G.R. No.

L-28226 September 30, 1970

HONGKONG & SHANGHAI BANKING CORPORATION, plaintiff-appellant,
vs.
PEOPLES BANK & TRUST COMPANY, defendant-appellee.

of the regular routine and on April 12, 1965 it was returned to the Philippine Long
Distance Telephone Company when the alteration in the name of the payee was
discovered. On that same date, Peoples Bank was notified of the alteration, so
that the Hongkong Shanghai Bank requested Peoples Bank to refund to it the sum
of P14,608.05 which had been previously credited by Plaintiff Bank in favor of
Defendant Bank. Upon its refusal to do so, this case has been filed." 2

Siguion Reyna, Montecillo, Belo and Ongsiako for plaintiff-appellant.

J. R. Balonkita for defendant-appellee.
FERNANDO, J.:
Defendant, now appellee Peoples Bank & Trust Company, is sought to be held
liable in the amount of P14,608.05, the sum payable in a check issued by the
Philippine Long Distance Telephone Company drawn on plaintiff Hongkong &
Shanghai Banking Corporation, now appellant, with itself as payee, the check
thereafter falling into the hands of a third party who substituted his name thereon
and was able to collect such amount from defendant Bank where it was
deposited. Plaintiff was unsuccessful, the Court of First Instance of Manila, the
Honorable Jesus de Veyra presiding, dismissing the complaint. It considered as
decisive the fact that plaintiff Bank allowed 27 days to elapse after clearing
before notifying defendant Bank as to such alteration, the applicable Central Bank
regulation providing for a 24-hour period. Hence, this appeal. Relying as the lower
court did on a controlling decision, 1 its decision cannot be reversed. We affirm.
The undisputed facts, as noted in the appealed decision, follow: "On March 8,
1965, the Philippine Long Distance Telephone Company drew the check ... on the
Hongkong & Shanghai Banking Corporation and in favor of the same bank in the
sum of P14,608.05. This check was sent by mail to the Payee. Somehow or other,
the check fell in the hands of a certain Florentino Changco, who was able to erase
the name of the payee Bank and instead typed his own name on the check. Four
days before, Changco had opened a current account with Defendant Peoples Bank
and Trust Company and on March 16, 1965, he deposited the altered check in his
name. This check was presented by the Peoples Bank for clearing wherein the
Peoples Bank made the following indorsement: "For clearance, clearing office. All
prior endorsements and/or lack of endorsements guaranteed. Peoples Bank and
Trust Company." The check was duly cleared by the Hongkong Shanghai Bank, so
that the Peoples Bank credited Changco with the amount of the check. Beginning
March 17, 1965, Changco began to withdraw from his account and on March 31,
1965 he closed his account. In the meantime, the cancelled check went the route

Why the complaint had to be dismissed was made clear in such decision. Thus:
"The entire case of Plaintiff is based on the indorsement that has been heretofore
copied namely, a guarantee of all prior indorsements made by Peoples Bank
and since such an indorsement carries with it a concomitant guarantee of
genuineness, the Peoples Bank is liable to the Hongkong Shanghai Bank for
alteration made in the name of payee. On the other hand, the People Bank relies
on the "24 hour" regulation of the Central Bank that requires after a clearing, that
all cleared items must be returned not later than 3:00 PM of the following
business day. And since the Hongkong Shanghai Bank only advised the Peoples
Bank as to the alteration on April 12, 1965 or 27 days after clearing, the Peoples
Bank claims that it is now too late to do so. This regulation of the Central Bank as
to 24 hours is challenged by Plaintiff Bank as being merely part of an ingenious
device to facilitate banking transactions. Be that what it may as both Plaintiff
as well as Defendant Banks are part of our banking system and both are subject
to regulations of the Central Bank they are both bound by such regulations. In
fact, our Supreme Court has already held that the 24-hour regulation of the
Central Bank in clearing house operations is valid and if banks feel the 24-hour
period is unwise, they should make proper representations with the Central Bank.
But until they do so, they are bound by such 24-hour period (Republic v. Equitable
Banking Corporation, GR No. L-15894; January 30, 1964). But Plaintiff Bank insists
that Defendant Bank is liable on its indorsement during clearing house
operations. The indorsement, itself, is very clear when it begins with the words
"For clearance, clearing office ...". In other words, such an indorsement must be
read together with the 24-hour regulation on clearing House Operations of the
Central Bank. Once that 24-hour period is over, the liability on such an
indorsement has ceased. This being so, Plaintiff Bank has not made out a case for
relief." 3
The complaint was therefore dismissed, resulting in this appeal to us on a
question of law, which, as set forth in the principal assigned error is predicated on
the inapplicability of the 24-hour clearing house rule of the Central Bank. Plaintiff
does not deny that in Republic v. Equitable Banking Corporation, 4 this Honorable
Court, through the then Justice, now Chief Justice Concepcion, applied the "24-

hour" clearing house rule issued by the Central Bank in accordance with its rulemaking authority. As noted in the aforesaid decision, its adoption came after a
conference with representatives and officials of different banking institutions in
the Philippines. It is embodied in section 4, subsection (c) of Circular No. 9 of the
Central Bank dated February 17, 1949, as amended by the then Governor of the
Central Bank on June 4, 1949, and reads thus: " "Items which should be returned
for any reason whatsoever shall be returned directly to the bank, institution or
entity from which the item was received. For this purpose, the Receipt for
Returned Checks (Cash Form No. 9) should be used. The original and duplicate
copies of said Receipt shall be given to the bank, institution or entity which
returned the items and the triplicate copy should be retained by the bank,
institution or entity whose demand is being returned. At the following clearing,
the original of the Receipt for Returned Checks shall be presented through the
Clearing Office as a demand against the bank, institution or entity whose item has
been returned. Nothing in this section shall prevent the returned items from being
settled by direct reimbursement to the bank, institution or entity returning the
items. All items cleared at 11:00 o'clock a.m. shall be returned not later than 2:00
o'clock p.m. on the same day and all items cleared at 3:00 o'clock p.m. shall be
returned not later than 8:30 a.m. of the following business day, except for items
cleared on Saturday which may be returned not later than 8:30 of the following
day. (Emphasis supplied)" 5 It is apparent from the above that the attempted
distinction sought to be made by plaintiff to the effect that it refers to forged, but
not to altered checks is not warranted. The circular is clear and comprehensive;
the facts of the present case fall within it. The lower court acted correctly in
relying on the doctrine announced in the above Republic v. Equitable Banking
Corporation decision.

viewpoint of the Treasury. Moreover, the same had not advertised the loss of
genuine forms of its warrants. Neither had the PI Bank nor the Equitable Bank
been informed of any irregularity in connection with any of the warrants involved
in these two (2) cases, until after December 23, 1952, or after the warrants had
been cleared and honored when the Treasury gave notice of the forgeries
adverted to above. As a consequence, the loss of the amounts thereof is mainly
imputable to acts and omissions of the Treasury, for which the PI Bank and the
Equitable Bank should not and cannot be penalized." 6

An excerpt from the opinion of the Chief Justice is likewise relevant as indicative
of the correctness of the decision appealed from. Thus: "At any rate, the
aforementioned twenty-eight (28) warrants were cleared and paid by the
Treasurer, in view of which the PI Bank and the Equitable Bank credited the
corresponding amounts to the respective depositors of the warrants and then
honored their checks for said amounts. Thus, the Treasury had not only been
negligent in clearing its own warrants, but had, also, thereby induced the PI Bank
and the Equitable Bank to pay the amounts thereof to said depositors. The gross
nature of the negligence of the Treasury becomes more apparent when we
consider that each one of the twenty-four (24) warrants involved in G.R. No. L15895 was for over P5,000, and, hence; beyond the authority of the auditor of the
Treasury whose signature thereon had been forged to approve. In other
words, the irregularity of said warrants was apparent on the fact thereof, from the

WHEREFORE, the appealed decision of April 24, 1967, dismissing the complaint, is
affirmed. With costs against plaintiff Hongkong & Shanghai Banking Corporation.

Moreover, in one of the very cases relied upon by plaintiff, as appellant, mention
is made of a principle on which defendant Bank could have acted without
incurring the liability now sought to be imposed by plaintiff. Thus: "It is a settled
rule that a person who presents for payment checks such as are here involved
guarantees the genuineness of the check, and the drawee bank need concern
itself with nothing but the genuineness of the signature, and the state of the
account with it of the drawee." 7 It at all, then, whatever remedy the plaintiff has
would lie not against defendant Bank but as against the party responsible for
changing the name of the payee. Its failure to call the attention of defendant
Bank as to such alteration until after the lapse of 27 days would, in the light of the
above Central Bank circular, negate whatever right it might have had against
defendant Bank. While not exactly in point, a later decision of the Chief Justice
announced in 1968, involving a forged check, argues for the correctness of the
conclusion reached by the lower court even assuming that a fault could be
imputed to defendant Bank. Thus: "Then, again, it has, likewise, been held that,
where the collecting (PCIB) and the drawee (PNB) banks are equally at fault, the
court will leave the parties where it finds them." 8

Reyes, J.B.L., Actg. C.J., Dizon, Makalintal, Zaldivar, Castro, Teehankee, Barredo
and Makasiar, JJ., concur.
DIGEST: HSBC, plaintiff-appellant, vs. PEOPLES BANK & TRUST COMPANY,
defendant-appellee.
35 SCRA 140 Mercantile Law Negotiable Instruments Law Notice of
Dishonor 24 Hour Clearing House Rule

FACTS: On March 8, 1965, the Philippine Long Distance Telephone Company

(PLDT) drew a check against its account with the Hongkong and Shanghai
Banking Corporation (HSBC) for P14,608.05. The check was also made payable to
HSBC. PLDT mailed the check to HSBC but somehow the check wound up in the
hands of one Florentino Changco. Changco managed to erase HSBC as the payee
and replaced the payees name with his own name. He then made a check
deposit with Peoples Bank and Trust Company on March 16, 1965. The check was
presented by the Peoples Bank for clearing wherein the Peoples Bank made the
following indorsement:
For clearance, clearing office. All prior endorsements and/or lack of
endorsements guaranteed
Peoples Bank and Trust Company.
The check was cleared on March 17, 1965 and Changco was able to withdraw all
the money. On March 31, 1965, he closed his account with Peoples Bank.

Bank is liable to HSBC for alteration of the name of the payee. On the other hand,
the Peoples Bank relied on the 24-hour regulation of the Central Bank that
required after a clearing, that all cleared items must be returned not later than 24
hours. It should be noted that the checks were returned by HSBC 27 days later.
Dismissal of its complaint was therefore called for.
------------------------------------------NOTES-------------------------------------------------Dishonour of Negotiable Instrument
1. Introduction
Dishonour means failure to honour a negotiable instrument. This may be by nonacceptance, when a bill of exchange is presented for acceptance and this is
refused or cannot be obtained or by non-payment, when the bill is presented for
payment and payment is refused or cannot be obtained.
2. Dishonour of Negotiable Instrument
A negotiable instrument is said to be dishonoured either by non-acceptance or
non-payment.

The alteration was subsequently discovered and on April 12, 1965 or 27 days
after the clearing, HSBC notified Peoples Bank that the check was altered (hence
in effect being dishonored). HSBC was asking for a refund but Peoples Bank
refused as it invoked the 24 hour clearing house rule issued by the Central
Bank. HSBC argued that the Peoples Bank is liable to refund them the amount of
the check because of the guarantee that Peoples Bank made in indorsing the
check to HSBC.

(a) Non-acceptance

ISSUE: Whether or not Peoples Bank should refund the amount of the check to
HSBC.

(iii) When the drawee is a fictitious person or after reasonable search cannot be
found.

HELD: No. The 24 hour clearing house rule applies. This rule mandates banks
that after a clearing, all cleared items must be returned not later than 3:00 PM of
the following business day. Therefore, when HSBC was sending its notice [of
dishonor] to the Peoples Bank, it was already 27 days late. Further, it is a settled
rule that a person who presents for payment checks guarantees the genuineness
of the check, and the drawee bank need concern itself with nothing but the
genuineness of the signature, and the state of the account with it of the drawee.
HSBC should go after Chango and not after the Peoples Bank. The entire case
of HSBC relied on the indorsement that has been heretofore copiednamely,
a guarantee of all prior indorsements made by Peoples Bank and since such an
indorsement carries with it a concomitant guarantee of genuineness, the Peoples

(iv) When presentment for acceptance is excused and the bill is not accepted.

A bill is said to be dishonoured by non-acceptance.

(i) When it is presented to the drawee for acceptance and he does not accept it
within 48 hours from the time of presentment for acceptance.
(ii) When the drawee is incompetent to contract.

(v) When the acceptance is a qualified acceptance

(vi) when one of several drawer not being partner makes default in acceptance on
being duly required to do so.
(b) Dishonour by non-payment
A promissory note, bill of exchange or cheque is said to be dishonoured by nonpayment when the maker of the note, acceptor of the bill or drawee of the cheque
makes default in payment upon being duly required to pay the dame.

Again a negotiable instrument is dishonoured by non-payment when presentment

for payment is excused and the instrument when overdue remains unpaid.

(ii) In case of a person who is died, a notice may be given to his legal
representative

3. Notice of Dishonour

(iii) In case of insolvency of a person, it may be given to him or his official

assignee.

When a negotiable instrument is dishonoured by non-acceptance or by nonpayment, the holder of instrument or some party to it who is liable, must give a
notice of dishonour to all the prior parties to whom he wants to make liable on
instrument. If he does not give this notice, all the prior parties other than the
maker or acceptor are discharged of their liability.
(i) Object of Notice
The object of giving notice is not to demand payment but to inform the party
notified that the engagement on the bill or note has been broken by the principle
debtor and that he being the surety, will now be liable for payment.
(ii) Requisites of Notice
A notice must clearly intimate:
(1) that a specified instrument has been dishonoured.
(2) whether the instrument has been dishonoured by non acceptance or nonpayment
(3) that the holder holds the person notified liable on the instrument
(iii) Notice by whom to be given
The following persons can give notice of dishonor
(i) The holder of instrument
(ii) The indorser who, at the time of giving notice, is himself liable on the bill
(iii) Any party receiving notice of dishonor to any prior party.
(iv) The authorized agent of the holder
(iv) Notice whom to be given
The notice of dishonour can be given to following persons:
(i) Notice must be given to all parties except maker or acceptor or drawee

(v) Effect of omission to give notice

Notice being a necessary part of the engagement of the drawer and the indorser
omission to give notice, would discharge all parties other than maker or the
acceptor. They are discharged not only on the bill or note but also in respect of
the original consideration.
(vi) Mode in which notice may be given
The notice of dishonour may be written or oral. It may given personally or through
messenger or through post or telephone. It may be in any form but it must
intimate that the payment was demanded from the drawee but refused and that
the holder holds the person notified liable on the instrument.
(vii) Reasonable Time
Notice of dishonour must be given within reasonable time. Reasonable time is
defined in Section 105 as.
In determining reasonable time regard shall be had to the nature of instrument
and the usual course of dealing with respect similar instrument. In calculating
such time public holidays shall be excluded.
(viii) Place of Notice
Notice of dishonour is to be given at the place of business of the party and in case
such party has no place of business, then it is to be given at the residence of the
that party.
4. When notice of Dishonour is unnecessary
Notice of dishonour is not necessary in the following cases.
(i) When it is dispensed with by the party entitled to it.
(ii) When the drawer of a cheque has stopped the payment of cheque.
(iii) When the party charged could not suffer damage for want of notice.

(iv) When the party entitled to notice cannot after due search be found

Conclusion

(v) When the party bound to give notice is, for any other reason, unable without
any fault of his own to give it.

A negotiable instrument is said to be dishonoured when the drawee refused to

accept it or to make payment upon it. In both cases the holder is entitled to sue
against the drawer and endorser. Notice of dishonour is given to all parties except
maker of note, acceptor of bill or drawee of cheque. Notice of dishonour indicates
that the instrument has been dishonoured and that the person served with the
notice will be held liable. Notice of dishonour is not necessary to give where it is
dispensed with by the party entitled to it, or where the party charged could not
suffer damage for want of notice.

(vi) When the acceptor is also a drawer.

(vii) In case of promissory note which is not negotiable
(viii) When the party entitled to notice, knowing
unconditionally to pay the amount due on the instrument.

the

facts

promises