The Paying Banker: Duties and Statutory Protection (Sections 85, 85A, 89 and 128)

The paying banker is the bank on which a cheque is drawn. It faces risks from two directions. If it wrongly refuses to pay, it is liable to its customer for wrongful dishonour; if it pays the wrong person, it may have to pay again. Because banks pay vast numbers of cheques and cannot verify every indorsement, the Act gives them statutory protection when they pay in due course. This note explains the paying bank's duties, when it must refuse payment, and the protection in Sections 85, 85A, 89 and 128.

1. The Duty to Pay and Its Limits

Under Section 31, the bank must pay a cheque duly presented when it holds sufficient funds of the drawer properly applicable to it (Topic 33). It must also refuse payment, or risk liability, in cases such as:

Countermand: a stop payment instruction from the drawer.
Notice of death, insanity or insolvency of the customer.
Garnishee, attachment or freezing orders affecting the account.
Defects in the cheque: a forged or unauthorised drawer's signature, material alteration, a post-dated or stale cheque, words and figures that differ, or a mutilated cheque.
Crossing: a crossed cheque presented over the counter (Section 126; Topic 34).
Irregular indorsement on an order cheque presented for cash.
Suspicion of fraud that would make payment not in good faith or negligent.

2. Order Cheques with Forged Indorsements (Section 85(1))

Section 85, Negotiable Instruments Act, 1881

(1) Where a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee is discharged by payment in due course.

(2) Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any indorsement whether in full or in blank appearing thereon, and notwithstanding that any such indorsement purports to restrict or exclude further negotiation.

"Purports": the bank need not verify that the payee's indorsement is genuine. It need only see that the cheque appears to be indorsed by or on behalf of the payee, regular on its face.
In due course: payment must satisfy Section 10: according to apparent tenor, in good faith, without negligence (Topic 27).
Effect: the bank is discharged and may debit the drawer's account, even if the indorsement was forged; the true owner's remedy lies against the forger or the person who received payment.

3. Bearer Cheques (Section 85(2))

A cheque originally payable to bearer remains payable to bearer for the paying bank's purposes, whatever indorsements appear on it. This is often summarised as "once a bearer cheque, always a bearer cheque". The bank is discharged by payment in due course to the bearer, even if an indorsement is in full or purports to restrict negotiation. The rule protects the paying bank; as between the parties, a special indorsement may still matter for their liability to one another.

4. Drafts, Crossed Cheques and Altered Cheques

Drafts (Section 85A): a bank paying in due course a draft drawn by one of its offices on another, payable to order on demand, which purports to be indorsed by or on behalf of the payee, is discharged.
Crossed cheques (Section 128): a bank paying a crossed cheque in due course, and the drawer if the cheque reached the payee, are placed in the same position as if payment had been made to the true owner.
Unapparent alteration or crossing (Section 89): a bank paying a cheque whose material alteration, or crossing or obliterated crossing, is not apparent, according to its apparent tenor and otherwise in due course, is discharged.
Truncated cheques (Section 89(2) and (3)): any difference between the electronic image and the paper cheque is a material alteration; the truncating bank or clearing house must ensure the image is exact, and a receiving bank must verify that the image received is the one transmitted.

5. Where There Is No Protection

Forged drawer's signature: a cheque on which the customer's signature is forged is not his mandate. The bank cannot debit his account, and the statutory protections do not apply (Canara Bank v. Canara Sales Corporation, 1987; Topic 20).
Negligence or bad faith: payment that is not in good faith or is negligent is not payment in due course.
Payment contrary to crossing: the bank is liable to the true owner (Section 129).
Payment after countermand or notice: payment after a valid stop instruction, or notice of death or insolvency, is unauthorised.
Apparent alteration: an alteration visible on the face of the cheque defeats protection under Section 89.

6. Modern Safeguards

Banks today rely on signature verification systems, cheque standards under CTS-2010, the Positive Pay System for high-value cheques, and alerts to customers on payment. These practices are relevant in deciding whether a bank acted without negligence: a bank that ignores its own verification procedures may find it has not paid in due course (Topic 8).

⚠ Key point

The paying bank must pay a duly presented cheque with sufficient funds, and must refuse it on countermand, notice of death, insanity or insolvency, court orders, defects, crossing or suspicion. It is discharged by payment in due course of an order cheque that purports to be indorsed by the payee, even if the indorsement is forged, and of a cheque originally payable to bearer, whatever indorsements it bears (Section 85); of a bank draft purporting to be indorsed (Section 85A); of a crossed cheque, as if paid to the true owner (Section 128); and of a cheque whose alteration or crossing is not apparent (Section 89). There is no protection for a forged drawer's signature, for payment contrary to crossing, or for negligent or bad faith payment.

7. Related Topics and Provisions

Payment in due course (Topic 27)
Banker and customer (Topic 33)
Crossing of cheques (Topic 34)
Collecting banker (Topic 36)