour all cheques drawn by the customers provided: –
4. The cheque is complete and regular on the face of it.
5. The customer’s account has sufficient funds.
6. The cheque is presented at a reasonable hour on a business hour and business day.
7. The payee identifies himself to the satisfaction of the banker.
8. If a banker fails to honour a cheque in breach of this duty, the customer has an action in damages.
9. Duty of secrecy
10. Duty not to pay without authority

Promissory notes

A promissory note is a written promise made by one party (the maker) to pay a specific sum of money to another party (the payee) on a specified future date or on demand. Promissory notes are typically used for lending and borrowing arrangements, often as a formal acknowledgment of debt.

Characteristics

1. It is an unconditional written promise made by a person to another.
2. It must be signed by the make
3. It contains a promise to pay a sum certain in money.
4. The sum is payable on demand or at a fixed or determinable future time.
5. The sum is payable to a specified person, his order or the bearer

A promissory note differs from a bill of exchange in that: –

1. It is a promise to pay made by the debtor.
2. It does not require presentation for acceptance nor does it require acceptance. However, it is a negotiable instrument capable being negotiated by one person to another in commercial transactions

Bills of exchange

A bill of exchange, also known as a draft, is an order written by one party (the drawer) to another party (the drawee) to pay a specified sum of money to a third party (the payee).

Parties to a bill of exchange

• Parties to a bill of exchange are the drawer and the drawee.
• The drawer is the person who draws the bill demanding payment.
• The drawee is the person to whom the bill is drawn. This is
• Person to pay the amount due.

Rules relating to representation of bills for acceptance

1. The bill maybe presented by the drawee or his agent-
2. It must be presented at a reasonable hour on a business day.
3. It must be presented to the drawee and if dead, to his personal representative.
4. If the drawee has been declared bankrupt, the bill must be presented to him or to his trustee in bankruptcy.
5. If trade custom and usage permits, it may be done thought the post.
6. However, presentation of a bill for acceptance will dispensed with if:

• The drawee is a fictitious person.
• It cannot be effected even with the exercise of reasonable diligence.

Dishonoured bills

A bill is said to be dishonoured if:-

1. Presentation for payment is exercised by law
2. Payment is refused.

It is the duty of the payee to notify the party liable the fact of the dishonour and to have it noted and or protested.

Discharge of a bill

A bill may be discharged in any of the following ways: –

1. Payment in due course
2. Acceptor – holder maturity (merger)
3. Renunciation or waiver.
4. Cancellation
5. Material alteration.
6. Non-presentation