0306 collection of cheques

8/3/2019 0306 Collection of Cheques

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Collection of Cheques

Collection of cheques, bills of exchange and other instruments on behalf of a customer is

an indispensable service rendered by a modern banker to his customer. When a customer

of a banker receives a cheque drawn on any other banker he has two options before him

(i) either to receive its payment personally or through his agent at the drawee bank, or (ii)to send it to his banker for the purpose of collection from the drawee bank. In the latter

case the banker, deputed to collect the amount of the cheque from another banker, is

called the collecting banker. He presents the cheque for encashment to the draweebanker and on its realization credits the account of the customer with the amount so

realized.

A banker is under no legal obligation to collect his customers cheques but collection of

cheques has now become an important function of a banker with the growth of banking

habit and with wider use of crossed cheques, which are invariably to be collected througha banker only. While collecting his customers cheques, a banker acts either

(i) as a holder for value, or

(ii) as an agent of the customer

The legal position of the collecting banker, therefore, depends upon the capacity in

which he collects the cheques. It does not make any difference if the collecting bankerpresents the cheque through the clearing house.

1. Collecting Banker as Holder for Value. Collection of cheques takessome time, specially in case of outstation 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 fromthe drawer banker, the collecting banker is deemed to be its holder for value. Hetakes an undertaking from the customer to the effect that the latter will reimburse

the former in case of dishonour of the cheque.

A banker becomes its holder for value for giving its value to the customer in any

of the following ways :

(a) by lending further on the strength of the cheque:

(b) by paying over the amount of the cheque or part of it in cash

or in account before it is cleared:

(c) by agreeing either then or earlier, or as a course of business,that customer may draw before the cheque is cleared.

(d) By accepting the cheque in avowed reduction of an existing

overdraft: and(e) By giving cash over the counter for the cheque at the time it

is paid in for collection.


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In any of these circumstances the banker becomes the holder for value and also

the holder in due course. He bears the liability and possesses the rights enjoyed by

the holder for value. If the last but one endorsement is proved to be forged, he willbe liable to the true owner of the cheque. But he shall have the right to recover the

money from the last endorser, i.e., his own customer. If the customer is unable to

pay, the banker himself will bear the loss. If the cheque sent for collection isreturned dishonoured, the collecting banker can sue all the previous parties after

giving them notice of dishonour. It is, however, essential that the amount of the

cheque is paid to the customer in good faith.

2. Collecting Banker as an Agent. A collecting banker acts as an agent

of the customer if he credits the latters account with the amount of the cheque

after the amount is actually realized from the drawee banker. Thereafter thecustomer is entitled to draw the amount of the cheque. The banker thus acts as an

agent of the customer and charges from him a commission for collecting the

amount from outstation banks.

As an agent of his customer, the collecting banker does not possess title to the

cheque better than that of the customer. If the customer has not title thereto, or histitle is defective, the collecting banker cannot have good title to the cheque. In

case the cheque collected by him did not belong to his customer, he will be held

liable for conversion of money, i.e. illegally interfering with the rights of the

true owner of the cheque.

Conversion by the Collecting Banker. Sometimes a banker is charged for having

wrongfully converted cheques to which his customer had no title or had defective title.Conversion means wrongful or unlawful interference (i.e., using selling, occupying or

holding with another persons property which is not consistent with the owners right of

possession. Negotiable instruments are included in the term property and hence abanker may be charged for conversion if he collects cheques for a customer who has no

title or defective title to the instrument. The basic principle is that a rightful owner of the

goods can recover the same from anyone who takes it without his authority and in whosehands it can be traced. When the banker acts as an agent of his customer for the collection

of his cheques, he cannot escape this liability. However, the right of the true owner is a

restricted one and cannot be exercised in case of the goods reach the hands of one who (i)

receives it in good faith, (ii) for value and (iii) without the knowledge that the other partyhad no authority thereon. Except these circumstances, the true owner of the goods

(including the negotiable instrument) can file a suit for conversion .

Statutory Protection to Collecting Banker

As the agent of the customer, the collecting banker should take due precautions with aview to avoid the risk of conversion involved therein. However, it is a difficult task for

the collecting banker to examine the validity of title of his customers, especially when

one has to collect numerous cheques daily in the ordinary course of his business.


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Keeping in view the importance of the banking business in the nations economy

and in order to minimize the risks of conversion inherent in case of collection of cheques

by the banker. Negotiable instruments Act provides statutory protection to the collectingbanker against the risk of conversion as follows :

A banker who has in good faith and without negligence received payment forcustomer 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 (Section 131).

The collecting banker is given statutory protection subject tot the fulfillment of the

following conditions :

1. The cheque must be a crossed cheque . The statutory protection is available to

the banker only in case of cheques crossed generally or specially to himself. He

cannot avail of this protection in case of an uncrossed cheque or an uncross

cheque which is crossed by the collecting banker himself after having received it.It is essential that the cheque is a crossed one before it is deposited with the

collecting banker, otherwise the banker will be liable for conversion if the title ofthe customer proves to be defective or the endorsement thereon is forged one.

2. The payment must be received for the customer . The statutory protection is

available only when the banker collects the cheque on behalf of a customer. Acustomer is one who has an account with the banker and his dealings with the

latter are in the nature of banking business. The statutory protection cannot be

availed of in case of a cheque sent to banker by a person who is not a customer ofthe banker. The statutory protection is available to the banker if he collects the

cheque as an agent of the customer and not as its holder for value. We have

already noted above the difference between these two capacities of collectingbanker. As the holder for value the collecting banker becomes its rightful owner

and cannot avail of the statutory protection.

Explanation to Section 131 states that a banker receives payment of a crossed

cheque for a customer within the meaning of this Section notwithstanding that he

credits his customers account with the amount of the cheque before receiving

payment thereof. This explanation is very significant as it extends statutoryprotection to a banker in all such cases where the customers accounts are credited

with the amounts of the cheques before their actual realization. In such cases the

banker is deemed to be the agent of his customer for collection and not the holderfor value. The collecting banker does not lose statutory protection if he credits his

customers account with the amount of the cheque before its actual realization but

the customer is allowed to draw the amount only after its realization.

However, the question whether the bill is taken from a customer for collection or

as security or is discounted by him is a question of fact, In Dena Bank vs. The

Madhya Pradesh National Textile Corporation Ltd. (A.I.R. 1982 M.P. 85), the


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Madhya Pradesh High Court held that if the bills and the relevant documents

presented by the drawer were accepted by a banker with endorsement in its favour

and the same were immediately discounted by the banker without waiting for theirrealization by giving full credit for the entire amount of the documents so

presented, the banker itself becomes a purchaser and holder thereof for full value.

In this case Dena Bank purchased the bills drawn by customer with necessary

documents for collection and credited the amount of such bills in the account of

the customer in accordance with the bill purchase facility granted to it. When thebank was unable to realise the bills and the documents were lost because of the

fraud of somebody else, it wanted to pass reverse entry in the account of the

customer. The customer objected to it, without getting back the documents. The

court held that the bank was not entitled to reverse the credit entry particularlywhen the documents were not returned.

3. Payment must be received in good faith and without negligence. The most

essential prerequisite for availing of the statutory protection is that the bankermust receive payment in good faith and without negligence. A thing is deemed to

be done in good faith when it is in fact done honestly whether negligently or not.He should not be negligent in receiving the payment. The onus of proof that he

was not negligent in collecting the cheque lies on the banker himself.

Negligence depends upon the circumstances of each case. Generally speaking,negligence indicates lack of care which is necessarily to be taken in any

circumstances. In Central Bank of India Ltd., Bombay vs. V Gopinathan Nair and

Others, the Kerala High Court observed that

The test of negligence under Section 131 is whether the payment considered in

the light of the circumstances, antecedent and present, was so much out ofordinary course that it ought to have aroused doubt in the bankers mind and

caused him to make enquiries.

For example, if the circumstances of a case create doubt or suspicion about the

right of the customer to the cheque, the banker must make proper enquiries and

take adequate precaution. Failure to do so will constitute negligence on his part.

It must be carefully noted that ordinarily a banker owes duty to his own customer

but the law makes him responsible to the true owner of the cheque also. Thus the

privilege of statutory protection can be availed of by the banker if he fulfils hisstatutory duty towards the true owner of the cheque and exercises due care in

safeguarding the latters interest.

4. Example of negligence A collecting banker loses statutory protection on the

ground of the negligence one his part. Examples of such negligence are as follows

:


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(i) Opening of accounts without proper introduction. If a banker opens an

account in the name of a person who may be an undesirable person

without proper and satisfactory introduction, the banker will be heldnegligent for having failed to know the true identity and respectability of

his customer. In a few cases accounts were opened in the banks in

fictitious names without proper introduction and the customers depositedstolen cheques for collection. Afterwards the amounts of such cheques

were withdrawn. The true owners of the cheques claimed the amounts

from the collecting banks, who were held responsible for not securingproper introduction of their new customers. It is, therefore, necessary that

the banker asks the new customer to give references of persons already

known to the banker. The referee must be known to the banker, otherwise

the banker must enquire about the standing and creditworthiness of thereferee himself. Failure to do so constitutes negligence on the part of a

banker. In case of persons, who are in regular employment, the banker

must enquire the names of their employers and in case of married women,

the names and the positions of their husbands should also be ascertained.

(ii)Irregularity of endorsements. The collecting banker should verify thecorrectness of regularity of the endorsements on the order cheques. For

example. :

(a) If the collecting banker fails to note that the endorser has notsigned his name in the same manner or spelling as appears in the

name of the payee (or endorsee), the endorsements will be held

irregular;

(b) If two or more endorsement on a cheque are in the same

handwriting, their genuineness may be easily doubted and enquiryshould be made. Failure to do so will constitute negligence on the

part of the banker; and

(c) If the banker does not verify the authenticity of the person

who signs per procuration, he will be held negligent.

(iii) No enquiry being in doubtful cases. To safeguard the interest ofthe true owner of the cheque it is essential for a banker to make necessary

enquiries, if the dealings of the customer are such as to create suspicion in

the circumstances of the case, e.g.,

(a) If a person of ordinary means deposits a cheque for a large

amount, the banker should properly enquire into the matter in orderto ascertain the good title of the depositor.

(b) If the customer of the collecting banker, who is an employee,

partner or director in a firm or a company, sends cheques payable


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to the firm or the company, duly endorsed by himself on behalf of

the firm or the company for the purpose of collection and credit to

his personal account, the banker should make necessary enquiryand be satisfied about the title of the customer, otherwise he will

be held negligent.

(c) If a cheque payable to a Trust Account or the principal is

deposited for collection and credit to the personal account of the

trustee or the agent respectively at their instance, the banker will benegligent if proper enquiries are not conducted. Similarly enquiries

must also be made if the agent draws the cheques on his principals

account and deposits the same for credit to his personal account.

(d) If a cheque payable to a firm or a company is deposited for

collection and credit to the private account of its employee or his

wife or if a cheque payable to a public official by designation is

deposited in his personal account, the banker must conductnecessary enquiry before collecting the cheque.

While conducting such enquiries the banker should take into

consideration:

(a) the amount of the cheque,(b) the history of the account to which the amount is to be credited.

(c) the antecedents of the customer, and

(d) the relationship between the customer and the drawer or the payee.

(iv) Failure to take note of Not Negotiable crossing. As already

discussed, a Not Negotiable crossing is a caution to the holder of thecheque to accept it carefully because the title of the transferee shall not be

better than that of the transferor. The collecting banker should carefully

examine the title of the prior parties before accepting for collection acheque with Not Negotiable crossing.

(v) Collection of Account Payee Cheque for any other person A crossing

with the words Account Payee Only is an instruction or a caution to thecollecting banker to collect the cheque for the payee mentioned therein.

The banker should therefore, collect such cheque and credit the proceeds

to the account of the payee only and of nobody else.

Liability of the Collecting Banker

(i) Genuineness of endorsements

The liability of collecting banker and the paying banker on a cheque with forged

endorsement was considered in The United Commercial Bank Ltd. and Others vs.


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Reliable Hire Purchase Co. Private Ltd. and Others (1976) II MLJ.p.286). The

brief facts of the case were as follows :

R & Co. issued cheque in favour of SM Ltd. and gave it to one R. It was drawn on

Indian Overseas Bank R forged the endorsement on the cheque in favour of M &

Co. of which he was a director and gave it for collection to United CommercialBank. The endorsement was also guaranteed by United Commercial Bank. The

cheque was duly collected and credited to the account of M & Co. Subsequently

M & Co. failed and the true facts came to light. The drawer of the cheque claimedthe amount of the cheque and damages from both the banks. The trial judge held

that the paying banker did not make the payment in due course and was liable for

the suit amount. The collecting banker acted negligently and was liable to the

paying banker.

On the appeal of both the banks, the Division Bench of the High Court held that

the paying banker was not liable but the collecting banker was. The Court held

that in view of the guarantee given by the collecting bank, which appeared on thereverse of the cheque, as to the reliability of the endorsement, the paying banker

was justified in accepting it and acting on that basis.

The collecting banker was held liable for conversion on the ground that there

were circumstances in which, if the collecting banker had applied its mind. It

would certainly have aroused suspicion calling for an enquiry as regards thegenuineness of the endorsement :

(a) The cheque was drawn in favour of a company and wasendorsed to another company. This is not a very usual feature for

incorporated companies to endorse cheques drawn in their favour for

payment to another company as a mode of payment. Normally suchcheques are sent to the companys banker for collection and fresh cheques

are issued by the company for making payment to others.

(b) The endorsement on the cheque was by the Sales Manager of

SM Limited and the companys seal was not there. The collecting banker

could have ascertained whether the sales manager of SM Ltd. had the

authority to act for the company in making endorsement, while the secondendorsement was by the director of M & Co. Private Ltd.

(c) The cheque was for a large amount viz., Rs.56,000 and theendorsements were not dated.

(d) SM Ltd. carried on the business of sale of motor vehicles,while M & CO. was carrying on business as transport owner. The

collecting banker might have enquired about the necessity for SM ltd. to

endorse the cheque in favour of M & Co.


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(e) The collecting banker credited M & Co. Ltd. with the amount

of the cheque, even before the paying banker honoured the cheque.

The Court, therefore, held that the collecting banker did not take the least

precaution to verify the endorsement and was liable to pay the amount of

the cheque to the drawer of the cheque, who was deemed to be the trueowner of the cheque.

Similarly in another case Canara Bank vs. Govind Ram Rajinder Kumar

& Others (1981) 51 company cases 476, it was held that once the

endorsement was found to be suspicious, the Manager of the bank was

duty bound to be on his guard and should have verified the endorsement

from independent source. In this case a bank draft, purchased at Bareilly infavour of M/s. Mithanlal Mangal Sain was never received by them and

was enchased through Canara Bank by means of fictitious endorsement.

The endorsement was in Urdu and Mangal Sain, who signed on behalf of

the firm, did not disclose his status or authority to put such signature. Hedid not even say that he was the partner. The person who examined the

endorsement never knew Urdu and exclusively relied on the confirmationof the fictitious endorsement by the second payee and subsequently

confirmed it on behalf of the collecting banker. It was held that the

circumstances of the case created a ground for suspicion, which should

have led the bank to make independent inquiry about the endorsement.

(ii) Opening account without introduction

Opening an account without proper and satisfactory introduction of the account-

holder constitutes negligence on the part of the banker, who may be held liable for

conversion on this ground.

The collecting banker gets statutory protection if he collects the cheques in good

faith and without negligence. What constitutes proper introduction and what is theduty of the collecting banker in this regard was considered in Indian Bank vs.

Catholic Syrian Bank(1980) T.N. Law Notes Journal p.323. The brief facts of the

case were as follows :

Mr. S.M. Desai opened a current account with the Indian Bank, Salem. Another

person obtained a demand draft for Rs.20 from a branch of the Catholic Syrian

Bank in favour of M/s Desai & Co. which was payable at its branch at Cochin.The draft was cleverly forged the amount was altered to Rs.29,000, payees

name as Mr. S.M. Desai and was made payable at Salem. The forged draft was

collected by Mr. S. M. Desai through his newly opened account with Indian Bank,and the amount was withdrawn before the forgery could be detected by the banks.

The paying banker filed a suit for Rs.29,000 against the collecting banker on the

ground of conversion of the draft. The collecting banker contended that there was


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no negligence on its part because Mr. S.M. Desai was introduced by a well-known

customer of the bank and the agent had made such enquiries as are normally

expected by a branch manager before opening an account.

The evidence before the High Court showed that the referee took Mr. Desai to the

bank and informed the agent of the bank that he was a man from indore and the hewanted to open a bank account to enable him to purchase carpets at Salem. He did

not mention that Mr. Desai was known to him or that they had long standing

business association and the Mr. Desai was a bonafide customer and an accountcould be opened in his name.

In these circumstances the right course for the Agent of the Bank was to make

independent enquiries about Mr. Desais business and his creditworthiness beforeopening his account. Further, Mr. Desai had not given his permanent address and

has admitted that he was opening an account for the first time. These facts should

also have put the banker on the alert,

The Court therefore, held that

a banker should not play the role of a master detective and subject a prospective

customer to a grueling examination about his status, creditworthiness, business

experience, etc., before permitting him to open an account. But when a man from

a different part of the country wants to open a bank account for the first time inhis life and he is introduced by a casual acquaintance of his, even though the

introducer may be known to the Agent, we would still rightly expect the banker to

make more enquiries than usual to test the credentials of the prospective customerbefore allowing him to open an account.

The draft was put into the account shortly after the opening of the account. Hencethe negligence in the matter of opening of the account has to be treated as

negligence in the matter of realization of the cheque also. The collecting banker

had thus not acted without negligence though he may have acted in good faith. Hecould not, therefore, get statutory protection.

But if the real cause of loss is the conduct of somebody else, then that person and

not the banker shall be held responsible. This was the ruling given by the DelhiHigh Court in Union of India vs. National Overseas Grindlays Bank Ltd. (1978)

(48 Company Cases, 277 Del.). The brief facts of the case were as follows :

RKB a trader, entered into a contract to supply certain goods to a Government

Department and received its full price. An auditor in the office of Dy. A.G.

audited the bills of the trader and in doing so fraudulently omitted notes andhanded over the requisite endorsement of cancellation on inspection notes and

handed over the uncancelled inspection notes to another person MCJ. MCJ

opened an account in the name of RKB with the Bank and presented to it a bill

purporting to be drawn by RKB accompanied by one of the stolen inspection


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notes. The Bank sent the bill for collection and credited the account of RKB on

collection. MCJ withdrew the amount subsequently. MCJ similarly presented

another bill for collection and withdrew its amount on realization. The Union ofIndia filed this suit to recover from the Bank , on the ground it was guilty of

conversion, the amount of the cheques and interest thereon. The Court observed

that the Bank was merely acting as agent for collection and there was no evidencethat the officials of the Government were deceived into issuing the cheques by

reason of any belief fraudulently induced in their minds that the Bank was

collecting the bills for RKB.

Further the Bank failed to produce any evidence to show that it acted without

negligence by opening the account on the recommendation of any reliable referee.

The Court, therefore, held that the manner in which the account was opened bythe Bank and operated does not show the absence of negligence so as to entitle it

to avail of protection under Section 131.

Referring to the fraud committed by the auditor in handing over the uncancelledinspection notes to MCJ, the High Court held that the Bank had no means,

machinery or material to scrutinize whether the bills and the inspection notes onwhich the bills were based were a forgery or that the two uncancelled inspection

notes were obtained by RKB by means of fraud. It was the plaintiff (Govt. Deptt.)

who had the means of knowledge to ascertain whether the inspection notes

accompanying the two bills were fraudulently kept uncancelled and whether ornot any payment was due under the particular acceptance of tender.

Therefore, the Court held that if the plaintiff (Govt. Deptt.) misled, howeverinnocently, the Bank by issuing cheques and although the plaintiff was itself

misled by the fraud which had been committed in keeping the two inspection

notes uncancelled, due to the negligence of the officials of the plaintiff inscrutinizing the bills, the plaintiff and not the bank ought to bear the loss The

negligent conduct of the plaintiff was the real cause of the loss and the plaintiff

was therefore stopped from claiming the amount from the bank.

Duties of the Collecting Banker

The collecting banker acts as an agent of his customer and is responsible to him for hisacts of omission or mistakes. The duties of a collecting banker towards his customer are

as follows :

1. Presentation of cheque for payment within reasonable

time. The banker should collect the cheques sent by the customer with due care

and should present the cheques to the drawee bank within a reasonable time.According to the practice followed by bankers if the collecting and paying

bankers are in the same place, the collecting banker should present the cheque the

next day after he receives it. In case of outstation cheques, he should dispatch the


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same to the drawee banker on the day after it is received by him. The cheque may

also be presented through a clearing house or through the post.

Sections 72 and 84 lay down the consequences of non-presentation of a cheque

before the drawee bank within a reasonable period of time. If a cheque is

presented with undue delay and in the meanwhile the drawee of the chequesuffers damage, the drawer is discharged to the extent of such damage.

According to Section 84(1). Where a cheque is not presented for payment withina reasonable time of its issue and the drawer or person on whose account it is

drawn had the right, at the time when presentation ought to have been made, as

between himself and the banker, to have the cheque paid and suffers actual

damage through the delay, he is discharged to the extent of such damage, that is tosay, to the extent to which such drawer or person is a creditor of the banker to the

larger amount than he would have been if such cheque had been paid.

The reasonable time for this purpose shall be determined having regard to:

(i) the nature of the instrument.(ii) the usage of trade and of bankers, and

(iii) the facts of the particular case.

When the drawer of the cheque is so discharged, the holder of the cheque shall bethe creditor of the banker to the extent of such discharge and shall be entitled to

recover the amount from him under Section 84(3).

Examples :

1. A draws a cheque for Rs.1,000 and when the cheque ought to be presented,has funds at the bank to meet it. The bank fails before the cheque was presented

after long delay. The drawer of the cheque is discharged, but the holder of the

cheque can prove against the bank for the amount of the cheque.

2. A draws a cheque at Delhi on a bank in Calcutta. The bank fails before the

cheque could be presented in the ordinary course. A is not discharged, for he has

not suffered actual damage due to delay in the presentation of the cheque.

3. It is to be noted that the drawer of the cheque is discharged to the extent of

loss suffered by him as a result of delay in the presentation of the cheque. If, inexample 1, the balance to the credit of the drawer at the time bank failed was

Rs.800 only and nothing was paid by the bank, the drawer is discharged to the

extent of Rs.800 only. He will remain liable to pay Rs.200 to the holder.

4. Section 72 provides that Cheque must, in order to charge the drawer, be

presented at the bank upon which it is drawn before the relation between the

drawer and his banker has been altered to the prejudice of the drawer. In order to


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charge any person except drawer, a cheque must be presented within a reasonable

time after the delivery thereof by such persons (Section 73).

5. If the collecting banker presents a cheque before the drawee bank with undue

delay on his part and the cheque is dishonoured, the collecting banker shall be

liable to reimburse the loss suffered by his customer in any of the following ways:

(i) If the collecting banker fails to present the cheque to the drawee

banker within a reasonable time, and in the meanwhile the latter fails, thecollecting banker will be liable to reimburse his customer in respect of the

loss caused to him due to the drawee bank because the collecting banker

was negligent in presenting the cheque in time.

(ii) If the drawer of the cheque himself becomes insolvent during the

period the cheque remains with the collecting banker, the latter is liable to

reimburse his customer.

(iii) If the banker does not employ the normal and usual channel of

collection of the cheque and thereby payment is received with delay and inthe meanwhile a cheque drawn by the customer is dishonoured the

customer will be entitled to recover damage from the collecting banker.

The legal position regarding the duties of a collecting banker wassummarized by the Supreme Court inKeshrichand Jaisukhlal vs. ShillongBanking Corporation Ltd. [ 1965 Company Case 514 (S.C.)] as follows :

A banker entrusted by his customer with the collection of a cheque is

bound to act according to the direction given by the customer, and in

the absence of such direction, according to the usages prevailing at the

place, where the banker conducts his business and applicable to the

matter in hand. The banker is also bound to use reasonable skill and

diligence in presenting and securing payment of the cheque and

placing the proceeds to his customers account and in taking such

other steps, as may be proper, to secure the customers interest.

In this case. The collecting banker presented two cheques to the drawerbanker and accepted a cheque from the latter instead of cash, without

consulting the customer. The cheque was dishonoured. Thereupon the

collecting banker demanded payment from the drawee bank and uponinstructions from the customer it accepted a demand draft drawn by the

drawee bank on its head office. The draft could not be encashed and the

drawee bank closed its business. In respect of draft, the collecting bankpreferred claim in the liquidation of the drawee bank and was admitted as

a preferential creditor. The customer pleaded that the collecting banker

had accepted the draft on its own responsibility and was bound to give him

credit for the full amount. The learned judges observed that in accepting a


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cheque from the drawee bank instead of cash the collecting banker acted

in good faith in the interest of the customer. The customer had also

approved of all the steps taken by the collecting banker in the matter ofcollection of the draft. Therefore, it was not open to the customer to take

the stand that the collecting banker had accepted the cheque or draft on its

won and not as an agent for the customer.

The above decision was relied upon by the Madras High Court in R.J.

Mohamed Jacub Sahib and Others vs. The Indian Bank Ltd. (A.I.R. 1975Madras 220). In this case, the Indian Bank was handed over the documents

of sale by the seller to be negotiated with the buyer at another centre. The

buyer cleared the documents sent through the State Bank of India and took

delivery of the goods and payment was received by the seller. However, aform. Form C, which was handed over by the buyer to the State Bank of

India could not reach the Indian Bank and could not be delivered to the

seller. As a result the seller had to pay tax on the transaction at a much

higher rate and claimed damages from Indian Bank. The Court held that itwas not possible to hold that the banks concerned in this case had taken all

the reasonable care in delivering Form C to the seller. Hence the latter wasentitled to claim damages from the Indian Bank and not from the State

Bank as there was no privity of contract between the seller and the State

Bank.

2. To serve notice of dishonour . In case a cheque is

dishonoured and returned back by the paying banker to the collecting banker

without payment for one reason or the other, the banker must serve a notice ofdishonour on his customer to enable the latter to claim the amount from the

previous parties including the drawer. If the banker fails to send such notice

within reasonable time he will be liable to the customer for any loss suffered byhim as a result of such omission on the part of the banker. It is to be noted that a

cheque is deemed to be dishonored when its payment is refused by the paying

banker. But if the cheque is returned for confirming the endorsement of the payee,etc., it is not deemed as dishonored.

If the collecting banker is a holder for value and not an agent or the customer for

collecting the cheque he must give notice of dishonour to all the parties to thecheque so as to make all or any of them liable for the payment of the amount of

the cheque.

The Negotiable Instruments Act specifies reasonable time for giving notice of

dishonour. It is important to note that the time of sending the notice is important

rather then the time of receipt of such notice.

RESERVE BANKS INSTRUCTION TO BANKS


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The Reserve Bank of India has advised the banks to avoid delay in the collection of

outstation instruments and to adopt new systems and procedures, infrastructure

arrangement etc. to ensure quick collection of such instruments. In 1995 the Bank alsoprescribed a new time frame for affording credit to the customer as follows :

(1) Immediate Credit of Cheques

Banks are required to give in the normal course immediate credit upto Rs.5,000 to

a customer for local as well as outstation cheques, subject to the satisfactoryoperation of the customers account.

(2) Time Limit for Collection of Outstation Cheques

In the four metropolitan centres having MICR cheque clearing system, the amount

of a cheque drawn on a bank located at any of the other three metropolitan centres

and presented for collection on any day in a week should be credited in the

customers account latest by the same day in the following week.

In case of State capitals and other centres with more than 100 bank offices, creditto the customers a/c should be given within 10 days and customer allowed to

withdraw the amount. These facilities are to be provided to the customer even if

the collection advices are not received by the banks concerned.

In case of local cheques, customers a/c should be credited latest by the third

working day from the date of acceptance of the cheques at the counter.

For the above facility banks are prohibited from charging any additional charge.

But if the cheques are returned unpaid banks are permitted to charge interest at

commercial rate on the overdraft amount from the date of the withdrawal till theamount is reimbursed by the customer.

To limit the risks involved in the above, Reserve Bank has advised the banks toextend the facility to giving credit to the accounts for outstation cheques only to

(i) satisfactory operated accounts and (ii) up to a maximum amount of Rs.10,000.

If one or more cheques for the value of more than Rs.10,000 are deposited for

collection on a single day or on subsequent days, withdrawal can be allowed up toa maximum of Rs.10,000 only. Thus banks exposure will be to the extent of

Rs.10,000 only against any individual customer. Reserve Bank has further

authorized the banks to ensure that where delay occurs, the account holdersshould be paid penal interest without their requesting for it.

Liability for the Collecting Banker in respect of its Agent appointed for Collection

The collecting banker collects the amount of the cheque from the paying banker through

its own branch at the place of the paying banker. If there is no branch of the collecting

banker at that place it appoints another banker, having a branch at that place, as its agent


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for collection. The status of such agent banker as a sub-agent or a substitute agent and

the liability of the collecting banker in respect thereof was decided by the Bombay High

Court in the Punjab National Bank Ltd., Gondia vs. Ishwarbhai Lalbhai Patel & Co.

(A.I.R. 1971, Bombay 348). Brief facts of the case were as follows :

The firm Ishwarbhai Lalbhai Patel & Company presented to Punjab National Bank,Gondia, a cheque drawn in its favour on the Lakshmi Bank, Bhandara, with the

instruction to credit the amount to its account, after realization. P.N. Bank had no branch

at Bhandara and, therefore sent the cheque to Lakshmi Bank, Gondia, for collection. Thecheque was sent by Lakshmi Bank, Gondia, to is Bhandara branch which passed it for

payment and issued a payment order to the P.N. Bank to receive payment at its Gondia

branch. The payment order was presented twice, but no payment was made and by that

time the Lakshmi Bank had suspended payment. The suit was filed by the firm on theP.N. Bank for the realization of the amount of the cheque.

The Bombay High Court pointed out that in the case of properly appointed sub-agent, the

agent is responsible to the principal for the acts of the sub-agent while in case ofsubstitute agent, i.e., a person named by the agent holding an express or implied authority

to act for the principal in the business of agency, the principal is responsible.

Dealing with the facts of the case, the High Court observed that the nature of the business

of the collecting banker, namely, agency to collect the amount on behalf of the customer,

was such that the collecting banker had to appoint another person for the purpose ofrealization. Since the collecting of the amount would have been facilitated by appointing

the Gondia branch, the collecting banker had implied authority to appoint the said branch,

which would be a substituted agent and not a sub-agent. The High Court, therefore, heldthat the acts of Lakshmi Bank, Gondia, as substituted agent, would be binding on the

customer and P.N. Bank would not responsible to the customer unless it had received the

amount in its hands and credited the same to the account of the customer.

Solved Problems

1. A opens an account with C Bank with an uncrossed cheque of Rs.500 drawn

on B bank and leaving Rs.200 to his credit takes away the balance of Rs. 300 incash. After B bank has paid the cheque, the drawer discovers that the payee has

never received it and the payees endorsement has been forged. The drawer

claims from C bank the amount of the cheque. Discuss the position of C bank.

(Rajasthan, 1967)

In this case Cbank is the collecting banker. A collecting banker often faces the

charge of conversion, i.e., a charge for collecting a cheque for a customer towhich the latter had no title, or defective title. Section 131 of the Negotiable

Instruments Act provides statutory protection to the collecting banker against

conversion of cheques but such protection is available only for crossed cheques

and only when he collects in good faith and without negligence. In the present


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case the collecting banker collected an uncrossed cheque. He, therefore, cannot

avail of the statutory protection. He will be liable to pay the amount to the drawer

of the cheque and will be entitled to recover the same from his own customer.

2. A draw a cheque for Rs.500 in favour of B on 1st January, 1969 and gave it to

him on the same day. The cheque was presented for payment on 15th

June, 1969.In the meantime, the bank had failed in May, 1969. Discuss the legal position of

Bs recourse against A and the bank for recovering the amount.

Or

A drew a cheque for Rs.20,000 in favour of B on 10 th April, 1971 and gave it to

him the same day. B who left the station immediately on a long pilgrimage tour

forgot about the cheque and when he returned and took it to the Bank on 10 th

September, 1971 found to his dismay, that the bank had failed on the previousday. Discuss Bs recourse against A and against the Bank for recovering the

amount.

The drawer of a cheque is responsible to the payee if the cheque is dishonored.But if the drawer suffers any loss due to non-presentation of the cheque within a

reasonable time, the drawer is discharged from his liability. Drawer is given such

protection under Sections 72 and 84 of the Negotiable Instruments Act. In order to

charge the drawer, a cheque must be presented at the bank upon which it is drawnbefore the relation between the drawer and his banker has been altered to the

prejudice of the drawer (Section 72). Where a cheque is not presented for

payment within a reasonable time of its issue and the drawer or person on whoseaccount it is drawn had the right, at the time when presentment ought to have been

made, as between himself and the banker, to have the cheque paid and suffers

actual damage through the delay, he is discharged to the extent of such damage,that is to say, to the extent to which such person is a creditor of the banker to a

large amount than he would have been if such cheque had been paid [Section 84

(1)]

In the present case the payee presented the cheque after more than five months,

which cannot be considered as reasonable period. The drawer suffered loss due to

this delay and is, therefore, discharged from his liability on the cheque. Theholder, however, can exercise his right to recover the amount from the drawee

bank.

3. X is the Managing Director of a limited company in which capacity he is

authorized to sign alone on the companys bank account which is kept with Ybank in Calcutta. Xs personal accounts is with Z bank in Calcutta, where he has

maintained an average balance of Rs.5000.

X draws a cheque on the companys account in favour of himself for Rs.85,000

which he pays in at z bank for credit of his personal account. The cheque is duly


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collected by Z bank and the proceeds credited to his account. Subsequently, thecompany goes into liquidation and the liquidator files a suit against Z bank for

recovery of the money on the ground that there had been fraudulent conversion.

What is the position of Z bank? Give reasons for your answer.

4. The collecting banker often faces the charge of fraudulent conversion in

situations like the above. Section gives him statutory protection against the charge

of conversion, but the protection is available only when he receives payment ingood faith and without negligence. From the facts of the case, it appears without

doubt that the banker was negligent in collecting the said cheque because of the

following reasons :

(a) Every banker is presumed to know the true identity of his customers.

Knowledge on the part of Z bank, of the fact that X was the Managing

Director of a limited company is to be taken for granted. When X issued a

cheque in his own favour under his signature on the account of thecompany. It was sufficient ground to arouse suspicion in the mind of the

collecting banker about the intention of the drawer and an enquiry musthave been made by him. If the banker was unaware of the true identity of

X, he will be deemed negligent on that account.

(b) The average credit balance maintained by X with Z bank wasRs.5,000. When a cheque for an abnormally big amount (Rs.85,000) was

deposited by the customer, and that too drawn by himself on the

companys account, this particular dealing was obviously out of thenormal course of dealings undertaken by the customer with the banker.

The banker must have conducted an enquiry about this. Failure to conduct

an enquiry amounts to negligence on the part of the collecting banker. Thecharge of conversion against him is valid.

0306 collection of cheques

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