Collecting banker

Collecting banker is the bank which collects the cheque on behalf of customers While collecting
the cheque the banker can be

 Agent of customer
 Holder for value

Banker as agent for customer

Collecting banker become agent to the customer if he credits his customers account with the
amount of cheque after it is actually realised from paying banker

Holder for value

A collection banker become holder for value if he has paid the value of the cheque before even
the cheque is realises or collected

Circumstance under which collecting banker becomes holder for value

 When bank take s the cheque in exchange of cash or debt to be realised

 When bank exercise lien on cheque for the amount due from customer
 When customer permit

Duties of the collecting banker-

1. Only genuine cheques should be accepted by the collecting banker.
2. The collecting banker should obtain proper information from the accountholders who
open accounts only for getting the cheques collected.
3. The collecting banker should exercise due care in collecting the cheques which are
issued by any partnership firms or trust or body corporate and presented through the
private accounts of the partner or trustee or director.
4. The collecting banker should collect only the crossed cheques.
5. Before accepting any cheque for collection, the collecting banker should verify the
validity of the endorsement, if any
6. Exercise reasonable care while collection cheque
7. Present the cheque for collection without delay
8. If cheque is dishonoured he should inform the customer without delay

Statutory protection of collecting banker

1. Protection is given only for a crossed cheque

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 2. Protection can be claimed only when the collection banker has collected the cheque
as agent
3. Protection can be claimed only for those cheque which has been crossed before it
reaches the collecting banker
4. Protection applies only if collecting banker has collected cheque in good faith and
without negligence

Holder and Holder in due course:

Holder: According to the negotiable instruments Act 1881, section 8, “holder means any person
entitled in his own name to the possession thereof and to receive or recover the amount due
thereon from the parties thereto.”

A person is called the holder of a negotiable instrument, if the following conditions are satisfied:

# He must be entitled to the possession of the instrument in his own name and under a legal title.
Actual possession of the instrument is not essential; the holder must have the legal right to
possess the instrument in his own name.
For example, if a person acquires a cheque or bill by theft, fraud, or forged endorsement or finds
it lying somewhere, he does not acquire in his own name legal title thereto and hence he can not
be called its holder.

# He must be entitled to receive or recover the amount from the parties concerned in his own
name. In case of an order instrument, it is essential that the name of the holder appears on the
document as its Payee or endorsee. But in case of bearer instrument the name of the bearer is not
essential to be appeared.

Holder for Value:

The negotiable instruments act does not define the term “holder for value”. In England,
according to the bills of exchange act, where value of a bill has at any time been given, its holder
is deemed to be a holder for value as regards the acceptor and all parties to the bill who became
parties prior to such time. The person, who claims himself as the holder for value, need not
himself give value. It may be given by prior party.

Example: A bill is drawn payable to Mr. Asad, who transfers it to Mr. Rahman for value. Mr.
Rahman transfers it to Mr. Samad without consideration. Mr. Samad is called holder for value.
He can sue Mr. Asad on the bill if it is dishonored.

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Paying banker

A banker has the obligation to return the money to the customer, when it is demanded by the
customer. The banker receives the money from the customer as deposit.
Therefore, the banker must make the payment of the cheques drawn by the customer. The banker,
who is under obligation to pay customers’ cheques, is known as paying banker.

Paying banker refers to the banker who holds the account of the drawer of the cheque and
is obliged to make payment.

While making payment, the paying banker must be cautious.

Duties or precautions of paying banker-

1. Type of cheque-first bank should ensure whether it is open cheque or crossed cheque
2. Type of crossing. If it is crossed then verify the type of crossing- general,special, A/c
payee crossing
3. Banker should ensure that endorsements are proper
4. Proper form--On receiving the cheque, the paying banker must see that the cheque
must be in the proper form as supplied by the banker. The cheque should not be torn
or mutilated.
5. Branch-The paying banker must see the account against which the cheque has been
drawn is maintained in the same branch.

6. Banking hours--. A cheque must be presented for payment within the normal business
hours of the bank.
7. Date-Every cheque issued by the drawer should be dated. The cheque should be
neither stale nor post dated
8. The signature of accountholder tallies with the specimen recorded with the bank.

9. Amount- paying banker must observe is that the amount of the cheque must be
written both in figures and in words and they must be similar.
10. Material alteration-The paying banker must be cautious about the material alteration
of the cheque. If such material alteration is there It should be confirmed with full
signature of the customer at the places of material alteration.
11. Duty to honour cheques ceases on receipt of:

 On receipt of countermanding( Stop payment instructions) from the account holder.

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  Notice about the death of the drawer.
 A garnishee order attaching the balance in the account or an income-tax attachment
order received by the banker.
 Drawer of the cheque becoming insolvent and/or a lunatic at the time of drawing
the cheque.
 Notice of Assigment – instruction from customer in writing to transfer entire amount
to 3 rd parties account

Dishonour of cheque
If bank refuse to make the payment to the customer against a cheque it is called dishonouring the
cheque.

Types of dishonour
 Rightful dishonour
Dishonour of cheque by the paying banker due to non fulfilment of essentials requirements for
drawing the cheque it is rightful dishonour. Banker will get statutory protection in this situation

 Wrongful dishonour
Dishonour of cheque by the bank due to negligence or carelessness by it employees is called
wrongful dishonour.

Statutory protection for paying banker

Banker will get statutory protection if payment is in due course

Payment in due course:

Meaning
If payment of a negotiable instrument is be made to the right person by the paying banker or the
acceptor of the bill after fulfilling all the requirements as per act then payment is in due course

Definition
According to the negotiable instrument act 1881, section 10, “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.”

The essential features of a payment in due course are as follows:

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 i. The payment should be made in accordance with the apparent tenor of the instrument
that is in accordance with the intention/ instruction of parties
ii. The payment should be made in good faith and without negligence with reasonable
care
iii. Payment must be made to person who has the actual possession of the instrument.
iv. Payment should not be made if bank is having doubt regarding identity of person

1. Statutory protection in Crossed cheque

The negotiable instruments act gives protection to a paying banker in respect of crossed cheque
if payment is made in due course. That is payment is made through an account and for special
crossing to the specified banker.

2. Statutory protection in Material alteration

The act gives protection to the paying banker in respect of material alteration if alteration is not
apparently noticeable and is confirmed with signature

3. Bearer cheque
In respect of bearer cheque bank get protection if payment is in due course and there is nothing
suspicious regarding genuinety of cheque

4. Forged endorsement
Banker gets protection if endorsement looked apparently proper and correctand payment was
made in course

Consequences of wrongful dishonour

2) Bank should compensate for the loss incurred by the customer

3) Damages will be more than actual amount in case of trader account
4) For trader account damaged will be nominal
5) Amount claimed by the customer need not depend on actual loss
6) Customer can declare substantial damages without having financial loss

Crossing of Cheques – Types of Crossing

Cheques can be of two types:-

1. Open or an uncrossed cheque

2. Crossed cheque

1. Open Cheque
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An open cheque is a cheque which is payable at the counter of the drawee bank on presentationof
the cheque.

2. Crossed Cheque

A crossed cheque is a cheque which is payable only through a banker where amount will be
credited to any account and not directly at the counter of the bank.
Crossing ensures security to the holder of the cheque as only the banker credits of the proceeds
to the account of the payee of the cheque.

Crossing is the prosess of putting two parallel transverse lines, with or without any words,
drawn , on the left hand top corner of the cheque

A crossed cheque does not effect the negotiability of the instrument. It can be negotiated the
same way as any other negotiable instrument.

Types of Crossing

There are two types of negotiable instruments:-

- General Crossing
- Special Crossing

1. GENERAL CROSSING:

If a cheque bears across its face two parallel transverse lines , either with or without the words
“not negotiable”, “and company” or any abbreviation thereof that addition a crossing, the cheque
shall be considered to be crossed generally.

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Specimen of General Crossing:

Features of General Crossing:

i. From the above section we find that a cheque is said to be crossed generally when it bears
across its face any of the following:
• Two transverse parallel lines.
• Two transverse parallel lines with the word “And Company”.
• Two transverse parallel lines with any abbreviation of the word “& Company”.
• Two transverse parallel lines with the words “Not Negotiable”.
• Two transverse parallel lines with the words “Account Payee Only”.
it gives a direction to the paying banker that, the paying banker should make payment through an
account and not at the counter.

Consequence if crossed cheque paid through counter

☺ banker will be liable to the drawer for any loss, which he may suffer;

☺ Banker will be liable to the true owner of the cheque who may be a third party, irrespective of
the fact, that, there is no contract between the banker and the third party.

SPECIAL CROSSING

If a cheque is crossed by specifying banker name with or without 2 parallel lines or either with or
without the words “Not Negotiable” or Account payee the cheque shall be deemed to be crossed
specially, and to be crossed to that banker

Specimen of Special Crossing:

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State bank of India

Significance of Special Crossing:

.It is a direction to the paying banker. that banker should pay the cheque only to the
banker, whose name appears in the crossing or to his agent.

Account Payee or Restrictive Crossing

if crossing is done by adding the words account payee in both general and special crossing its
Account Payeecrossing. In this type of crossing the banker should credit the amount of the
cheque to the account of the payee mentioned on the cheque only.

Not Negotiable Crossing

The words 'Not Negotiable' can be added to General as well as Special crossing and a crossing
with these words is known as Not Negotiable [Link] effect of such a crossing is that it
removes the most important characteristic of a negotiable instrument i.e the transferee of such a
crossed cheque cannot get a better title than that of the transferor and cannot covey a better title
to his own transferee, though the instrument remains transferable

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Double Crossing

When collecting banker to whom a cheque is crossed, cross it again to another bank it is double
crossing.
Thus a paying banker shall pay a cheque doubly crossed only when the second banker is acting
only as the agent of the first collecting banker and this has been made clear on the instrument.

SBI send to Indian bank As an agent for collection

Who can cross a cheque?

a) A cheque may be crossed generally or specially by the drawer.
b) Holder may also cross it.
c) Holder may turn a general crossing into special crossing.
d) A banker may cross an uncrossed cheque & he may cross it specially to himself or to
another banker for purpose of collection through him.

Opening of crossing/cancellation of crossing

If the crossing on a cheque is cancelled, it is called opening of the crossing. The cheque
thereafter becomes an open cheque. Only the drawer of the cheque is entitled to open the
crossing of the cheque by writing the words “Pay Cash” and canceling the crossing along with
his full signature. His initials are not sufficient for this purpose.

Endorsement:
“The word endorsement is said to have been derived from Latin ‘en’ means ‘upon’ and ‘dorsum’
meaning ‘the back’. An endorsement is the mode of negotiating a negotiable instrument. A
negotiable instrument payable otherwise than to a bearer can be negotiated only by endorsement
and delivery.

An endorsement, is process of putting signature on the back or on the face of instrument

for the purpose of transferring the instrument to another

The person who endorse the instrument is called the endorser.

The person to whom the instrument is endorsed is called the endorsee.

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Thus usually the endorsement is on the back of the instrument though it may be even on the face
of it.

Allonge’.
Where no space is left on the instrument, the endorsement may be made on a slip of paper
attached to it. This attached slip of paper is called ‘Allonge’.

Essentials of a Valid Endorsement:

1. It must be written on the instrument itself and be signed by the endorser. The simple
signature of the endorser, without additional words, is sufficient.
2. The endorsement must be of the entire instrument. A partial endorsement, that is to
say, an endorsement to transfer a part only of the amount payable, is allowed
3. Where a negotiable instrument is payable to the order of two or more payees or
endorsees who are not partners, all must endorse unless the one endorsee has
authority to endorse for the others.

4. Wherein a negotiable instrument payable to order, the payee or endorsee is wrongly

designated or his name is misspelt, he should sign the instrument in the same manner
as given in the instrument. Though, he may add, if he thinks fit, his proper signature.

5. Where there are two or more endorsements on an instrument, each endorsement is

deemed to have been made in the order in which it appears on the instrument, until
contrary is provided.

6. An endorsement may be made in blank or special. It may also be restrictive.

Types of Endorsement:

According to the N.I. Act, 1881 endorsement may take any of the following forms:

o Endorsement in blank or general endorsement.

o Endorsement in full or special endorsement.
o Restrictive endorsement.
o Sans recourse
o Sans frais
o Partial endorsement.
o Conditional endorsement.
o Facultative endorsement

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Endorsement in Blank or General Endorsement:
In case of an endorsement in blank, the payee or endorser does not specify an endorsee and he
simply signs his name

(signature)

Endorsement in Full or Special Endorsement:

When the payee or endorser specifies the person to whom or to whose order the instrument is to
be paid, the endorsement is called special endorsement or endorsement in full. The specified
person i.e. the endorsee then becomes the payee of the instrument.

Pay to tinu
Minu (sd)
Restrictive Endorsement:
An endorsement is restrictive when it prohibits further negotiation of a negotiable instrument.
For example B, the holder of the bill, makes an endorsement on the bill saying “Pay C only.” It is
a restrictive endorsement as C cannot negotiate the bill further
• Format

Pay to Raj only Rahul(sd)

Sans Recourse Endorsement:

When the endorser expressly excludes his own liability on the negotiable instrument to the
endorsee or any subsequent holder in case of dishonour of the instrument, the endorsement is
known as ‘sans recourse’ endorsement.
. It is done by adding the words “sans recourse”. A cheque
written by A, the maker, to B, the payee. B, in turn pays off a debt to C byendorsing t he check
and adding the without recourse phrase. If A's bank refuses to pay C the che ck amount because
A has insufficient fundsin his checking account, C cannot demand payment from B. C will have
to attempt to collect the money from A.
Format

“Pay to X or order sans recourse.”

Sans Frais endorsement

In Sans Frais Endorsement the endorsee does not incur any expenses on his/her account on the
instrument drawn by the endorser.

Partial Endorsement:

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If only a part of the amount of the instrument is endorsed, it is a case of partial endorsement. An
endorsement which purports to transfer to the endorsee only a part of the amount payable, or
which purports to transfer the instrument to two or more endorsees severally, is not valid. Section
56 provides that a negotiable instrument cannot be endorsed for a part of the amount appearing to
be due on the instrument. In other words, a partial endorsement which transfers the rights to
receive only a part payment of the amount due on the instrument is invalid.

Pay to Mr X 1000 out of 2500

Mr Y

Conditional Endorsement:
If the endorser of a negotiable instrument, by express words in the endorsement, makes his
liability or the right of the endorsee to receive the amount due thereon, dependent on the
happening of a specified event, although such event may never happen, such endorsement is
called a conditional endorsement

For example, “pay C if business earns profit ”. Thus C gets the right to receive payment only on
the happening of a particular event, i.e. if he returns from London.
Effect of Endorsement

Facultative endorsement:
When the endorser expressly gives up some of his rights under the negotiable instrument, the
endorsement is called a ‘facultative’ endorsement. Thus, “Pay X or order, notice of dishonour
waived” is a facultative endorsement.

As a result of such an endorsement the endorsee is relieved of his duty to give notice of
dishonour to the endorser and the latter remains liable to the endorsee for the non- payment of
the instrument, even though no notice of dishonour has been given to him.

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