Protection of Collecting Banker

When a customer of a banker receives a cheque drawn on any other banker he has two options before him –

(i) either to receive its payment personally or through his agent at the drawee bank, or
(ii) to send it to his banker for the purpose of collection from the drawee bank. In the latter case the banker,
deputed to collect the amount of the cheque from another banker, is called the ‘collecting.

A banker is under no legal obligation to collect his customer’s cheques but collection of cheques has now become an
important function of a banker with the growth of banking habit and with wider use of crossed cheques, which are
invariably to be collected through a banker only. While collecting his customer’s cheques, a banker acts either

(i) as a holder for value, or

(ii) as an agent of the customer.

Banker as Holder for Value

A banker becomes its holder for value by giving its value to the customer in any of the following ways:

(a) by lending further on the strength of the cheque;

(b) by paying over the amount of the cheque or part of it in cash or in account before it is cleared;
(c) by agreeing either then or earlier, or as a course of business, that customer may draw before the cheque is
cleared;
(d) by accepting the cheque in avowed reduction of an existing overdraft; and
(e) by giving cash over the counter for the cheque at the time it is paid in for collection.

United Bank of India v. Smt. Kananbala Devi and others

The drawer of the cheque stopped payment of the cheque by a notice given to the branch on which it was drawn. The
payee afterwards endorsed the cheque to another branch of the same bank, and the manager of that branch advanced
money on the cheque in good faith and without notice that the cheque had been stopped. Held that the bank was the
holder of the cheque and was entitled to relief. The Supreme Court held that the notice to one branch of the bank is not
a notice to all the branches of the bank.

Silchar Bank Ltd. v. Pioneer Bank Ltd

A drew a cheque in favour of B on bank P. B presented the cheque for payment which was returned with the
endorsement that the cheque will be paid after realisation of the proceeds of a bill for A.B endorsed the cheque in
favour of S Bank and received full payment. Bank S presented the cheque which was returned with the former note.
When the cheque was presented second time the drawer stopped payment. Held, that the endorsement on cheque did
not amount to dishonour and bank S had become holder in due course before the drawer stopped payment and
therefore the drawer was liable to compensate the bank.

Collecting banker as an agent

A collecting banker acts as an agent of the customer if he credits the latter’s account with the amount of the cheque
after the amount is actually realized from the drawee banker. Thereafter the customer is entitled to draw the amount of
the cheque. The banker thus acts as an agent of the customer and charges from him a commission for collecting the
amount from outstation banks. As an agent of his customer, the collecting banker does not possess title to the cheque
better than that of the customer. If the customer has no title thereto, or his title is defective, the collecting banker
cannot have good title to the cheque. In case the cheque collected by him did not belong to his customer, he will be
held liable for conversion of money, i.e., illegally interfering with the rights of true owner of the cheque.
Statutory Protection.
Section 131 of the Negotiable Instruments Act 1881 governs the protection given to the collecting banker in India,
runs 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. Explanation: A banker receives
payment of a crossed cheque for a customer within the meaning of this section notwithstanding that he credits
his customer’s account with the amount of the cheque before receiving payment thereof

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.

 Firstly, it should be noted, that the statutory protection given to the collecting banker can be claimed only for
crossed cheques, which term does not include cheques on which drawers' signatures are forged.
If the cheque is crossed after it has reached the hands of the collecting banker, he cannot claim protection under
Section 131 of the Negotiable Instruments Act, 1881 as such a cheque is not regarded as a crossed cheque within
the meaning of the said section.
 He should receive payment for a customer. The protection can be claimed only for those cheques which the banker
collects as an agent and not for those collected as holder for value, or in which he acquires personal interest. The
distinction between collecting a cheque and holding it for value was originally determined by the fact, whether or
not the banker had paid cash or had given credit to the customer for its amount before collection.
 Lastly, the collecting banker can claim protection only if he received payment "in good faith and without
negligence". If the words "in good faith and without negligence" were to refer to the receipt of money only, they
would, in the words of Sir John Paget be, "nugatory, worse than nugatory and a mere trap". However they refer to
all the preliminary operations leading up to the receipt of the payment. The first part of this condition, which
refers to good faith, does not require any comment, as, in this book, we have presumed that bankers act in good
faith. It is. therefore, the second part which refers to negligence that need be considered here.

Canara Bank Ltd. v. Govind Ram Rajinder Kumar and others

Held that it is the duty of the collecting bank to act without negligence. Where the endorsement on the draft was
fictitious and the collecting bank failed to check it, the collecting bank was not protected by Section 131. It was
also held that when the collecting bank confirms the endorsement, the payee bank would be naturally entitled to
assume that the collecting bank had performed its duty without negligence, therefore, the payee bank is entitled to
protection under Section 85-A. Had there been no confirmation of endorsement by the collecting bank on the
reverse of the draft there can be no doubt that the payee bank would also have not been entitled to the protection
of Section 85-A.

Ladbroke vs Todd

In this case a thief stole a cheque in transit and collected the same through a banker where he had opened an
account without reference and by posing himself as the payee whose signature the thief forged. After the cheque
was collected the thief withdrew the amount. The bank was held liable to make good the amount since it acted
negligently while opening the account in as much as it had not obtained any reference.

Nu-Stilo Footwear Ltd. vs Lloyds Bank Ltd

The plaintiffs who were manufacturer of ladies footwear were defrauded by their Secretary and Works Accountant
who converted 9 cheques payable to the plaintiffs into his account. The Secretary opened the accounts in the
defendant bank in a false name and as reference gave his real name. The bank thereupon called the reference and
got a satisfactory reply which included the fact that the account holder had recently come down from Oxford and
intended setting up a business of his own. The Secretary thereupon presented 9 cheques totally aggregating to £
4855. Since these cheques were drawn on the plaintiffs they sued the defendant bank who had collected the
cheques. The Court held that the collecting bank was negligent in as much as the collecting bank did not take
 necessary precautions because the amounts collected were inconsistent with the business of the account holder and
therefore necessary enquires should have been made by the bank.

Ross vs London County Westminster and Parrs Bank Ltd

Cheques payable to “the Officer in charge, Estate Office, Canadian Overseas Military Force” were used by an
individual to pay off his debts. There was an instruction in all the cheques that it was negotiable by the concerned
officer. However, it was held that the fact that the cheques were drawn in favour of the Officer in charge should
have put the banker on enquiry and since no such enquiry was made by the banker the bank is liable on the
grounds of negligence.

Duties of the collecting bank

1. Duty to open the account with references and sufficient documentary proof

Indian Bank vs Catholic Syrian Bank

D opened an account at Salem branch of Bank A with the introduction of a customer who falsely claimed to be a well-
known merchant. D presented a forged demand draft for ₹29,000, originally issued for ₹20 by Bank B's Singanallur
branch, which was altered and credited to D’s account. Bank A did not verify D’s background adequately, neglecting
to check the legitimacy of the introducer or D’s business details. After discovering the fraud, Bank B sued Bank A for
negligence, claiming that the collecting bank had failed to exercise due diligence in opening D’s account. The High
Court found that Bank A was negligent in failing to verify D’s identity, business, and creditworthiness before allowing
him to open the account.

2. Duty to confirm the reference where the referee is not known or has given reference in absentia

Harding vs London Joint Stock Bank

An account was opened for a new customer after complying with the necessary formalities. The account was not
opened by deposit of cash as is the usual practice but was by paying in a third party cheque. The bankers in the case
made enquiries with the customer who thereupon produced a forged letter issued by his employer giving him power to
deal with the cheque. It was thereafter found that the cheque was stolen by the customer and credited to his account.
The bank was held negligent for failure to make necessary enquiries from the employer as to whether the customer
who was an employee had in fact the necessary power to deal with the cheque.

3. Duty to ensure crossing and special crossing

4. Duty to verify the instruments or any apparent defect in the instruments
5. Duty to take into account the state of customer’s account
6. Negligence of collecting bank in collecting cheques payable to third parties