Statutory Protection to Collecting Banker
Posted by Ripon Abu Hasnat on Sunday, June 14, 2015 | 0 comments
Section 131 of
the Negotiable Instruments Act provides protection to a collecting banker who
receives payment of a crossed cheque or draft on behalf of his customers.
According to Section 131 of the Act “a banker who has, in good faith and
without negligence, received payment for a customer of 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 of having received such payment.”
The protection
provided by Section 131 is not absolute but qualified. A collecting banker can
claim protection against conversion if the following conditions are fulfilled.
1. Good Faith and
Without Negligence:
Statutory
protection is available to a collecting banker when he receives payment in good
faith and without negligence.
The phrase in “good
faith” means honestly and without notice or interest of deceit or fraud and
does necessarily require carefulness. Negligence means failure to exercise reasonable
care. It is not for the customer or the true owner to prove negligence on the
part of the banker. The burden of proving that he collected in good faith and without
negligence is on the banker. The banker should have exercised reasonable care
and deligence. What constitutes negligence depends upon facts of each case.
Following are a
few examples which constitute negligence:
(a) Failure to
obtain reference for a new customer at the time of opening the account.
(b) Collection
of cheques payable to ‘trust accounts’ for crediting to personal accounts of a
trustee.
(c) Collecting
for the private accounts of partners, cheques payable to the partnership firms.
(d) Omission to
verify the correctness of endorsements on cheques payable to order.
(e) Failure to
pay attention to the crossing particularly the “not negotiable crossing.”
2. Collection
for a Customer:
Statutory
protection is available to a collecting banker if he collects on behalf of his
customer only. If he collects for a stranger or noncustomer, he does not get
such protection. As Jones aptly puts if “duly crossed cheques are only
protected in their collection, if handled for the customer”. A bank cannot get
protection when he collects a cheque as holder for value. In Great Western Railway
Vs London and Country Bank it was held that “the bank is entitled for protection
as it received collection for an employee of the customer and not for the customer.”
3. Acts as
an Agent: A collecting banker must act as an agent of the customer in order
to get protection. He must receive the payment as an agent of the customer and
not as a holder under independent title. The banker as a holder for value is
not competent to claim protection from liability in conversion. In case of
forgery, the holder for value is liable to the true owner of the cheque.
4. Crossed
Cheques:
Statutory
protection is available only in case of crossed cheques. It is not available in
case uncrossed or open cheques because there is no need to collect them through
a banker. Cheques, therefore, must be crossed prior to their presentment to the
collecting banker for clearance. In other words, the crossing must have been
made before it reached the hands of the banker for collection. If the cheque is
crossed after it is received by the banker, protection is not available. Even drafts
are covered by this protection.
To conclude, it
is necessary that the collecting banker should have acted without negligence if
he wants to claim statutory protection under Section 131 of the said Act. The statutory
protection is available to the banker if he collects a cheque marked “Not
Negotiable” for a customer, whose name is not used as the payee there-in,
provided the requirements of the said sections are duly complied with.
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