Paying and Collecting Banker in Banking Law: Complete Notes

Two banks handle every cheque. The bank on which it is drawn must decide whether to pay it, and the bank into which it is paid must decide whether to collect it. Each takes a different risk, each has a different statutory protection, and each loses that protection for a different reason. This note brings together the law of the cheque as it bears on those two decisions, and ends with what happens when the cheque is returned unpaid.

Figure 1: Everyone with an interest in a single cheque

1. The Cheque

• Definition (Section 6): a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand, including the electronic image of a truncated cheque and a cheque in the electronic form.
• Distinguishing features: the drawee must be a banker, and it must be payable on demand. It needs no acceptance and carries no days of grace, and it alone can be crossed.
• Essentials: writing, an unconditional order, a specified banker, payment on demand, a certain sum, a certain payee or bearer, a date, and the drawer's signature conforming to the mandate. Where words and figures differ, Section 18 prefers the words.
• Validity: three months from the date it bears, since 1 April 2012.
• Truncation: the image substitutes the physical movement of the paper, the instrument must conform to the CTS-2010 standard, and Explanation II to Section 131 obliges the collecting banker to verify the prima facie genuineness of the instrument.
• Positive pay: since 1 January 2021 the drawer may register the date, payee and amount of a cheque with his own bank. Banks must offer it at ₹50,000 and may compel it at ₹5,00,000.

2. Crossing

• General (Section 123): two parallel transverse lines across the face, with or without words. The lines are essential.
• Special (Section 124): the name of a banker, with or without lines. The name is essential and the lines are not.
• Who may cross (Section 125): the drawer crosses before issue; after issue the holder may cross, make a general crossing special, and add not negotiable; a banker may cross specially again only to another banker as agent for collection.
• The paying banker's duty: Section 126 forbids payment of a generally crossed cheque otherwise than to a banker, and of a specially crossed cheque otherwise than to the named banker; Section 127 requires refusal of a double special crossing except for collection.
• Reward and sanction: Section 128 gives a complete discharge to a banker who pays a crossed cheque in due course; Section 129 makes one who pays out of due course liable to the true owner for the loss.
• Not negotiable (Section 130): a transferee shall not have, and shall not be capable of giving, a better title than his transferor. The cheque stays transferable; it loses negotiability.
• Account payee: not in the Act. It is a direction to the collecting banker to credit only the named payee, and the Reserve Bank forbids collection for anyone else.

3. The Paying Banker

Figure 2: Due course, protection and liability

• Payment in due course (Section 10): payment in accordance with the apparent tenor of the instrument, in good faith and without negligence, to a person in possession, in circumstances affording no reasonable ground to believe he is not entitled. Every protection begins here.
• The duty (Section 31): the drawee having sufficient funds properly applicable must pay when duly required, and on default must compensate the drawer.
• Section 85(1): an order cheque bearing an endorsement that purports to be the payee's discharges the drawee who pays in due course, which covers a forged but regular endorsement. An irregular endorsement defeats it.
• Section 85(2): once a bearer, always a bearer. A cheque originally payable to bearer stays so, whatever endorsements appear.
• Section 85A: the same protection for drafts drawn by one branch on another.
• Section 89: protection where a material alteration or an obliterated crossing is not apparent, provided payment follows the apparent tenor and is otherwise in due course.
• Section 128: complete discharge for a crossed cheque paid in due course.
• Forged drawer's signature: a nullity. There is no mandate, no protection and no ratification, and the bank cannot debit the customer. The loss shifts only by estoppel or by the customer's negligence in drawing the instrument.

4. The Collecting Banker

Figure 3: The two bankers compared

• The risk: conversion, a tort of strict liability, for dealing with an instrument inconsistently with the true owner's title. Honesty and care are no defence at common law.
• Section 131: a banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself incurs no liability to the true owner where the title proves defective, by reason only of having received such payment. Section 131A extends it to drafts.
• Four conditions: the cheque must be crossed before it reached the bank; payment must be received for a customer; the bank must act in good faith; and it must act without negligence. The burden of proof lies on the bank.
• Explanation I: the protection survives a credit given before realisation.
• Explanation II: for a truncated cheque, a duty to verify the prima facie genuineness of the instrument and any fraud, forgery or tampering apparent on the face that due diligence and ordinary care would reveal.
• Negligence in practice: careless account opening; crediting a third party cheque or a cheque payable in an official capacity to a private account; collecting an account payee cheque for a stranger; accepting an irregular endorsement; and ignoring a credit out of keeping with the account.
• Holder for value: a bank that has given value, by allowing a drawing against the cheque or taking it against an overdraft, holds a title of its own and relies on the holder in due course rules rather than on Section 131.

5. Dishonour under Section 138

• The offence: a cheque drawn on an account maintained by the drawer, for a legally enforceable debt or other liability, presented within its validity, returned unpaid for insufficiency of funds or because it exceeds the arrangement, followed by a written demand notice within thirty days of information of dishonour and failure to pay within fifteen days of its receipt.
• Punishment: up to two years, or a fine up to twice the cheque amount, or both.
• The three periods: thirty days to give notice, fifteen days for the drawer to pay, one month to complain under Section 142(b), with power to condone delay.
• Presumptions: Section 118(a) presumes consideration and Section 139 presumes the cheque was for a debt or other liability. Both are rebuttable on the preponderance of probabilities. Section 140 removes the defence that the drawer had no reason to believe the cheque would be dishonoured.
• Companies (Section 141): every person in charge of and responsible to the company for the conduct of its business is deemed guilty, on specific averments, and the company itself must be prosecuted.
• Jurisdiction (Section 142(2)): since 2015, the court where the payee's bank branch is situated, or, where the cheque was presented otherwise than through an account, where the drawer's branch is.
• Procedure: summary trial under Section 143, evidence on affidavit under Section 145, and the offence compoundable under Section 147.
• Money during the case: interim compensation of up to twenty per cent under Section 143A, payable in sixty days and repayable with interest at the bank rate on acquittal; and a deposit of a minimum of twenty per cent on appeal under Section 148.
• The bank's own position: it is not a party. Its duties are to state the reason for return accurately on the memorandum, to levy only reasonable return charges, and to remember that if the cheque ought to have been paid, it answers to the drawer under Section 31 for wrongful dishonour.

6. How the Protections Fit Together

The scheme is a single bargain. A cheque is a mandate, and a bank that follows the mandate exactly is protected; one that departs from it is not. Section 10 states what following the mandate means on the paying side, and Sections 85, 85A, 89 and 128 then say that a bank which has done so is discharged, even where someone in the chain has been dishonest. Section 131 makes the same bargain on the collecting side, except that the currency is not the tenor of the instrument but the care taken about the customer. The collecting banker's protection is confined to crossed cheques, because the crossing is what gives the system the audit trail that makes the protection safe to grant; the paying banker is protected on open cheques too by Sections 85 and 89, with Section 128 adding a complete discharge where the cheque is crossed.

The limits are equally coherent. Neither protection reaches a forged drawer's signature, because that is not a defective mandate but the absence of one. Neither reaches a bank that gave value and claims for itself, because it is then a party in its own right. And neither displaces the bank's liability to its own customer for wrongful dishonour or for a debit outside the mandate, since the protections are directed at the true owner, a stranger, and not at the person the bank contracted with.

7. Quick Revision

8. Frequently Asked Questions

What is the difference between a paying banker and a collecting banker?

The paying banker is the bank on which the cheque is drawn, and it decides whether to pay. The collecting banker is the bank with which the payee has his account, and it presents the cheque and collects the proceeds. The first is protected by Sections 85, 85A, 89 and 128 on proof of payment in due course; the second by Section 131 on proof of good faith and absence of negligence.

What is payment in due course?

Under Section 10, payment in accordance with the apparent tenor of the instrument, in good faith and without negligence, to a person in possession of it, in circumstances which afford no reasonable ground for believing that he is not entitled to receive payment. It is the condition of every protection the paying banker has.

Is a bank protected against a forged signature of the drawer?

No. The instrument is a nullity, because the customer gave no mandate at all, and no section protects the bank. It cannot debit the account however carefully it acted. The loss shifts to the customer only where he is estopped, having known of the forgery and stayed silent, or where his negligence in drawing the cheque made the fraud possible.

When does a collecting banker lose the protection of Section 131?

Where the cheque was not crossed, where the person was not its customer, where it did not act in good faith, or, most commonly, where it cannot prove it acted without negligence. The usual failures are careless account opening, crediting a third party or official capacity cheque to a private account, collecting an account payee cheque for a stranger, and ignoring an unexplained credit.

What are the time limits under Section 138?

Thirty days from receiving information of dishonour to send the demand notice; fifteen days from the drawer's receipt of it for him to pay, after which the offence is complete; and one month from that cause of action to file the complaint under Section 142(b), subject to the court's power to condone delay.

9. Related Topics and Provisions

• Nature of the banker and customer relationship
• Duties of a banker: secrecy, care and honouring cheques
• Deposit accounts and the opening of accounts
• Electronic banking and customer liability
• Payment systems and the digital rupee