Paying Banker and its Statutory Protection
INTRODUCTION
• A Paying Banker is a banker on whom a Cheque is drawn.
• He should pay the Cheque when it is presented for payment.
• This function of his of paying cheque is a distinguished one.
• This obligation has been imposed on him by Section 31 of the Negotiable
Instruments Act, 1881.
• A banker is bound to honour his Customers cheque provided that there is
availability of funds and no legal bar on making the payment.
• Again, for making payment, the Cheque must be in order and must be duly
presented for payment at the branch where the account is kept.
• Therefore, a bank has a duty to honour the Cheques of its Customer provided
that;
i) The Cheque is technically in order
ii) There is no legal impediment as to the payment; eg:- Death of a Customer
iii) Funds are available
iv) Cheque is not Countermanded
v) Bank is not put upon inquiry.
STATUTORY PROTECTION TO THE PAYING BANKER
• If suppose a paying banker pays a Cheque bearing a forged signature of the
payee or the endorsee, he is liable to the true owner of the Cheque.
• However, it is quite unjustifiable to make the banker responsible for such errors.
• This is because he is not expected to know the signature of the payee or the
endorsee.
• Therefore, law relieves the paying banker from his liability to the true owner of the
Cheque.
• This relief is known as Statutory Protection.
• To Claim protection under Section 85 of the Negotiable Instruments Act; 1881,
the banker should have fulfilled the following conditions.
i) He should have paid an Order Cheque.
ii) Such a Cheque should have been endorsed by the payee on his order.
iii) It should have been paid in due course.
i) ORDER CHEQUE
• The Statutory protection is extended to an Order Cheque.
• Example of an Order Cheque is:- PAY TO “X” ON ORDER
• When such a Cheque is paid by the banker, he is entitled to get protection.
• Endorsement is a must for an Order Cheque, and thus the statutory protection is
extended to an Order Cheque.
ii) ENDORSED BY THE PAYEE ON HIS ORDER
• Endorsement is a must for an Order Cheque.
• Therefore, it must be properly endorsed by him or any other person authorised by
him to obtain payment.
• Thus, Protection cannot be claimed if such a Cheque is not endorsed by the
Payee or any other third party.
iii) PAYMENT IN DUE COURSE
• The Cheque should have been paid in due course.
• This is as per section 10 of the Negotiable Instruments Act; 1881.
• This Concept of Payment in due Course has 3 essential features.
a) Apparent Tenor of The Instrument
• It is necessary that, the payment should have been made in accordance with the
apparent tenor of the instrument.
• The apparent tenor refers to the intention of the parties, as it is evident from the
face of the instrument.
• Eg:- If the drawer draws a post - dated cheque, and if it is paid before the due
date; the payment does not amount to “Payment in due Course”.
b) Payment In Good Faith & Without Negligence
• Good faith is the basis of all banking transactions.
• With regards to negligence, the banker may sometimes be careless while
performing his duties
• This carelessness of the banker amounts to an act of negligence.
• Thus; if Negligence is proved, the banker will not be entitled to the statutory
protection.
c) Payment To A Person Who Is Entitled To Receive Payment
• The banker must see that, the person who presents the cheque must be in
possession of it and must be entitled to receive the amount.
v PROTECTION TO A BEARER CHEQUE
• Statutory Protection is extended to a Bearer Cheque as well.
• According to Section 85(2) of the Negotiable Instruments Act, if a Bearer Cheque
is paid in due Course, the banker is entitled to get protection.
v PROTECTION TO A MATERIAL ALTERED CHEQUE
• A paying banker cannot normally claim any statutory protection for a Material
altered Cheque.
• However, Section 89 of the Negotiable Instruments Act gives protection in case
of a Material altered Cheque.
• According to Section 89, if a banker pays on a Material altered Cheque which is
not apparent on the face of it, he is not liable.
v RECOVERY OF MONEY PAID BY MISTAKE
• Money wrongly paid can be recovered under the following Circumstances.
i) When a person receives money by mistake, in bad faith, knowing that he is not
entitled to receive it, the banker is entitled to recover the same.
ii) Similarly, money received under a mistake of fact or in a mala fide manner can
be recovered.
• Eg:- A banker pays money to “X” thinking that he is “Y”.
• This is a mistake of fact.
• Thus, “Y” is under a legal duty to pay the money back to the banker.
Leading case laws on Payment of cheques by a Bank
1. Canara Bank v. Canara Sales Corporation & ors. [(1987) 2 SCC 666]
In this Case, the SC ruled that bank is not allowed to pay when the customer signs the
Cheque. Since such a banker has no right to debit the account of the customer on such
falsified cheque. Since the customer-bank link is between the borrower and the debtor,
a cheque that has a forged signature has no authority on the bank to pay,
2. Bank of Bihar v. Mahabir Lal (AIR 1964 SC 397)
In this Case, the SC held that only where payment was made to the holder or to this
agent, i.e due course, a banker would claim cover under Section 85. Payment to an
individual without a business or to a bank’s agent is not a payment to a corporation.
