Question

Explain the protection given to the paying and collecting banker as provided by the Bills of Exchange Act 1949.

Answer 1

Please find below the required answer for above given question:

PAYING BANKER:

Paying banker (drawee bank) is the bank where a customer draws a cheque on it. The duty of a paying banker is to pay the right person according to the customer’s mandate. If the bank pays to a wrong person, the bank must bear the loss. However, The Bills of Exchange Act 1949 has provided the certain protection to the paying banker in following conditions:

(1) Payment in due course as per Section-59: A bearer is not liable if the banker pays a cheque in due course by or on behalf of the drawee or acceptor. Payment in due course means payment made at or after maturity of the bill to the holder in good faith and without notice that his title to the cheque is defective.

(2) Forged or unauthorized endorsement as per Section-60: If the banker pays in good faith and in the ordinary course of business a cheque drawn on him which bears a forged or unauthorized indorsement, he is not prejudiced by the forgery. E.g. “A” draws a cheque on Central Bank Ltd in favor of “B”. It is stolen by “C” who forges “B”s endorsement and negotiates it to “D” who in turns negotiates it to “E” who obtains payment from the bank. If the bank pays in good faith in the ordinary course of business then the bank will not be prejudiced by the forgery.

(3) No endorsement or irregular endorsement as per Section-82: The paying banker is protected if he pays a cheque, which is not endorsed or is irregularly endorsed in good faith and in the ordinary course of business.

(4) Crossed cheque as per Section-80: If the paying banker pays a crossed cheque in good faith without negligence and according to the crossing then he is not liable. E.g. “A” draws a cheque on “Bank X Ltd” in favor of “B” in order to repay a friendly loan. On receiving the cheque, “B” crosses it generally. But the cheque is stolen by “C” who goes into “Bank Y Ltd” and pretending to be “B” opens an account in “B”s name. “Bank Y Ltd” presents the cheque to “Bank X Ltd” who pays in good faith and without negligence. “Bank X Ltd” is not liable to “B” by virtue of Section- 80.

COLLECTING BANKER:

Collecting banker is the bank to whom a holder of a cheque presents the cheque for the credit of his account. Its duty is to collect the amount stated in the cheque from the paying banker. If the collecting bank fails to collect the amount as instructed by the customer then the collecting banker will be liable for breach of contract. However, The Bills of Exchange Act 1949 has provided the certain protection to the collecting banker in following condition:

(1) As per Section-85: If a banker in good faith and without negligence receives payment of a cheque for a customer with no title or a defective title then he is not liable to the true owner. To get this protection, the collecting bank must prove the following:- a) The collecting banker acted for the customer, b) The collecting banker acted in good faith and c) The collecting banker acted without negligence. However, If an act is done in good faith though negligently then the bank will not be protected. E.g. The director of the “A Company” (payee) handed 3 cheques of which 2 were crossed with the words ‘account payee’ to “X” and “Y” to open an account in a bank in the name of the “A Company”. However, they persuaded the defendant’s bank to collect the amount for the third party. The defendant’s bank was negligent in collecting cheques for the third party and is not protected under Section-85. The bank will be order to return the amount of money with interest to the “A Company”.