RISK INVOLVED IN COLLECTION The ‘Doctrine of conversion’ which intervenes in the

negotiable instruments operation is one such risk. Conversion is an unauthorized interference with

another persons property inconsistent with the owner’s right of possession. Any person who however, innocently obtains possession of the goods of a person who has been fraudulently deprived of them and disposes of them whether for his own benefit or that of some other person is guilty of convesion.

The CB runs the risk when he collects the cheques of customers which have defective titles, the true owner of the cheque may sue the banker and collect the money already collected by the banker and paid to the person who presented the cheque for collection.

The banker has to present the cheque for collection within a reasonable time.

If any instruction is given by the customer regarding the appropriation of collection proceeds, he should strictly follow such instruction otherwise CB is liable.

In case of dishonor information should be given.

DUTIES OF COLLECTING BANKER He should always accept cheques for collection

which are genuine. In case of customers who open account for the sake

off getting the cheque collected the CB should get proper introduction from his account holder.

The genuinity of the title of the instrument should be tested before accepting the cheque for collection.

If the cheque presented for collection belongs to any firm or trust and presented through the personal account………………….

The collecting banker should not collect under suspicious circumstances.

He should see that only the crossed cheque is given for collection.

STATUTORY PROTECTION

The negotiable instrument Act 1881 provides some protection. sec 131 and 131A of the act deals with the protection given to the CB

sec 131 ‘A banker who has in good faith and without negligence, received payment for customer, of a cheque, of a cheque crossed generally or specially to himself, and incase the title to the previous cheque proves defective incur liability to the true owner of the cheque by reason only of having received such payment.

Protection to CB

The cheque must be crossed before it is presented for payment by the customer who presents it for collection.

An open cheque cannot be collected or when sent for collection after crossing by the CB, he will not get statutory protection.

Sec 131 also state that the amount should be collected in good faith and without negligence.

According to court decision negligence “Mathuri sanyasalingam vs. Exchange bank of India

and Africa Ltd” in this case banker failed to obtain proper introduction of a new customer at the time of opening a current account which tantamount to negligence.

At the time of opening an account of a new customer the banker may fail to ascertain the name of employer of the customer.

Not verifying the references given by the customers at the time of opening the account. union bank of India vs national overseas and Grind lays Bank ltd.

It is the duty of the banker to ascertain the name of the husband and his employer when the banker has to open an account in the name of a married woman.

Not verifying regularity of endorsement on an order cheque collected by the banker. Bavins junior and Sims vs. London and south western bank, CBI vs. Gopinath Nair).

when a customer presents a cheque for collection which may lead to suspicion and if the enquiry is not made in such circumstances.

Protection for Bank Draft

section 131A of N.I. Act gives protection to the CB as regards the draft collected by him having forged endorsement or the draft having defective title or no title at all. However all the conditions laid down in sec 131 should be satisfied to get the protection.

Not applicable to BOE

Provision 131 and 131A of NI act 1881 do not apply to BOE as they are not crossed.

The CB has no obligation to collect the bills on behalf of customers.

To provide services to customers the bill are collected

The bills should be remitted to the true owner or else he will not get statutory protection.

Precautions to be taken by CB He must make sure that the bill presented for

collection has genuine title and is free of defects.

Only bills of trusted customers must be collected.

The bill on realization should be credited to the customers account and be informed accordingly to the customers

The bill should be presented within a reasonable time.

Banker acting as both CB and PB Sometimes, the cheuqe are drawn on the

banker himself by one customer for another customer.

He will be acting as both CB and PB. He will be given protection under both the

capacities, If he satisfies the condition relating to both

the provision given. It is easier to get protection as PB than CB

(carpenter company vs. British mutual company).

CHEQUE

According to sec 6 “a bill exchange drawn on a specified banker and not expressed to be payable otherwise than on demand’’

Proper drawing of cheque The date column Ante dating and post dating Payee column Amount and signature column

Electronic cheque

sec 6(a) of the NI act “ a Cheque in the electronic form means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system, ensuring the minimum safety standards with the use of digital signature.’’

Truncated cheque sec 6(b) of the N.I act “ a cheque which is

truncated during the course of a clearing house either by the clearing hose or by the bank, whether paying or receiving payment, immediately on generation of an electronic image for transaction, substituting the further physical movement of the cheque in writing.

Features of truncated cheque

It is an electronic image of a physical paper cheque. It is only clearing hose or the banks involved can

truncate a cheque Any holder or drawer cannot truncate a cheque. It is done only for the purpose of clearing to reduce

time taken for collection. The physical cheque after truncation, is need to be

retained in the custody of clearing house

Crossing of cheques

A cheque may be classified An open cheque A crossed cheque

Crossing

a cheque is said to be crossed when two transverse parallel line with or without any words drawn across its face. A crossing is a direction to the paying banker to pay the money generally to a banker or a particular banker and no to the holder at the counter,.

Crossing may be written, stamped, or printed.

Object of crossing

Crossing affords security and protection to the true owner since payment of cheque has to be made through a banker.

It helps to detect to whose use the money has been received.

Cheques are crossed in order to avoid losses arising from open cheques falling into the hands of wrong person.

Crossing of cheque does not affect its negotiability.

Uses or merits

It helps in making and receiving heavy payments in the fastest manner.

It serves as a receipt and as both means of payment and acknowledgement.

In case of disputes between the parties, it acts as a witness in the court of law and the entries in the pass book and the ledger book will also help in this regard.

In case of loss, theft- the holder may advice the company to stop payment in order to avoid misuse of cheque.

Types or modes of crossing

General crossing: where a cheque bears across its face two transverse parallel line with or without any words it is called ‘general crossing’

Words such as ‘and company’ or any other abbreviations e.g. ‘&co.,’ may be written in between these two transverse parallel lines.

Absence of these words would not affect the validity of the crossing.

specimen

Special crossing

Where a cheque bears across its face an addition of the name of a banker with or without the words ‘ not negotiable’ it shall be deemed to be a special crossing(sec124)

When a cheque has been specially crossed, the banker upon whom it has been drawn will make the payment only to that banker in whose favour it has been crossed.

Essentials of special crossing

Two parallel transverse line are not at all essential for a special crossing.

The name of a banker must be necessarily specified across the face of the cheque.

It must appear on the left hand side, preferably on the corner.

The two parallel line and the words ‘not negotiable may be added to a special crossing.

Restrictive crossing

In recent years the practice of crossing cheques with the words “account payee’’ or account payee only has sprung up such a crossing is termed as ‘restrictive crossing’.

It is only direction to the collecting banker that the proceeds are to be credited only to the account of payee named in the cheque.

Double crossing

When a cheque bears two separate special crossing it is said to have been doubly crossed.

This has been prohibited by NI act 1881 under sec 127 although it has one exception whenever a CB has no branch of his bank in collecting place he can write the name of the other bank situated in that place appointing the banker as an agent for collection.