Paying Banker – Ch 2

Ruchi Mehrotra, Alliance Business Academy

Preview of Chapter - 2 Nature of Banking Business Meaning of Paying Banker Mandatory Functions of Paying Banker Statutory Protection to PB Dishonor of Cheques Various NIs

Nature of Banking Business BR Act 1949, defines in Sec 5b what banks

have to do.

Collect deposits from public

Lend money so Collected /invest

Nature of Banking BusinessDEPOSITS

Demand deposits Time deposits Withdrawn anytime by - Are made in 2 types of

Cheque or normal slip A/cs current / Savings

DDs/Telegraph/transfers

payorders

Paying Banker Bank – Savings a/c, current a/c, deposit a/c Thus the banker has contractual obligation to

honor customer’s cheque across the counter. The banker who pays the value of instrument is

called paying banker or drawee bank. The payment to be made by him has arisen due to

the contractual obligation, as the cheque is drawn on him so he is called as drawee bank.

Paying banker Sec 31 of NI Act – the drawee of a cheque,

having sufficient funds of the drawer in his hands properly applicable to the payment of such a cheque, must pay the cheque when duly reqd. to do so & in default of such payment must compensate the drawer for any loss or damage caused by such default.

Mandatory Functions of Paying Banker

Time of presentation

Office of drawing

Date of Cheque

Crossing Physical

form

Functions of Paying banker

Proper Form Amount

Material alteration

Signature Endorsements Legal

Restrictions Sufficient Balance

Legal restrictions Invalid cheques should not be honored at all Invalidity will take place into forms –

1. By countermanding by customer himself – stop payment of cheque. Telegram, phone but express agreement – writing

2. Caused by death, lunacy, by serving garnishee order, insolvency etc

Statutory protection NI Act – Sec 10, 16, 31, 85, 87, 89, etc

deal with this In absence of protection the PB has to

satisfy himself that all payments made against each cheque is made to true owner.

Order cheq. Having forged endorsements of the payee & endorsee.

Statutory protection NI Act - Sec 85, 89, 128 deals with role of

PB For instruments like bank draft, cheque Sec 85 (1)– regularity of endorsement – no

break in the chain of endorsements – PB is not concerned with genuineness

Sec 85(2) – all endorsements on a bearer cheque are meaningless (once a bearer is always a bearer)

Statutory protection

Sec 85(a) – protection similar to Sec 85(1) & Sec 85(2) are available for a bank draft

Sec 89 – cheq. With material alteration which is not visible

Sec 128 – for a crossed cheque, if payment is in due course, the PB gets protection

Bearer Cheque Sec 85(2) – of NI Act – where a cheque is originally

expressed to be payable to bearer, the drawee (pb) is discharged by payment in due course to the bearer there of not withstanding any endorsement.

This indicates that the PB is discharged from liability by honoring a bearer cheque acco. To principle – once bearer always bearer in spite of subsequent endorsement

Precautions Bearer cheque should be an open cheque &

NOT A CROSSED ONE

As the bearer cheque subsequently crossed cannot be paid across the counter & if paid , the PB will not have any protection under this section

Open cheque Crossed cheque

Precautions Satisfaction in terms of – no suspicion about

the bearer

Payment has to be made in due course

Overdraft with forged endorsements

Conditions – sec 85(a) – protects the PB by laying down where any draft, that is an order to pay money, drawn by the office of a bank upon another office of the same bank for a sum of money payable to order on demand, purports (claim) , to be endorsed by or on behalf of the payee, the bank is discharged by payment in due course.

This protects PB regarding the draft having a forged endorsement.

Endorsement should be regular Payment in due course – Sec 10 in acco. With law &

good faith, without negligence

)

Crossed cheques Protection given to PB regarding the payment of

crossed cheques to a person other than the true owner is given u/s 128 of NI Act

This provision states that when the PB makes payment in due course regarding the crossed cheque he is discharged of the liability as he is deemed to have paid the value to the true owner.

Materially altered cheques Where a promissory note, BOE, or wher a

cheque has been altered but does not appear to have been altered or

Where a cheque is presented for payment which does not at the same time of presentation appear to be crossed or have had a crossing

Materially altered cheques Protection

Protection – PB is protected of any payment made regarding materially altered cheques provided

the material alteration is not noticeable even by careful examination

the payment is a payment in due course

What is payment in due course ? Sec 10 states that payment in accordance

with the apparent tenor of the instrument in good faith & without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount mentioned therein.

What is payment in due course ? Payment in accordance with the apparent

tenor of instrument – banker should pay as per instruction given by drawer like no partial payment, or payment of crossed one at counter or beyond/prior date

In good faith & without negligence – sincere & honest payment

What is payment in due course ? Person in possession thereof – legitimate

person, legal holder of person or else its a wrong payment

Under circumstances which don’t afford a reasonable ground for believing that he is not entitled to receive payment of amt.

Payment in money only it may mean legal money/BoE/PN if payee agrees to pay in this form

Dishonor of cheques - MUST When countermand by customer Banker receives notice of death of customer Order of insolvency of customer Lunatic condition of customer Garnishee order in absolute

Others -Y dishonor of cheque? Notice of assignment Holding a defective title Mis-use of trust funds Forged cheques Cheques withoutt signatures – not to be

honored

Others – Y dishonor of cheque? Any violation of FOREX rules – RBI

norms, for currency conversion During war time, incase of enemy

country cheque issued by foreigners

Closure of accounts Savings by choice of customer / by force Current

• If customer is erratic • Irregular • Criminal record • Reasonable good

Cheque MAY BE dishonored Funds at the credit is insufficient in one

account Signature does not tally with specimen Not dated cheque, post dated or bears

incomplete date or impossible date Presented after banking hours Irregular endorsements

Cheque MAY BE dishonored Amount only in words Mutilated cheque not confirmed by drawer Not drawn in proper form Not written in clear terms Having material alteration Presented in other branch where collection

is not possible

Cheque MAY BE dishonored Acount is subject to set-off or bank has

marked lien over it Cheque is not signed by all authorized

signatories in case of joint accounts operated by joint holders

Causes of dishonor Refer to drawer - RD Effect not cleared - ENC Not sufficient balance – credit – NS Endorsement irregular – EI No account – NA No effect – NE

Causes of dishonor – contd.

No funds – NF Not arranged for – NAF Exceeds arrangements – EA Discharge required – DR Words & figures differ – W & FD Drawer deceased – DD

Causes of dishonor – contd.

Drawer inslvent – DI Drawer insane – DI Account closed Irregularly drawn Stop payment by court order Countermanded by customer Sign. – different

Mandate Means simple , unstamped , written

authority given by a customer to the banker authorizing his agent to operate on his bank account

This legally permits the bank to honor cheques signed by the mandatory (agent) or by the person to whom such power to sign is granted by customer

Mandate It can be for specific operations , time etc Deviations made by banker can make him

fall into trouble He cannot further delegate to any one else Mandate ceases when a/c holder goes

lunatic, dies insolvent etc Specifc inst. In case of joint a/cs

penalties in case of dishonor SEC – 138 to 147

Due to insufficiency of FUNDS in drawer’s account which was earlier upto one year imprisonment or with fine has been increased upto two years imprisonment or with fine.

For a holder, the period to issue notice to the drawer of dishonored cheque has been increased from 15 days to 30 days.

Dishonor o

f Cheq

ues

penalties in case of dishonor SEC – 138 to 147

Cognizance can now be taken even if compliant is made after the expiry of the stipulated period of one month provided the complainant satisfies the court that he has sufficient cause for not making the complaint within such period.

Mode of service of summons : The summons can be served by speed post/ authorized courier services & if not accepted will be treated as duly served.

Dishonor o

f Cheq

ues

TRAIL Provisions of summary trail in the code of

criminal procedure 1973 made it applicable & offences shall be tried by Class I Judicial Magistrate or by a Metropolitan Magistrate

Trial to be concluded as expeditiously as possible & the effort to be made to conclude the trail within six months.

TRAIL In case of conviction (certainty) in a trial,

the Magistrate has been empowered to pass a sentence not exceeding 1 yr imprisonment & fine not exceeding Rs 5000.

Offences under the Act made compoundable

TRAIL Directors of Companies who are nominated

directors in the in the employment of central / state govt. or FIs, owned or controlled by central/state govt. are exempted from prosecution.

Sec wise – Dishonor consequences Sec 138 – drawers liability for cheque

returned unpaid for insufficient funds Sec 139 – unless proved otherwise, it will

be presumed that the cheque has been issued for discharge of a debt/liability

Sec 140 – the drawer cannot plead that he did not expect the cheque to be dishonored

Sec wise – Dishonor consequences

Sec 141 – offences made by companies Sec 142 – Cognizance of offences Sec 143 – power of courts to try cases

summarily Sec 144 – Mode of service of summons

Sec wise – Dishonor consequences Sec 145 – Evidence of affidavit Sec 146 – Bank slip prima facie evidence of

certain facts Sec 147 – Offences to be compoundable

Banker has protections when to pay & when to dishonor – but if without negligence (wrongful dishonor) as a paying banker it has make good the loss of customer.