According to Section 19. of the NI Act 1889, A promissory note or bill of exchange, in which no time for payment is specified, and a cheque, are payable on demand.
Section 31 of the Negotiable Instruments Act, 1881 covers the liability of the drawee of a cheque. The section states that the drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque shall pay the cheque when duly required so to do, and, in default of such payment, shall compensate the drawer for any loss or damage caused by such default.
However, The bank must also ensure the cheque is in order, which means it must meet the following criteria:
The cheque is in the proper form
The cheque has the correct date
The bank takes care of any extra modifications or changes made to the cheque
The bank checks all endorsements on the cheque
The bank ensures that the cheque is issued by the holder in its original form within a reasonable period
The bank ensures that the bank hasn’t provided orders to stop paying or receiving notice of the customer’s death
Cash Payments:
When an uncrossed cheque is presented for payment in cash at the counters of the bank, the presenter should sign on the reverse of the cheque. Banks verify the signature on the cheque with the specimen signature of the drawer on record before making payment. The payment cashier will ask for another signature to be made by the presenter at the time of payment. The banks ordinarily do not insist on the presence of an account holder for making cash withdrawals in case of bearer cheques unless the circumstances warrant bankers to take precautions. In case of the bearer’s word in the cheque is cut then it becomes an order instrument. Banks make payment of order cheques only on confirming the endorsement/s of Payee and other endorsees on the reverse of the cheque. A depositor cannot withdraw a smaller sum than one Rupee except on the occasion of the closure of the account.
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.