Banking Law about hqus - Essay Example

Banking Law about Сhеquеs Banking Law about Сhеquеs Author Author’s Affiliation Date Introduction Usage of cheques is a common and convenient mode of making payments all over the world. There is no written contract between a customer and a bank when a cheque account is initiated. But some banks send a letter to the customer that confirms the terms of the account. This is especially true when the account requested in an overdraft account operable by cheque. If the terms of contract are not written down, then the law applies on both the bank and the customer1 (comlaw, 2013). Cheques under Australian Law The administration of Cheques is done under the Cheques Act 1986 (Cth)2 inclusive of all references. Since the bank can pay ‘cheques’ by obligation, the definition of a cheque is crucial. A cheque is an categorical instruction indelibly written and having (comlaw.gov.au, 2012): 1. Addressed by the customer to the bank 2. Signature of the customer 3. The amount written in words and digits which is to be paid.3 There are ‘order cheques’ and ‘bearer cheques’4. Order cheques ask for the sum to be paid to a certain organization or person or to their order instead of the holder of the cheque. Most cheques used in the country follow a set common pattern. The drawer delivers it to the payee who then deposits the cheque in his or her bank, which is known as the collecting bank. This collecting bank then delivers it to the drawer’s bank to which the original order was addressed in the first place. The bank of the drawer is called the compensating bank in which the complete process is called ‘collecting the cheque’. The collecting bank probably collects about countless cheques in a day and the disbursing bank similarly collects cheques drawn in the accumulating bank. Instead of treating each cheque as an individual entity, representatives of both these banks meet at an agreed location and exchange the cheques they both have. This conversation is known as ‘clearing’ and the place is called the ‘clearing house’. The payment systems used by banks are becoming more and more electronic every day (Latimer, 2012). When should the payment be ideally made? A cheque does not always necessarily get deposited. The cheque may be billed on demand, which means that the payee is allowed to payment immediately5. That is of course in the provision that no restrictions apply on it. These restrictions will be discussed shortly and can come across when the cheque is presented at the paying bank. The bank will take its time to verify the signature on the cheque with the specified account. But, disbursement has to be done as soon as possible and on a readily basis (Gillies, 2004 ). When can payment be refused? Payment can be declined on a cheque if it is not filled out correctly and completely, e.g. f the amount to be paid is stated in numbers (figures) only and not in words. It can also be refused if the date is not mentioned6 or if the teller feels that there is some uncertainty or ambiguity in the intention of the presenter. In case the amount in numbers (figures) and the one in words do not match, payment can be refused. This is despite the fact that the Cheques Act 1986 states that the lesser amount will apply7. Another reason why payment cannot be done is when the account does not have sufficient funds or if the cheque has an excess of the agreed limit. An example is that a $500 will not be honored if the amount in the account is $499. The order of the cheques are kept in great consideration while doing payment as they have to keep a log of the order in which they are presented to the bank. But, if two cheques come at the same time and the account only has available balance to entertain one cheque, then it is up to the bank to decide which one it will honor. Secondly, the funds in the account must not only be adequate to insure the amount indicated in the cheque, but they should also be ‘present’ for transactional purposes. There are instances when funds which are unavailable have actually originated from cheques that have not been cleared. The funds may even be lying in a different branch or in a separate account of the same branch (Australia, 2010). There are times when the bank will refuse payment on a cheque in case of insufficient funds. It can treat the cheque as an overdraft request. If the bank chooses to go for this option, then the customer will have to pay interest on the overdraft amount. When payment is mandatorily refused? Payment has to be mandatorily refused by the bank in certain circumstances. In case the bank does pay in one of these conditions, it will not be allowed to conduct a debit transaction on a customer account due to the quantity mentioned in the cheque. Some of the most crucial of these circumstances are as follows: 1. The customer ‘stops’ payment through the check, known as countermanding payment. 2. The bank comes to know that the customer has a serious mental illness8 3. The cheque is presented to the bank over ten days after the customer’s demise9 4. The cheque is ‘stale’ meaning it dates over 15 months before presenting for payment10 5. The bank finds out that there is a insolvency petition offered against the customer11. Payment on a cheque can be put to a halt any time the cheque is presented for payment. Though banks have the option to inquire the concerning customer for filling printed format for records, this is considered as a legal requirement. A fax or telephone call to the pertinent branch and evidently identifying the cheque to one of the bank’s officers are enough to stop a cheque, but having a conversation with any operator is not. In case the instructions are not clear or the cheque is not identified properly, the reversal will be invalid. The safest way to go about it is to responsibly follow all phone calls from the bank and then visit the branch in order to fill out the required standard forms. In case of a joint account, any one of the account holders can stop a cheque being drawn on the particular account (Thorpe, 1993). Crossed cheques A bank can refuse to instantaneously interchange a crossed cheque in return for cash when it is offered in person, obviously by the payee. Since there is a likelihood of the cheque falling into wrong hands, customers and banks have developed specialized marks that decode certain instructions to the bank. These marks are called ‘crossings’12. The most usual of these marks comprise two parallel lines which are drawn on the face of the cheque across. The lines usually have the words ‘not negotiable’ inscribed in them. Simply writing ‘not negotiable’ without the parallel lines will mean nothing to the bank and they will not be treated as valid direction. A common crossing is a direction to the disbursing bank to pay the amount only to the stated accumulating bank. That particular cheque will and cannot be paid across the counter or through cash directly to the payee. In order to get the payment, the payee must inquire the bank to present the cheque via a clearing system to the paying bank. In case a cheque is lost, crossing provides a valuable protection because the latter will only be done if the cheque holder has an account at the second bank (Australia, 2005). In case the bank does make the grave mistake of paying a crossed cheque to some other party than the second bank, it will be held liable for any losses caused to the rightful owner of the cheque and to the customer. This is because it did not follow the customer’s instructions. The term ‘account payee only’ on a cheque will have no authority under the Act but judicial interpretation provide some sort of authority. These words actually instruct the amount mentioned in the cheque to be disbursed into the payee’s bank account only and nowhere else. The order is intended for the payee’s bank, which is the collecting bank. Since the drawing person is not a customer of the payee’s bank, it is not obliged to follow their orders. Yet courts maintain that these words should alert the collecting bank. It is their responsibility to make inquiries if it is asked to credit the account of someone other than the payee named. In case of adequate inquiries and satisfactory results, the cheque can be used to pay someone who is not the named payee (MacKay, 1987). Obligations for the customer The customer must practice caution when drawing the cheque. The customer will suffer a loss if the bank is misled into making a payment through a cheque that did not fulfill all obligations. The bank will obviously debit the respective account and the customer will lose his money. An example is when the customer only writes digits but not the words for the amount. Another person can easily increase the amount from a small to a large one and the bank would debit the customer’s account according to it. This obligation stands only when the drawing is to be done immediately. The chequebook does not have to be taken care of specially (Muraleedharan, 2009). Another obligation on the customer is to notify the bank if there are any forgeries that he knows of. An example is an employer forging the account holder’s name on cheques. The holder did not notify the bank because the employer apologized and vowed not to do it again. But he did so for many other cheques. The account holder was held liable for all those subsequent withdrawals because if the bank had known about the forgery, it would have taken precautionary measures on time. This only applies to known forgeries and there is no contractual duty to find out about forgeries even if it was possible to do so via going through a periodic statement (Focus, 2012). Conclusion It is very important to abide by the tenants mentioned in the Cheque’s Act 1986. They clearly mention the operations and rules surrounding the usage of cheques. In case of ambiguity, it is always better to check with the bank or your financial lawyer. Exercising caution at every step is crucial too. This refers to when writing a check to following up on phone calls from the bank. It will avoid any mishaps related to your usage of cheques. Bibliography Australia. (2005). Federal Statutes Annotations, Volume 3. Butterworths. Australia, N. L. (2010). APAIS 1992: Australian public affairs information service. National Library of Australia. comlaw. (2013). Cheques Act 1986. Retrieved from comlaw.gov.au: http://www.comlaw.gov.au/Details/C2007C00573 comlaw.gov.au. (2012). Cheques Act 1986." Cheques Act 1986. . Retrieved from comlaw.gov.au: http://www.comlaw.gov.au/Details/C2007C00573/Html/Text#_Toc179084950 Focus, C. (2012). Banking Services and the Consumer (RLE: Banking & Finance). Routledge. Gillies, P. (2004 ). Business Law. Federation Press. Latimer, P. (2012). Australian Business Law 2012. CCH Australia Limited. MacKay, C. (1987). Pay Cheques & Picket Lines All About Unions. Kids Can Press. Muraleedharan, D. (2009). Modern Banking: Theory And Practice. PHI Learning Pvt. Ltd. Thorpe, D. (1993). Australian Books in Print, 1993. Read More