The document discusses the roles and responsibilities of a collecting banker when handling cheque collections. It outlines that a collecting banker can act either as a holder for value or as an agent of the customer. As a holder for value, the collecting banker enjoys rights similar to a holder in due course. As an agent, the banker must take precautions to avoid liability for conversion. The document also discusses the statutory protection provided to collecting bankers under Section 131 of the Negotiable Instruments Act if they collect payment in good faith and without negligence. It provides examples of negligence and outlines various duties and precautions collecting bankers must follow.

1. Collection of Cheque
Vaghela Nayan
SDJ International College

2. Meaning:
 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. Collecting banker as a Holder for Value
 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:

4. 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.

5.  The Rights of a Banker as a older for Value:
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.

6. Collecting Banker as an Agent of the Customer
 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’.

7. Conversion
 What is Conversion?:
 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.

8.  Legal/ statutory protection to the collecting banker in the case of
conversion:
 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.

9. Precautions to be taken by a collecting banker:
1. 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.
2. 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.

10. 3. Collection with good faith and without negligence:
 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)

11. Negligence
 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.
 “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:

12. 1. Gross Negligence: 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.

13. 2. Negligence connected with the Immediate Collection: 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.
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 from Trust’s A/C to the private account of the person
operating the trust’s account.

14. Duties of a Collecting Banker
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.
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.

15. Paying Banker V/s Collecting Banker
 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.
 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.

16. Thank You