Bank Draft vs. Certified Cheque - when is it appropriate to use one or the other?
4 BANK DRAFTS 4.1 Introduction A bank draft is an order to pay a sum of money on demand and addressed by a banker either to itself or to another banker and drawn on its head office or at a branch.11 Bank drafts are issued and then signed by two authorized signing officers of the bank; one being a “counter signature”. Once “signed”, bank drafts become a statutory obligation of the signing bank and are irrevocable.12
4.2 Particulars Required The date, amount payable, and payee’s name must be typed on the bank draft prior to its delivery. It can be payable to a customer or creditor. Once the bank draft is purchased, the amount paid is placed in a special reserve account. When presented for payment, funds are withdrawn or collected from that account.13 The item is then collected through the ACSS.
4.3 Not a Guarantee of Payment Although bank drafts are substitutes for cash, they cannot always be converted to cash immediately on deposit to a holder’s14 bank and are not a guarantee of payment. A collecting bank must be certain that the signatures are genuine and authorized.15 Funds are not realized until actual collection. The larger the amount of the draft or the greater the geographical distance between the place of issue and deposit, are factors that can increase the time of collection.16 Many devices exist for discovering counterfeit banknotes; however no corresponding devices exist for the discovery of forged or unauthorized signatures on a bank draft or certified cheque.17
5 CERTIFIED CHEQUES
5.1 Introduction “Certification” is the name given to the marking of a cheque by a bank to show that its customer has an existing account with sufficient funds to meet the drawn amount.18Certification is demonstrated by a mark on
the cheque, typically a stamp marked “certified.”19 It must be signed by a bank or other financial institution.20 Certified cheques are not a guarantee of payment; items bearing forged endorsements can be returned for up to six years.
5.2 Particulars of Payment Certified cheques are typically drawn by a bank’s regular customer21 and payable to a creditor or an endorsee. They are payable on demand and collected through the ACSS. The customer’s account is then debited and the amount set aside into a special suspense account. When presented for payment through the ACSS, the amount is charged to that account.
5.3 A Direct Promise to Pay The courts have held that certification amounts to an acceptance of the cheque by the bank and puts the payee22 in possession of something equivalent to cash. There is no difference at law in the treatment of a cheque certified at the request of the bank’s customer and one certified at the request of the payee. A bank may be able to refuse payment on a certified cheque, if it can be demonstrated that a payee would be unjustly enriched by payment.23 Certification therefore is a direct promise of a bank to pay, independent of a customer’s obligation to pay, even where a bank has mistakenly certified a cheque.24
5.4 Verification is Required Whether funds are direct deposited by bank draft or certified cheque, there is no appreciable difference in risk in comparison to closings in the past.25 Remember however that financial institutions may not post funds to a trust account until the next business day and sometimes later if the other lawyer’s financial institution is not one of the major institutions, or, if a cheque is drawn on an account in another region of thecountry.26 Verification of both items is necessary as the ACSS does not guarantee payment by bank draft or certified cheque.