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Collection of Cheque

A collecting banker is one who undertakes to collect the amount of a cheque for his
customer from the paying banker. A banker is under no legal obligation to collect cheques,
drawn upon other banks for a customer. But, every modern banker performs this duty,
because, no customer will be satisfied merely with the function of payment of cheques
alone. Moreover, in the case of crossed cheques, there is no other alternative to collect the
cheques except through some banker. In rendering such services, a banker should be
careful, because he is answerable to a number of persons with whom he has no contractual
relationship and any negligence or carelessness on his part may land him in difficulties.

Banker as a holder for value

Collection of outstation cheques takes a reasonable time and in such a situation the
customer may need money immediately. When a banker sends a cheque for collecting and
in the meantime makes payment or permit the customer to draw cheques, Banker’s
position is that of a “holder for values or holder in due course.”

The banker would be regarded as a “holder for value” under the following circumstances:

I. If banker allows its customer to draw money against the cheque or part of it in cash
or in account before it is cleared.

II. If any open cheque is accepted and its value is paid before collection.

III. If the cheque is expressly paid to reduce that amount of an overdraft before the
cheque is collected and the proceeds thereof is credited to the perspective accounts.

IV. If there is an existing prior arrangement or a new agreement is made or as a course

of business, that customer may draw before the cheque is cleared.

In the above case, the banker’s generally complete documentation obtaining an

undertaking to the effect that the customer will be reimburses the banker in the case of
dishonor of cheque.

Liability of Collecting Banker

I. Genuineness of endorsement:
The collecting Banker must take proper precaution to verify the endorsement and if he
does not do this will be liable to pay the amount of the cheque to the drawer of the cheque,
who is deemed to be the true owner of the cheque.

The collecting banker should verify the correctness or regularity of the endorsements on
the order cheques: For example:
a. If the collecting banker fails to note that the endorser has not signed his name
in the same manner or spelling as appears in the name of the payee (or
endorsee), the endorsement will be held irregular.
b. If two or more endorsements on a cheque are in the same hand writing, their
genuineness may be easily doubted and enquiry should be made. Failure to do
so will constitute negligence on the part of the banker, and

c. If the banker does not verify the authenticity of the authority of the person
who signs per procurator, he will be held negligent.

II. Opening of accounts without proper introduction:

If an account is opened without introduction, the account holder may be a fake one. Any
instrument collected by the bank giving proper endorsement, bank is solely and fully
responsible for such endorsement. So, bank should never open account without
introduction. Bank always works on behalf of the party. It the party is not genuine whole
process will be fictitious.

Circumstances under which a Collecting Banker will be liable for Conversion

The following are the few instances in which a collecting banker will be liable for

i. Where banker has collected, without enquiry, for the private account of an
official, cheques payable to company of the official or to him/her in official
position and endorsed by the official on his/her company’s behalf.
ii. Where the banker collects without making an enquiry, cheques made payable to a
partnership for the partner’s account.

iii. Failure to obtain reference on opening an account and then collecting a cheque to
which the customer had no title.

iv. Where a banker collects a cheque crossed “Account Payee” for someone other
than the payee.

Duties of Collecting Banker

i. Exercise reasonable care and diligence in his collection work

When a banker collects a cheque for his customer, he acts only as an agent of the
customer. As an agent, he should exercise reasonable care, diligence and skill in
collection work. He should observe utmost care when presenting a cheque or a bill
for payment. Reasonable care and diligence depends upon the circumstance of
each case.
ii. Present the cheque for collection without any delay
The banker must present the cheque for payment without any delay. If there is
delay in presentment, the customer may suffer losses due to the insolvency of the
drawer or insufficiency of funds in the account of the drawer or insolvency of the
banker himself. In all such cases, the banker should bear the loss.

iii. Notice to customer in the case of dishonor of a cheque

If the cheque, he collects, has been dishonoured, he should inform his customer
without any delay. The NI Act has prescribed a reasonable time for giving the
notice of dishonour. If he fails to do so, and consequently any loss arises to the
customer, the banker has to bear the loss.
iv. Present the bill for acceptance at an early date
As per Sec.61 of the NI Act, a bill of exchange must be accepted. Acceptance gives
an additional currency to the bill, because, the drawee becomes liable thereon from
the date of acceptance .Moreover, in the case of a bill of exchange payable after
sight, acceptance is absolutely essential to fix the date of maturity. If a banker
under takes to collect bills, it is his duty to present them for acceptance at any early
v. Present the bill for payment
The banker should present the bills for payment in proper time and a proper
place .If he fails to do so and if any loss occurs to the customer, then the banker
will be liable .According to Sec.66 of the NI Act, a bill must be presented for
payment on maturity.