Paying Bank

 Paying Bank : ‗Paying Banker‘ is the ‗drawee‘ bank or in other words the banker upon whom a cheque is drawn. It pays the cheque to the collecting banker who presents those before him on behalf of their customers. He is responsible to the customers and duty bound to make payments to the right persons in accordance with the instructions of the drawer.

 

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 the banking hours

has no legal effect and therefore banker cannot be held liable for refusing payment on such cheques.

04. Sufficient balance:

Funds in the 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 that it is perfectly a valid instrument containing an unconditional order to pay a certain sum of money.

 

Statutory protection to paying banker.

01. Protection in case of order cheque:

In case of an order cheque, Section-85(1) provides statutory protection to the paying banker as

follows : ―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‖.  However, two conditions must be fulfilled to avail of such protection.

(a) Endorsement must be regular : To avail of the statutory protection, the banker must confirm that the endorsement is regular.

(b) Payment must be made in Due Course : The paying banker must make payment in due course. If not, the paying banker will be deprived of statutory protection.

02. Protection in case of Bearer cheque:

Section-85(2) provides protection to the paying banker in respect of bearer cheques as follows :

―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 blank appearing thereon and notwithstanding that any such endorsement purports to restrict or exclude further negotiation‖. This section implies that a cheque originally issued as a bearer cheque remains always bearer. In other words it retains its bearer character irrespective of whether it bears endorsement in full or in blank or whether any endorsement restricts further negotiation or not. So the banks are not required to verify the regularity of the endorsement on bearer cheque, even if the instruments bears endorsement in full. The banker shall free from any liability (discharged) if he makes payment of an uncrossed bearer cheque to the bearer in due course. If such cheque is a stolen one and the banker makes its payment without the knowledge of such theft, he will be discharged of his obligation and will be protected under Section-85(2).

03. Protection in case of Crossed cheque:

The paying banker has to make payment of the crossed cheques as per the instruction of the drawer

reflected through the crossing. If it is done, he is protected by Section-128. This section states

―Where the banker on whom a crossed cheque is drawn has paid the same in due course, the banker paying the cheque and (in case such cheque has come to the hands of the payee) the drawer thereof shall respectively be entitled to the same rights, and be placed in the same position in all respects, as they would respectively be entitled to and be placed in if the amount of the cheque had been paid to and received by the true owner thereof‖.

Collecting Bank

 The bank which collects the proceeds of cheques, drafts, pay orders and bills etc. from other banks for

deposit into the accounts of its customers is called a collecting banker.

Capacity of Collecting Banker :

As an Agent : A collecting banker acts as an agent of the customer if he credits the latter‘s account with the

amount of the cheque after the amount is actually realised from the drawee bank. Thereafter, the customer is entitled to draw the amount of the cheque. The banker thus acts as an agent of the customer and may charge from him a commission for collecting the amount from other banks.

As an agent of his customer, the collecting banker does not possess title to the cheque better than that of the customer. If the customer has no title thereto, or his title is defective, the collecting banker can not have good title to the cheque. He will be held liable for conversion of money, i.e. illegally interfering with the rights of the true owner of the cheque.

As Holder for Value : Collection of cheques takes some time, specially in case of outstation cheques. If the collecting banker pays to the customer the amount of the cheque or credits such amount to his account and allows him to draw it before the amount of the cheque is actually realised from the drawee bank, the collecting banker is deemed to be its ‗holder for value‘. The bankers takes an undertaking from the

customer to the effect that the latter will reimburse the former in case of dishonour of the cheque.

 

Duties of Collecting Banker

01. Presentation of cheques for payment within reasonable time:

The banker should collect the cheques, sent by the customers, with due care. As per Section-74, they

must present the cheque to the drawee bank within a reasonable time. According to the practice followed by the bankers, if the collecting and paying bankers are in the same place, the collecting banker should present the cheque before the next clearing immediately after he received it. In case of outstation cheques, he should despatch the same to the drawee banker on the same day after it is received by him. The cheque may also be presented through a clearing house or through the post. If a cheque presented with undue delay and in the meanwhile the drawer of the cheque suffers damage, the drawee is discharged to the extent of damage.

02. Notice of dishonour :

In case a cheque is dishonoured and returned back by the paying banker to the collecting banker

without payment for one reason or the other, the banker must serve a notice of dishonour on his

customer to enable the latter to claim the amount from the previous parties including the drawer.

 

Statutory protection to Collecting Banker.

01. Crossed cheque only:

The statutory protection is available to the banker only in case of cheque crossed generally or

specially to himself. He can not avail this protection in case of uncrossed cheque.

02. Collection as an Agent:

The statutory protection is available to the banker if he collects the cheque as an agent of the

customer and not as its holder for value.

03. Good faith and without negligence:

The most essential prerequisite for availing of the statutory protection is that the banker must

receive payment in good faith and without negligence. A thing is deemed to be done in good faith when it is in fact done honestly irrespective of whether negligently or not. He should not be negligent in receiving the payment. The onus of proving that he was not negligent in collecting the cheque lies, however, on the banker himself.