Cheques

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PART III |

CHEQUES ON A BANKER |

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Cheque defined. | 73. A cheque is a bill of exchange drawn on a banker payable on demand. Except as otherwise provided in this Part, the provisions of this Ordinance applicable to a bill of exchange payable on demand apply to a cheque. |

Presentment of cheque for payment. | 74. Subject to the provisions of this Ordinance- | (1) Where a cheque is not presented for payment within a reasonable time of its issue, and the drawer or the person on whose account it a drawn had the right at the time of such presentment as between him and the banker to have the cheque paid and suffers actual damage through the delay, he is discharged to the extent of such damage, that is to say, to the extent to which such drawer or person is a creditor of such banker to a larger amount than he would have been had such cheque been paid. | | (2) In determining what is a reasonable time regard shall be had to the nature of the instrument, the usage of trade and of bankers, and the facts of the particular case. | | (3) The holder of such cheque as to which such drawer or person is discharged shall be a creditor, in lieu of such drawer or person, of such banker to the extent of such discharge, and entitled to recover the amount from him. | |

Revocation of banker's authority. | 75. The duty and authority of a banker to pay a cheque drawn on him by his customer are determined by- | (a) countermand of payment; | | (b) notice of the customer's death. | |

CROSSED CHEQUES |

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General and special crossings defined. | 76. | (1) Where a cheque bears across its face an addition of- | (a) the words " and company " or any abbreviation thereof between two parallel transverse lines, either with or without the words " not negotiable "; or | | (b) two parallel transverse lines simply, either with or without the words " not negotiable "; | | that addition constitutes a crossing, and the cheque is crossed generally. | | | (2) Where a cheque bears across its face an addition of the name of a banker, either with or without the words " not negotiable", that addition constitutes a crossing, and the cheque is crossed specially and to that banker. | |

Crossing by drawer or after issue. | 77. | (1) A cheque may be crossed generally or specially by the drawer. | | (2) Where a cheque is uncrossed, the holder may cross it generally or specially. | | (3) Where a cheque is crossed generally, the holder may cross it specially. | | (4) Where a cheque is crossed generally or specially, the holder may add the words " not negotiable ". | | (5) Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker for collection. | | (6) Where an uncrossed cheque or a cheque crossed generally is sent to a banker for collection, he may cross it specially to himself. | |

Crossing a material part of cheque. | 78. A crossing authorized by this Ordinance is a material part of the cheque; it shall not be lawful for any person to obliterate, or, except as authorized by this Ordinance, to add to or alter the crossing. |

Duties of banker as to crossed cheque. | 79. | (1) Where a cheque is crossed specially to more than one banker, except when crossed to an agent for collection being a banker, the banker on whom it is drawn shall refuse payment thereof. | | (2) Where the banker on whom a cheque is drawn which is so crossed nevertheless pays the same, or pays a cheque crossed generally otherwise than to a banker, or if crossed specially otherwise than to the banker to whom it is crossed, or his agent for collection being banker, he is liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid: | | Provided that where a cheque is presented for payment which does not at the time of presentment appear to be crossed, or to have had a crossing which has been obliterated, or to have been added to or altered otherwise than as authorized by this Ordinance, the banker paying the cheque in good faith and without negligence shall not be responsible or incur any liability, nor shall the payment be questioned by reason of the cheque having been crossed, or of the crossing having been obliterated or having been added to or altered otherwise than as authorized by this Ordinance, and of payment having been made otherwise than to a banker or to the banker to whom the cheque is or was crossed, or to his agent for collection being a banker, as the case may be. | |

Protection to banker and drawer where cheque is crossed. | 80. Where the banker on whom a crossed cheque is drawn, in good faith and without negligence pays it, if crossed generally, to a banker, and if crossed specially, to the banker to whom it is crossed, or his agent for collection, being a banker, the banker paying the cheque, and, if the cheque has come into the hands of the payee, the drawer, shall respectively be entitled to the same rights and be placed in the same position as if payment of the cheque had been made to the true owner thereof. |

Effect of crossing with words "not negotiable " on holder. | 81. Where a person takes a crossed cheque which bears on it the words " not negotiable ", he shall not have and shall not be capable of giving a better title to the cheque than that which the person from whom he took it had. |

Protection to collecting banker. | 82. | (1) Where a banker in good faith and without negligence receives payment for a customer of a cheque crossed generally or specially to himself, and the customer has no title or a defective title thereto, the banker shall not incur any liability to the true owner of the cheque by reason only of having received such payment. | | (2) A banker receives payment of a crossed cheque for a customer within the meaning of this section notwithstanding that he credits his customer's account with the amount of the cheque before receiving payment thereof. | |

Extension of sections 76 to 82 to certain drafts on bankers. | 83. Sections 76 to 82, both inclusive, of this Ordinance shall extend to any document issued by a customer of any banker, and intended to enable any person or body corporate to obtain payment from such banker of the sum mentioned in such document, and shall so extend in like manner as if the said document were a cheque: |

| Provided that nothing in this Ordinance shall be deemed to render any such document a negotiable instrument. |

| For the purpose of this section, the Deputy Secretary to the Treasury[1] shall be deemed to be a banker, and the public officers drawing on him shall be deemed customers. |

Application of sections 76 to 82 to drafts drawn by a bank on itself. [ 2, 5 of 1955.] | | 84. Sections 76 to 82, both inclusive, of this Ordinance shall apply to a banker's draft as if that draft were a cheque. |

| For the purposes of this section, the expression "banker's draft" means a draft payable on demand drawn by or on behalf of a bank upon itself, whether payable at the head office or some other office of the bank. |

Collecting Banker: A Collecting Banker is one who undertakes to collect various types of instruments representing money in favour of his customer or his own behalf from the drawers of these instruments; some are negotiable instruments as provided for in the negotiable instruments Act. 1881 and some are quasi negotiable instruments.

Negotiable Instruments: As per section number 13 of the negotiable instrument Act. 1881, “A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer”. A Banker’s draft is also negotiable instrument.

a. Promissory Note: A promissory note is an instrument in writing containing an unconditional under taking signed by the maker to pay on demand or at a fixed or determinable future time a certain sum of money only to, or to the order of a certain person, or to the bearer of the instrument.

b. Bill of Exchange: A bill of exchange is an instrument in writing containing an unconditional order signed by the maker directing a certain person to pay on demand or at a fixed or determinable future time a certain sum of money only to or the order of a certain person or to the bearer of the instrument.

c. Cheque: A cheque is a unconditional order of the drawer in writing bearing a date, to the Banker maintaining his account to pay on demand, to a named person, his order or bearer, a certain specified sum of money, expressed in both figures and words.

Quasi Negotiable instruments: The negotiable instruments Act. 1881 does not talk of any other negotiable instruments except bills, promissory notes, cheques and bank drafts. But there are some instruments which are in practice, treated negotiable for certain events only and are so regarded by usage and custom. Some of these are documents of tittle of goods and property while others are documents of value. Such as, Bill of lading, railway receipts, stock and share certificates, debentures, dividend warrants, interest coupons & treasury bills.

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:

i. The cheque he collected is a crossed cheque. ii. He collected such crossed cheque only for his customer as an agent & not as a holder for value. iii. He collected such crossed cheque in good faith and without negligence.

No Protection: * Opening of A/c without satisfactory references/ introduction. * Crediting the proceeds of cheque to an endorsee with irregular endorsement. * Crediting the proceed of a cheque to the personal A/c of director, partners or any employee when it is payable to the company. * Crediting the proceeds of charge to personal name of the official when it is payable to a govt. agency, autonomous body, or corporation. * Crediting the amount of a cheque in the personal A/c which is drawn by an agent on behalf of its principal. * When the customer depositing the cheque is of little means and the cheque deposited suddenly is of sizable amount and the banker credited the proceeds there to without making proper enquiry. * Cheque drawn by customer is dishonored very often and crediting such account with the proceeds of collecting cheque without making proper enquiry. * If the crossed cheque is collected and credited the proceed to the other account.

Paying Bankers duties & responsibilities.

A banker on whom the cheque is drawn should pay the cheque, when it is presented for payment. It is his obligation by section 31 of the NI Act. A banker is bound to honour his customers cheque to the extent of the fund available & the existence of no legal bar for payment. The paying banker should use reasonable care and diligence in paying a cheque so as to abstain from any action likely to damage his customers credit.

At the time of making payment of he should observe the following very carefully:

i. Verification of signature of the drawer. ii. Verification of the genuineness of the instrument. iii. Payment not stopped by the A/c holder. iv. Holders title on the cheque is valid.
v. A/c is not dormant one. vi. A/c holder is not bankrupt, deceased and insanse. vii. A/c is not under subject of liquidation process. viii. No. ‘Guernsey Order’ is issued by count. ix. Properly endorsed.
x. Cheque is not drawn beyond limit fixed by the drawer is respect of amount. xi. Instrument being presented is crossed. xii. Instrument is not state or post dated. xiii. No material alteration is made. xiv. Sufficient balance in the A/c

* 1. Banker & Customer There is no statutory definition of the term ‘banker’ and ‘customer’ Banker The business of a banker in ordinary consists in receiving money from or an account of a customer and repaying the same on demand. * 2. The Negotiable Instrument Act defines a banker as any person acting as a banker. The Banking Regulation Act, 1949 defines‘banking company’ as a ‘company which transactthe business of banking in India. ‘The term banking’ has been defined as‘accepting’ for the purpose of lending orinvestment. of deposit of money from the publicrepayable on demand or withdrawable by cheque,draft or order. * 3. CustomerA customer is a person who has some sortof account, either deposit or currentaccount, with the banker. * 4. Legal relationship between banker and customer• The relationship between a banker and his customer is essentially contractual like Debtor (banker) and creditor (customer).• This relationship is sometimes reversed. This happens when the banker lends money to the customer.• The relationship also partakes many aspects of agent and principal. * 5. Special features or legal relationship• Obligation to honour cheques.• Obligation to keep proper record of transactions.• Obligation to abide by the express instruction of the customer.• Obligation not to disclose the state of his customer’s account or affairs.• Right of general lien.• Right to charge incidental charges and interest on money lent.• Right to set-off.• Right of appropriation. * 6. When may a banker dishonour a customer’s cheque?• Where the banker does not have sufficient funds to the credit of the customer.• Where the funds to the credit of the customer are not applicable to the payment of the cheque. (when the money held in trust)• Where the cheque is ambigious or doubtful.• Where the cheque is mutilated (imperfect).• Where the cheque is irregular or materially altered.• Where the cheque is not duly presented.• Where the cheque is post dated.• Where the cheque has become stale. (six months from the date of issue).• Where the cheque is presented at a other branch.• Where an account is in joint names of a few persons, but they have not all signed the cheque.• Where the cheque is for an amount in excess of the balance. * 7. When must a banker dishonour a cuctomer’s cheque?• When the customer become insolvent.• When the customer countermands payment (order the banker not to honour the cheque.)• When the banker receive notice of the customer’s death. But he pays the cheque before he receive notice, the payment is valid.• When the banker receive notice of the customer’s insanity (madness, lunacy).• When banker receive the legal notice about customer or dealing with money from some other sources.• When the customer gives notice to the banker to close the account.• When the customer gives notice of assignment of the credit balance of his account.• When the banker suspects, that the title of the person presenting the cheque is defective.• When the holder gives a notice of loss the cheque to the banker * 8. Protection of Paying Banker• Cheques payable to bearer• Crossed cheques• Payment of cheque crossed generally.• Payment of cheque crossed specially.• Payment of crossed cheque in due course.• Payment of crossed cheque out of due course. * 9. Protection of collecting banker• Collecting banker as an agent.• Crossed cheques.• Open cheques.• Collecting banker as a holder in due course.

Statutory Protection to Paying Banker
01. Protection in case of order cheque :
In case of an order cheque, Section -85(1) provides statutory protection to the paying banker as follows : "Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course".However, two conditions must be fulfilled to avail of such protection.
(a) Endorsement must be regular : To avail of the statutory protection, the banker mustconfirm that the endorsement is regular.
(b) Payment must be made in Due Course : The paying banker must make payment in due course. If not, the paying banker will be deprived of statutory protection.

02. Protection in case of Bearer Cheque :
Section -85(2) provides protection to the paying banker in respect of bearer cheques as follows : "Where 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 blank appearing thereon and notwithstanding that any such endorsement purports to restrict or exclude further negotiation". This section implies that a cheque originally issued as a bearer cheque remains always bearer. In other words it retains its bearer character irrespective of whether it bears endorsement in full or in blank or whether any endorsement restricts further negotiation or not. So the banks are not required to verify the regularity of the endorsement on bearer cheque, even if the instruments bears endorsement in full. The banker shall free from any liability (discharged) if he makes payment of an uncrossed bearer cheque to the bearer in due course. If such cheque is a stolen one and the banker makes its payment without the knowledge of such theft, he will be discharged of his obligation and will be protected under Section -85(2).

03. Protection in case of Crossed cheque :
The paying banker has to make payment of the crossed cheques as per the instruction of the drawer reflected through the crossing. If it is done, he is protected by Section -128. This section states "Where the banker on whom a crossed cheque is drawn has paid the same in due course, the banker paying the cheque and (in case such cheque has come to the hands of the payee) the drawer thereof shall respectively be entitled to the same rights, and be placed in if the amount of the cheque had been paid to and received by the true owner thereof".
It is clear that the banker who makes payment of a crossed cheque is by the Section -128 given protection if he fulfils two requirements (a) That he has made payment in deucecourse under Section -10 i.e. in good faith and without negligence and according to theapparent tenor of the cheque, and (b)That the payment has been made in accordance with the requirement of crossing (Section -126), i.e. through any banker in case of general crossing and through the specified banker in case of special crossing.
Thus, the paying banker is free from any liability on a crossed cheque even if the paymentwas received by the collecting banker on behalf of a person who was not a true owner. For example, a cheque in favour of X is stolen by Y. He endorses it in his own favour by forging the signature of X and deposits it in his bank for collection . In this case, the paying banker shall be discharged if he makes payment as mentioned above and shall not be liable to pay the same to X, the true owner of the cheque.
The drawer of the cheque is also discharged since protection is also granted to him under this Section. There is, however, one limitation to the protection granted under this Section. If the banker cannot avail of the protection granted by other Section of the Act, the protection under Section -128 shall not be available to him.
For example, if the paying bankers makes payment of a cheque crossed with (a) Irregular endorsement or (b) A material alteration or (c) Forged signature of the drawer, he loses statutory protection granted to him under the Act for these lapses on his part. Hence he cannot avail of the statutory protection under Section -1289, even if he pays the cheque in accordance with the crossing.