Question

QUESTION 7.

(a) The paying bank is duty bound to pay a customer’s cheque provided the instrument meets certain

criteria. Discuss these criteria in detail. [10 MARKS]

(b) A forged signature is wholly inoperative (section 22 of the Bills of Exchange Act). Discuss.

[10 MARKS]

Answer 1

(a)

If you decide to accept checks, keep some key points in mind for your small business. Follow a few simple steps to collect valid checks and correctly deposit them.

When you receive a check, verify that it was written for the right amount. The numerical amount and the amount written out should be the same. Do not accept checks for more than the total amount due.

The check must include personal and banking information. The following details should be correctly written or printed on the check:

• Complete name of the payer
• Current date
• Bank ID numbers including account and routing/ABA numbers
• Payee name (you or your business)
• Dollar amount
• Signature

(b)

signature is necessary to create the cheque, to negotiate a cheque made to order, and to found the liability of the various parties to the cheque. Section 22 of the Bills of Exchange Act provides that a forged signature is wholly inoperative. The bank may thus not pay out a cheque with a forged signature on it. Hence the drawer is not liable on such a cheque to the payee.
Section 36(b) of the Bills of Exchange Act creates special rights for a holder in due course.
The section provides that a holder in due course “holds the bill free from any defect in the title of prior parties, as well as from mere personal defences available to prior parties among themselves, and may enforce payment against all parties liable on the bill”.
Title defects and personal defences are referred to as relative defences when compared to absolute defences. Forgery is an absolute defence; one meaning that a drawer will also not be liable to a holder in due course where his signature was forged.

Liability of an endorser on a cheque where the drawer’s signature was forged
Forgery may, in certain cases, not be raised as a defence. Section 53(2)(b) of the Bills of Exchange Act creates a statutory estoppel by providing that an endorser, by endorsing an instrument, is “precluded from denying to a holder in due course the genuineness and regularity in all respects of the drawer’s signature and all previous indorsements”. This means that where the drawer’s signature was forged but the endorser’s signature is valid, that the endorser will be liable to the endorsee on the cheque.