Legal-3-part-A

Legal-3-part-A

Module 2 Legal

Paying Bankers –NI Act

1. One of the following sections of NI Act does not give ABSOLUTE protection to paying Bankers.

a) Section 10                                   b) Section 85

C) Section 89                                   D) Section 128

Answer: b

Explanation: Section 10- is about ‘payment in due course’

Section 85- generally gives ‘Protection to paying banker’; but not fully/absolutely.

Section 89- deals with ‘material alteration’ in cheques

Section 128- is about ‘payment in due course of a crossed cheque’

2. One of the points below do not relate to definition of the cheque.

a) Bill of Exchange

b) Drawn on specific Bank

c) Defined under section 6 of N.I Act

d) Payable on demand

e) Term Deposit

Answer: E.

Explanation: A cheque is an order by the customer to his bank; *cheque is also a bill of exchange; to be drawn on specific branch; payable on demand;

***Sec 6 of NI Act defines a cheque.

3. Payment in due course is a payment…..

a) In good faith

b) In accordance with the tenor of cheque

c) Without negligence

d) To the possessor of cheque

e) With no doubt about his right / identity

f) All of these

Answer: F.

4. ‘A’ drew a cheque in Bank P. ‘B’ was Payee. It was a bearer cheque.  ‘B’ handed over it to ‘C’. ‘C’ signed on the back of cheque. But he sent ‘D’ to get the money from the Bank. Bank can pay _______?

a) Bank can pay only to ‘B’

b) Bank can pay ‘e’ only

c) Bank can pay D

d) Bank to inform ‘A’ and ask for confirmation

Answer: C

Explanation:  A Bearer cheque is payable TO ANYBODY provided Bank should have checked the tenor and details on cheque without negligence.

Eg:. D lost the cheque. It was found on the road by ‘F’. F came with the cheque. Bank looked for all checks and satisfied with ‘F’. Bank paid the money obtaining F’s signature on the back of the cheque. BANK IS FULLY PROTECTED here too.

5. Collecting bank-C sent a cheque for Rs.47000 to bank-P for collection for their customer ‘A’. The cheque was duly cleared and credited to A/C ‘A’. Y was the original payee. ‘A' had sold some goods to Y and in consideration of this sale,Y transferred the cheque by an endorsement for price.

But, the original drawer-R claimed that cheque was forged. So, he claimed the money from Bank-P. Bank-P asked bank-C to indemnify the loss because he collected for a wrong person.

The case came to court. You are the judge. Which one will be your judgement?

A. Bank-C liable because he collected for a wrong person.

B. ‘A’ is liable because A is not real holder but received the money.

C. ‘R’ cannot claim; he lost the cheque because of his carelessness and negligence

D. Paying banker cannot claim indemnity from bank ‘C’ because bank-C's position is legally right; forged cheque is not a real mandate.

Ans: D

Explanation:

Why?

It is a case on 'Holder in due course'.

A collecting banker can collect money:

1. for a customer

2. specially/generally crossed cheque

3. In good faith (here the customer-A is doing business and has a current account in bank-C)

4. Without negligence (bank checked the tenor, amount, words, figures and endorsements on the back).

It was held that collecting banker and his customer could not be held responsible because they received the cheque during the course of genuine business.

So, paying banker alone is responsible for wrong payment of a forged cheque.

But remember when a forged cheque comes in your problems, always  PAYING BANKER is liable though the cheque appears to be 100% correctly signed by drawer.

6.  A-Liquidator received a cheque for 17,392- on sale of a property of M/S PQR & Co. It was uncrossed. He presented the cheque with a seal as 'A-Liquidator of M/S PQR' and signature in his official capacity. Then, below it he signed the cheque as 'A' in his personal capacity. The drawee bank was bank-B. He went to bank-B and demanded cash over the counter. Being a court appointed official, cash was handed over to him. He used the money for his personal expenses. When it was found out, court suspended him and appointed another officer. The new Liquidator asked the bank-B to pay the money 17,392- to court, because he argued it was wrong payment. Which one will you decide?

A. Bank is not liable since the cheque was not crossed.

B. Bank is liable because it cannot give cash to a Liquidator.

C. Only the previous liquidator is personally liable.

D. Nobody is liable since action is taken on him.

Ans: B.

Explanation:

Please have in mind, whether crossed or uncrossed: All the cheques in the name of : “name+ 'LIQUIDATOR/EXECUTOR/ADMINISTRATOR”

have to be credited to 'their accounts in the capacity of LIQUIDATOR/EXECUTOR/ADMINISTRATOR' (**official account only) and

NOT TO THEIR PERSONAL ACCOUNTS. This is the rule. It does not matter whether it is uncrossed/bearer cheque.

More points :

1. Accounts are opened for LIQUIDATOR/EXECUTOR' in their personal name followed by their official status like

Mr. K, Liquidator for M/S PQR & Co.

They are free to have separate personal accounts in their name like any other people.

2. What is endorsement?

Endorsement is a signature of payee on the back of a cheque. It gives that person a right to receive the amount in cheque.

EX: D draws a cheque in favor of P-payee. Now, P is the person having the right to receive money from D's bank. It is an order to bank by D to pay the money to P.

Bank is the drawee( on whom order to pay is placed and one who pays money ultimately is called DRAWEE)

Now P asks his friend Q to go to bank to fetch the money. P endorses the cheque (just signs) and delivers the cheque to Q. P is now endorser. Q as the holder of cheque has all the rights to receive the amount on cheque. He comes to bank. Banker verifies the credentials of drawer and takes note of the endorsement ; then pays the money after receiving a signature of Q on the back of cheque. Bankers action is legally correct.

Any number of endorsements can be done. If there is no space in cheque, a paper can be attached for further endorsements and it is called ***allonge.

 General crossing: is two lines on left top corner in traverse or a/c payee crossing or not negotiable crossing done by customer.

Special crossing: is bank's name appearing between two crossed lines; this means payment is to be made to this bank only.

Endorsement:

It is a signature of payee usually on the back of the cheque giving a right to another person to receive money. This second person has also the right to transfer the cheque further to another third person. It can go on without any  restrictions.

Endorsement and delivery are expected by law.

Important questions for2 marks:

1. ABC & Co represented by its proprietor 'P' and introduced by 'Q' opened a current account in Bank-C; ABC & Co was in the same street as that of the bank. After a few days ABC & Co presented a DD for Rs.75000- issued by BANK_P for collection. A week later the purchaser of the DD complained and reported that DD did not reach original ABC & Co; also claimed the money back. Court also found out that ABC & CO of Proprietor-P was a fake one. Banker-C was held liable. What are reasons for booking collecting banker-C?

A. Negligence in opening the account

B. Did not doubt the presentor-P

C. No proper introduction

D. Negligence in verifying the DD and inquiring the issuing bank.

Ans: A

Explanation:

ABC & CO is a company. But account is opened by ‘Proprietor-P’.

Bank should have questioned this point.

A company has to submit MOA, AOA, certificate of incorporation from ROC, resolution from board, power of operation, other IDs to bank for opening a current account..

But bank-C did not ask for any of these documents; casually opened the account allowed operation under the seal of PROP-P.

So, collecting banker-C was held liable.

MOA - Memorandum of articles.

AOA - Articles of association.

ROC - Registrar of companies.

2. Mr. A opened a current account in a bank. Mr. A deposited a cheque for 2,50,000-drawn by D for collection. Bank also sent the cheque through clearing to another bank which passed the cheque after complete checking of the details like date, amount etc.

 A few days later the drawer-D claimed that he issued cheque for Rs.250- only. Bank is responsible for wrong payment. Bank was brought to court. Bank also argued that the cheque was in order in all parameters and it was a payment in due course. No material alteration was apparent to the eyes. Paying Bank is

A. protected because no material alteration was available to naked eye and no law says that bank should use latest technology

B. Liable because they lacked latest technology to check the authenticity  of cheques

C. Not liable because it is a perfect 'payment in due course'.

D. None of the above

Ans: A .

Explanation:

This is a bit difficult to understand before knowing what is meant by payment in due course'.If a payment is ‘in due course’, banker is protected.

Under 'payment in due course', you have to make payment

1. as per the instructions/orders/mandate of the customer

2. in good faith

3. without negligence (making all possible checks)

4. the holder of the cheque/payee should be assessed for identity.

5. banker on seeing him should have no doubt on him.

Let us analyse the problem.

Cheque is paid by drawee-banker after due checking of all data-date, amount in words and numbers, drawer's signature;

Another bank has presented the cheque; so, naturally we don't have any doubt over the payee.

Above all no alterations are visible to naked eye (*sec89 gives protection to bankers if there is no alterations, which are visible to normal eyes.)

In all these points bank is perfectly alright.

So, this payment falls in the category of 'Payment in due course'.

Banker is not liable IN THIS CASE.

3. ABC & co deposited a cheque for Rs.4,98,000 in their bank-ES . It was sent for

collection. VEE bank was the drawee bank. The officer in charge had an hectic day in passing 100s of cheques after 4 days of continuous holidays. He verified date, name of payee, words and figures. He found the drawer's signature too 100% agreeing to original one. He passed the cheque. Two days after, the drawer of the cheque complained that the cheque was not signed by him. He claimed the money from the bank. He went to court.

A. ES bank, which collected it, is liable.

B. ABC & CO has to return the money

C. VEE bank which was drawee/paying bank is liable

D. the officer who passed the cheque is personally liable

E. None because signature is 100% correct.

Ans: C.

Explanation:

It is the responsibility of the paying bank to verify the signature of drawer. In this case the officer did the checkings 100% correctly. But the drawer claimed it was not his signature. Forgery is never allowed by law.

When a cheque is forged, it is not a true mandate (order) of the drawer.

This is the judgment of supreme court in several cases.

Even if you cannot find any difference between original and **forgery, **paying bank is always held **responsible for negligence of identifying forgery.

Without doubt paying bank is liable as far as negotiable instruments ACT is concerned.

Again remember if you have a question on forged signature (of account holder), fix the liability on paying paper. You might get 1 or 2 marks.

4. A deposit of a cheque for Rs.11000.00 was made by Narender Singh. It was wrongly entered in the system as 11,00,000 and sent for clearing. And meanwhile a cheque issued by Narender was passed against clearing for Rs.10,00,500/=. But the service branch noticed the difference between claim and the original cheque amount and informed the collecting bank. Narender refused to pay and his argument was that it was the mistake of the bank. Bank can approach

A. Any civil court

B. DRT

C. High court

D. CBI against concerned branch officials

E. bank could not do anything since it was the mistake on its part.

Ans: B

Explanation:

The due is more than Rs.10 lacs. As per law (though it is wrongly credited) the amount should be treated as a DEBT. Notice should be sent and then a case for recovery can be filed in DRT.

 Let us add another dimension to this case. The credit of 11.00,000 was done intentionally with the connivance of a staff and a officer; there was no official sanction for passing against clearing. If so, which court should be approached?

It is a clear case of ***fraud because staff is also involved. Here there is no debt/loan. So, it cannot go to DRT which is a legal body for recovery of loans. Bank has to necessarily go to police only as it is a crime of fraud.

Note: For examination purpose.

1. If drawer’s signature is forged, paying Banker is liable.

2. Generally when alterations on the cheque (other than drawer’s signature) are not visible to ordinary eyes & Bank has followed the rules of payment in due course, paying Banker is not LIABLE.

3. Bank should not credit / pay any cheque to the personal accounts of Liquidator / Administrator of Executor/ C.M.D / Trustee when the cheque (crossed/uncrossed) is payable to the institution they are connected. It should be deposited in the official accounts of the Receiver / Liquidator only. In all these cases paying Bank is Liable if there is any negligence in payment.

Responsibilities of Collecting Bankers.

1. On 1/11/15 Bikram went to a Bank and dropped a cheque dated 5/11/15 in the clearing box for collecting it to the credit of his account. Next day Banker called him and returned the cheque. Which of the following conditions would be the reason for the return of cheque?

a) Cheque not crossed

b) Post-dated

c) stale cheque

d) None of these

Answer: B

Explanation: Any collecting Bank can have protection it they check the all the details on the cheque without negligence

1. Collect for its customer

2. Collect only the crossed cheques with special or general crossings

3. Collect in good faith

4. Collect without negligence of any duty.

1.     ‘E’ came to Bank-C for depositing a cheque. He opened his account by giving a letter purported (supposed) to be given by his employer. Bank did not check with employer. The cheque was duly collected. Bank- C had a summon from the court that it collected the cheque for a false person and then, Banker-C was made liable for the amount due to

a) Collection of the uncrossed cheque.

b) Opened A/C in good faith which was based on Employers letter.

c) Employer’s letter was forged. Employer reported there was no such employee in his office.

d) Not collected for a customer.

Answer: C

Explanation: Bank opened the account in good faith on the basis of the letter signed by employer as introduction. **Bank must refer / call / go to the office of employer to verify the identity of the customer. But bank did not do this in this case; So, court booked the banker on negligence of duty.

3. Bank – B opened an account for ‘P’ on the introduction of ‘Q’. Who had an account with the BANK. The address of ‘P’ was also that of ‘Q’. ‘P’ gave a DD drawn on Bank – D for collection and drew the money later. Bank – D filed a case against ‘Bank – B’ for collection of altered amount and forged “payee’s name”.

Bank – P was

a) Liable

b) Not liable because it collected cheque in good faith.

c) Not liable because Account was a properly introduced one

d) Not liable because no negligence & could not identify alterations.

Answer: A

Explanation: Because bank did not question the address of the customer; did not verify the address directly. It is a gross negligence in opening of the account. For example, the address was same as of Q.

4. Bank’s have to open account only after verifying the address and identity of the customer by

a) Getting Xerox copy of IDs

b) Proper introduction by an existing customer

c) Original IDs to be verified and Xerox copies obtained with self attestation

d) Letter from employer and tnen,verifying employer over phone / directly

e) B C D

f) a b c

f) None

Answer: E

Explanation: Always verify with original; Use E-aadhar; Employer should be visited or they should come and introduce the employee in addition to a letter.

5. Which of this is not a collecting Banker’s duty?

a) Checking Date

b) Checking for apparent alteration

c) Verification of drawee’s signature

d) Verification of drawer’s signature

Answer: D

Explanation: Drawer is the customer of paying bank. So, collecting bank cannot check it. Drawee bank is paying bank where customer’s signature is kept for verification.

Types of Borrowers

1. Banks avoid opening of accounts to?

a) Corporate                                    b) Partnership

c) Individuals                       d) Drunken People

e) Minors

Answer: D

Explanation: Because they are not sound of mind when they come for opening of accounts.

2. Match the following:

a)	Individual	-	Partnership Deed
b)	HUF	-	Certificate of Incorpartion
c)	Company	-	Guardian
d)	Partnership	-	Karta
e)	Minor	-	PAN

A.    A-E; B-D; C-B; D-A; E-C.

B.     A-C; B-D; C-A; D-E. E-B.

Answer: A.

3. Minor’s Age 18 is defined in ________?

a) Indian Contract Act

b) Indian Citizens Act

c) Indian Guardians and wards Act

d) Juvenile Act

e) Indian Majority Act

Answer: E

Explanation:

Indian Majority Act defines who is a major and fixes this age at 18,.

(while Indian Guardians and wards Act the majority age is 21)

4. A 17 years 11 months person comes to Bank and asks for a loan to join Engineering College. He has no parents. But he has a paternal uncle as guardian appointed by a court. Manager is to?

a) Sanction                                                   b) Reject

c) Recommend to Regional Office         d) Consult Legal H.O.

Answer: A

Explanation:**** If minor comes for loan; it is a contract for the benefits of the minor only. So, manager is in order it he sanctions the loan; The condition is that minor is to be represented by the legal guardian. On completion of 18 years, borrower should give acknowledgement of debt. People cannot have any contract with minors.

5. Who does not require certificate of Registration?

a) HUF                                                           b) Partnership

c) Company                                                 d) Limited Liability Partnership

Answer: A) HUF

Explanation: Partnership Certificate of Partners to be obtained from registrar of firms.

For Company and LLP –From registrar of companies (ROC).

6. Match the following:

a)	Individual	-	Company
b)	Partners	-	HUF
c)	Legal Entity	-	Proprietor
d)	Co-parceners	-	Partnership

Choose”

a.     A-d; b-c; c-a; d-b.

b.     a-c; b-d; ; c-a; d-b

Answer: b

Explanation:

Individual and proprietorship are same;

Partners and Partnership firm are not different; both are same. We cannot differentiate between partner and partnership firm.

Company is a Legal Person, Artificial separate and perpetual (permanent) entity

Karta is chief of HUF & other members are co-parceners; **Karta is the senior most member of the family; *His liability is unlimited while *co-parceners liability are equal to the value of their share in family property.

7. A partner can act on his own when?

a) Selling an immoveable asset

b) Buying a property

c) Accepting a case against firm

d) Withdrawing a case by firm on third party

e) Buying a property for personal use

f) All except E

Answer: E

Explanation: A partner should not buy & sell a property withdraw a suit or accept a case on firm without the consent of all other partners.

8. Partnership firm-P had an over draft Account in a bank. It was in credit balance.

One of the partners who had the power of operating the account died. Bank should?

a) Stop operation and close the account

b) Open new account if partnership deed allows continuity

c) Suspend operation till all partners make a decision

d) None of these

Answer: B

Explanation: Present Account should be stopped/ freezed and a new account should be opened for further transaction if partnership deed allows continuity.

If there is no mention about continuity in partnership, operation of the account should be stopped.

9. Insolvency of a firm leads Bank to?

a) Close Account

b) Stop operations in the account

c) Handover the balance to receiver appointed by court

d) None of these

Answer: C

Explanation:

Insolvency is always decided by a Court of Law only.  Court immediately appoints a receiver to acquire and sell all the assets of any insolvent and adjust all the debts of insolvent in proportion to value of assets sold.

10. Only one of the partner becomes insolvent then Bank has to?

a) Stop operation & close the account

b) Suspend operations till the insolvent- partner’s portion of debt is arrived at.

c) Allow operations by getting new mandate which includes all cheques already signed by Insolvent partner.

d) Ask permission from court

Answer: C.

11. Unregistered Partnership/partners can exercise only one right below:

a) To suit file on behalf of firm on third parties

b) to suit file against other partners

c) To suit file against Tax authorities

d) To suit file for dissolution

Answer: D

Explanation: If partnership firm is not registered, the partners cannot go to court against any party or government or against each other. But they can apply for dissolution only.

12. Joint Hindu family HUF is a creature of which law?

a) Indian Contract Act

b) Indian Citizens Act

c) Indian Partnership Act

d) Hindu Code & Hindu Succession Act

Answer: D

13. In Hindu united families, the senior male member of the family is called ______.

All other men and women members are called_________.

a) Shareholders                              b) Partners

c) Chief                                              d) Co-parceners

e) Karta

Answer: E & D

14. Match the following:

a)	Company	-	Indian Trust Act 1882
b)	Firm	-	Public Trust Act
c)	Society	-	Wakf Act
d)	Muslim Religions Trust	-	Registrar of firms
e)	Helpage india: Trust for Public with participation of public	-	Indian Companies Act
f)	Ayurvedic Promotion: A Private Trust	-	Societies Registration Act

      A.  a-d; b-f; c-e; d-b; e-a.

      B.  a-f; b-e; c-b; d-a; e-d; f-c.

C.     a-e; b-d; c-f; d-c; e-b; f-a.

Answer: c.

Explanation:

Companies are registered with ROC under Indian companies Act.

Firm means legally a partnership firm; it should be registered with Registrar of Firms.

Societies are generally registered under Societies Registration Act.

Muslim Religious Trust is registered under *Wakf Act;

If it is a Hindu trust it is registered under *Religious and charitable endowments Act.

If a trust is established with participation of *public, it is governed by *Public Trust Act

If a trust is established by a *private group, it is governed by *Indian Trusts Act 1882.

15. A Private Ltd Company has one common feature with a public Ltd?

a) Shares are freely transferable

b) No restriction on number of members

c) Public participation in allotment

d) Liability of shares limited to nominal face value.

Answer: D

Explanation: Private companies have restrictions on the transfer of shares, public participation and number of members.

16. P and his 10 friends planned to start a Bank forming a partnership of 11 members. Auditor advised them to register the firm M/S P&F Bank under………….?

a) Indian companies Act 2012

b) Indian Partnership Act

c) RBI Act 1934

d) Banking Regulation Act

Answer: A

Explanation: Why a partnership firm should be registered under companies Act?

 A Banking firm (partnership) cannot have more than 10 members. IF they have *more than 10, the firm should be **registered under Company law. If it is below= 10 members it can registered under Partnership Act.

Generally, if any partnership firm (for all other business except banking) has more than 20 members, they also have to register under Companies Act only.

Remember in short:

**For banking firms 10 members and for other firms maximum partners can be 20 under Partnership Act.

If this limit is exceeded, the partners should register it under Company Act.

17. MOA does not have one of the following details?

a) Name and state                                                  b) Objects of the company

c) Liability of members & Share capital           d) Transferability of shares

Answer: D

Explanation: MOA tells about place, objects, share capital and liability of members. AOA only contains details about restrictions on transferability of shares.

AOA: Article of Association.

MOA: Memorandum of Association (Primary / Basic document for formation of company).

18. Which of these is the Conclusive evidence of incorporation of a company?

a) M.O.A

b) A.O.A

c) Certificate of Incorporation

d) Certificate of commencement of business

Answer: C

Explanation: Certificate of Incorporation is a certificate issued by Government of India by Registrar of Companies. So, it is the Legal Evidence for the existence of Company.

19. Which is the odd one as per ownership in this group of companies?

a) Private Ltd.

b) Limited by guarantee

c) Unlimited liability companies

d) Limited by shares

Answer: A

Explanation: Private Limited tells about the ownership:   privately owned; no public.

 Guarantee, unlimited liability and limited by shares tells about the Liability of public shareholders: how much they owe/have to pay per share/guarantee to the company.

20. Public limited should have a minimum of _______ capital?

a) 1 Lakh                                                       b) 5 lakhs

c) 10 lakhs                                                    d) 50 lakhs

Answer: B

Explanation: minimum capital required

5 lakhs for public Ltd.

1 lakh for pvt Ltd.

Types of credit facilities.

1. Which one of these is a non-fund based credit?

a) Cash Credit                                              b) Letter of Credit

c) Term Loan                                               d) Short term loan

Answer: B

Explanation:

Letter of credit is issued by importer’s bank in favour of exporter; the letter guarantees payment to the exporter if the importer fails to pay; but all the export related documents are to be submitted and found correct in detail with LC.

So, it is only a promise by importer-bank. *No loan is released. *LC comes under

 OFF-balance sheet items.

2. Which one of them is fund based borrowal account?

a) Letter of credit                                       b) Deferred payment guarantee

c) Stand by letter of guarantee              d) Bills discounted

Answer: D

Explanation: LC &Guarantees are mere promises to pay till some failure happens in payment or performance in future.

Stand by letter of credit is another name for bank guarantee.

But payment is already made under bills discounted; now bank is a holder in due course because it has paid consideration; so, it is fund-based.

3.Bank -B sanctioned an over draft to A for a limit of Rs.2 lakhs. Balance on that day was

Debit balance 1, 80,000. Bank received a cheque for 45,000. Bank passed the cheque and now balance was DR 2,25,000. ‘A’ refused to pay the excess. Case was filed in the court.

a) ‘A’ is not liable

b) Bank has no power to pass cheques beyond the limit.

c) ‘A’ to pay the excess

d) Bank - to bear the loss       

Answer: C

Explanation: Even though bank has passed wrongly, excess amount over the Limit is a **debt only. So, borrowers have to pay the amount. **It includes over draft in SB  passed on oversight.

4. P was enjoying a T.O.D in a Bank for 3 years. J a new manager took charge of branch and planned to strictly implement the procedures.  He stopped the facility of TOD and asked the borrowers to apply for regular limits. P went to court against stopping of TOD.

a) Bank need not continue TOD

b) Bank has to give reasonable notice period & stop TOD

c) Bank’s action is correct as per bank procedures

d) Borrower cannot demand TOD

Answer: B

Explanation: Bank has to give proper notice to borrowers who enjoy TODs before stopping the facility. Court held the right of borrower, because there was an unwritten contract for past 3 years. Consideration was there in the form of interest to bank and loan to borrower. It was oral contract too.

5. Match the following with part II ?

Part I: A. Medium Term loan

B. Short - term loan

C. Long – term loan

Part II: A. Within one year

             B. > 1 to 7 years

             C.> 1 to 5 years

            D.> 5 years

            E.> 7 years

a. A-B; B-A; C-E.

b. A-C; B-A; C-E

c. A-B; B-C; C-E

Answer:  a

Explanation:

STL-one year; medium term loan is >1 to 7 years; LTL is more than 7 years.

6. L.C is governed by?

a) Indian Contract Act                   b) Negotiable Instruments Act

c) UCPDC 600                                  d) IBA

e) Sales of Goods Act

Answer: C

Explanation: Uniform customs and practices relating to documentary credits 600 are framed by International Chamber of Commerce (ICC). LC governed by the codes issued by ICC under UCPDC.

Documentary Credits is another name for LC.

Bank Guarantees

1. Differences between Guarantee and bank guarantee are given below. Which one is correct?

a) 3 parties in Bank guarantee and two in Guarantee

b) 2 parties in Bank guarantee and 3 in guarantee.

c) Bank is not liable in both the guarantees

d) Bank is liable to pay the guaranteed amount in Bank guarantee. Surety is Liable to pay the loan in guarantee.

e) None of these

f) B & D

Answer: F

Explanation: In a Bank guarantee there are only two parties. Bank is a promisor here. Bank promises/guarantees ( I promise you to pay if he fails) the performance of its customer to the other party. Promisee is called Beneficiary.

In an ordinary guarantee, surety promises bank to pay the creditor/bank if borrower fails. Though there is no written document between borrower and guarantor, there is an underlying and un-written implied indemnity between them. If guarantor pays the loan, the borrower is expected to pay the loan to guarantor.

2. Bank-B issued a guarantee for Rs.11,28,500 favoring ABC & Co on behalf of M/S PQR & co. PQR & Co has to construct an office building for ABC & Co. Performance is promised by ‘B’. ABC & Co invoked (asked for) guarantee payment. Which of this bank had to do?

A. Bank can ask for proof of non-performance from ABC.

B. Bank can refuse guarantee money.

C. Bank is Liable to pay on receipt of demand notice.

D. PQR & Co is Liable to pay.

Answer: C

Explanation: The agreement is between Bank and ABC & Co only. Banks in all these type of guarantees promise to pay the guaranteed amount immediately on demand without any protest/demur & it has nothing to do with our customer’s performance or non-performance.

3. What are the differences between financial guarantee and performance guarantee?

a) Specific Amount of guarantee                      

b) Specific period of guarantee

c) Claim period for making demand                

d) In lieu of an advance deposit/earnest deposit/security deposit

e) For a performance                                           

f) All of the above

g) A & D                                                                   

h) D & E

Answer: H;

A B C are common terms in both types of guarantees.

Explanation: Usually government departments ask for security deposit or Earnest Money Deposit for contracts or tax authorities ask for specific amount of deposits from people. When Banks issue guarantee on behalf of these customers, it is treated equal to deposits. Banks, when demanded by guaranteed party, have to pay the guaranteed money without protest. When it is finance related like tax /earnest money/security deposits, it is called financial guarantee. In this case, banks’ guarantees are treated equal to deposit of money.

When it is related to performance of a job/work/supply it is called performance guarantee.

No court will issue stay / injunction for Bank guarantees. Court never stops payment of a guarantee by Bank.

4. Banks can desist from payment of a guarantee to the beneficiary?

a) On failure of performance on the part of customer

b) On fraudulent claim by Beneficiary

c) On customer asking the guaranteeing Bank

d) None of these

Answer: B

Explanation: If there is a *fraudulent claim from beneficiary’s side, bank can refuse payment of guarantee money. Bank has to prove and show evidence of fraud to court.

5. Beneficiary can invoke guarantee money by strictly following these procedures:

a) Specific amount as in the Bank guarantee.

b) Within claim period

c) With authentic signature of the empowered officer.

d) a & b

e) a b & c.

f) all of the above a to e.

Answer: e

Explanation:

Beneficiary has to claim within the claim period; only the guaranteed amount; it should be properly signed by the appropriate authority. If any difference occurs in any of these points, banks can stop/refuse payment of guarantee money.

If claimed beyond claim period or signed by junior officer or guarantee amount is more than guarantee amount, bank will refuse.

6. Bank Guarantees and Letter of Credits are?

a) Dependent on underlying contract between parties.

b) Subsidiary to main contract between parties.

c) Depends on performance of parties

d) Independent of all other contracts

e) None of these

Answer: D

Explanation: Bank Guarantees and L.C’s are Independent of all other Contracts between Bank and beneficiary. It says that when beneficiary demands or invokes the guarantee, Bank is bound to pay the guaranteed money without protest. It is International practice and no court intervenes except in cases of frauds.