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.