Collection of Cheques and Liability of the Collecting

Collection of Cheques and Liability of the Collecting Banker Definition of a collecting Banker

A bank is called a collecting banker when it collects the proceeds of the cheque from another banker on behalf of its customer. This is the case where a drawer issues a cheque drawn on his or her account, say with Equity Bank, payable to a person who has an account in Barclays bank. Now, instead of going to Barclays Bank and obtain payment, the payee presents the cheque to his or her Barclays bank so that it collects the cheque for him or her. When Equity Bank pays the cheque, Barclays Bank would credit its customer’s account with the amount of the cheque.

Duties and liability of a collecting Banker The Duties • Duty to present Cheques Without Delay The collecting banker must present for payment cheques paid in for collection within a reasonable time. • Notice of Dishonour The collecting bank has a duty to inform its customer of the dishonour of a cheque deposited for collection.

Liability of the Collecting Banker The collecting banker may be held liable for breach of contract if the cheque is not presented for payment within a reasonable time or if it fails to give notice of dishonor within reasonable time.

The Protection Section 81(1) of the Bills of Exchange Act is to the effect that “where a banker in good faith and without negligence receives payment for a customer of a cheque crossed generally or specially to himself or herself, and the customer has no title or a defective title to it, the banker shall not incur any Liability to the owner of the cheque by reason only of having received that payment. ” The above protection of a banker does not apply to cheques only but also applies to: • Any document (not being a cheque) issued by a customer to enable another person to obtain payment from the bank e. g cheques drawn “Pay cash” • Any document such as a warrant issued by a public officer and intended to enable a person to obtain payment from the government or local authority. • Banker’s drafts.

The Conditions for Protection • The collecting banker received • payment on the cheque. • For the customer. • In good faith, and • Without negligence.

When is a Bank Negligent? Negligence refers to the failure by a person to take due care where circumstances demand that such care should be taken. The following question may be raised-Did the bank take reasonable care, taking into account past and present circumstances of the customer? Negligence by a collecting bank has been held to arise in one of the following circumstances:

• Opening an account without ascertaining the particulars of the customer e. g. name, name of spouse, name of employer and referees. • Opening an account with a cheque paid in for collection and allowing the customer to draw cash on the account. • Allowing a customer to draw against uncleared effects • Losing a customer’s cheque that has been paid in for collection. • Failure to inqure and obtain satisfactory explanaination where circumstances ought to arouse suspicion.

A collecting bank has been held to be negligent in either failing to make inquiries or in accepting inadequate answers in the following situations: • Collecting to the private account of the employee, without inquiry, cheques drawn by the customer’s employer payable to bearer. • Collection without inquiry cheques for larger amounts than would be consistent with the customer’s information on his business or other circumstances of the customer. • Collecting without inquiry to the private account of an agent, a cheque payable to the agent in his or her official capacity as agent. • Collecting without inquiry to the private account of an agent or employee on a cheque drawn the principal’s or employer’s account respectively. • Collecting without inquiry a cheque payable to the firm, which was endorsed and Negotiated by a partner to a third party

• Collecting cheques payable to a company into personal account of an official of the company even if the official involved owns the company or the company is a one-person company. • Collecting without satisfactory explanation a cheque payable to a limited company for the account of another company. • Collecting a cheque drawn payable to a payee other than the customer, which is crossed “A/C Payee”, whether the cheque is payable to order or to bearer. (Atrib v. United Bank of Africa Limited (1968).

Collection of a Cheque with a Forged Endorsement If the bank collects a cheque bearing a forged or an unauthorized endorsement it is only liable if it is negligent in doing so, in the sense explained above. The mere failure to recognize that an endorsement is forgery is not negligence. The rights of a collecting Banker Where the bank is liable in conversion to the true owner of the cheque, it is entitled to a full indemnity (i. e. compensation) from its customer. The banker can realize this right through the exercise of • The Right of lien, and • The Right of Set off in which case the banker re-debits the customer’s account with the amount of the cheque. Both rights are among the general rights of a banker, which we have already discussed above.

Lien on a cheque A bank automatically has a lien on cheques, which a customer pays into his overdrawn account so long as there is no agreement to the contrary. The lien is irretrievably lost if the bank returns the cheque to the customer. A banker who gives value for, or has a lien on, a cheque payable to order which the holder delivers to him for collection without indorsing it, has the same rights, if any, as he would have had if upon delivery, the holder had indorsed it in blank. Note: a banker gives value for a cheque e. g. • Where it buys the cheque and pays off the customer. • Where it allows the customer to withdraw funds against an uncleared cheque. • Where it accepts the cheque in permanent reduction of an overdraft.

Who is a Paying Banker? A paying banker is the banker on whom cheques are drawn by his customers i. e. the drawee bank. Liability of a paying Banker A bank may become liable to its customer under the following circumstances: • Payment of a Countermanded cheque The payment of a cheque that the bank had previously been instructed not to pay. For a countermand of payment to be effective: • The instruction must be in writing. • It must be communicated to the branch on which the cheque was drawn • It must be absolute and unconditional (i. e. unequivocal). This means that the instruction must not be able of being misinterpreted.

(b) Payment of a post-dated Cheque Debiting an account with a postdated cheque before the proper date for payment would be another obvious failure to comply with the instructions of the customer. (c) Payment on a Forged or an Unauthorized Signature A forged signature is not a signature at all. According to Section 23 of the Bills of Exchange Act, a forged or unauthorized signature is wholly inoperative and gives no right to retain the cheque or give a discharge to it or enforce payment. A banker, who pays the proceeds of a cheque to a person other than the true owner, is liable to him or her for the value of the cheque. (d) Wrongful Dishonour of a cheque A wrongful dishonor of a cheque occurs when a banker returns a cheque which should have been paid, due for example, to misplaced credits or wrong debits, resulting in a reduced balance of the account insufficient to meet the cheque. (e) Paying a Materially Altered Cheque A bank is liable if it debits an account, which has been materially altered without the customer’s consent. A bank has no protection if it pays a cheque, which has been materially altered.

Statutory protection of a paying Banker A paying banker is given limited statutory protection against innocent mistakes when paying cheques (a)Payment in Due Course A paying banker obtains a valid discharge of a cheque when it makes payment in due course. Section 58(2) of the Bills of Exchange Act defines payment due course as payment made: • to the holder • of a cheque which is not overdue, • in good faith; and • without notice of defect in the holder’s title.

• Payment on a Forged Endorsem The most obvious risk for a paying banker is that payment may be obtained by a person who is not a holder because there is either a forged or an unauthorized endorsement of an order cheque which the bank is not aware of. It is a forged or unauthorized signature by a wrongful possessor or fraudulent agent of the owner. Section 59 of the Bills of Exchange Act gives protection to the paying banker that pays a cheque bearing a forged or unauthorized endorsement provided that such payment is mad • In good faith and • In the ordinary course of business. (c)Paying an Unendorsed or Irregularly Endorsed Cheque Section 59 of the Bill of Exchange Act protects a paying banker who pays a cheque which is not endorsed or which is irregularly endorsed provided that payment is made in good faith and in the ordinary course of business.

(d)Payment of Crossed Cheques Section 75 of the Bills of Exchange Ordinance defines a crossed cheque as a cheque, which bears across its face an addition of: The words “and company” or any abbreviation thereof between the parallel transverse lines, either with or without the words “not negotiable”; or Two parallel transverse lines simply either with or without the words “not negotiable ” (i. e. general crossing), or An addition of the name of a banker, either with or without the words “not negotiable” (i. e. special crossing). • • Where a cheque is crossed, the paying (drawee) banker has a duty to pay the proceeds of the cheque according to the crossing. That is: To the bank presenting the cheque, if the cheque is crossed generally, To the bank named in that crossing, if the cheque is crossed specially