UNIT – III

PAYING BANKER AND COLLECTING BANKER

PAYING BANKER
The bank on which a cheque is drawn (the bank whose name is printed on the cheque)
and which pays the amount for which the cheque is written and deducts that sum from the
customer's account.
PRECAUTIONS BEFORE HONOURING A CHEQUE
In order to safeguard his position, the paying banker has to observe the following
precautions before honouring a cheque.
(1) PRESENTATION OF CHEQUE
First of all a paying banker should note whether the presentation of the cheque is correct.
It can be found out by noting the following factors.
(a) Type of Cheque
Cheques may generally be of two types – open or crossed. If it is open one, the payment
may be paid at the counter. If it is crossed, the payment must be made only to a fellow banker.
(b) Branch
The paying banker should see whether the cheque is drawn on the branch where the
account is kept.
(c) Banking Hours
The paying banker should also note whether the cheque is presented during the banking
hours on a business day.
(d) Multination
If the cheque is from into pieces or cancelled or mutilated, then the paying banker should
not honour it.
(2) FROM OF THE CHEQUE
Before honouring a cheque, a banker should see the form of cheque and find out whether
it is regular or not.
(a) Printed Form
The customer should draw cheques only on the printed leaves supplied by the bankers
failing which the banker may refuse to honour it.

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(b) Unconditional Order
The cheque should not contain any condition
(c) Date
Before honouring a cheque, the paying banker must see whether there is a date on the
instrument. if a cheque is ante dated, it may be paid if it has not exceeded six months from the
date of its issue otherwise it will become stale one. If a cheque is post dated, he should honour it
only on its due date.
(d) Amount
The paying banker should see whether the amount stated in the cheque both in words and
figures agree with each other.
(e) Material Alteration
If there is any material alteration the banker should return it with a memorandum
―Alteration requires drawer‘s confirmation‖.
(f) Sufficient Balance
If the funds available are not sufficient to honour a cheque, the paying banker is justified
in returning it.
(g) Signature of the Drawer
It is the duty of the paying banker to compare the signature of his customer found on the
cheque with that of his specimen signature.
(h) Endorsement
The banker must verify the regularity of endorsement, if any, that appears on the
instrument.
(i) Legal Bar
The existence of legal bar like Garnishee order limits the duty of the banker to pay a
cheque.
DISHONOUR OF CHEQUE MEANING:
A cheque is said to be honoured, if the banks give the amount to the payee. While, if the
bank refuses to pay the amount to the payee, the cheque is said to be dishonoured. In other
words, dishonour of cheque is a condition in which bank refuses to pay the amount of cheque to
the payee.

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CIRCUMSTANCES UNDER WHICH A CHEQUE MAY BE DISHONOURED
A paying banker is under a legal obligation to honour his customer‘s mandate. He is
bound to do so under his contractual relationship with his customer. A wrongful dishonor will
have, the worse effect on the banker. However, under the following circumstances, the payment
of a cheque may be refused.
a) Countermanding
Countermanding is the instruction given by the customer of a bank requesting the bank
not to honour a particular cheque issued by him. When such an order is received, the banker
must refuse to pay the cheque.
b) Upon receipt of notice of death of a customer
When a banker receives written information from an authoritative source, regarding the
death of a particular customer, he should not honour any cheque drawn by that deceased
customer.
c) Upon the receipt of notice of insolvency
Once a banker has knowledge of the insolvency of a customer he must refuse to pay
cheques drawn by him.
d) Upon the receipt of notice of insanity
Where a banker receives notice of a customer‘s insanity, he is justified in refusing
payment of the cheque drawn by him.
e) Upon the receipt of notice of Garnishee order
Garnishee order refers to the order issued by a court attaching the funds of the judgement
debtor (i.e. the customer) in the hands of a third party (i.e. the banker). In such a case, the banker
may refuse payment.
f) Upon the receipt of notice of assignment
The bank balance of a customer constitutes an asset and it can be assigned to any person
by giving a letter of assignment to the banker. In such case also the banker may refuse payment.
g) When a breach of trust is intended
In the case of trust account, mere knowledge of the customers intention to use the trust
funds for his personal use is a sufficient reason to dishonor his cheque.

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h) Defective Title
If the person who brings a cheque for payment has no title or his title is defective, the
banker should refuse to honour the cheque presented by him.
i) Other Grounds
A banker is justified in dishonouring a cheque under the following circumstances also:
 a conditional one,
 drawn on an ordinary piece of paper,
 a stale one,
 post-dated one,
 mutilated,
 drawn on another branch where the account is not kept,
 presented during non-banking hours.
 If the words and figures differ,
 If there is no sufficient funds,
 If the signature of the customer is forged,
 If the endorsement is irregular and,
 If a crossed cheque is presented at the counter
Statutory Protection to a Paying Banker
Supposing, a paying banker pays a cheque which bears a forged signature of the payee or
endorsee, he is liable to the true owner of the cheque. But, it is quite unjustifiable to make the
banker responsible for such errors. It is so because, he is not expected to know the signature of
the payee or the endorsee.
Therefore, law relieves the paying banker from his liability to the true owner in such
cases, This relief is known as ‗statutory protection.‘
To claim protection under Sec.85 of the Nl. Act, 1881, the banker should have fulfilled
the following conditions:
1. He should have paid an order cheque.
2. Such a cheque should have been endorsed by the payee or his order.
3. It should have been paid in due course.

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Payment in due course
The cheque should have been paid in due course as per Sec. 10 of the N.l. Act. This
concept of payment in due course has three essential feature :
(I) Apparent tenor of the instrument
To avail of the statutory protection, the payment should have been made according to the
apparent tenor of the instrument. The apparent tenor refers to the intention of the parties as it is
evident from the face of the instrument.
Example: If a drawer draws a cheque with a post —date, his intention is to make payment only
after a certain date. If it is paid before the due date, this payment does not amount to payment in
due course. So also, the payment of a countermanded cheque does not amount to payment in due
course.
(ii) Payment in good faith and without negligence
Good faith forms the basis of all banking transactions. As regards negligence, the banker
may sometimes be careless in his duties which constitutes an act of negligence. If negligence is
proved, the banker will loss the statutory protection given under Sec. 85.
Example:
 Payment of a crossed cheque over the counter.
 Payment of a post-dated cheque before maturity.
 Failure to verify the regularity of an endorsement.
(iii) Payment to a person who is entitled to receive payment:
The banker must see that the person, who presents the cheque, is in possession of the
instrument and he is entitled to receive the amount of the cheque.
Protection to a bearer cheque
Now this protection has been extended to bearer cheques also under sec. 85(2). If a
bearer cheque is paid in due course, the banker is entitled to get protection.
Statutory Protection in the case of a Materially Altered Cheque
A paying banker cannot normally claim any statutory protection for a materially altered
cheque. However; Sec. 89 of the Negotiable instrument Act. Gives protection in the case of a
materially altered cheque provided,
1) He is liable to pay,
2) Such an alteration is not apparent and,

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 3) The banker has made the payment in due course.
Recovery of Money Paid by Mistake
Under the following circumstances, money wrongly paid can be recovered:
(i) Money received mala fide is recoverable
When a person receives money by mistake in bad faith, knowing that he is not entitled to
receive that money then the banker is entitled to recover the same.
(ii) Money paid under a mistake of fact is recoverable
For instance, a banker pays money to X, thinking that he is Y. This is a mistake of fact
regarding the identity of the parties. Y is under a legal duty to pay the money back to the banker.
COLLECTING BANKER
A collecting banker is one who undertakes to collect the amount of a cheque for his
customer from the paying banker. In collecting a cheque, the banker can act in two capacities
namely
i) as a holder for value, and
ii) as an agent for collection.
As a Holder for value
The banker would be regarded as a holder for value:
 If he allows his customers to withdraw money before cheques paid In for collection are
actually collected and credited.
 If any open cheque‘ is accepted and the value is paid before collection, and
 If there is a reduction in the overdraft account of the customer before the cheque is
collected and credited in the respective account.
 In all these cases, the banker acquires a personal interest.
A Banker as an agent
In practice, no banker credits a customer account even before a cheque is collected. He
collects a cheque on behalf of a customer. So, he cannot acquire any of the rights of a holder for
value, He has to act only as an agent of the customer.
COLLECTING BANKER
A collecting banker is one who undertakes to collect the amount of a cheque for his
customer from the paying banker.

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DUTIES & RESPONSIBILITIES OF COLLECTING BANKERS:
Acting as agent
While collecting an instrument, whether for credit to customer‘s account or for himself,
the Bankers works as agent of his customer. As an agent he has generally to take such steps &
precautions to protect the interest or his customer as a man of ordinary prudence would take to
safe-guard his own interest.
Scrutinizing the instruments
Name of the holder, Branch name, date, amount in world and figure, any cutting without
signature, material alteration of any to be checked carefully.
Checking the endorsement
Bankers has to check the instrument whether it has been endorsed properly.
Presenting the instrument in due time
It is the responsibility of the collecting bank to present the instrument in due time to the
paying bank.
Collecting the proceeds in the payee’s account
It is the duty of collecting banks to collect and credit the proceed of the instruments to the
proper/correct account.
Notice of dishonor and returning the instruments
If any instrument is dishonored by the paying bank it should be informed to the
customer on the business day following the receipt of the unpaid instruments.
Collecting Banker’s Protection
Under section 131 of negotiable instrument Act the collecting banker is not liable to the
true owner of a cheque or a banker‘s draft if his title to the instrument proves defective provided
the cheque or draft was one crossed generally or specially to himself and collected for a customer
is good faith and without negligence.
The above statutory protection is available to the collecting banker only if he fulfills the
following conditions:
 The cheque he collected is a crossed cheque.
 He collected such crossed cheque only for his customer as an agent & not as a holder for
value.
 He collected such crossed cheque in good faith and without negligence.

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STATUTORY PROTECTION TO COLLECTING BANKS
A collecting banker can claim protection against conversion if the following conditions
are fulfilled:
1. Good Faith and Without Negligence
Statutory protection is available to a collecting banker when he receives payment in good
faith and without negligence. The phrase in ―goodfaith‖ means honestly and without notice or
interest of dishonesty or fraud and does necessarily require carefulness. Negligence means
failure to exercise reasonable care. The banker should have exercised reasonable care and
deligence.
2. Collection for a Customer
Statutory protection is available to a collecting banker if he collects on behalf of his
customer only. If he collects for a stranger or noncustomer, he does not get such protection. A
bank cannot get protection when he collects a cheque as holder for value
3. Acts as an Agent
A collecting banker must act as an agent of the customer in order to get protection. He
must receive the payment as an agent of the customer and not as a holder under independent title.
The banker as a holder for value isnot competent to claim protection from liability in conversion.
In case of forgery, the holder for value is liable to the true owner of the cheque.
4. Crossed Cheques
Statutory protection is available only in case of crossed cheques. It is not availablein case
uncrossed or open cheques because there is no need to collect them through a banker. Cheques,
therefore, must be crossed prior to their presentment to the collecting banker for clearance.
What is negligence?
Negligence is a failure to take reasonable care to avoid causing injury or loss to another
person. There are four steps in proving negligence. The plaintiff must prove:
 That there is a duty in the circumstances to take care duty of care
 That the behaviour or inaction of the defendant in the circumstances did not meet the
standard of care which a reasonable person would meet in the circumstances that the
plaintiff has suffered injury or loss which a reasonable person in the circumstances could
have been expected to foresee (damage)
 That the damage was caused by the breach of duty (causation).

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