The document discusses the obligations and precautions of banks when honoring customer cheques under the Negotiable Instruments Act. It explains that banks must honor cheques drawn by customers if there are sufficient funds, and outlines various precautions banks must take regarding genuineness of cheques, customer accounts and balances, and legal restrictions. Precautions include verifying signatures, dates, amounts, endorsements, checking for stops on payments or legal orders, and only making payments that constitute "payment-in-due-course".

1. Vaghela Nayan
SDJ International College

2.  As per section 31 of the Negotiable Instrument Act,
1881 the provision is given as follows.
 “the drawee of a cheque having sufficient funds of
the drawer in his hands, properly applicable to the
payment of such cheque, must pay the cheque when
duly required to do so and in default, such payment
must compensate the drawer for all loss or damage
caused by such default”

3.  It means the banker is bound to honour the cheque
drawn by the customer.
 The term ‘applicable to the payment cheque’ implies
that the cheque should fulfill the necessary
conditions.
 This obligation of the banker is very delicate and
crucially important. The banker should also keep
himself safe while honouring the cheque. The banker
has to see that the cheque is paid to the proper payee.
 The following are the precautions that a banker has to
take at the time of honouring the cheque.

4. A. Precautions regarding Genuineness of the Cheque:
1. Proper form of the cheque: As defines by The Negotiable
Instrument Act, there is no prescribed form for the cheque
generally available. It is also not clear that the cheque must be
hand written or it must be in printed form. But it is generally
accepted by all the banks that the cheque must be drawn on a
bank’s printed forms and the bank reserves its right to refuse
payment of any Cheques drawn otherwise.
2. Date of the cheque: A cheque without a date will not create
any obligation on the part of banker for the payment of that
cheque. As the mandate will create the obligation only after
the date mentioned on the cheque. So the date on a cheque
drawn must be written by the drawer. Here, we must consider
the point of alteration as the cheque without date is not
invalid as the holder of the instrument can fill the date and
can present the same for the payment.

5. 3. Proper place for presentation: The cheque must be presented in
the branch of the drawee bank only. If the cheque is presented in
such a branch of the bank where the specimen signature of the
drawer is not available, the encashment process becomes
somewhat lengthy. Here the withdrawal is to shown from the
customer’s account at the original first branch.
4. Presentation at proper time: The cheque for the payment must be
presented on working date and during working hours.
5. Amount of Cheque: The amount on cheque must be certain.
Amount in words and figures should tally. If it does not matches
each other, the bank will reject the payment. In some cases the
amount written in words will be taken for consideration and the
cheque may be accepted. (sec. 18)
6. Crossing of the Cheque: the payment of the crossed cheque is
made according to the instructions conveyed in the cheque by the
drawer through crossing. Crossing provides the protection under
section 128.

6. 7. Material Alteration: the drawer can alter the details of the cheque
by counter signing or initials. The alteration without countersign
makes it invalid. The alteration of date, name of the payee, amount
or of any crossing would be material. However the banker is
protected under sec. 84 if he pays the cheque with the alterations
under the following circumstances:
- if the alteration is not apparent
- if the payment is according to the apparent tenor of the
instrument.
8. Signature of a customer on a cheque: The paying banker should
carefully ascertain that the cheque bears a genuine signature of the
drawer after comparing the same with his specimen signature. The
drawer must sign the cheque at its face and not on the back side.
The account holder can change the signature by giving the new
specimen signature to the bank any time. Cheque with a different
sign will not be accepted by the bank.

7. 9. Name of a payee endorsement: when a cheque payable to
order has a meaning to be endorsed by or on behalf of the
payee, the drawee is discharged by payment in due course. For
such protection to the banker, following two conditions must be
satisfied:
◦ Endorsement must be Regular: when the endorsement is made
with the signature containing same name and signature of the
payee, it is said to be regular.
◦ Payment must be made in due course.
10. A cheque should not be void or torn or multiliated: A
cheque torn at the corner can be accepted but if a part of
cheque is missing then it can be rejected by the banker.

8. B. Precautions regarding Customer’s account and balance:
1. To check carefully the credit balance of the account holder.
(drawer)
2. In the case of more than one account of the customer, the bank
is not required to collect all the credit balance of the customer.
It is enough if the account form which the cheque is drawn is
having sufficient credit balance.
3. In the case of insufficient credit balance, no part payment will
be made.
4. After the dishonour of the cheque of a large amount, another
cheque of lesser amount can be honoured by the bank if the
account is having sufficient credit balance for the second one.

9. C. Precautions regarding Legal Restrictions:
1. Stop Payment by the customer: The drawer can issue such
order any time before the actual payment of the cheque is
made. A written application is to be given for stop payment.
Only drawer can issue such order to the drawee and not the
holder of the instrument.
2. Death of the Drawer: as we already know that the banker’s
liability is ceased in the occurrence of the death of the customer
and therefore, on the receipt of authentic information about the
death of the customer, bank will have to stop the payment of
the cheques signed by the diseased customer. The cheques
signed by the person in his official capacity such as principal,
director, secretary, etc. will not become inoperative and will be
honoured.

10. 3. Insanity of the customer: On receipt of the information of insanity
of the customer, the bank is not bound to honour the cheques drawn
by an unsound minded customer. The bank will honour the cheques
till the customer acts rationally.
4. Insolvency of the customer: on the declaration of the insolvency
of any customer, and when all his properties are vested in the hands
of court or official receiver, any of the property is not available for
the purpose of distribution among the creditors. Here the bank
account will also be treated as a property and so the cheques will
not be honoured
5. Garnishee Order: on receipt of the Garnishee order for any of the
customer of the bank under order 21 Rule 46 of the Code of Civil
Procedure, 1908, the cheque there on will not be honoured.
6. Notice of Assignment of credit balance: As and when a customer
assigns his credit balance to any other person under section. 130 of
the transfer of property act 1882, the banker should stop payment
of the cheques drawn by the assignor.

11. 1. Breach of Trust: if the banker comes to know that the customer,
who is operating a Trust Account, contemplated to use the funds of
the Trust Account in breach of trust, the banker must stop payment
of the cheques drawn on such account.
2. Defective title of the party: if any person presenting the cheque in
the bank for the purpose of encashment, but he is having a
defective title and the bank is aware about that fact, bank can
refuse to honour such cheques without any risk, because if he
makes payment of such cheque, it will not be made in good faith
and the payment will not be deemed as payment-in-due course

12.  Section 10 of the Negotiable Instrument Act explains the
meaning of Payment-in-due- course is as follows:
1. Payment is in accordance with the apparent tenor of the
instrument.
2. Payment must be made in good faith and without negligence.
3. Payment must be made to the person in procession of the
instrument.
4. Payment must be made under circumstances which do not
afford a reasonable ground for believing that he is not entitled
to receive payment of the amount mentioned therein.
5. Payment must be made in money only.

13.  The following are not the acts of payment-in-due-course:
1. Payment of a crossed cheque in cash.
2. Payment made after stop payment.
3. Payment made after banking hours,
4. Payment of a forged cheque.
5. Payment of a bearer cheque a doubtful person without
concerning the drawer.
 Conditions of Payment-in-due-course:
1. Payment in accordance to the apparent tenor.
2. Payment must be made by or on behalf of the drawee or
acceptor.
3. Payment must be made in good faith.

14.  ‘Marking’ or ‘Certification’ of cheque is the act, whereby, a
drawee bank obligates itself to pay a cheque according to its
terms.
 It can be done by stamping on the face of the cheque,
writing word “good for payment” or “certified” or
“accepted” followed by the name and signature of the
authorized officer.
 The marking of cheque is not statutorily recognized in India
and therefore, it is difficult to lay down the importance of
marking.
 The banker should see that the payment of such cheques are
made at any cost.

15. 1. In India, it has been a custom to mark a cheque for the purpose
of clearance. Of course there should be sufficient credit balance
in the drawer’s account and a genuine signature.
2. If the customer asks the banker to mark a cheque and if the
banker does so, then banker must honour the cheque by
keeping sufficient balance even by dihonouring the other
cheques.
3. Any cheque marked as ‘good’ mean at the time of marking, the
account bears sufficient balance. This is applicable in America
and not recognized in India.
4. Sometimes the marking is done on the request of other
banker.this is done for the purpose of clearance. Applicable in
many countries including India.

16. 1. In the case of post dated o0r stale cheque.
2. If the cheque is drawn in the other branch of the same
bank.
3. If cheque contains unauthenticated material alteration.
4. If the signature of the drawer does not tally the specimen
signature.
5. In case of the insufficient fund in the account of the
drawer.
6. If the endorsement on the back of the cheque is found
defective.

17.  If the cheque is correctly written and presented in time at
proper place for collection to a banker by the customer
and the same is dishonoured by the banker by mistake
then it will be a wrongful dishonour of the cheque and
bank will be declared defaulter for such sort of action and
the customer has to be compensated for the loss on the
account of economic losses or loss of credit in the
business world. (sec. 31 of the Negotiable Instrument
Act- 1881)
 The compensation may be of 2 types:
1. Nominal compensation
2. Special or Substantial compensation

18. 1. Nominal Compensation:
 This type of compensations are given to the general customers who
are not the businessmen.
 The case of Gibson vs. West Minister Bank 1939. (dishonour of the
cheque of 9.16 ₤ and the nominal compensation was 40 s. only.
 Similar decision in Mrs. Sterling vs. Barclay’s Bank Ltd. (1930)
2. Special Compensation:
 Exemplary compensation to the customer will be given. (to
businessmen only)
 If there are possibilities of damage to the business of the customer.
 If the creditors of the customer losses the confidence on him.
 Damage to the goodwill.
 If there is any damage to the important contract of the customer.

19.  At the time of assessing loss, the court of law give due weightage to
factors like financial position, business reputation and custom of trade.
 In some exceptional cases a non trade customer can also be entitled to
claim the special compensation against the damages which he has
suffered , is alleged and proved.
 In case of dishonour of cheque the customer can proceed against the
banker for wrongful dishonour on the following grounds:
1. Breach of contract
2. Negligence
3. Defamation
 Here, Loss or Damage means
1. Damage for the breach of contract to pay cheque.
2. Damage to the drawer’s general business.
3. Damage to his general reputation.
4. Damage for the negligence of the banker.

20.  Any correction or change in the cheque must be made by a
Drawer or with the consent of drawer must be confirmed by
his full signature. The paying banker should be very cautious
and should not make payment if the cheque bears an alteration
specifically a material alteration, without confirmation by the
drawer.
 Legal Effect of Material Alteration:
 “Any material alteration of a negotiable instrument renders the same
void as against any one who is a party thereto at the time of making
such alteration and does not consent thereto, unless it was made in
order to carry out the common intention of the original parties and
any such alteration, if made by endorsee, discharge his endorser
from all liability to him inrespect of the consideration thereof.” (sec.
87)

21.  What is Material Alteration?:
a) Which substantially changes the rights and liabilities of
the parties or any of the parties, to the instrument, or
b) Which changes the identity and the legal character of the
instrument, or
c) Which reduces to certainty to some provision which was
originally unascertained and as such void, or
d) Which may otherwise prejudice the party bound by the
deed as originally expressed.
Changes in Sum Payable, Date and time of interest, addition of
a party, the medium of payment, etc. are considered as
material alterations.

22.  Alterations which does not affects the validity:
An alteration which is purely the result of an accident
does not affect the validity of an instrument. Following
are such factors:
a) Multilations by the washing or ironing of a garment in
which the document as kept.
b) Ravages of white ants or rats
c) Document torn by a child
d) Document burnt in part by accident

23.  Alterations permitted by Law:
a) Completing an inchoate stamped instrument; (sec. 20)
b) Conversion of an endorsement in blank in an
endorsement in full; (sec. 49)
c) Crossing of an uncrossed cheque, conversion from
general crossing to special crossing; (sec. 125)
d) Qualified acceptance; (sec. 86)
Note: Overwritten Cheques with corrections should not
be valid from July, 2010

24.  A cheque is a bill of exchange, drawn on a specified banker
and not expressed to be payable otherwise on demand.
 Banker’s draft is also a bill of exchange by which on bank
asks some other bank or its own branch to pay a certain sum of
money to a particular person who is thus saved from carrying
cash with him for place to place.
 A drawer or purchaser can cancel the payment of cheque or
draft before it is actually paid or being presented by the payee
for payment to the bank.
 This right of cancelling or stopping the payment is known as
Countermanding.

25. 1. A stop payment order can be given by drawer only and cannot be
by payee or endorsee.
2. In case of stop payment instruction, the drawer cannot be asked
for reason of stop payment.
3. In case of information received from payee or endorsee regarding
the loss of instrument to bank, banker must advise to set stop
payment order from drawer.
4. Stop payment order can be given even after business hours- by
oral instructions on telephone provided it is followed by written
confirmation.
5. In case of join account operations, stop payment by any one
operator is accepted.
6. Certain minimum information like cheque no. date of the cheque,
name of payee and amount of cheque must be provided to
proceed stop payment order.

26. 7. In case of wrongful payment of a cheque which is
countermanded, the banker cannot debit the account of the
customer on realization of the negligence.
8. The stop payment instruction will be applicable till the
cheque becomes a stale cheque.
9. Banks are required to send acknowledgement of receipt of
instructions for stop payment.
10. In case of countermanding of a draft by an agent, the agent-
principal relationship will be terminated.
11. Before the delivery of a draft to payee, a purchaser can
cancel the draft and can ask the banker to get the refund.

27.  As the banker-customer relationship is a contractual one and a
banker is under the obligation to honour all the orders given
by a customer.
 A wrongful dishonor will create adverse effect on a banker but
a cheque can be returned by a bank under following
circumstances.
1. In case of a countermanded cheque.
2. In case of a death of a drawer.
3. On the receipt of notice of insolvency of the drawer.
4. In case of insanity of the customer.
5. If a garnishee order has been received from court on the
name of drawer.
6. On the receipt of notice of Assignment of the credit balance.

28. 7. In case of breach of trust by the customer.
8. If a customer or bearer is having a defective title to the
instrument.
9. Other circumstances:
a) If a cheque is conditional
b) Drawn on an ordinary piece of paper
c) Stale cheque
d) Post dated cheque
e) Multilated
f) Drawn on another branch
g) Presented during non banking hours
h) If amount of the cheque in words and figures differs.
i) In case of insufficient credit balance
j) In case of forged signature
k) In case of irregular endorsement
l) If a crossed cheque is presented on counter for encashment.

29.  A question always persists whether the amount paid by
mistake would be recovered or not.
 It depends on the following circumstances.
A. Can be recovered when:
1. Money received with bad faith: A person knows that he is not entitled
to get the amount and still he recovers the cheque then banker can
recover the amount.
2. Money paid under the mistake of fact is recoverable: In case of
payment of cheque is made to wrong individual by mistake, then it
can be recovered by banker.
3. Mistake between the party paying and party receiving: in case of
payment to payee is made when the credit balance is not sufficient,
the banker cannot recover the same from payee but can recover from
drawer.

30. B. Cannot be Recovered when:
1. Money paid under a mistake of law is not recoverable as
ignorance of law is no excuse.
2. Money paid on a negotiable instrument to an innocent holder
is not recoverable.
3. Money paid to agent by mistake who in turn had paid the
same to the principal or used it before the mistake is found
out.

31.  Payment of Cheques involves a great risk as there are chances
of payment to a wrong person. It is the duty of the banker to
honour the Cheques drawn by a customer when being
demanded.
 The banker is given some statutory protection against the risk
involved in payment of cheque under section 85, 128, and 89
of the Negotiable Instrument Act 1881.

32. 1. Protection in case of order cheque: [sec. 85(1)]
 “Where a cheque payable to order purports to be endorsed by or
on behalf of payee, the drawer is discharged by payment-in-due-
course.”
 If the paying banker has done payment in-due-course, then paying
banker is free from the liability.
 This protection is possible under the case where endorsement is
regular and payment must be made in-due-course.
2. Protection in case of Bearer cheque: [sec. 85(1)]
 “When a Cheque is originally expressed to be payable to bearer,
the drawee is discharged by payment in-due-course to the bearer
thereof, notwithstanding any endorsement whether in full or in
blank appearing thereon, and notwithstanding that any such
endorsement purports to restrict or exclude further negotiation”

33.  If a Cheque is bearer and bears simple or special or blank
endorsement on its back whether conditional or not, banker does
not have any liability in case he has paid money to a person,
presenting a Cheque.
 The banker is protected under sec. 82(2) in case of payment to the
bearer for a bearer Cheque.
3. Protection in case of crossed Cheque: [sec. 128]
 In case of banker and drawer, both gets protection. If a banker
makes the payment in-due-course of a crossed Cheque, then he
is free from the liability and he can debit the amount in the
account of a customer.
 It is not a liability of a banker , whether the money is received
by the true owner of a cheque as the payment is made in
accordance with the instructions expressed though crossing.

34. 4. Legal protection in case of Material Alteration:
 When there is any material alteration on a cheque and the banker
is unable to detect the same,
 The crossing is rubbed out in such extent that it may not be seen
at first sight,
 If the bank has made payment in-due-course as per desire of the
parties, the banker is free from the liabilities.
5. Protection in case of payment in-due-course:
 When the banker has made the payment of chequeaccording to
apparent tenor and in-due-course, whether crossed, bearer or
order cheque, the banker is free from his liability.