Paying banker, collecting banker and crossing of cheques

1. The paying banker: duties

The paying banker is the drawee bank. Under s.31 it must pay its customer's cheques when it has sufficient funds and is duly required. Before paying it must see that:

• the instrument is a cheque in proper form, drawn on that branch, and not stale (beyond three months) or post-dated;
• the drawer's signature matches the specimen and the mandate on the account;
• words and figures agree and there is no apparent material alteration;
• if crossed, it is paid only to a banker (s.126);
• if payable to order, it bears an indorsement that purports to be the payee's, and the indorsements are regular in form;
• funds are available and not subject to any order, lien or countermand;
• there is no notice of the drawer's death, insanity or insolvency, or of a garnishee order.

2. The paying banker: protection

• Payment in due course (s.10): payment according to the apparent tenor, in good faith and without negligence, to a person in possession, where there is no reasonable ground to believe he is not entitled.
• Order cheques (s.85(1)): where a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee is discharged by payment in due course. The bank need not verify that the payee's indorsement is genuine, only that it is regular on its face.
• Bearer cheques (s.85(2)): a cheque originally payable to bearer is paid in due course to the bearer, whatever indorsements appear on it. “Once a bearer cheque, always a bearer cheque.”
• Bank drafts (s.85A): the same protection for drafts drawn by one branch on another.
• Altered cheques (s.89): payment of a cheque whose material alteration, or obliterated crossing, is not apparent, according to its apparent tenor and otherwise in due course, discharges the bank.
• Crossed cheques (s.128): a bank which pays a crossed cheque in due course to a banker is placed in the same position as if it had paid the true owner, and so is the drawer if the cheque had reached the payee.

No protection for a forged drawer's signature. A cheque on which the drawer's signature is forged is not the customer's mandate at all. None of the sections helps the bank, because none of them deals with the drawer's signature. In Canara Bank v. Canara Sales Corporation, 1987 INSC 125, (1987) 2 SCC 666, the bank had paid cheques bearing forged signatures of the company's managing director over several years; it had to restore the amounts. The customer's failure to check pass books was no defence; only the customer's own negligence that directly caused the loss, or estoppel by conduct as in Greenwood v. Martins Bank, can shift it.

Liability for payment out of due course (s.129): a bank which pays a cheque crossed generally otherwise than to a banker, or crossed specially otherwise than to the named banker, is liable to the true owner for any loss.

3. Crossing of cheques

Crossing is a direction to the paying banker to pay only to a banker, so that the money can be traced to an account. Kinds:

• General crossing (s.123): two parallel transverse lines across the face, with or without the words “and company” (“& Co.”), and with or without “not negotiable”. The paying bank shall pay only to a banker (s.126).
• Special crossing (s.124): the name of a banker added across the face, with or without “not negotiable”; parallel lines are not needed. The bank shall pay only to the banker named or its agent for collection (s.126). A cheque specially crossed to two bankers, except to an agent for collection, must be refused (s.127).
• “Not negotiable” (s.130): a person taking such a crossed cheque gets no better title than his transferor had, and cannot give a better one. The cheque is still transferable; it loses only the holder-in-due-course protection.
• “Account payee” crossing: not mentioned in the Act, but recognised by banking usage and by RBI directions. It is a direction to the collecting banker to credit the proceeds only to the payee's account. A collecting bank that credits it to someone else is prima facie negligent and loses s.131.

Who may cross (s.125): the drawer may cross generally or specially; the holder may cross an uncrossed cheque, turn a general crossing into a special one, or add “not negotiable”; a banker to whom a cheque is crossed specially may cross it again to another banker as its agent for collection. Crossing is an authorised alteration (s.87). Section 131A extends these rules to drafts.

4. The collecting banker

When a customer pays a cheque into his account, the bank collects it as his agent. If the customer had no title (the cheque was stolen, or the payee's indorsement forged), the bank has converted the true owner's property and is prima facie liable to him for its value.

Section 131 protects it: a banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself incurs no liability to the true owner, if the title proves defective, by reason only of having received the payment. The Explanation says the banker still receives payment for a customer even if it credits the account before it is paid.

The conditions:

• the cheque is crossed, generally or specially to the collecting bank;
• it is collected for a customer, which means an account holder;
• the bank acts as agent, receiving payment, and not as a holder for value in its own right;
• it acts in good faith; and
• without negligence: judged by the practice of careful bankers, and the burden of proving it lies on the bank.

5. What counts as negligence

• Opening the account carelessly. In Indian Overseas Bank v. Industrial Chain Concern, 1989 INSC 336, the firm's manager was alleged to have opened a fictitious account in the firm's name, describing himself as its proprietor, and to have paid the firm's cheques into it; the firm sued the bank for negligence and conversion. The case is cited for the proposition that the question of negligence under s.131 reaches back to the opening of the account: the bank must make reasonable inquiries about the identity of a new customer, and a failure at that stage is relevant when it later claims protection for collecting cheques for him.
• Unexplained transactions on a new account. In Kerala State Co-operative Marketing Federation v. State Bank of India, 2004 INSC 70, a person opened an account with a small sum, soon paid in a cheque of ₹1 lakh, withdrew half of it, and could not be traced when the drawer stopped payment. The Court treated these as parts of one transaction and held that the bank had failed to discharge the burden of showing that it acted in good faith and without negligence.
• Collecting cheques payable to an employer, a firm or a company for the personal account of an employee, partner or director without inquiry.
• Crediting an account payee cheque to a person other than the payee.
• Ignoring irregular indorsements, unusually large amounts out of line with the customer's business, or cheques payable to a third party paid in by a customer of no standing.

How this is examined

“Define cheque and explain the different kinds of crossing of cheque” (February 2025) is the usual essay; older papers ask for the duties and protection of the paying banker and of the collecting banker. For crossing, give ss.123, 124, 130, the account payee crossing, s.125 and s.126. For the collecting banker, give s.131 with its conditions and two cases on negligence; for the paying banker, ss.10, 85, 89 and 128 with Canara Sales on forgery.