Chapter 8 Case Laws on Responsibility of Paying Bank – CS Professional Banking Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.
Case Laws on Responsibility of Paying Bank – CS Professional Banking Law and Practice Study Material
Question 1.
Discuss Section 10 of the Negotiable Instrument Act, 1881 with the help of relevant case law.
Answer:
Section 10 of the Nl Act: Payment in due course is one made in accordance with the apparent tenor of the instrument that is according to what appears on the face of the instrument to be intention of the parties (Section 10 of the NI Act).
To qualify as payment in due course, the payment will have to comply with the following:
(a) payment should be made to the person entitled to the payment;
(b) it should not be made before the due date;
(c) it should not be made with the knowledge that it may impair the rights of the holder to receive moneys or under reasonable grounds for believing that the holder in due course is not entitled to receive payment; and
(d) the payment must be made in good faith and without negligence under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment.
If the payment complies with the above requirements, then it will get the protection as a payment in due course. Actually, it is difcult to list down good faith and / or negligence, it will depend on the facts and circumstance of each and every case.
Case Law: Whether the Paying Bank was bound to keep ultraviolet lamp and scrutinize cheques even if alteration is not noticed on visual examination?
Facts of the case
A partnership frm opened a current account with a branch of Bank of Maharashtra, Wagle Industrial Estate, Thane. As forgery of cheques were frequently occurring in that locality, all branches were provided with ultraviolet lamp for examining the cheques, except this branch at Thane. On 26th May 1967 one Mr. Shah, opened an account in the name of Imperial Tube and Hardware Mart as a proprietary concern with another nationalized Bank viz. Union Bank of India.
On 29th May 1967 a cheque was presented for ₹ 6500 in clearing in favour of Imperial Tube and Hardware Mart on Bank of Maharashtra by Union Bank on behalf of Mr. Shah. The cheque was passed by Bank of Maharashtra and debited to the account of the drawer namely Automotive Engineering Company (AEC).
Later, AEC raised an objection towards the debit of the cheque on account of forgery. The cheque which was originally issued for an amount of ₹ 95.98 in favour of one Mr: G. R. Pardawaia seemed to have been chemically altered with reference to date, payee’s name as well as the amount of the cheque. AEC wanted Bank of Maharashtra to compensate the loss.
Bank of Maharashtra did not compensate AEC but fled a suit in a court. The trial court held that bank was negligent by not providing ultraviolet lamp at the branch though it agreed that no infirmity is noticed on visual examination of the cheque in question.
The Bank had appealed to the district court in the matter and they too passed a judgement similar to that of trial court. Bombay High Court too held the Bank for negligence by not providing the ultraviolet lamp. The matter was taken to Supreme Court on further appeal by the Bank.
Decision of the Supreme Court
The Supreme Court held that there is nothing in the Nl Act, which makes it obligatory for the bank to subject every cheque to examination under ultraviolet ray lamp, though it could be prudent to examine under the said light.
The bank will not be deemed as failed to take reasonable care in passing the cheque for payment without subjecting it for further scrutiny under ultraviolet ray lamp, as material alteration was not visible on the cheque. The Supreme court ruled in favour of the bank. (Bank of Maharashtra Vs. M/s. Automotive Engineering Co., 1993, 2SCC-97).
What the law requires is to ensure that the alteration is not apparent to the naked eye. In this case the original amount and the name of the payee was chemically altered. To prevent such frauds, normally a transparent cell tape is pasted over the payee’s name and amount.
Question 2.
Explain Section 31 of the Negotiable Instrument Act 1881 with the help of relevant case law.
Answer:
Section 31 of the NI Act reads as The drawee of a cheque, having sufficient funds of the drawer in hands, properly applicable to the payment of such cheque must pay the cheque when duly required to do so and, in default of such payment must compensate the drawer for any loss or damage caused for such default.
A banker is entitled to refuse payment of a cheque drawn in a form whose identity is doubtful or when it is irregular, or when it is undated. The relationship between the customer and the banker also creates certain obligations on the customer. The customer must take due and proper care not to mis-lead the bank.
For any negligence on the part of the customer, the customer shall be responsible. If the customer draws a cheque which facilitates fraud, he is guilty of breach and will be responsible to the banker for any loss sustained by the banker as a direct consequence of breach of duty. The negligence should be directly connected to the transaction itself. This will depend on the facts and circumstances of each case.
Case Law: A banker is not absolved of his liability on forged cheque if it has acted negligently, even if the customer was negligent.
Facts of the case
Lala Pirbhu Dayal (LPD)was a customer of Jwala Bank. On 16th March 1936 cheque No. 23958 for ₹ 57- 8-0 was presented at the bank alleged to have been signed by the plaintiff LPD in favour of one Bhai Kashi Nathji. The Bank honoured the cheque and paid the amount to the person who presented the cheque. LPD complained to the Bank that he had not drawn cheque of ₹ 57-8-0 debited to his account.
The bank did not accept LPD’s contention and refused to make good the amount and maintained that the cheque was passed in the usual course and his signature was fully tallied with his specimen signatures. Unable to recover any money from the bank, LPD fled a suit to recover his money.
The trial court judge found that though the signature on the forged cheque did not tally with LPD’s signatures and held that bank was not legally liable to return the amount of the cheque to LPD as it has not been shown that the payment of the same was made by it dishonestly and knowing that it was a forged cheque.
The court also took cognizance of the matter that other persons had also access to the box containing the cheques remained unlocked during day time at LPD’s home and held him negligent for leaving his cheques in an unlocked box and dismissed the case. LPD fled an appeal against the trial court judgement before the Allahabad High Court.
Decision of the Allahabad High Court
A banker is not absolved of his liability on forged cheque, even if the customer was negligent in keeping the cheque book under lock and key as required by the rules of the bank. The Court held that it is the duty of the employees of the bank to be able to identify the signature of the customers and if they fail to discharge their duty and thereby suffer loss, there is no reason why the customer should make good that loss. (Lata Pirbhu Dayal vs. Jwala Bank Ltd., AIR 1938 All. 374)
Question 3.
Write a short note on Section 85 of the Negotiable Instrument Act, 1881.
Answer:
Section 85 of the NI Act : (a) Where the cheque is payable to order is indorsed by or on behalf of the payee, the drawee is discharged by payment in due course.(b) where a cheque is drawn in favour of a bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any indorsement in full or blank and notwithstanding any such indorsement purports to restrict or exclude further negotiation.
This section ensures that a bearer cheque does not lose its character by any indorsement on the same, but the protection is available only if the payment is in due course. It must appear that the holder is the person entitled to payment of the cheque though the bank need not bother itself about the genuineness of indorsement.
Cheque honoured without reference to the crossing is negligent. However, in case of any irregularity, if the bank make enquiries and is satisfied and makes payment thereafter, the bank will be considered as not being negligent.
This section does not extend protection to the banker if the payment is made on a forged cheque. Mandate of the customer to the bank to pay the cheque signed by him, which is recognized by Section 85 is not available to the bank in a forged cheque. If a customer is aware of forgery whereby his banker debits his account, but fails to inform the bank till the chances of recovery from the forger is materially prejudiced, it was decided that the customer was precluded from claiming the amount.
Question 4.
Explain Section 89 of the Negotiable Instrument Act, 1881 with the help of relevant case law.
Answer:
Section 89 of the Nl Act: If the alternation of a cheque is not apparent and the bank has made payment in due course, in good faith and not acting negligent, then such payment shall not be questioned by the reason of that the instrument was altered or the cheque crossed.
Now since truncated cheques are transmitted, it shall be the duty of the bank or the clearinghouse, as the case may be, to ensure exactness of the electronic image while truncating and transmitting the same. The receiving party of such truncated cheque shall also ensure from the other party transmitting the image, that the image transmitted is exactly the same.
Protection under this section is available to the Bank only if the (a) alteration is not apparent; and (b) the instrument is paid in due course and in good faith and without negligence.
Case Law: Liability of a Bank in respect of a cleverly forged cheque.
Facts of the case
On 1-7-1946 One Mr. Brahma issued cheque for ₹ 256/- payable to Mr. J. M. Das Gupta from his account in which the bank used to allow overdrafts against securities given for such overdrafts from time to time in the form of marketable shares.
The cheque was sent by post, but the it did not reach the said payee. Mr. Brahma use to allow his clerks to prepare the cheques and he used to sign. Mr. Brahma was informed by his bank by a letter dated 24-7-1946, that after paying a sum of ₹ 2, 34,081/-,against the said cheque the drawer’s account had been overdrawn to the extent of ₹ 2,19,460/-.
It was later found that Mr. Brahma did not draw any cheque or authorise any payment of ₹ 2,34,081/-. He had issued the said cheque for ₹ 256/=. During the transit of the cheque was intercepted and stolen. The amount and the name of the payee had been cleverly altered to ₹ 2,34,081/- with the name of the payee as S. Dass & Co. in place of J.M. Das Gupta, the original payee.
These alterations and forgeries were not noticeable to the naked eyes. The cheque was collected on behalf of S. Dass & Co by Hindustan Industrial Bank Ltd. Mr. Brahma sued his bank, S. Dass & Co. and Hindusthan Industrial Bank Ltd., through whom the collection of the cheque was made for negligence and wrongful conversion or unlawful appropriation of the proceeds of the cheque.
After lengthy deliberations over a period of time the Calcutta High Court gave a judgement in the matter, the summary of which is below:
Decision of the High Court
The Calcutta High Court held that since no alteration or obliteration was visible at the time of payment, the payment was made according to the apparent tenor of the cheque. Further since drawer had on other occasions also issued cheque signed by him and written by others, the bank suspicion could not have aroused.
The court also held that the words “liable to pay” appearing in section 89 included a liability to pay under an overdraft agreement as much as it applied to an ordinary deposit account. As regards exceeding the overdraft limit, the court held that no definite limit was fixed at the time and it fluctuated according to the securities deposited.
Hence the paying bank was absolved of negligence. However the court held S. Dass & Co. as well the collecting bank for negligence and conversion. (Brahma Shum Shere Jung Bahadur and Other Vs Chartered Bank of India and Others, AIR 1956, 399)
Question 5.
Write a brief note on Truncated Cheques.
Answer:
Truncated Cheques:
The process of truncation requires the banker to convert the cheque data to electronic form for the purposes of safe keeping or to return the cheques at the request of the banker to provide information on cheques as and when requested.
Cheque in the electronic form means a cheque which contains the exact mirror image of a paper cheque and id generated, written and signed in a secure system ensuring minimum safety standards with the use of digital signatures (with or without biometric signature) and asymmetric crypto system.
Under the cheque truncation system all cheques are transmitted electronically. The original cheques are retained by the collecting banker.
Provision and Process:
Truncation of cheques can be done by the clearing house or the bank which collects the truncated version of the cheque.
Section 6 (b) of the NI Act, defines a truncated cheque as a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.
As per Section 81 of the Nl Act, the banker who receives the payment is also supposed to retain a copy of the cheque even after payment has be done. Section 89 of the Nl Act provides that any difference between the original cheque and the truncated image should be construed as material alteration. In such cases, it is obligatory on the part of the clearing house or the bank to ensure correctness of the truncated image while transmitting the image.
Question 6.
Write a brief on Cheque bouncing.
Answer:
Section 138 to 142 of the NI Act: Cheque bouncing Under Section 138 of the NI Act, dishonour of a cheque is a criminal offence liable to be punished with 2 years imprisonment.
The following are required to be satisfied to make the dishonour an offence under the provisions of the NI Act.
- Existence of a legally enforceable debt or other liability by the drawer of the cheque towards another person (will be payee or holder of the cheque, as the case may be) and a cheque is drawn to discharge the debt or liability.
- Cheque is returned due to insufficient funds or exceeds the amount agreed upon to be paid by the bank.
- Cheque should be presented within its validity (i.e) 3 months from the date of issue.
- Notice in writing is sent within 30 days to the drawer along with the receipt of information from bank about failure of payment of cheque.
- The payee or holder doesn’t receive the payment within 15 days of the receipt of the notice to the drawer.
Cheques issued towards payment of debt will only attract the provisions of Section 138. Cheques given for donation or post dated cheques issued for security purposes or undated cheques will not be covered under this section.