Under what circumstances a banker loss its protection under the Negotiable instrument Act, 1881?

  The Negotiable Instruments Act has come to the rescue of the paying banker and provided protection under certain circumstances. These circumstances are given below:

1. Protection in Case of Bearer Cheque.

2. Protection in Case of Order Cheque.

3. Protection in Case of Crossed Cheque.

4. Protection in Case of Obliterated Cheque.

5. Protection in Case of Drafts.

1. Protection in Case of Bearer Cheque: Section 85 (2) of the Negotiable Instruments Act, 1881 states, “Whereas 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, notwithstanding that any such indorsement purports to restrict or exclude further negotiation.”

The above protection is given in the Act on the basis that a bearer cheque always remains a bearer cheque and it bears endorsement in blank or full whether any endorsement restricts further negotiation or not. In case a bearer cheque is stolen or lost and the banker honours the cheque without any knowledge, the banker will be discharged from his duty under the protection given in Section 85 (2) of the said

Act. In such a case, the paying banker is not required to verify the endorsement on bearer cheque.

In case a bearer cheque is crossed, the paying banker has no right to pay in across the counter in disregard of the crossing.

2. Protection in Case of Order Cheque: In case the payment is made to a person other than the payee, the paying banker does not get any protection under the Negotiable

Instruments Act. If the endorsement is regular and payment is made in due course, the paying banker gets the protection under Section 85 (1) of the Negotiable Instruments Act, 1881 : “Whereas 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.” In case, payment is made to a wrong person whose signature is not according to

specimen signature, the protection is given to a banker under Section 16 (2) of the Negotiable Instruments Act : “It is not possible for a banker to know each of the endorsers and their signatures.” For getting the protection, the banker should note the following:

(a) Regular Endorsement: According to Section 85 (1) of the Act the endorsement should be regular. For example, if a cheque is payable to a right person and signature is bearing same name and the same spellings this is known as regular endorsement, though this is not a valid endorsement.

(b) Payment in Due Course: According to Section 10 of the Act the cheque should be paid in due course. In case the payment is made on forged signature of the endorser and not that of the drawer, the banker gets statutory protection under Section 10 of the Act.

3. Protection in Case of Crossed Cheque: Regarding payment of crossed cheque, the paying banker gets the protection under Section 128 of the Negotiable Instruments Act, 1881 : “Whereas the banker on whom a crossed cheque is drawn has paid the same in due course, the banker paying the cheque and the drawer thereof (in case such cheque has come to the hands of the payee) shall be entitled respectively to the same rights and placed in the same position if the amount of the cheque had been paid to and received by the true owner thereof.”

In case the payment is made on the instructions of the drawer in good faith without any negligence, the paying banker gets the statutory protection under the Negotiable Instruments Act, 1881: “The payment of crossed cheque in due course makes the drawee banker liable to the true owner of the cheque besides disentitling himself to debit the customer’s account.”

4. Protection in Case of Obliterated Cheques: According to Section 89 of the

Negotiable Instruments Act, 1881, “Whereas a cheque is presented for payment which does not at the time of presentation appear to be crossed or to have had a crossing which has been obliterated, payment thereof by a banker is liable to be paid and paying the same according to the apparent tenor thereof at the time of payment and otherwise in due course, shall discharge such banker from all liability thereon and such payment shall not be questioned by reason of the cheque having been crossed.”

Thus the above Section is very meaningful where crossing of a cheque is obliterated by dishonest person. Under the above Section the banker gets the protection in the way that the payment is made according to the apparent tenor of the cheque and due course.

5. Protection in Case of Drafts: In case of demand drafts drawn by one branch of a bank upon another branch of the same bank, the banker gets protection under Section 85 of the Negotiable Instruments Act. The Section states: “Whereas any draft, that is, an order to pay money drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand, purports to be endorsed by or on behalf of the payee, the bank is discharged by payment in due course.”

In short, a banker may get statutory protection under the various Sections of the Negotiable Instruments Act, if he fulfils the terms and conditions of the said Section of the said Act. No protection however is available, in case the drawer’s signature is forged.

When does a collecting bank lose his protection under the Negotiable Instrument Act 1881?

 According to the section 131 of the N.I. Act “a banker who has in good faith and without negligence received payment for a customer on a cheque crossed generally or specially to himself, shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only having received such payment” This section, no doubt, gives ample protection, in normal circumstances, to the banker  who collects cheques on behalf of his customers so long as a cheque happens to be crossed generally or specially to himself when he receives it. He will however not get any protection if the cheque is received uncrossed and the banker puts the crossing himself. In other words, this statutory protection is available to a banker only in the case of a “crossed” cheque. In case of an “uncrossed” or “open” cheque, the collecting banker’s position is that of any other holder for value or holder in due course. Again, a banker will be protected only if the collection of the cheque is made on behalf of a customer in the case of collection for a person who is not a customer of the bank, he will not be protected. 

 The Negotiable Instruments Act has come to the rescue of the paying banker and provided protection under certain circumstances. These circumstances are given below:

1. Protection in Case of Bearer Cheque.

2. Protection in Case of Order Cheque.

3. Protection in Case of Crossed Cheque.

4. Protection in Case of Obliterated Cheque.

5. Protection in Case of Drafts.

1. Protection in Case of Bearer Cheque: Section 85 (2) of the Negotiable Instruments Act, 1881 states, “Whereas 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, notwithstanding that any such indorsement purports to restrict or exclude further negotiation.”

The above protection is given in the Act on the basis that a bearer cheque always remains a bearer cheque and it bears endorsement in blank or full whether any endorsement restricts further negotiation or not. In case a bearer cheque is stolen or lost and the banker honours the cheque without any knowledge, the banker will be discharged from his duty under the protection given in Section 85 (2) of the said

Act. In such a case, the paying banker is not required to verify the endorsement on bearer cheque.

In case a bearer cheque is crossed, the paying banker has no right to pay in across the counter in disregard of the crossing.

2. Protection in Case of Order Cheque: In case the payment is made to a person other than the payee, the paying banker does not get any protection under the Negotiable

Instruments Act. If the endorsement is regular and payment is made in due course, the paying banker gets the protection under Section 85 (1) of the Negotiable Instruments Act, 1881 : “Whereas 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.” In case, payment is made to a wrong person whose signature is not according to

specimen signature, the protection is given to a banker under Section 16 (2) of the Negotiable Instruments Act : “It is not possible for a banker to know each of the endorsers and their signatures.” For getting the protection, the banker should note the following:

(a) Regular Endorsement: According to Section 85 (1) of the Act the endorsement should be regular. For example, if a cheque is payable to a right person and signature is bearing same name and the same spellings this is known as regular endorsement, though this is not a valid endorsement.

(b) Payment in Due Course: According to Section 10 of the Act the cheque should be paid in due course. In case the payment is made on forged signature of the endorser and not that of the drawer, the banker gets statutory protection under Section 10 of the Act.

3. Protection in Case of Crossed Cheque: Regarding payment of crossed cheque, the paying banker gets the protection under Section 128 of the Negotiable Instruments Act, 1881 : “Whereas the banker on whom a crossed cheque is drawn has paid the same in due course, the banker paying the cheque and the drawer thereof (in case such cheque has come to the hands of the payee) shall be entitled respectively to the same rights and placed in the same position if the amount of the cheque had been paid to and received by the true owner thereof.”

In case the payment is made on the instructions of the drawer in good faith without any negligence, the paying banker gets the statutory protection under the Negotiable Instruments Act, 1881: “The payment of crossed cheque in due course makes the drawee banker liable to the true owner of the cheque besides disentitling himself to debit the customer’s account.”

4. Protection in Case of Obliterated Cheques: According to Section 89 of the

Negotiable Instruments Act, 1881, “Whereas a cheque is presented for payment which does not at the time of presentation appear to be crossed or to have had a crossing which has been obliterated, payment thereof by a banker is liable to be paid and paying the same according to the apparent tenor thereof at the time of payment and otherwise in due course, shall discharge such banker from all liability thereon and such payment shall not be questioned by reason of the cheque having been crossed.”

Thus the above Section is very meaningful where crossing of a cheque is obliterated by dishonest person. Under the above Section the banker gets the protection in the way that the payment is made according to the apparent tenor of the cheque and due course.

5. Protection in Case of Drafts: In case of demand drafts drawn by one branch of a bank upon another branch of the same bank, the banker gets protection under Section 85 of the Negotiable Instruments Act. The Section states: “Whereas any draft, that is, an order to pay money drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand, purports to be endorsed by or on behalf of the payee, the bank is discharged by payment in due course.”

In short, a banker may get statutory protection under the various Sections of the Negotiable Instruments Act, if he fulfils the terms and conditions of the said Section of the said Act. No protection however is available, in case the drawer’s signature is forged.

what is meant by a paying banker? Describe the duties and responsibilities of a paying banker

Paying banker refers to the banker who holds the cheques of the drawer and is obliged to make payment if the funds of the customer are sufficient to cover the amount of his cheque drawn.  

The paying banker is the banker who cancels the signature of the drawer on payment of the cheque either by the usual means of authorizing a drawer’s signature or by any method that the bank takes, which also reflects the point of payment. In some cases, cheques are paid by stamping the cheques “Paid”, usually with the date being included in the stamped crossing, or by perforating the payment date onto the cheque.

As paying banker, the banker is obligated to accept the customer’s check if it is valid and if it is issued by the holder in its original form within a reasonable period of time and before the banker has provided orders to stop paying or receiving notice of the death of the customer, etc., and if sufficient funds are available to the customer’s account and that balance is available to the banker.

Responsibility of Paying Banker

 01. Cheques drawn on Branch : The paying banker shall honour only those cheques which are drawn against the account maintained at a branch of the bank where the cheques are presented. 

02.Presentation within validity needed : The paying banker is legally bound to pay only such cheques which are presented to him for payment within a reasonable time. Reasonable time is 6 months from the date of issue of the cheque. 

03. Presentation within banking hours: Cheque must be presented within the banking hours. Any cheque presented after thebanking hours has no legal effect and therefore banker cannot be held liable for refusing payment on such cheques.

 04. Sufficient balance : Funds in tha a/c must be sufficient and available to honour the cheques. For dishonour of cheque due to shortage of funds banks are not held responsible. Rather, if cheques are drawn without funds, drawers by punishable under Section -138.

 05. Must be valid instrument : Cheques not drawn in the proper form are refused by the paying banker. Section -5 & 6 of the N.I. Act provide that the bank should examine the contents of the cheque to ensure taht it is perfectly a valid instrument containing an unconditional order to pay a certain sum of money.

KYC

 Having sufficiently verified/corrected information about customers is known as “Know Your Customer” (KYC)

Money  Laundering  Prevention  Act,  2012  requires  all  reporting  agencies  to  maintain  correct  and concrete information with regard to identity of its customer during the operation of their accounts. KNOW YOUR CUSTOMER PROGRAM

n  The adoption of effective Know Your Customer (KYC) program is an essential part of financial institutions’ risk management policies.

COMPONENTS OF KYC PROGRAM

Financial institutions in the process of designing the KYC program should include certain key elements. Such essential elements should start from the financial institutions’ risk management and control procedures and should include –

(1) Customer acceptance policy, (2) Customer identification,

(3) On-going monitoring of high risk accounts, and

(4) Identification of suspicious transactions.

n   Financial institutions with inadequate KYC program may be subject to the following risks regarding

Money Laundering:-

1.   Reputational Risk

2.   Operational Risk

 3.   Legal Risk

4.   Concentration Risk

Floating charge

 A floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership  (LLP), which 'floats' or 'hovers' until conversion  into a fixed charge,  at which point the charge attaches to specific assets.

Floating charges can only be granted by companies. If an individual person or a partnership was to purport to grant a floating charge, it would be void as a general assignment in bankruptcy.

Floating charges take effect in equity only. The floating charge has been described as "one of equity's most brilliant creations.