PAYING BANKER AND COLLECTING BANKER CHAPTER2 Meaning of
PAYING BANKER AND COLLECTING BANKER CHAPTER-2
Meaning of Paying Banker A banker on whom a cheque is drawn should pay the cheque when it is presented for payment. A banker is bound to honour his customer’s cheques, to the extent of the funds available and the existence of no legal bar to 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 customer’s credit. If the paying banker wrongfully dishonours a cheque, he will be asked to pay heavy damages.
Precautions before Honouring a cheque 1. Presentation of the cheque a) Type of the cheque b) Branch c) Account d) Banking hour e) Mutilation 2. Form of the cheque a) Printed form b) Unconditional order c) Date d) Amount e) Material alteration 3. Sufficient Balance 4. Signature of the drawer 5. Endorsement 3
Precautions before Honouring a cheque 6. Legal Bar 7. Minor Precautions A paying banker should look into the following minor details also, before honouring a cheque: (a) He must see whethere is any order of the customer not to pay a cheque. (b) He must see whethere is any evidence of misappropriation of money. If so, the cheque should be returned. (c) He must see whether he has got any information about the death or insolvency or insanity of his customer. Failure to note those instructions will land him in trouble. 4
Circumstances under which a cheque can be dishonoured 1. Countermanding 2. Upon the receipt of notice of death of a customer 3. Upon the receipt of notice of insolvency 4. Upon the receipt of notice of garnishee order 5. Upon the receipt of notice of assignment 6. When a breach of trust is intended 7. Defective title 8. Other ground Copyright (c) 2009 Prentice Hall. All rights reserved. 5
Statutory protection to a paying Banker Sec. 85 of the N. I. Act, 1881 offers protection to the paying banker in India. “Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawer is discharged by payment in due course”. To claim protection under sec. 85, the bankerbshould have fulfilled the following conditions (i) He should have paid an order cheques. (ii) Such a cheque should have been Copyright (c) 2009 Prentice Hall. All rights reserved. 6
Statutory protection to a paying Banker endorsed by the payee or his order. (iii) It should have been paid in due course ORDER CHEQUE The statutory protection has been extended to an order cheque. Example of an order is “pay to x or order”. When such a cheque is paid by the banker, he is entitled to get protection. ENDORSED BY PAYEE OR HIS ORDER Such a cheque requires an endorsement by its payee. So, it must be properly endorsed by him or any person authorised by him to obtain payment. Copyright (c) 2009 Prentice Hall. All rights reserved. 7
PAYMENT IN DUE COURSE “Payment in due course means payment in accordance with the apparent tenor of the instrument, in good faith and without negligence, to any person in possession thereof under circumstances which do not afford a reasonable ground for believing, that he is not entitled to receive payment of the amount therein mentioned”. This concept of payment in due course has three essential features: Copyright (c) 2009 Prentice Hall. All rights reserved. 8
PAYMENT IN DUE COURSE (i) Apparent tenor of the instrument (ii) Payment in good faith and without negligence (iii) Payment to a person who is entitled to receive payment. Protection to a Bearer Cheque Protection to a Crossed Cheque Protection to a materially Altered Cheque (a) Protection to a draft (b) Forgery of a Customer’s Signature Copyright (c) 2009 Prentice Hall. All rights reserved. 9
HOLDER IN DUE COURSE Sec. 9 of the N. I. Act lays down that “Holder in due course means any person, who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof, if payable to order before the amount mentioned in it became payable and without having sufficient cause to believe that anybdefect existed in the title of the person from whom he derived his title. Copyright (c) 2009 Prentice Hall. All rights reserved. 10
RIGHTS AND PRIVILEGES OF A HOLDER IN DUE COURSE (i) He obtains a better title to the instrument than that of a true owner. (ii) The defective title of the previous endorsers will not adversely affect his rights. (iii) He can pass on a better title to others, since once the instrument passes through his hands. (iv) Until the instrument is finally disharged every party to that instrument is liable to him. (v) Even the drawer of a negotiable instrument cannot claim invalidity of the instrument against him. Copyright (c) 2009 Prentice Hall. All rights reserved. 11
COLLECTING BANKER A Collecting banker is one who undertakes to collect the amount of a cheque for his customer from the paying banker. A banker is under no legal obligation to collect cheques, drawn upon other banks for a customer. In rendering such services a banker should br careful, because, he is answerable to a number of persons with whom he has no contractual relationship and any negligence or carelessness on his part may land him in difficulties. Copyright (c) 2009 Prentice Hall. All rights reserved. 12
STATUTORY PROTECTION GRANTED TO A COLLECTING BANKER According to sec. 131 of the Negotiable Instrument Act, ”A banker who has in good faith and without negligence, received payment for a customer of a cheque, crossed generally or specially to himself, shall not, in case 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” Statutory protection is available to the collecting banker only if he fulfills the following conditions: Copyright (c) 2009 Prentice Hall. All rights reserved. 13
STATUTORY PROTECTION GRANTED TO A COLLECTING BANKER (1) The cheque he collects must be a crossed cheque. (2) He must collect such crossed cheques only for his customer as an agent and not as a holder for value. (3) He must collect such crossed cheques in good faith and negligence. Protection Extended to Dividen Warrants, Drafts etc. Negotiable Instrument Act Amended in 1922 Copyright (c) 2009 Prentice Hall. All rights reserved. 14
BASIS OF NEGLIGENCE The word ‘negligence’ has no definite meaning in banking law. According to Sir John Paget “The assumption of his duty to a stranger must be regarded as a part of the price paid by bankers for protection”. When a collecting banker wants to claim protection under Sec. 131 he has the burden of proving that he has acted without negligence. Negligence is more or less artificial, as there is no contractual relationship between thecollecting banker and the true owner of the cheque. Copyright (c) 2009 Prentice Hall. All rights reserved. 15
DEFINITION “Negligence is the doing of that which a reasonable man under all the circumstances of the particular case in which he is acting, would not do, or the failure to do something, which a reasonable man under those would do”. Negligence can be studied under the following heads: (1) Gross negligence (2) Negligence connected with the immediate collection of cheque. (3) Negligence under remote grounds, Copyright (c) 2009 Prentice Hall. All rights reserved. 16
BASIS NEGLIGENCE (4)Contributory negligence. (1) GROSS NEGLIGENCE: If a banker is completely careless in collecting a cheque, then, he will be held liable under the ground of ‘Gross Negligence’. Examples: (i) Collecting a cheque crossed ‘A/c payee’ for than the payee’s account. (ii) Failure to verify the correctness of endorsement. (iii) Failure to verify the existence of authority in the case of per pro signatures. Copyright (c) 2009 Prentice Hall. All rights reserved. 17
BASIS OF NEGLIGENCE (2) NEGLIGENCE CONNECTED WITH THE IMMEDIATE COLLECTION: If on the face of a cheque, there is a warning that there is misappropriation of money, the collecting banker should not disregard such warnings. He should make some reasonable enquiry and only after getting some satisfactory explanations, he can proceeds to collect cheques. Examples: (i) Collecting a cheque drawn against the principal’s A/c, to the Private A/c of the agent without enquiry. Copyright (c) 2009 Prentice Hall. All rights reserved. 18
BASIS OF NEGLIGENCE (ii)Collecting a cheque payable to the firm to the Private A/c of a partner without enquiry. (iii)Collecting a cheque payable to the firm to the company to the private account of the direction or any other officer without enquiry. (iv) Collecting a cheque payable to the employer to the private account of the employee would constitute negligence under sec. 131 of the Negotiable Instrument act. (3) NEGLIGENCE UNDER REMOTE GROUNDS (4)CONTRIBUTORY NEGLIGENCE Copyright (c) 2009 Prentice Hall. All rights reserved. 19
DUTIES OF A COLLECTING BANKER (i) Exercise reasonable care and diligence in his collection work. (ii) Present the cheque for collection without any delay. (iii) Notice to customer in the case of dishonour of a cheque. (iv) Present the bill for acceptance at an early date. (v) Present the bill for payment. (vi)Protest and note a foreign bill for nonacceptance. Copyright (c) 2009 Prentice Hall. All rights reserved. 20
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