Paying banker’s responsibilities

The section 85(1), 85(2), 128 of negotiable instrument acts provide statutory protection to paying banker for making payments of order cheque, bearer cheque or crossed cheque in that order.

Payment of order cheque

Section -85(1) of N.I.Acts 1881 provides that

“Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course”

The above section provides protection to paying banker if he has made payment of an order cheque in due course (within the meaning of sec.10 of N.I.Act.) and if the proceeds credited to the account of an endorsee if and only if the endorsement is regular.

Payment of bearer cheque

Section -85(2) of N.I.Acts provides that

“Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in full or blank appearing thereon and notwithstanding that any such endorsement purports to restrict or exclude further negotiation”. 

The above section specifies that a cheque which is ‘once a bearer is always bearer’ (which means if a cheque is originally drawn as a bearer cheque remains always bearer irrespective of any endorsements on the back of the instrument). Therefore banks are not required to verify the regularity of the endorsement on the back of the cheque if any and they are protected from liability if they have made payment of an uncrossed bearer cheque to a bearer in due course.

Payment of ‘Crossed cheque’

Section -128.of N.I.Acts 1881 provides that

“Where the banker on whom a crossed cheque is drawn has paid the same in due course, the banker paying the cheque and (in case such cheque has come to the hands of the payee) the drawer thereof shall respectively be entitled to the same rights, and be placed in if the amount of the cheque had been paid to and received by the true owner thereof”.

The paying banker of a crossed cheque shall satisfy the following condition to be eligible for protection under related NI acts.

1. Payment shall be made in due course.
2. Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker.
3. Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed or his agent for collection.

In following cases paying banker does not get statutory protections if he makes the payment of a cheque;

a) Materially altered or signature of the drawer is forged or payment made of a crossed cheque with an irregular endorsement.
b) Makes payment of a crossed cheque to a person otherwise than to the banker then he is liable for the loss to the true owner of the cheque.

Related articles:

Meaning of valid Endorsement

Holder: Who is a holder of a negotiable instrument?

Holder in due course- explained

Payment in due course- explained

A better title to ‘Holder in due course’ explained

Collecting Banker’s responsibility under NI Acts

General and Special crossing of cheques

Effects of ‘Not Negotiable’ mark on a cheque

Difference between assignment and negotiation

Allonge: When is an allonge to be used?