Collecting and paying banker

ByAbdul Qadir Bhamani

Meaning:

 When a person receives a cheque drawn on any other banker he has two options before him:

1. Either to receive the payment personally or through his agent at the counter of the drawee bank or

2. To sent it his banker for the purpose of the collection from the drawee bank. (collecting bank) While collecting cheques on behalf of the customer, a banker acts either as holder for value or as agent of the customer.

CHEQUE CLEARANCE

 Collecting banker as a Holder for Value Collecting of cheques takes some time in

case of outstanding cheques. If the collecting banker pays to the customer the amount of the cheque or credits such amount to his account and allows him to draw it, before the amount of the cheque is actually realized from the drawee banker (paying banker), the collecting banker is deemed to be its ‘holder for value’. The banker would be regarded as a holder for value in the following ways:

Collecting banker as a Holder for Valuea) If bank allows his customer to withdraw money before

cheque paid in for collection are actually collected and credited.

b) If any open cheque is accepted and the value is paid before collection and/or

c) If there is a reduction in the overdraft amount of the customer before the cheque is collected and credited in the respective account.

d) If he gives its value to the customer by lending further on the strength of the cheques.

e) If he gives its value to the customer by paying over the amount of the cheque or part of it in cash or in account before it is cleared.

f) If he gives cash over the counter for the cheque at the time it is paid in for collection.

The Rights of a Banker as a holder for Value:

1. If the bank acts as a holder, his rights will be the same as of holder in due course. Hence, the collecting banker enjoys all the rights and liabilities of a holder and hence, a holder in due course. Note that the title of holder in due course is superior to the title of true owner.

2. If there is a forged endorsement on the back of the cheque then the paying banker is liable to compensate the damage caused to the true owner and the collecting banker possesses the right to recover this damage from the last endorser. So, in case of an instrument containing forgery the title of true owner is superior. If the last endorser i.e. the customer is unable to meet the liability then the banker will have to bear the burden.

3. If the cheque sent for collection is dishonoured, then the collecting banker can sue all previous parties after giving them notice of dishonour. It is however essential that the amount of cheque is paid to the customer in good faith.

 Collecting Banker as an Agent of the Customer

A collecting banker acts as an Agent of the customer when the customer’s cheque is collected and actually realized from the drawee banker.

The customer is entitled to draw the amount from his account when the amount of cheque has been credited to his account.

Thus the bank is acting as an agent of the customer and charges him the commission for collecting the amount from outstation bank.

If the cheque collected by the bank does not belong to his customer , he will be held liable for ‘Conversion of money’.

 Conversion What is Conversion?: Conversion means wrongful meddling or interference with

the goods of others. Here, goods includes Bill of Exchange, Cheque or Promissory note. It can be committed innocently. Conversion is the act which renders the person liable committing it. This liability exists even when the person is merely acts as an agent to his principal. Therefore, a banker however innocently may have converted the goods of another, bank will be held personally liable. This liability exists because the banker is acting as an agent and not as an holder for value. If it is so, no banker will be in apposition to collect cheques for his customer.

Hence the collecting banker should take due precautions to avoid the risk of conversion involved therein. It is a difficult task for collecting banker to examine the validity of the title of his customer, when one has to collect so many cheques daily in ordinary course of his business.

Legal/ statutory protection to the collecting banker in the case of conversion:

Section 131 of the Negotiable Instrument Act 1881 provides the protection to the collecting banker against the risk of conversion as follows:

“A banker who has in good faith and without negligence received payment of a cheque for a customer, crossed generally or specially to himself, shall not, in case of 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.”

The protection will be available to the collecting banker if the following conditions are satisfied:

1. The cheque must be crossed cheque. 2. The payment must be received for a customer. 3. Payment must be received in good faith and without

negligence.

 Precautions to be taken by a collecting banker:

Crossed Cheques only: To avail the protection under section 131, the collecting banker should only accept crossed cheques. Open or bearer cheques generally do not require the service from the collecting bank. (Drawee bank becomes the collecting bank)

The banker cannot cross the cheque afterwards, it must be a crossed cheque before it is presented at the counter for encashment.

Payment collected must be for a customer: Section 131 provides protection to the banker if he is working as an agent of the banker and not a holder for value.

If the banker is having interest in the collection of cheque and is acting as a holder, i.e. not collecting cheque as an agent then the banker cannot avail protection against the conversion

Collection with good faith and without negligence:

The payment procedure must be with good faith and without any negligence.

Grounds of Negligence: a) Opening of account without proper

introduction b) Irregularity of Endorsement. c) No enquiry is being made in doubtful case. d) Failure to take note of ‘Not Negotiable’

crossing. e) Collection of ‘Account Payee’ cheque for

any other person. (non customer)

Negligence There is no specific meaning being clarified by the

banking laws, but on the basis of circumstances aroused, court of law have given judgments and that is why the meaning and scope of Negligence is ever expanding based on new circumstances. Even to avail the protection under section 131 of the Negotiable Instrument Act, the collecting banker has to prove that the act was made without any Negligence. This is because the true owner’s case is complete, as soon as conversion is proved against the banker. Negligence under section 131 is more or less artificial as there is no contractual relationship between the true owner and the collecting banker

Negligence “Negligence is doing of that which a reasonable

man under all the circumstances of a particular case which he is acting, would not do, or the failure to do something,

which a reasonable man under those circumstances would do.” As the word Negligence cannot be determined with some specific and concrete grounds for all the cases, the study constitutes the following probable heads under which Negligence should be divided:

1. Gross Negligence2. Negligence connected with immediate collection

GROSS NEGLIGENCE Complete carelessness at the time of collection of cheque. i. Collecting an ‘A/C payee cheque for other than payee’s

account: Payment to the person other payee. (other than A/C payee)

ii. Failure to verify the correctness of Endorsement: If banker omits to verify the correctness of the endorsement on an order cheque.

iii. Failure to verify the existence of authority in case of stamp and signature together.

vi. If any cheque contains warning regarding misappropriation of money, the collecting bank should not disregard such warning, and should make necessary enquiry. It should be paid only after receiving a satisfactory explanation.

Negligence connected with the Immediate Collection

i. Collecting a cheque drawn against the Principal’s Account to the Private Account of the Agent without enquiry.

ii. Collecting a cheque payable from the firm to the private account of a partner without enquiry.

iii. Collecting a cheque payable from the company to the private account of a director or any other officer without enquiry. iv. Cheque payable from employer to the private account of employee.

v. Cheque payable from Trust’s A/C to the private account of the person operating the trust’s account.

Duties of a Collecting Banker

1. Collecting cheques with due care and presenting it to drawee banker in reasonable time.

2. Presenting the cheque to drawee banker on next working day in case if both the banks are located in same area.

3. Sending the cheque through clearing house or post to drawee bank in case of outstation bank.

4. Taking due care and precaution for the interest of true owner of a cheque.

5. Verify the endorsement properly on order cheque.

Duties of a Collecting Banker

6. Proper investigation of ‘Per Pro’ endorsements to avoid negligence on the part of collecting banker and to avail statutory protection.

7. Providing the information of dishonor of the cheque to the customer without delay. In case of failure, any consequent loss will have to born by bank.

8. Obtaining introduction of the customer, in case if the account is being open without proper introduction.

9. In case of open cheque, the collecting banker should ask the drawee to cross the same to avail the protection under section 131.

10. Verifying the detail in case of any doubt regarding the true ownership of the cheque.

Paying Banker

Meaning:The banker on whom the cheque Is

drawn or the banker who is required to pay the cheque drawn on him by a customer is called the Paying Banker or Drawee Banker.

Precautions to be taken by a paying banker:1. He should see that the cheque is drawn in proper form and

satisfies all the requirements of a valid cheque.2. He Should verify whether the cheque is dated or not.3. He should satisfy himself that the amount payable is certain.4. He should see whether there is sufficient amount in the bank

account.5. The banker should see whether the cheque is signed by the

drawer.6. The banker should see whether the cheque is drawn on the

same branch of the bank in which the drawer has his account.7. When a cheque is presented to him at the counter, the paying

banker must verify whether it is an open (i.e., Uncrossed Cheque or Crossed Cheque).

8. The Banker should see whether there is any material alteration in the cheque.

9. When a cheque presented for payment is mutilated, he should check whether it is intentional or accidental.

Protection to paying bankerThe paying banker is given some

statutory protection in respect of risks or difficulties faced by him.

The protection to the paying banker is laid down in Section 85(1), 16(2), 85(2), 85A, 89 and 128 of the Negotiable Instruments Act of 1881

 Paying  banker – Notes on Safeguard The responsibility and liability of the paying banker is far greater than that of the receiving banker.

Payment of cheque crossed generally: (Sec. 126) Not to pay anyone than a banker

Payment of cheque crossed specially: (Sec. 126) Not to pay anyone than a specific banker, or his agent for collection

Payment made in due course of crossed cheques: (Sec. 128) When the paying banker, makes payment in the due course, It is discharged from liability if

1. The cheque is forged due to customer’s default 2. Endorsement of the payee or the indorsee subsequently turns out to be

forged and the banker has paid in good faith and without negligence

Paying  banker – Notes on Safeguard

It is liable1. if The customer’s signature is forged and hence

cannot debit the amount to the customer’s account

2. Endorsement of the payee or the indorsee subsequently turns out to be forged and there is apparent irregularity in endorsement

Payment of bearer cheques: Payment of these cheques at the counter on presentation discharges the banker from liability

Payment of order cheques: The banker is discharged from liability if the payment is made in due course.

Effect of paying otherwise than in due courseWhat if the paying banker does not pay in due course? Banker isLiable

In paying a cheque crossed generally or specially, if pays otherwise than to a banker, or his agent for collection (Sec. 129)

In case of transmission of an electronic image of a truncated cheque, it is the responsibility of the paying bank to verify the party from which the image has been transmitted and the image so transmitted to it and received by it are exactly the same [Sec. 89(3)] The drawee of a cheque (always a banker) having sufficient funds of the drawer in his hand, properly applicable to the payment of such cheque must pay the cheque when duly required to do so and, in default of such payment, must compensate the drawer for any loss or damages caused by such default [Sec. 31]

Effect of paying otherwise than in due course

Banker is Not Liable In case of payment, done at the time

of presentation, to cheque which is not crossed or have had a crossing which has been obliterated [Sec. 89(1)]

In case of an alteration between the electronic image and the truncated cheque. It is the liability of the clearing house/bank [Sec. 89(2)]

 Paying Banker V/s Collecting Banker

To make payments of the cheque and to collect money and deposit it into the account are the two compulsory functions for any banker. A banker can be performing the function of paying banker for one customer and collecting banker for another. Paying banker and collecting banker both are getting legal protections or statutory protections when they perform their duties in accordance with the laws, with good faith and without negligence.

Paying Banker V/s Collecting Banker

In case when the paying and collecting banker is same, the bank must pay the money on the same day of presentation. If banker is having any objection in the cheques drawn, the information of dishonor must be given to the customer. In case of both the duties performed at the same time, the banker gets statutory protection for both the cases. (when a cheque is drawn by one customer for the payment to the another customer of the same bank.) Paying banker gets protection under section 85 and collecting banker gets protection under 131 of the Negotiable Instrument Act, 1881. When a banker is performing both the function at the same time, the banker may not be liable as paying banker but will be liable as collecting banker.

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