Protection of Paying Banker
Table of Contents
Business Low Notes :-
The paying banker is in a privileged position as regards the payment of his customer’s cheques.-According to section 85 where a cheque payable to order signifies to be indorsed by or on behalf of the payee, the banker is discharged by payment in due course.
He can debit the account of the customer with the amount even though the endorsement of the payee turns out subsequently to have been forged, or the agent of the payee without authority indorsed it on behalf of the payee. It would seem that the payee includes indorsers.
This protection is granted because a banker cannot be expected to know the signatures of all persons m the world. He is only bound to know the signatures of his own customers. Therefore the forgery of drawer’s signature will not ordinarily protect the banker, but even in this case, the banker may debit the customer’s account, if he can show that the forgery was intimately connected with the negligence of the customer and was the proximate cause of loss. With regard to bearer cheques the rule is ‘once a bearer cheque always a bearer cheque’.
Therefore, where a cheque is originally expressed by the drawer himself to be payable to bearer. The banker may ignore any indorsements on the cheque. He will be discharged by payment in due course.
But a cheque that becomes bearer by a subsequent indorsement in the blank is not covered by this section (Section 85).
Collecting Banker: By Sec. 131, where a banker in good faith and without negligence receives payment on behalf of a customer of a cheque crossed generally or specially to himself and the customer has no title to the cheque, the banker is protected against the claims of true owner. The banker will be protected only if he proves that :
- the cheque collected by him was crossed before it reached his hands,
- the cheque was presented by or on behalf of the customer and that he received payment for the
- he acted in good faith and without negligence in collecting the money due on the cheque. Therefore, if he collects an uncrossed cheque or a crossed cheque for a non- customer, he gets no
Instrument payable on demand— The following instruments are payable on demand :—
- A cheque is always payable on
- A note or bill in which no time for payment is
- A note or bill expressed payable “on demand”, or “at sight”, or “on presentment”.
Instrument which are not payable on demand are expressed to be payable at certain period ‘after sight or ‘after date’, or after happening of ‘an event’ which is certain to happen. Thus,
bill or note may be made payable 30 days after sight, 60 days after date, or 90 days after the death of A, and payment can be demanded on presenting it on its maturity.
Sometimes it may happen that an instrument is so worded that it can bt interpreted either ts a bill of exchange or as a promissory note. Such an instrument is called an Ambiguous Instrument and the holder may treat it either as a bill or a promissory note. A bill drawn by an agent on his principal, or by one branch of a bank on another is an ambiguous instrument and the holder may treat it as a bill or a note.
Again, it may happen that a person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instrument, and either wholly blank or having written thereon an incomplete negotiable instrument, he is said to issue an Inchoate Instrument. He thereby gives authority to the holder of the instrument to make or complete up on it a negotiable instrument, for any amount not exceeding the amount covered by the stamp.
A signs a promissory note without stating the amount payable, puts a 25 paise stamp on it and hands it to his clerk B for making certain purchases and asks him to put the amount. B purchases goods worth Rs.400 but puts Rs.500 in the note. The note is negotiated to C, who takes in good faith and for value. C can recover Rs.500 from A,
Maturity of an Instrument- The maturity of a bill of exchange or a promissory note is the date on which it falls due. An instrument payable at a specified period after sight, or after date or after the happening of a certain event is entitled to three days of grace. Such a bill matures or falls due on the last day of grace, and must be presented for payment on that day. If it is dishonoured, a suit can be filed on the next day after maturity.
When a note or bill is expressed to be payable at a stated number of months after sight, or after date; or after certain event, the period of payment terminates on the day of the month which corresponds with the date of the instrument, or with the date of acceptance of the bill be accepted, or, presented for sight or noted or protested for non-acceptance.
If the month in which the period would terminate has on corresponding day, the period shall be held to terminate on the last day of such month. If the date of maturity falls on a public holiday, the instrument is payable the preceding business day. Thus, if a bill is at maturity on a Sunday, it will be deemed due on Saturday and not on Monday.
The Instruments entitled to days of grace are :
- A bill of exchange or p;u,nissory note payable at a specified
- A bill or note payable after sight,
- A bill or note payable at a certain period after date, iand
- A bill or note payable at a certain period after the happening of a certain event. The Instruments which are not entitled to days of grace :
- A cheque,
- A bill or note payable at sight or on presentment or on demand and
- A bill or note in which no time is
Parties to a Bill of Exchange
- The Drawer: the person who draws the
- The Drawee: the person on whom the bill is
- The Acceptor: the person who accepts the bill. Generally, the drawee accepts the bill, but stranger may accept on behalf of the
- The Payee: one to whom the sum stated in the bill is payable. Either the drawer or any other person may be the
- The Holder is either the original payee or any other person to whom the payee has endorsed the In case of the bearer bill, any bearer is the holder.
- The Endorser: when the holder indorses the bill to anyone else he becomes the
- The Endorsee is the person to whom the bill is
- Drawee in case of need: Besides the seven parties, another person called the drawee in case of need, may be introduced at the option of the The name of such a person is added to the bill so that when the bill is dishonoured either by non-acceptance or by non-payment, the bill may be accepted or paid.
- Acceptor for Honour: a person who voluntarily becoitles a party to a bill as an acceptor to save the honour of the drawer at any
Parties to a Promissory Note ,
- The Maker: the person who makes or executes the note promising to pay the amount stated therein (Debtor).
- The Payee: one to whom the note is payable (Creditor).
- The Holder: is either the payee or some to whom he may have endorsed the note. 4,5. The Endorser and Endorsees: Same as in the case of a
Parties to a Cheque
- The Drawer: the person who draws the
- The Drawee is always the drawer’s banker on whom the cheque is
3,4. The payee, Holder, Indorser and Indorsee: same as in the case of a bill of exchange 5&6 or promissory note.
Holder and Holder in due course
A holder of negotiable instrument is a person who is entitled to be legally in possession of the instrument and to recover or receive the amount due thereon from the parties to the instrument (Sec.8). A person who has obtained possession of the instrument by illegal means, e.g. by theft, or under a forged indorsement, is not a holder. He cannot recover amount from the parties thereto.
A holder in due course is a person who obtained possession of the instrument for valuable consideration before its maturity, (i.e. before the amount mentioned in it becomes payable), and had no cause to believe that any defect existed in the title of the person from whom he derived title (Sec.9)
It follows from the above that a person is a holder in due course if:
- he has obtained the instrument for valuable consideration. Where the instrument is obtained by gift or by illegal means, the holder can not become a holder in due
- he has obtained the instrument complete and regular in all
- he has become the holder before its
- he has obtained the instrument in good faith. Good faith simply means that a person takes the instrument without sufficient cause to believe that any defect existed in the title of the person from whom it is So where an instrument was torn into pieces and then pasted or the amount on the bill was erased, it should have arouse suspicion and the holder may not be called holder in due course.
Special Rights or Privileges of a Holder in due course
According to Sec.53 of the Act, once a negotiable instrument passes through the hands of a holder in due course, it gets cleansed of all defects, unless he himself was a party to fraud or illegality committed regarding the instrument.
The rights of a holder in due course can be summed up as follows :
- He gets a good title to the instrument even though the title of the transferor is Thus, he may get a better title than that of the transferor; e.g. if A steals a bill from B and endorses to C, a holder due course, C can recover the amount from B, although A cannot recover from B.
- Every prior party to a negotiable instrument is liable thereon to a holder in due course untill the instrument is duly
- A holder in due course can sue all the parties liable to pay in his own
- The holder in due course gets a good title even though the instrument was originally and inchoate stamped instrument and the transferor completed the instrument for a sum greater than what was intended by the maker. He can recover the full amount provided the stamps affixed were sufficient to cover the
- Where a bill is drawn payable to drawer’s order in fictitious name and endorsed by the same as drawer’s signature, the acceptor cannot plead, by way of defence, then the bill is drawn in fictitious
- In the eyes of the law, every holder is a holder in due course unless proved
- Even though between the immediate parties to an instrument it was caused by fraud etc., once the instrument passes through the hands of a holder in due course, it is purged of all defects, and any person acquiring it takes it free of all defects, unless he was himself apart to the
- The maker of promissory note, the drawer of bill of exchange or cheque, and acceptor of a bill for the honour of the drawer, in a suit thereon by the holder in due course, is not permitted to deny the validity of the instrument as originally made or drawn. (A minor can plead minority).
- The indorser of a negotiable instrument, in a suit thereon by the holder in due course, course, is not allowed to deny the signature or the capacity to contract of any prior party to the
- In case of forged instrument, a holder in due course will get no title because it amounts to complete absence of title rather than a mere defect in (Sec.58).