1
INTRODUCTION
The banker upon whom duty to pay the amount of the Cheque is imposed,
is called the paying banker. The paying is the banker to whom the order to pay,
where the order takes the form of a cheque, is addressed when a person opens an
account with a particular branch of bank, the contractual relationship of banker
and the customer starts.
The relationship is mutual and contractual nature, and is effected by legal
obligation from both sides. The customer deposits amount, deposits cheques with
his banker. Whenever he needs, draws such amount or issue cheques to other
persons. It is the obligation of the bank to honour such cheque. If it is presented
in the proper form, in working hours, at a proper place. The drawee of a cheque
is always paying banker.
Consumers are people who pay for goods and services offered by
companies. When someone opens a bank account, they become a client of that
bank.
There’s a special relationship between a customer and their bank, which
comes with certain responsibilities for both sides. Since banks provide various
services, the relationship can take different forms. For example, if a client stores
items in a bank’s safe, the bank is responsible for keeping those items safe.
DEFINITION OF BANKING
As per section 5(b) of Banking Regulation Act, 1949, the term banking is
characterized as the acceptance of deposits of money from the public, repayable
2
on demand or otherwise, for the purpose of lending or investment, and
withdrawals by cheque, draft, order or otherwise
Section 5(d) of the Banking Regulation Act, 1949 Company means any
company as defined in Section 3 of the Companies Act, 1956 and includes a
foreign company within the meaning of Section 591 of that Act.
MEANING OF PAYING BANKER
Paying banker refers to the banker who holds the cheques of the drawer
and is obliged to make payment if the funds of the customer are sufficient to
cover the amount of his cheque drawn.
The paying banker is the banker who cancels the signature of the drawer
on payment of the cheque either by the usual means of authorizing a drawer’s
signature or by any method that the bank takes, which also reflects the point of
payment. In some cases, cheques are paid by stamping the cheques “Paid”,
usually with the date being included in the stamped crossing, or by perforating
the payment date onto the cheque.
As paying banker, the banker is obligated to accept the customer’s check
if it is valid and if it is issued by the holder in its original form within a
reasonable period of time and before the banker has provided orders to stop
paying or receiving notice of the death of the customer, etc., and if sufficient
funds are available to the customer’s account and that balance is available to the
banker.
3
PAYMENT IN DUE COURSE
A banker's payment should always be a payment in due course. Payment
in due course has been clearly defined in Sec. 10 of the Negotiable Instrument
Act, 1881. It is the manner in which a paying banker should make payment to a
cheque presented to him.
Sec. 10, defines "payment in due course" as "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 mentioned therein".
The definition gives clearly the conditions, the paying banker has to fulfil
before making payment of any cheque. If he fulfils the same, the paying banker
gets the statutory or legal protection under NI Act (Negotiable Instruments Act).
DUTIES AND LIABILITIES OF A PAYING BANKER:-
A banker has an obligation to honour cheques of its customer, drawn on
him and presented for payment, subject to the condition that there are sufficient
funds in the accounts and the cheque is in order.
Section 31 of the Negotiable Instruments Act 1881, provides that "The
drawee of a cheque, having sufficient funds of the drawer in his hands 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 damage caused by such fault.
4
So, it is the bounden duty of a bank to honour its customer cheques, after
taking some precautions. In other words, the paying banker is under an
obligation to honour cheque subject to some conditions, being [Link] are
PRECAUTIONS OF A PAYING BANKER:
PRESENTATION OF CHEQUE:
First of all, a paying banker should note whether the presentation of the
cheque is correct. It can be found out by noting the following factors.
a) Type of Cheque:
Cheques may generally be of two types – open or crossed. If it is open
one, the payment may be paid at the counter. If it is crossed, the
payment must be made only to a fellow banker.
b) Branch:
The paying banker should see whether the cheque is drawn on the
branch where the account is kept.
c) Banking Hours:
The paying banker should also note whether the cheque is presented
during the banking hours on a business day.
d) Mutilation:
If the cheque is from into pieces or cancelled or mutilated, then the
paying banker should not honour it.
HONORING A CHEQUE
a. Printed Form:
The customer should draw cheques only on the printed leaves supplied
by the bankers failing which the banker may refuse to honour it.
5
b. Unconditional Order:
The cheque should not contain any condition
c. Date:
Before honoring a cheque, the paying banker must see whether there is
a date on the instrument. if a cheque is ante dated, it may be paid if it
has not exceeded six months from the date of its issue otherwise it will
become stale one. If a cheque is post dated, he should honor it only on
its due date.
d. Amount:
The paying banker should see whether the amount stated in the cheque
both in words and figures agree with each other.
e. Material Alteration:
If there is any material alteration the banker should return it with a
memorandum “Alteration requires drawer’s confirmation”.
f. Sufficient Balance:
If the funds available are not sufficient to honour a cheque, the paying
banker is justified in returning it.
BANK OF BIHAR
VS .
DAMODAR PRASAD (1969)
The case of Bank of Bihar v. Damodar Prasad (1969) is a significant
judgment in Indian banking law, particularly concerning the liability of banks as
paying agents and the circumstances under which they may be held liable for
wrongful payment of cheques.
6
Case Background
Facts:
Damodar Prasad (the plaintiff) had an account with the Bank of
Bihar (the defendant). The account had a balance of Rs. 3,000. Damodar
Prasad issued a cheque for Rs. 1,500 to a third party. However, the bank
mistakenly paid out Rs. 2,500 against the cheque due to a forgery of
Damodar Prasad's signature on the cheque presented. The cheque was
altered to increase the amount without proper authorization.
Claim:
Damodar Prasad sued the Bank of Bihar for the wrongful payment
made to the third party, claiming that he had suffered a loss due to the
bank's negligence in honoring a forged cheque.
Legal Issues
Liability of Paying Banker: The primary legal question was whether
the Bank of Bihar was liable for the wrongful payment of the cheque,
which it had paid without verifying the authenticity of the signature and
the amount.
Nature of Forgery:
The court needed to determine the nature of the forgery (i.e.,
whether it was a simple forgery or involved alteration) and its implications
on the bank’s duty to pay.
7
Duty of Care:
The case examined the duty of care a banker has in verifying the
authenticity of cheques before making payments.
Court's Judgment
The Supreme Court of India ruled in favor of Damodar Prasad,
holding that the Bank of Bihar was liable for the wrongful payment.
The court emphasized that the bank has a duty of care to ensure that
the signature on the cheque matches the signature on record before making
a payment. The bank failed to exercise reasonable diligence, which
constituted negligence.
The court noted that a bank, as a paying banker, is not merely an
automatic payer of cheques. It must act with prudence and caution. In this
case, the bank's failure to detect the forgery and alteration led to a loss for
the account holder.
g. Signature of the Drawer: It is the duty of the paying banker to
compare the signature of his customer found on the cheque with that of his
specimen signature.
h. Endorsement: The banker must verify the regularity of endorsement, if
any, that appears on the instrument.
8
Canara Bank
Vs
Canara Sales Corporation and Others (1987)
The case of Canara Bank v. Canara Sales Corporation and Others (1987)
is a landmark case in banking law, particularly in understanding the
responsibilities and liabilities of a paying banker. This case focuses on the duties
of the paying banker when handling cheques and the implications of negligence
in such duties. Here is a detailed analysis of the case:.
Facts of the Case:
Canara Sales Corporation had an account with Canara Bank.
The corporation's accountant, who was authorized to draw
cheques on behalf of the corporation, started committing fraud. He
drew cheques in favor of fictitious parties and deposited them in his
account by forging endorsements.
Over a period, the accountant was able to misappropriate a
significant amount of money by forging these cheques and
presenting them to Canara Bank.
Canara Sales Corporation later discovered the fraudulent
activities and sued Canara Bank, claiming the amount
misappropriated by the accountant.
9
Issues:
Whether Canara Bank acted negligently as a paying banker in
allowing payment of the forged cheques.
Whether the bank’s liability could be limited under Section 85(1)
of the Negotiable Instruments Act, 1881.
Legal Provisions Involved:
Section 85(1) of the Negotiable Instruments Act, 1881: It
protects a paying banker who makes a payment on a cheque that
appears to be properly endorsed. The bank is not liable if it pays the
cheque in due course, believing it to be in order.
Arguments:
Arguments by Canara Sales Corporation:
The corporation argued that Canara Bank had failed to
perform its duty as a paying banker by not verifying the authenticity
of the endorsements on the cheques.
It contended that the bank’s negligence in scrutinizing the
cheques allowed the fraud to go undetected, causing a loss to the
corporation.
10
Arguments by Canara Bank:
The bank argued that it was protected under Section 85(1) of
the Negotiable Instruments Act, 1881, as it had made the payments
in due course, based on what appeared to be proper endorsements.
Canara Bank contended that it had no reason to suspect the
fraud and that it had acted in good faith while processing the
cheques.
Judgment:
The Supreme Court of India held that Canara Bank was
liable for the loss suffered by Canara Sales Corporation. The key
aspects of the judgment are as follows:
This case is a critical reference point for understanding the
responsibility of paying bankers in cases involving forged
[Link] established that bankers must act with due
diligence and verify the authenticity of the endorsements before
making payments. The ruling reinforced that protection under
Section 85(1) of the Negotiable Instruments Act is not absolute
and does not cover instances where the bank acts negligently.
STATUTORY PROTECTION TO THE PAYING BANKER
PROTECTION IN CASE OF ORDER CHEQUE
In case of an order cheque, Section -85(1) provides statutory protection to
the paying banker as follows : "Where a cheque payable to order purports to be
11
endorsed by or on behalf of the payee, the drawee is discharged by payment in
due course". However, two conditions must be fulfilled to avail of such
protection.
(a) Endorsement must be regular : To avail of the statutory protection,
the banker must confirm that the endorsement is regular.
(b) Payment must be made in Due Course : The paying banker must
make payment in due course. If not, the paying banker will be deprived of
statutory protection.
PROTECTION IN CASE OF BEARER CHEQUE
This section implies that a cheque originally issued as a bearer cheque
remains always bearer. In other words, it retains its bearer character irrespective
of whether it bears endorsement in full or in blank or whether any endorsement
restricts further negotiation or not. So, the banks are not required to verify the
regularity of the endorsement on bearer cheque, even if the instruments bears
endorsement in Banker shall free from any liability (discharged) if he makes
payment of an uncrossed bearer cheque to the bearer in due course. If such
cheque is a stolen one and the banker makes its payment without the knowledge
of such theft, he will be discharged of his obligation and will be protected under
Section - 85(2)
PROTECTION IN CASE OF CROSSED CHEQUE:
The paying banker has to make payment of the crossed cheques as per the
instruction of the drawer reflected through the crossing. If it is done, he is
protected by Section -128.
12
This section states "Where the banker on whom a crossed cheque is drawn
has paid the same in due course, the banker paying the cheque and (in case such
cheque has come to the hands of the payee) the drawer thereof shall respectively
be entitled to the same rights and be placed in if the amount of the cheque had
been paid to and received by the true owner thereof". Thus, the paying banker is
free from any liability on a crossed cheque even if the payment was received by
the collecting banker on behalf of a person who was not a true owner.
For example, a cheque in favour of X is stolen by Y. He endorses it in his
own favour by forging the signature of X and deposits it in his bank for
collection. In this case, the paying banker shall be discharged if he makes
payment as mentioned above and shall not be liable to pay the same to X, the
true owner of the cheque.
CONCLUSION
In modern banking, the aspects of the payment and processing of cheques
are still the central and fundamental features. A paying banker has a
responsibility for the customer's cheque if it is valid and issued by the holder in a
given period. The sufficient fund is available to the customer's account, and
when that balance is available to the paying banker.
The banking system is designed in such a way that it generates money
through different business transactions and domestic and foreign trade. This type
of banking system develops a special relationship between the banker and the
customers.
13
REFERENCE
1. Law of Banking and Negotiable Instruments by Dr.S.R. Myneni
published by Asia Law House. – 4th Edition