Bank Liability and Provisions Pertaining to Collecting Cheques

 Every day, for some purpose of the other, we use cheques to make payments. The world of banking is one that is fraught with risks that we can barely contemplate. Banks have a privileged position by law to honor the cheques that we issue to third parties. Also, the cheque is made out to another bank that collects the cheque. The Supreme Court has held in several cases that at every step, right from collecting money to making payments, a banker is bound by law to safeguard the rights and obligations flowing from the banker-customer relationship.

Bank Liability: How does Section 131 Protect Banks? 

To claim protection for bank liability under section 131 of the Negotiable Instruments Act, the burden is on the bank to prove that it collected the cheque in good faith and without negligence. The collecting banks enjoy protection under section 131 of the Negotiable Instruments Act. The said section reads as follows:

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.

Subsequently, two Explanations were added to section 131, namely:

Explanation 1 -A banker receives payment of a crossed cheque for a crossed cheque for a customer within the meaning of this section notwithstanding that he credits his customer's accounts with the amount of the cheque before receiving payment thereof

Explanation 2 - It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care.

Bank Liability: How Do Courts Interpret Negligence of Banker?

Negligence does not have to be directly pertaining to the collection of the cheque. In a majority of cases, negligence is established in courts when the collecting bank fails to make proper inquiries at the time of opening the account such as reviewing the customer’s occupation and employer to confirm identity and residential address.

Here are some instances when courts held that the collecting banks may have been guilty of negligence:

• Collecting a cheque that was materially altered and the bank did not verify the customer’s details or verify by making proper inquiries.
• Where there is negligence on the bank, due to which some employees of the true owner of the cheque, tried to get the said amount by fraud.
• Collecting materially altered bank drafts.

To claim protection under section 131 of the Negotiable Instruments Act, it is essential for banks to that they take all precautions to ensure that they are not held ‘negligent’ as per this section. In case a bank senses an iota of doubt pertaining to any cheque in the ordinary course of its affairs, it should pave the way for a proper, documented form on inquiry by the bank so that the issue of negligence is not raised in the event of litigation.