All you need to know about Liability of the Banker under Negotiable Instruments Act

Introduction

On May 6, 2015, the Lok Sabha introduced the Negotiable Instruments (Amendment) Bill, 2015 by amending the Negotiable Instruments Act, 1881. It defines cheques, bills of exchange, promissory notes and establishes penalties for offences such as cheque bouncing. The objective of the Act was legalizing the mechanism for trading the instruments like other items and providing special procedure in case the obligation under the instrument was not discharged.

Liability of a Banker

A banker is someone whose business it is to honour cheques issued on him by those for whom the current accounts are maintained by him. There is a unique connection between the banker and the customer, with distinct obligations and responsibilities. By depositing funds and opening a current account, the customer establishes a creditor-debtor relation with the banker. He agrees to honour the customer’s cheques till he has adequate funds to the customer’s credit. If a banker disregards a customer’s directive given in the type of a cheque without cause, he will be obligated to reimburse the drawer for any loss or harm sustained. However, the payee or holder of the cheque has no recourse against the lender, as the banker’s obligation to honour cheques is limited to the drawer. The customer may be given extremely high damages if he establishes loss of credit as a result of the dishonour, and the general rule is that the lower the amount of a dishonoured cheque, the higher the quantity of the damages.

Liability of Collecting and Paying Bankers

Paying Banker’s Responsibility

Since modern banking encompasses a variety of operations and clearing banks now engage in a diverse array of operations, the processing and payment of cheques remain a core and important part. The term ‘paying banker’ pertains to the banker who retains the drawer’s cheques and is obligated to pay them if the customer’s finances are appropriate to fulfil the sum of the cheque drawn. The banker who cancels the drawer’s signature upon receipt of the check, either through the traditional way of approving a drawer’s signature or through any other mechanism used by the bank that represents the point of payment is called a paying banker. Cheques may be paid in certain instances by stamping them ‘Paid’, generally by perforating the payment date onto the cheque or with the date contained in the stamped crossing. To fulfill their role as a paying banker, the bank has an obligation to admit the customer’s cheque as long as it is legitimate, is issued by the account holder and is received by the banker already when the bank has given orders to cease paying or received notice of the death of the customer and if there are enough funds in the account of the account holder for the bank to pay with before those events have occurred.

Negotiable Instrument Acts sections 85(1), 85(2) and 128 safeguard paying bankers who make payments by order cheque, bearer cheque or crossed cheque.

1. Payment of Order Cheque: Section 85(1) of Negotiable Instrument Acts, 1881[1]– If a paying banker pays an order cheque in timely manner (according to section 10 of the N.I. Act,1881)[2] and the profits are deposited to an endorsee’s account, only ordinary endorsements are protected.
2. Payment of Bearer Cheque: Section 85(2) of Negotiable Instrument Acts, 1881[3]–  A cheque with a ‘once a bearer is always a bearer’ designation is a legal document. Because of this, banks are exempt from the obligation if they pay a bearer of an uncrossed bearer cheque in due process without verifying the legality of endorsing on the back of the cheque.
3. Payment of Crossed Cheque: Section 128of Negotiable Instrument Acts, 1881[4]– To be qualified for security under relevant Negotiable Instruments statutes, the paying banker of a crossed check must meet the essential requirements:
4. If a cheque is crossed, the banker who receives it cannot make a payment to anyone other than a banker.
5. Payment should be made on time.
6. No other agency or banker for recovery shall be paid when a cheque is crossed particularly, except the banker on whom it is drawn or his agent therefor.

Leading case laws on payment of cheques by a bank

1. Canara Bank v. Canara Sales Corporation & Ors.[5]: The Apex Court held that if a consumer writes a check and signs it, the bank cannot pay it. Because a banker cannot debit a customer’s account with a forged check because they don’t have the authority to do so. There is no authorization for a cheque with a forged signature to be paid because the customer-bank relationship is between the debtor and borrower.
2. Bank of Bihar v. Mahabir Lal[6]: The Apex Court ruled in this instance that a banker could only seek Section 85[7] coverage if payment was paid in due time to his agent or  holder. A payment made to a bank’s agent or a non-corporate person is not considered a payment made to a business.

Collecting Bankers Responsibility

Collecting banker is the one whose duty is to hold on to the funds that a customer has in the form of cheques. The Negotiable Instruments Act, 1881, notwithstanding the fact that a banker collects the proceeds of a check purely for the benefit of the customer, eventually imposes a duty that is legal in character. As banking procedures have expanded and crossed cheques have grown increasingly common, banks are no longer legally required to accept cheques from their clients. However, collecting cheques has been a key part of their job, with only a banker being able to acquire them. When a banker obtains customer cheques, he acts accordingly as his:

• Agent
• Holder for Value

Statutory Protection to Collecting Bank: Non-liability of a banker receiving payment of cheque (Section 131)[8]

If the title to the cheque purports to be flawed, a banker who has collected money for the customer of a cheque crossed specifically or explicitly for oneself does not bear any duty for the genuine owner of the cheque just because he has received this money.

Duties of a Collecting Banker

Under the Negotiable Instruments Act, which gives protection to the collecting bank under Section 131[9], the bank must not be careless among other things in order to qualify for protection. To show that it is not negligent, the bank must show that it has done all the efforts required of a prudent banker to get a check. These safeguards have been created through time depending on practices and court rulings as obligations put on bankers, whereby the bank can be held liable if it refuses to adhere due to negligence.

The duties of a collecting banker are discussed below:

1. Identifying a reference when one is not provided or when a reference is made in absentia: Due to the fact that Indian banking procedure necessitates introducing an existing bank customer, this may not necessarily be achievable. Customers are required to get references from the locals or their present lenders in these situations. As a result of this, the banker will have to approach the referee to verify that the individual with a freshly opened account is real.
2. The duty to be aware of a customer’s account status: The banker in charge of collecting the debt must be familiar with the customer’s account history, including the state of the account and any recent transactions. Taking measures is the banker’s responsibility when receiving funds that he is unlikely to gain, as well as while collecting suspicious cheques.
3. Duties pertaining to the Crossing and any other unique crossing: To guarantee that the cheque is properly crossed, the banking officer must deny collection if the cheque has been given to another banker. 
4. Mandatory account opening with references and acceptable proof: Keeping criminals and fraudsters out by getting a good customer introduction is critical. They can open accounts using forged cheques or other fraudulent methods to obtain money. When creating an account, the RBI has mandated that pictures of the consumer be provided together with acceptable documentation of their identity and address as an extra measure.
5. Obligatory instrument inspection for evident defects: In certain cases, a client who submits a collection instrument is either breaking the law or mismanaging the funds that belongs to others. This instrument serves as a warning to the banker. A banker may be made responsible for negligence if he ignores a prudent banker’s plea for advice.

Leading case laws on duties of collecting banks 

1. Ladbroke v. Todd[10]: An individual took the transit cheque and used it to open an account in the name of the payee whose signature he falsified. It was only after the robbery that the money was taken from the victim’s bank account. Since the bank opened the account carelessly and did not have any references, it was held accountable for making the money right.
2. Harding v. London Joint Stock Bank[11]: Following completion of the necessary processes in this case, a new client’s account was created for business. The account was started by paying a third-party cheque rather than depositing cash, as is customary. Forgery was used by his employer to grant him power to handle the cheque and the bankers discovered this after speaking with the client. Finally, the customer discovered that the cheque had been taken from him and that it had been moved to his bank account. The bank was found to be inept because it failed to do the essential enquiries on behalf of the employer to determine if the client, an individual, had the power to handle the cheque.

Conclusion

Banking’s fundamental goal has been and continues to be the safekeeping of money and the transfer of part of it to others. The issues of paying and collecting bankers have been discussed in this article. It has been clarified who is a consumer. Customers and bankers have a unique connection, as evidenced by the responsibilities and duties assigned to each party. The many sorts of banker-customer relationships and how an implied contract was created in such a connection were discussed.

The Negotiable Instruments Act protects the paying and collecting bankers by providing numerous remedies and protections. Finally, if the collecting banker tries to acquire legal protections under Section 131 of the same law, he must have behaved without a careless attitude towards the debt. There is legal immunity for the banker who picks up a ‘Not Negotiable’ cheque for a customer who is not listed as the payee, given that the conditions of those particular provisions are met.

This article is authored by Sabrina Bath, student at Symbiosis Law School, Pune

References

• https://educatech.in/liability-of-a-banker/
• https://lawtimesjournal.in/duties-and-liabilities-of-banker/

[1] The Negotiable Instruments Act, 1881, s. 85(1), No. 26, Acts of Parliament, 1881.

[2] The Negotiable Instruments Act, 1881, s. 10, No. 26, Acts of Parliament, 1881.

[3] The Negotiable Instruments Act, 1881, s. 85(2), No. 26, Acts of Parliament, 1881.

[4] The Negotiable Instruments Act, 1881, s. 128, No. 26, Acts of Parliament, 1881.

[5]Canara Bank v. Canara Sales Corporation & Ors., (1987) 2 SCC 666.

[6]Bank of Bihar v. Mahabir Lal, AIR 1964 SCC 397.

[7] The Negotiable Instruments Act, 1881, s. 85, No. 26, Acts of Parliament, 1881.

[8] The Negotiable Instruments Act, 1881, s.131, No. 26, Acts of Parliament, 1881.

[9] The Negotiable Instruments Act, 1881, s.131, No. 26, Acts of Parliament, 1881.

[10]Ladbroke v. Todd, (1914) 30 TLR 433.

[11]Harding v. London Joint Stock Bank, (1914) 3 Legal Decision Affecting Bankers 81.