2. When a person receives a cheque drawn on any
other banker he has two options before him:
1. Either to receive the payment personally or
through his agent at the counter of the drawee
bank or
2.To sent it his banker for the purpose of the
collection from the drawee bank. (collecting
bank) While collecting cheques on behalf of the
customer, a banker acts either as holder for
value or as agent of the customer.
3.
4. Collecting of cheques takes some time in case of
outstanding cheques. If the collecting banker
pays to the customer the amount of the cheque
or credits such amount to his account and allows
him to draw it, before the amount of the cheque
is actually realized from the drawee banker
(paying banker), the collecting banker is deemed
to be its ‘holder for value’. The banker would be
regarded as a holder for value in the following
ways:
5. a) If bank allows his customer to withdraw money before cheque
paid in for collection are actually collected and credited.
b) If any open cheque is accepted and the value is paid before
collection and/or
c) If there is a reduction in the overdraft amount of the customer
before the cheque is collected and credited in the respective
account.
d) If he gives its value to the customer by lending further on the
strength of the cheques.
e) If he gives its value to the customer by paying over the amount of
the cheque or part of it in cash or in account before it is cleared.
f) If he gives cash over the counter for the cheque at the time it is
paid in for collection.
6. 1. If the bank acts as a holder, his rights will be the same as of
holder in due course. Hence, the collecting banker enjoys all
the rights and liabilities of a holder and hence, a holder in due
course. Note that the title of holder in due course is superior to
the title of true owner.
2. If there is a forged endorsement on the back of the cheque
then the paying banker is liable to compensate the damage
caused to the true owner and the collecting banker possesses
the right to recover this damage from the last endorser. So, in
case of an instrument containing forgery the title of true
owner is superior. If the last endorser i.e. the customer is
unable to meet the liability then the banker will have to bear
the burden.
3. If the cheque sent for collection is dishonoured, then the
collecting banker can sue all previous parties after giving them
notice of dishonour. It is however essential that the amount of
cheque is paid to the customer in good faith.
7. A collecting banker acts as an Agent of the
customer when the customer’s cheque is collected
and actually realized from the drawee banker.
The customer is entitled to draw the amount from
his account when the amount of cheque has been
credited to his account.
Thus the bank is acting as an agent of the customer
and charges him the commission for collecting the
amount from outstation bank.
If the cheque collected by the bank does not belong
to his customer , he will be held liable for
‘Conversion of money’.
8. Conversion means wrongful meddling or interference with
the goods of others. Here, goods includes Bill of
Exchange, Cheque or Promissory note. It can be
committed innocently. Conversion is the act which renders
the person liable committing it.This liability exists even
when the person is merely acts as an agent to his principal.
Therefore, a banker however innocently may have
converted the goods of another, bank will be held
personally liable.This liability exists because the banker is
acting as an agent and not as an holder for value. If it is so,
no banker will be in apposition to collect cheques for his
customer.
Hence the collecting banker should take due precautions
to avoid the risk of conversion involved therein. It is a
difficult task for collecting banker to examine the validity
of the title of his customer, when one has to collect so
many cheques daily in ordinary course of his business.
9. Section 131 of the Negotiable Instrument Act 1881
provides the protection to the collecting banker against
the risk of conversion as follows:
“A banker who has in good faith and without negligence
received payment of a cheque for a customer, crossed
generally or specially to himself, shall not, in case of the
title to the cheque proves defective , incur any liability to
the true owner of the cheque, by reason only of having
received such payment.”
The protection will be available to the collecting banker if
the following conditions are satisfied:
1.The cheque must be crossed cheque.
2.The payment must be received for a customer.
3. Payment must be received in good faith and without
negligence.
10. Crossed Cheques only: To avail the protection under
section 131, the collecting banker should only accept
crossed cheques. Open or bearer cheques generally do not
require the service from the collecting bank. (Drawee bank
becomes the collecting bank)
The banker cannot cross the cheque afterwards, it must be
a crossed cheque before it is presented at the counter for
encashment.
Payment collected must be for a customer: Section 131
provides protection to the banker if he is working as an
agent of the banker and not a holder for value.
If the banker is having interest in the collection of cheque
and is acting as a holder, i.e. not collecting cheque as an
agent then the banker cannot avail protection against the
conversion
11. The payment procedure must be with good faith
and without any negligence.
Grounds of Negligence:
a) Opening of account without proper
introduction
b) Irregularity of Endorsement.
c) No enquiry is being made in doubtful case.
d) Failure to take note of ‘Not Negotiable’
crossing.
e) Collection of ‘Account Payee’ cheque for any
other person. (non customer)
12. There is no specific meaning being clarified by the
banking laws, but on the basis of circumstances
aroused, court of law have given judgments and
that is why the meaning and scope of Negligence is
ever expanding based on new circumstances. Even
to avail the protection under section 131 of the
Negotiable Instrument Act, the collecting banker
has to prove that the act was made without any
Negligence.This is because the true owner’s case is
complete, as soon as conversion is proved against
the banker. Negligence under section 131 is more or
less artificial as there is no contractual relationship
between the true owner and the collecting banker
13. “Negligence is doing of that which a reasonable man
under all the circumstances of a particular case
which he is acting, would not do, or the failure to do
something,
which a reasonable man under those circumstances
would do.” As the word Negligence cannot be
determined with some specific and concrete
grounds for all the cases, the study constitutes the
following probable heads under which Negligence
should be divided:
1. Gross Negligence
2. Negligence connected with immediate collection
14. Complete carelessness at the time of collection of cheque.
i. Collecting an ‘A/C payee cheque for other than payee’s
account: Payment to the person other payee. (other than
A/C payee)
ii. Failure to verify the correctness of Endorsement: If banker
omits to verify the correctness of the endorsement on an
order cheque.
iii. Failure to verify the existence of authority in case of
stamp and signature together.
vi. If any cheque contains warning regarding
misappropriation of money, the collecting bank should not
disregard such warning, and should make necessary
enquiry. It should be paid only after receiving a satisfactory
explanation.
15. i. Collecting a cheque drawn against the Principal’s
Account to the Private Account of the Agent
without enquiry.
ii. Collecting a cheque payable from the firm to the
private account of a partner without enquiry.
iii. Collecting a cheque payable from the company to
the private account of a director or any other officer
without enquiry. iv. Cheque payable from employer
to the private account of employee.
v. Cheque payable fromTrust’s A/C to the private
account of the person operating the trust’s account.
16. 1. Collecting cheques with due care and
presenting it to drawee banker in reasonable
time.
2. Presenting the cheque to drawee banker on next
working day in case if both the banks are
located in same area.
3. Sending the cheque through clearing house or
post to drawee bank in case of outstation bank.
4.Taking due care and precaution for the interest
of true owner of a cheque.
5.Verify the endorsement properly on order
cheque.
17. 6. Proper investigation of ‘Per Pro’ endorsements to avoid
negligence on the part of collecting banker and to avail
statutory protection.
7. Providing the information of dishonor of the cheque to the
customer without delay. In case of failure, any
consequent loss will have to born by bank.
8. Obtaining introduction of the customer, in case if the
account is being open without proper introduction.
9. In case of open cheque, the collecting banker should ask
the drawee to cross the same to avail the protection
under section 131.
10.Verifying the detail in case of any doubt regarding the
true ownership of the cheque.
18. Meaning:
The banker on whom the cheque Is drawn or
the banker who is required to pay the cheque
drawn on him by a customer is called the
Paying Banker or Drawee Banker.
19. 1. He should see that the cheque is drawn in proper form and
satisfies all the requirements of a valid cheque.
2. He Should verify whether the cheque is dated or not.
3. He should satisfy himself that the amount payable is certain.
4. He should see whether there is sufficient amount in the bank
account.
5. The banker should see whether the cheque is signed by the
drawer.
6. The banker should see whether the cheque is drawn on the
same branch of the bank in which the drawer has his account.
7. When a cheque is presented to him at the counter, the paying
banker must verify whether it is an open (i.e., Uncrossed Cheque
or Crossed Cheque).
8. The Banker should see whether there is any material alteration
in the cheque.
9. When a cheque presented for payment is mutilated, he should
check whether it is intentional or accidental.
20. The paying banker is given some statutory
protection in respect of risks or difficulties
faced by him.
The protection to the paying banker is laid
down in Section 85(1), 16(2), 85(2), 85A, 89
and 128 of the Negotiable Instruments Act of
1881
21. The responsibility and liability of the paying banker is far greater than
that of the receiving banker.
Payment of cheque crossed generally: (Sec. 126)
Not to pay anyone than a banker
Payment of cheque crossed specially: (Sec. 126)
Not to pay anyone than a specific banker, or his agent for collection
Payment made in due course of crossed cheques: (Sec. 128)
When the paying banker, makes payment in the due course, It is
discharged from liability if
1. The cheque is forged due to customer’s default
2. Endorsement of the payee or the indorsee subsequently turns out to
be forged and the banker has paid in good faith and without
negligence
22. It is liable
1. ifThe customer’s signature is forged and hence
cannot debit the amount to the customer’s account
2. Endorsement of the payee or the indorsee
subsequently turns out to be forged and there is
apparent irregularity in endorsement
Payment of bearer cheques: Payment of these
cheques at the counter on presentation discharges
the banker from liability
Payment of order cheques:The banker is
discharged from liability if the payment is made in
due course.
23. What if the paying banker does not pay in due course?
Banker isLiable
In paying a cheque crossed generally or specially, if pays
otherwise than to a banker, or his agent for collection (Sec.
129)
In case of transmission of an electronic image of a truncated
cheque, it is the responsibility of the paying bank to verify the
party from which the image has been transmitted and the
image so transmitted to it and received by it are exactly the
same [Sec. 89(3)]The drawee of a cheque (always a banker)
having sufficient funds of the drawer in his hand, properly
applicable to the payment of such cheque must pay the cheque
when duly required to do so and, in default of such payment,
must compensate the drawer for any loss or damages caused
by such default [Sec. 31]
24. Banker is Not Liable
In case of payment, done at the time of
presentation, to cheque which is not crossed
or have had a crossing which has been
obliterated [Sec. 89(1)]
In case of an alteration between the
electronic image and the truncated cheque. It
is the liability of the clearing house/bank [Sec.
89(2)]
25. To make payments of the cheque and to collect
money and deposit it into the account are the
two compulsory functions for any banker. A
banker can be performing the function of paying
banker for one customer and collecting banker
for another. Paying banker and collecting
banker both are getting legal protections or
statutory protections when they perform their
duties in accordance with the laws, with good
faith and without negligence.
26. In case when the paying and collecting banker is same,
the bank must pay the money on the same day of
presentation. If banker is having any objection in the
cheques drawn, the information of dishonor must be given
to the customer. In case of both the duties performed at
the same time, the banker gets statutory protection for
both the cases. (when a cheque is drawn by one customer
for the payment to the another customer of the same
bank.) Paying banker gets protection under section 85
and collecting banker gets protection under 131 of the
Negotiable Instrument Act, 1881.When a banker is
performing both the function at the same time, the banker
may not be liable as paying banker but will be liable as
collecting banker.
