LEGAL AND REGULATORY ASPECTS OF BANKING (LRAB) 

Unit - 6: Case Laws on Responsibility of Paying Bank 

​Legal & Regulatory Aspects of Banking - Case laws on Responsibility of Paying Bank. 
Unit - 6 : Case Laws on Responsibility of Paying Bank
The Negotiable Instruments Act, 1881 lays down the law relating to payment of a customer's cheque by a banker and a protection available to a banker.The relationship between a banker and customer being debtor -creditor relationship , the banker is bound to pay the cheques drawn by his customer.
        This duty on the part of the banker, to honour his customer's mandate , is laid down in Section 31 of the Act 

SECTION 10,85, 85A, 89 and 128 of the Act , 1881, grant protection to a paying banker.

Negotiable Instruments Act and Paying Banks :
The Customer has the right to ask back his money from the banker (debtor).The duty of the banker to pay has been laid down :
1.Section 31 applies only to bankers 
2. Sufficient funds
3. Properly Available 
4. When duly required to do so he is bound to pay
5. Compensate the drawer
6. Loss or Damage caused by Default

Protection to Paying Banker :
For a paying banker to claim protection,he has to satisfy , is that the payment is in due course laid down under Section 10 of the Act.

Liability of a paying Banker when customer's signature on the cheque is forged :
Section 128 of the Act applies -
1. There is no mandate to the bank to pay . As such the banker is not entitled to debit the customer's account on such forged cheque . 
2. In a joint account if one of the signature is forged then there is no mandate and banker cannot make payment . 

Cheque Truncation:
Truncation is the process of stopping the flow of the physical cheque issued by drawer at some point by the presenting bank en-route to the drawee bank branch .
It thus obviates the need to move the physical instruments across branches , other than in exceptional cases for clearing purposes. 
Section                         Description
31  The banker is bound to pay the cheques drawn by        customer i,e, to honor his customer’s mandate
10,85,89,128 Grants protection to paying banker
6  Cheque is defined as bill of exchange. Protection         to Paying Banker if payment is in due course
10 Payment In Due Course
85 Grants protection to a Paying banker, but it is not absolute
Banker can seek protection under section 85 only where payment has been made to the holder, his servant or his agent, i.e. payment must be made in due course.
Payment to a person who had nothing to do with the firm or a payment to an agent of the bank would not be payment in due course.
89         Payment of instrument on which alternation is not apparent The material alteration on both the cheques are visible and since they were not authenticated by the drawers initials, the payment made by the bank was not according to apparent tenor of the instrument and as such bank cannot claim protection under section 89
When the customers Signature on the cheque is forged there is no mandate to the bank to pay. As such banker is not entitled to debit the customers account on such forged cheque
In a Joint account if one of the signature is forged then there is no mandate and banker cannot make payment.
244A Indian companies Act : An official liquidator was required to open an account with a bank and pay therein moneys received by him in the course of the liquidation
Paying bank was bound to keep an ultraviolet ray lamp and to scrutinize the cheque under the said lamp.

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