Sec 10 of the Negotiable Instrument Act defines ‘Payment in due course” as ‘payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned’.
A paying banker does not get statutory protection under the NI Acts if he does not make the payment of a negotiable instrument in due course. According to the above, the following four conditions are to be satisfied to treat payment as payment in due course.
Payment must be in accordance with the apparent tenor of the instrument.
For example, a banker makes the payment of a postdated cheque. In this case, payment made by the banker is not in accordance with the apparent tenor of the instrument (i.e. payment made before the date apparent on the instrument). Since the payment made by the banker is against the intention of the drawer of the cheque, such payment cannot be treated as payment in due course.
Payment made must be to a legally entitled person in good faith and without negligence
The banker must have made the payment on the true belief that the person who received the payment is entitled to receive payment of the amount therein mentioned. Besides, the drawee (payer) should not be guilty of negligence in making such payment. Guilty of negligence means when the drawee banker did not make a proper inquiry (like any person of normal prudence makes enquiry under such circumstances) before making payment in doubtful situations or when endorsement on the instrument is not regular.
Payment must be made only against the presentation of the instrument for payment.
If the payment is made in the absence of presentation of the instrument for payment, such payment will not be treated as payment in due course. The drawee shall receive and see the instrument (physical or electronic image in clearing) presented to him for payment before making payment, lest it cannot be treated as payment in due course.
Liability of Paying Banker when Customer’s Signature on the Cheque is Forged:
A bank is generally liable for paying a forged check because the bank has a contractual relationship with the customer as a debtor and creditor. Payment of a forged cheque is not a payment in due course. The bank can only avoid liability if the customer knew about the forgery and didn’t inform the bank about it. However, it is difficult to prove that the customer is aware of the forgery and facilitated the payments. In the case of Canara Bank vs Canara Sales Corporation, the Supreme Court ruled in favor of the respondent company in its case against Canara Bank. The company had filed a suit to recover amounts withdrawn via 42 forged cheques totaling Rs. 3,26,047.92. The Court held that the bank acted unlawfully in debiting the company for forged cheques and had a duty to repay the amounts. Further, mere negligence by the customer does not prevent recovering amounts from forged cheques unless the customer’s actions facilitated the forgeries. The bank was ordered to repay the full amount to the company with interest. It has been held that the bank can escape from liability only if it can establish knowledge to the customer of the forgery in the cheques and negligence for a continuously long period cannot by itself provide a relevant ground for the bank to escape liability.
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CLICK here to know ‘10 parties’ to a negotiable instrument viz. maker/drawer, drawee, payee, holder, holder in due course, endorser, endorsee, endorsement, drawee in the case of need, Acceptor for honour.
