Protection to paying banker :
(a) For a paying banker to claim protection under the Negotiable Instruments Act, one of the criteria he has to satisfy is that the payment is in due course. As to what is payment in due course has been stated in Section 10 which reads as follows:
“Payment in due course” means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which does not afford a reasonable ground for believing that he is not entitled to, receive payment of the amount therein mentioned.
From the above definition it can be seen that payment in due course requires the payment to be made:
– in accordance with the apparent tenor of the instrument;
– in good faith;
– without negligence;
– to the person in possession of the instrument; and
– while making payment the banker should not have reasons to believe’ that the person in possession of the instrument is not entitled to receive payment of the amount mentioned in the instrument.
(b) Section 85 of the Negotiable Instruments Act, 1881 grants protection to a banker on his making payment on a cheque. Though this principle may sound as a simple logic it is to be noted that the protection granted as per Section 85 is not absolute.
Section 85 of the Negotiable Instruments Act, 1881 reads as follows:
Section 85
1. Where a cheque payable to order purports to be endorsed 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 endorsement whether in full or in blank appearing thereon, and notwithstanding that any such endorsement purports to restrict its further negotiation.
Paying banker should ensure that the cheque is regular in all respects and should take the precautions while making payment of the cheque:
1. The cheque must have been drawn properly. It is interesting to note that Negotiable Instruments Act defines a cheque but does not prescribe it’s from. It does not even say that it should be drawn on the printed form issued by the bank. Strictly speaking, a banker cannot refuse to honour a cheque drawn on piece of paper provided it carries an unconditional order to the banker and fulfills other requirements of a cheque. But by tradition and custom, banks all over recognize only the cheque drawn on the printed form issued by the bank. Accordingly, if customer demands that the payment be made on the basis of a letter other than by way of a cheque, the banker should permit such request. However he can demand stamped discharge. We are aware that in the case of cheque, it need not be stamped. This exemption is accorded to cheques, of they are in the prescribed format.
2. A cheque must bear a date because the mandate of the customer to the banker becomes legally effective on the date mentioned therein. The date should not be incomplete. If the drawer mentions a date earlier to the date of writing then it is called an ante-dated cheque. In India, a cheque is treated as stale cheque after the expiry of three months from the date of the cheque.
If the drawer mentions a date on the cheque, which is subsequent to the date on which it is drawn, it is called a post-dated cheque. Paying banker should not make payment of a post-dated cheque before the dale mentioned therein. Otherwise, he will be liable as follows:
– If the drawer instructs the banker, before the date mentioned in the cheque, not to make payment of the post-dated cheque, the banker can not debit his account with the amount of the cheque. If the banker had paid the cheque, it would be deemed as payment made without authority of the drawer.
– If as a consequence of payment of a post-dated cheque by the bank, any other cheque issued by the drawer is dishonored on the ground of insufficiency of funds, the drawer will be entitled to claim damages for its dishonor under section 31 of Negotiable Instrument Act.
– If the customer unfortunately dies, becomes insolvent after the banker has made the payment but before the date mentioned in the cheque, the amount cannot be debited to the customer’s amount account because his mandate becomes ineffective on his demise.
– Payment of a post-dated cheque before the date of the cheque is not considered as payment in due course. The banker, therefore, can not avail the statutory protection under section 85. But its payment on or after the date of the cheque is valid and the banker will bear no liability in this regard.
Paying banker must refuse payment of the cheque under the following circumstances:
1. When the drawer countermands the payment:
A cheque is an unconditional order of the drawer to the baker. The drawer is competent to cancel or withdraw such order at any time before its payment is made. The drawer need not explain the reason for stopping payment of a cheque.
2. Death of the drawer:
On receipt of reliable information about the death of the customer, the banker must stop payment of the cheques signed by him because the order of the customer to the bank ceases to operate on the occurrence of his death.
3. Insolvency of the drawer:
If the debtor commits an act of insolvency as defined in the insolvency Law, either he or any of his creditors may present a petition in the court of law for an order of adjudication. When the court issues an order of adjudication, the whole property of the insolvent person (with certain exceptions) vests in the court or an official receiver and becomes available for distribution among the creditors.
The banker must stop payment from customer’s account as soon as he receives the information that an insolvency petition has been filed by or against the customer.