Mr. Stevan introduces himself to you as a salesman of Good Life Appliances Co. Ltd. of Nasik. He hands you a cheque of Rs. 12,000 drawn by one of the customer’s of your bank and requests you to issue a mail transfer in the name of the payee company on your Nasik branch where the company maintains a current account. He wants to know the fate of the cheque immediately so that he can deliver a parcel of appliances to the drawer of the cheque. Will you comply with Mr. Steven’s request?
Since issuing a mail transfer against a cheque drawn by another customer of the bank would first involve collection of the cheque, the request of Mr. Stevan should not be acceded to because the payee is not a customer of your branch and as a result the bank will not be entitled to the protection available under section 131 of the Negotiable Instruments Act, 1881.
The best way to overcome the problem is for the drawer to request the bank to issue the mail transfer to the debit of his account.
Messrs. Raj & Sons, your customer, pay in a cheque drawn on another bank, payable to and purporting to be endorsed by Mr. Khanna. The cheque is crossed bearing the words ‘Not Negotiable’. Will you accept the above cheque for collection?
The crossing bearing the words ‘Not Negotiable’ does not restrict the transferability of the instrument in any way. Nor does is cast any responsibility upon the collecting banker to verify the genuineness of the customer’s title to the cheque. The statutory protection under section 131 of the Negotiable Instruments Act is available to the banker if he collects a cheque marked “Not Negotiable” for a customer who is not the payee therein provided the requirements of section 131 are duly complied with. The cheque in question may therefore be accepted for collection provided there are no irregularities in the endorsements and the cheque is otherwise in order.
Mr. Mukesh opened a savings account for which proper introduction was obtained by the bank. He paid in a cheque crossed ‘Account Payee’ favoring Mr. Singh or bearer drawn on another bank. The cheque was collected. He withdrew the proceeds and disappeared. The drawer has informed that the cheque was stolen in transit. He has called upon to pay the amount as the cheque was collected by the bank for a person other than the payee. Discuss the bank’s position.
No doubt, the cheque has been collected for an introduced account; nevertheless the statute imposes a duty upon the collecting banker to see that there is nothing on the face of the transaction which may indicate that all is not well with the title of the holder.
It is well established that the words ‘account payee’ are addressed to the collecting banker and signify the account for which the proceeds of a Cheque are to be collected. To receive the proceeds of a cheque so crossed for an amount other than that of the named payee would unquestionably be considered negligence. Consequently, the collecting banker will not get the statutory protection.
Mr. Brijesh, employed by Mr. Ramashankar to manage his property, received from a tenant, a cheque payable to “Brijesh for Mr. Ramashankar”. Mr. Brijesh pays this cheque into his (Brijesh’s) account. Would the provisions of the Negotiable Instruments Act protect the bank if it took the cheque for collection in good faith and it subsequently transpired that Mr. Brijesh was not entitled to it?
It is negligence if a bank collects a cheque in the personal account of a person who on the cheque itself is indicated to be an agent or trustee of someone else. In the given case the cheque showed on it’s very face that it belonged to Mr. Ramashankar and Mr. Brijesh was to receive money as agent or constructive trustee. It is elementary banking practice that such cheques are not collected for the personal account of the agent or trustee. Therefore the bank would be liable for conversion and thus deprived of the protection under section 131 of the Negotiable Instruments Act. This apart, the bank would also be liable for becoming knowingly or unknowingly, a party to a breach of trust.
Mr. Patel received an uncrossed order cheque in his favor. He endorsed the cheque in blank and kept it with him for giving it to one of his creditors. However the cheque was stolen by Mr. Raman who endorsed it to Mr. Ravi in payment of a debt. Mr. Ravi took the cheque in good faith and without any notice of defect in Mr. Raman’s title. When Mr. Ravi presented the cheque to the drawee banker it was dishonoured, its payment being stopped by the drawer.
Who is liable on the cheque to Mr. Ravi?
A man who has stolen a bearer’s cheque or a cheque endorsed in blank, can give a perfectly good title to another, who takes it as a holder in due course. A holder in due course is one who takes the cheque for value and without having sufficient cause to believe that any defect existed in the title of the person from whom he received his title. To acquire the status of the holder in due course it is also necessary for the person to see that apparently the cheque has not been in circulation for an unreasonable length of time. If the transferor had defective title or no title, a holder in due course is entitled to claim good independent title to the cheque against all prior parties. But this principle will not be applicable if the cheque bears forged endorsement. In the case of dishonour, the holder in due course has the right to claim the amount of the cheque from the drawer, payee or endorsers. Since Mr. Ravi complies with all the requirements he will be deemed to be a holder in due course. Consequently he can enforce payment from the drawer, or Mr. Raman, or Mr. Patel or all of them at his option.
Mr. Pandey draws a cheque for Rs. 13,000 favoring Mr. Tiwari. The cheque is dishonored by the drawee bank for the want of funds. Subsequently it transpires that a cheque for Rs. 17,000, which was deposited for collection by Mr. Pandey was wrongly credited to some other account by the bank, which resulted in dishonor of the cheque issued to Mr. Tiwari. Mr. Pandey, in the meantime, has been adjudged insolvent. Mr. Tiwari serves a notice on the bank for wrongful dishonour of the cheque and claims damages. Discuss the position of the bank.
By opening an account, the banker undertakes to honor cheques drawn by the customer provided there is sufficient balance in the account and there is no legal bar to the payment. In case the banker defaults in such payments, he must compensate the drawer for any loss or damage caused by such default. Thus for default in the payment of the cheque, the liability of the drawer banker is towards the drawer and not to the payee. Moreover, there exists no contractual relationship between a banker and the holder of a cheque.
When a cheque is wrongly dishonored, the payee or holder thereof has no right of action against the drawer banker. His remedy may lie in an action against the drawer or any other prior party.