INTRODUCTION

In this project I am going to analyze the Duties and Responsibilities of collecting

Banker. A collecting banker is one who undertakes to collect cheque, drafts, bills, pay order,
traveler cheque, letter of credit, documents such as dividend warrants, debenture interest etc.
on behalf of customer. For undertaking this collection, the collecting banker will be charging
commission. The collection of this documents may be done by presenting these instruments in
the local clearing house or in a case of outstation cheques or drafts in those clearing house in
representive canters. collecting has more responsibility of not merely collecting these
documents and realizing the amount but have to credit the amount to the account of the true
owner of the instrument. Thus they not only act as an agent but also act as a bailee and trustee.
He is a bailee when he is in possession of the document but he is a trustee when he collects the
amount for the benefit of the customer.
It is part of the banker-customer contract, "The bank undertakes to receive money and
to collect bills for its customer's account." "Bills", of course, included cheques since the cheque
was, and is, a special form of the bill of exchange. 1 Collection of cheques and bills will, if the
customer has no title to the instrument, expose the bank to an action in conversion by the "true
owner" of the instrument. At first, banks enjoyed no special privileges with respect to the action
in conversion, but when crossings were given legal significance, this changed. In practical
terms, a crossed cheque must be deposited into an account and collected by a bank. Since it was
now seen as an obligation on banks to deal with certain cheques, banks were given a special
defence against actions in conversion. The defence was originally restricted to crossed cheques,
but in response to lobbying from the banks, was extended to all cheques by s4 of the Cheques
Act 1957 (UK). In Australia, the defence was included in the Bills of Exchange Act 1909 as
and later in s95 of the Cheques Act 1986 and later extended to "financial institutions" as
defined by the Act.
It is for the bank to establish the defence. In order to do so, it must show that it collected the
cheque , for a customer, in good faith, without negligence. If the defence is established, the
1

Lord Atkin, in Joachimson v Swiss Bank Corp AIR[1921] 3 KB 110

1

consequence is that "the collecting institution does not incur any liability to the true owner by
reason only of having received payment of the cheque": s95(1)(b). One possibility is that the
collecting bank might owe a duty of care to other parties associated with the cheque.

DEFINITION OF COLLECTING BANKER?

A Collecting Banker is one who undertakes to collect various types of
instruments representing Money in favour of his customer or his own behalf from the
drawers of these instruments. Some are Negotiable instruments as provided for in the
negotiable instruments Act, 1881 and some are quasi negotiable instruments.

A collecting banker is one who undertakes to collect the amount of a

cheques & bills 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 this function
is performed by every modern bank.

DUTIES & RESPONSIBILITIES OF COLLECTING BANKERS:

Acting as agent: While collecting an instrument, whether for credit to customers account
or for himself, the Bankers works as agent of his customer. As an agent he has generally to
take such steps & precautions to protect the interest or his customer as a man of ordinary
prudence would take to safe-guard his own interest.

Scrutinizing the instruments: Name of the holder, Branch name, date, amount in world
and figure, any cutting without signature, material alteration of any to be checked carefully.

Checking the endorsement: Bankers has to check the instrument whether it has been
endorsed properly.

Presenting the instrument in due time: It is the responsibility of the collecting bank to
present the instrument in due time to the paying bank.

Collecting the proceeds in the payees account: It is the duty of collecting banks to collect
and credit the proceed of the instruments to the proper/correct account.

Notice of dishonor and returning the instruments: If any instrument is dishonoured by the
paying bank it should be informed to the customer on the business day following the receipt
of the unpaid instruments.

COLLECTING BANKERS PROTECTION:

Under section 131 of negotiable instrument Act the collecting banker is not liable to the true
owner of a cheque or a bankers draft if his title to the instrument proves defective provided
the cheque or draft was one crossed generally or specially to himself and collected for a
customer is good faith and without negligence.

The above statutory protection is available to the collecting banker only if he fulfils the
following conditions:

The cheque he collected is a crossed cheque.

He collected such crossed cheque only for his customer as an agent & not as a holder for
value.

He collected such crossed cheque in good faith and without negligence.

NO PROTECTION:-

Opening of A/c without satisfactory references/ introduction.

Crediting the proceeds of cheque to an endorsee with irregular endorsement.

Crediting the proceed of a cheque to the personal A/c of director, partners or any employee
when it is payable to the company.

Crediting the proceeds of charge to personal name of the official when it is payable to a
govt. agency, autonomous body, or corporation.

Crediting the amount of a cheque in the personal A/c which is drawn by an agent on behalf
of its principal.

When the customer depositing the cheque is of little means and the cheque deposited
suddenly is of sizable amount and the banker credited the proceeds there to without making
proper enquiry.

Cheque drawn by customer is dishonored very often and crediting such account with the
proceeds of collecting cheque without making proper enquiry.

If the crossed cheque is collected and credited the proceed to the other account.

PAYING BANKERS DUTIES & RESPONSIBILITIES:A banker on whom the cheque is drawn should pay the cheque, when it is presented for
payment. It is his obligation by section 31 of the NI Act. banker is bound to honour his
customers cheque to the extent of the fund available & the existence of no legal bar for
payment. The paying banker should use reasonable care and diligence in paying a cheque so as
to abstain from any action likely to damage his customers credit.

At the time of making payment of he should observe the following very carefully:

Verification of signature of the drawer.

4

Verification of the genuineness of he instrument.

Payment not stopped by the A/c holder.

Holders title on the cheque is valid.

A/c is not dormant one.

A/c holder is not bankrupt, deceased and insanse.

A/c is not under subject of liquidation process.

No. Guernsey Order is issued by count.

Properly endorsed.

Cheque is not drawn beyond limit fixed by the drawer is respect of amount.

Instrument being presented is crossed.

Instrument is not state or post dated.

No material alteration is made.

Sufficient balance in the A/c

RESPONSIBILTIES OF COLLECTING BANKER:The following are the responsibilities of a collecting banker.

The banker should present the cheque to the paying banker for encashment within a
reasonable time. What is reasonable time depends upon the facts of each case. As per the
prevailing practice, the collecting banker should present the cheques received for collection
from customers at least by the following or next day after he receives it. Any undue delay in
collection would render the banker liable to the customer for any loss the latter may suffer
on account of the delay.

If the cheque presented in clearing is realized, then the proceeds of the realized cheque
should be credited to the account of the customer without any delay. In case the cheque sent
for collection is dishonoured by the drawee bank, the collecting bank should return the
cheque to the customer within a reasonable time so as to enable the customer to recover the
amount of the cheque from parties liable thereto. If he fails to send the notice of dishonour
of the cheque to the customer within a reasonable time and the customer suffers a loss as a

consequence of the omission to send the notice, the collecting banker becomes liable to
compensate the customer.

CONVERSION BY COLLECTING BANKER:There is no contractual relationship between the collecting banker and a third party, i.e., the
true owner of the cheque. As such no contractual liability is imposed on the collecting banker.
But, still, the collecting banker may become liable to the true owner of the cheque under a
doctrine called the doctrine of conversion. Conversion is unlawful taking, using, disposing or
destroying of goods or property which is inconsistent with the owner's right of possession. This
means depriving the true owner of the possession and ownership of the goods or property to
which he is entitled. The negotiable instruments are also included in the term "goods" for the
purpose of conversion. Therefore, a banker will be liable to the true owner of the cheque for
conversion, even if acts innocently, if the negotiable instrument bearing a forged endorsement
or to which his customer has no title or has defective title has been collected by him. However,
NI Act provides protection under Section 131 to the collecting banker in this respect provided
the following conditions are satisfied:

(a) The protection under the law is available only if he collects a crossed cheque for collection.
No protection is available for uncrossed or open cheques.

(b) The protection can be claimed only when the collecting banker has collected the cheque as an
agent for his customer. If he collects the cheque for non-customers this protection is not
available. The banker should collect the cheque in good faith and without negligence.

STATUTORY PROTECTION TO COLLECTING BANKER:Section 131 of the Negotiable Instruments Act provides protection to a collecting banker who
receives payment of a crossed cheque or draft on behalf of his customers. According to Section
131 of the Act a banker who has, in good faith and without negligence, received payment for a
customer of a cheque crossed generally or specially to himself shall not, in case the title to the

cheque proves defective, incur any liability to the true owner of the cheque by reason only of
having received such payment.The protection provided by Section 131 is not absolute but
qualied. A collecting banker can claim protection against conversion if the following
conditions are fullled.

Good Faith and Without Negligence:

Statutory protection is available to a collecting banker when he receives payment in good faith
and without negligence. The phrase in good faith means honestly and without notice or
interest of deceit or fraud and does necessarily require carefulness. Negligence means failure to
exercise reasonable care. It is not for the customer or the true owner to prove negligence on the
part of the banker. The burden of proving that he collected in good faith and without negligence
is on the banker. The banker should have exercised reasonable care and deligence. What
constitutes negligence depends upon facts of each case. Following are a few examples which
constitute negligence:(a) Failure to obtain reference for a new customer at the time of opening
the

account.(b) Collection

of cheques

payable

to trust

accounts for

crediting to

personal accounts of a trustee.(c) Collecting for the private accounts of partners, cheques payable
to the partnership rms.(d) Omission to verify the correctness of endorsements on cheques
payable to order.(e) Failure to pay attention to the crossing particularly the not negotiable
crossing.

Collection for a customer:

Statutory protection is available to a collecting banker if he collects on behalf of his customer
only. If he collects for a stranger or non-customer, he does not get such protection. As Jones aptly
puts if duly crossed cheques are only protected in their collection, if handled for the customer.
A bank cannot get protection when he collects a cheque as holder for value. In Great Western
Railway Vs London and Country Bank it was held that the bank is entitled for protection as it
received collection for an employee of the customer and not for the customer.

Acts as an Agent:

A collecting banker must act as an agent of the customer in order to get protection. He must
receive the payment as an agent of the customer and not as a holder under independent title. The
banker as a holder for value is not competent to claim protection from liability in conversion. In
case of forgery, the holder for value is liable to the true owner of the cheque.

PRECAUTIONS TO BE TAKEN BY THE COLLECTING BANKER WHILE ACTING AS

A HOLDER FOR VALUE COLLECTING BANKER AS AGENT:-

When a banker credits the account of the customer only after the cheque is sent for
collection and is realised, he acts as an agent of the customer. The relationship of principal and
agent between the customer and the banker comes to an end the moment the amount is realised
and placed to the account of the customer. Then the general relation of debtor-creditor
relationship emerges. Even if the banker credits the account of the customer with the amount of
the cheque before it is collected, he would be deemed to be an agent for the customer, if
crediting of the account was for convenience only and does not allow withdrawing the amount
till the cheque is realised. When a banker acts as an agent of a customer, he has no right of his
own. His rights or title to the cheque will be the same as that of the customer. If the customer
has a good title to the cheque, he too will have a good title to the cheque. On the other hand, if
the customer has not title or has a defective title to the cheque, he too will have no title or
defective title to the cheque2. If the customer has no title over the cheque collected, the banker
may be held for conversion unless he could claim protection under Section 131 of the
Negotiable Instrument Act. Protection under this section is available to the collecting banker
only when he acts an agent for his customer; it is not available when he acts a holder for value.
Further, the banker should have acted in good faith and without negligence and the cheque
should have been crossed before it was received for collection by him.

Banker And Customer Realationship by Sayed Janan , HR at WEKH ZWANANon Oct 06,
2009.

WHETHER DUTY CAST ON COLLECTING BANKER TO VERIFY

ENDORSEMENTS?
A collecting bank may be held negligent for not verifying an apparent irregularity in the
endorsements on the cheque collected by it. In Bharat Bank Limited Vs. Kishanchand
Chellaram3 it was held that where an endorsement on the cheque conveys a warning that all is
not well with the title of the holder, it will be negligence not to heed it. If at that stage, the bank
shuts its eyes to what plainly appears on the back of the cheque, it would clearly be a case of
negligence on the part of the banker, which will deprive it of protection under Section 131 of
NI Act.

Where a draft was indorsed in favour of Nagindas Premchand Shaha and was
collected for a customer named Nagindas Premji Shah, the bank was held to be negligent
in not having detected the difference in name. The bank was also held negligence for
having obtained no introduction at the time of opening the account. Maruti
Sanyasilingam Vs. Exchange Bank of India and Africa Limited4 The nature of the
indorsement on the reverse of a draft drawn payable to Hurry Das Auddy was bound to
arouse suspicion and that the collection of the same without verifying the nature of the
indorsement was held to be negligence depriving the banker from protection under Section
131 of NI Act. Central Bank of India Limited Vs. Gopinathan Nair 5.The position in
English Law is different. Under the Cheques Act 1957, a collecting bank need not concern
itself with irregularity in indorsements on cheques.

PLEA OF CONTRIBUTORY NEGLIGENCE RAISED BY COLLECTING BANK:Contributory negligence is a plea that though there is negligence, the damages shall be reduced
to the extent of the responsibility for the damage. In India, Courts have not taken cognizance of
the plea of contributory negligence. In Bapulal Premchand Vs. Nath Bank Limited 6, it was
3

AIR(1954) 1 Madras Law Journal 560,

AIR(1946) 49 Bombay Law Reporter 309.
5
AIR 1970 Ker 74.
6
AIR(1946) 48 BOM393
4

observed that as follows: However, negligent the true owner may be, it can be no answer by
the person who converts the article that he should be let off from his liability because of
negligence of the true owner. But for the protection afforded to the bank by Sec 131 of the
NI Act, the bank would have no defence whatever to the claim of the plaintiff.

The plea of contributory negligence was rejected in the Indian Bank Vs. Catholic Syrian Bank,
Vysya Bank Vs. Indian Bank, Kerala State Co-operative Marketing Federation Vs. SBI,
Kannur District Co-operative Bank Limited. Kerala State Co-operative Marketing Federation
and Syndicate Bank Vs. Jaishree Industries. The following cases involve materially altered
drafts which were stolen in transit and then materially altered and presented in collection. The
decisions are of relevance in the light of the claims of protection by the collecting banker.

Indian Bank Vs. Catholic Syrian Bank Limited7 One Mohammed Hussain obtained a draft
for Rs.20/- from Catholic Syrian Bank payable at Cochin Branch. This draft was altered to
Rs.29,000/- favouring SM Desai and presented at Salem Branch of Indian Bank Limited for
credit of the Current Account opened by one Shantilal Manilal Desai. Indian Bank collected
the draft which was paid in clearing by Catholic Syrian Bank. In the suit by Catholic Syrian
Bank, Indian Bank claimed protection under Section 131 of NI Act. Held, that the account was
opened with a small sum of Rs.300/- on 07.06.1969 and on the very next day a sum of
Rs.200/- was drawn leaving a balance of Rs.100/- and on 13.06.1969, the draft for a
considerably large amount was presented for collection. This should have aroused suspicion. It
was for Indian Bank to have exercise diligence and hence not entitled to protection u/s 131 A
of NI Act. The plea of contributory negligence of Catholic Syrian Bank, as paying banker, was
not accepted.

Vysya bank Limited, Madras Vs. Indian Bank, Madras8 One BK Shetty purchased a draft
for Rs.20/- on 27.03.1974 and one B. Ramaswami purchase a draft for Rs.30/- on 2.11.1974

7
8

AIR 1981 Mad 129

AIR1998 (2) Commercial Law Reporter 514 (Madras)

10

from Indian Bank. Sri Ramanathan, who had an account with Vysya Bank, came into
possession of these 2 drafts and materially altered the payees name and the amounts and
deposited the same for collection and on realization, Vysya Bank allowed the amounts to be
withdrawn. Indian Bank filed the suit, which was resisted by Vysya Bank claiming protection
under Sec 131 A of NI Act, Held, that Vysya Bank had no personal knowledge of the
antecedents of Ramanathan in whose name the account was opened. Except deposit of small
amount at the time of opening the account, there were no other transactions, before the drafts
were deposited. Vysya Bank ought to have made enquiries at the time of opening of the
account and when the drafts for considerable amounts were deposited into the account within a
short span of time after its opening, the collecting banker should have entertained a reasonable
suspicion and verified the account holders identity. The plea of contributory negligence on the
part of Indian Bank was also rejected.

Canara Bank, Nalgonda Vs. Nalgonda Co-operative Central Bank Ltd

Nalgonda Co-

operative Central Bank issued 2 uncrossed demand draft on 30.10.1976 in favour of V.Ram
Reddy and V.Babu Rao. The drafts were for a sum of Rs.25/- each. These drafts were materially
altered, whereby the date was shown as 02.11.1996, the payee was shown as Sudarshan Trading
Corporation and the amount under the drafts were altered to read as Rs.14,500/- and
Rs.35,500/- respectively. These materially altered drafts were deposited in collection with
Canara Bank on 3.11.1976 and 04.11.1976 by one Sundar Rao claiming to be proprietor of
Sudarshan Trading Corporation. The Account was opened with Canara Bank on
02.11.1976.The suit was filed by Nalgonda Co-op Central Bank on the ground that they came
to know of the fraud on 27.10.1997 and sought for a decree against Canara Bank for recovery
of Rs.49,950/- with interest. Further, as recognized by the Supreme Court, the negligence of the
plaintiff bank fades away once it is established that the defendant bank was negligent.

For example, in spite of this author's best efforts, it seems established that a forged cheque
is not the subject of an action in conversion: see Koster's Premier Pottery v Bank of

AIR 2009 AP 89.

11

Adelaide 10yet the plaintiff suffered losses by virtue of the collection of the forged cheque.One
possibility is that the collecting bank might owe a duty of care to other parties associated with
the cheque. These would normally be parties to the cheque, but may include apparent parties
such as in the Premier Pottery case.

2 CANADIAN CASES
The issue does not appear to have been considered by any Australian Court, but has come
before the British Colombia Court of Appeal.
In Groves-Raffin Construction Ltd v Canadian Imperial Bank of Commerce 11 There was
a director of the plaintiff who improperly drew a cheque on the companies account with the
Bank of Nova Scotia. He deposited the cheque into his account with the Canadian Imperial
Bank of Commerce. G withdrew the funds the same afternoon and, according to the report,
"departed posthaste for Australia"

The company also sought to hold the Bank of Commerce liable in negligence. The trial judge
found that there was a duty of care on the basis of the generalised "neighbour" test as
formulated in M'Alister (Donoghue) v. Stevenson 12All three members of the Court of Appeal
rejected this very general approach, holding that the collecting bank owed no duty of care to the
company.
In Arrow Transfer v Royal Bank13, Seaton J also held that the collecting bank owed no duty
of care to the drawer of a cheque drawn on another bank. The judgment was affirmed in the
Court of Appealand in the Supreme Court of Canada: but the issue was not pursued in either of
the appeal cases. The alleged duty of care in Arrow Transfer was that the collecting bank
should know the signature of the drawer, a claim that was destined for certain failure.

National Westminster Bank Ltd v Barclays Bank International Ltd 14Imposing a duty of care
10
11
12
13
14

AIR(1981) 28 SASR 355.

AIR[1976] 2 WWR 673.
AIR [1932] AC 562.
AIR (1969) 9 DLR (3d) 693
AIR[1975] 1 QB 654.

12

on a collecting bank may cause all banking to come to a halt, but surely it depends on the
content of the duty.
The misconception, still promulgated by some well-known textbooks, is that s95 and its
predecessors imposed a new duty on banks to collect "without negligence". The use of the word
"negligence" is very unfortunate since the section has nothing to do with the tort of
negligence.ndeed, far from imposing a new duty, the provisions provided the banks with a
defence to what was otherwise a tort of strict liability. Banks have a defence against a claim in
conversion, a defence that is not available to the general public.In Groves-Raffin, Bull J relied
in part on the House of Lords decision in Home Office v Dorset Yacht Co 15and in particular, In
that passage, Lord Reid cited pure economic loss as a category where the "neighbour principle"
of M'Alister (Donoghue) v. Stevenson should not be applied in a mechanical fashion.

3 ECONOMIC LOSS: AUSTRALIAN CASES

Groves-Raffin was decided in 1976, the very year that the High Court considered the question
of negligence when the loss is pure economic loss: Caltex oil (Aust) Pty Ltd v The Dredge
Willemstad 16The court in Caltex Oil found its way around the difficulties envisaged by Lord
Reid. At least for Australia, the Dorset Yacht argument does not apply.

The present situation is far from clear. In Perre v Apand Pty Ltd 17it was alleged that the
defendant negligently imported diseased seed which affected some potatoes in the vicinity of
the appellant's farm. It did not directly infect the potatoes of the appellant, but appellant
suffered economic harm because it was forbidden from exporting its potatoes. A majority of the
High Court held that the appellant could recover since there was a reasonable likelihood of
harm and the appellant fell into an ascertainable class of those likely to be harmed by the
respondent's actions.
In both Perre and Woolcock the notion of "vulnerability" was discussed and considered
important.

15

AIR[1970] AC 1004.
AIR(1976) 136 CLR 529.
17
AIR[1999] HCA 36
16

13

In Woolcock Street investments pvt Ltd v CDG Pty Ltd 18a purchaser of a commercial building
sued a firm of consulting engineers who had designed the foundations for a warehouse and
offices. The plaintiffs were not the original owners, but had purchased the buildings some years
later.

The majority of the Court dismissed the suit on the grounds that the plaintiff was not
"vulnerable". On the facts, there was nothing to show that the plaintiffs could not have
defended themselves from the consequences of the defendants' actions.McHugh J analysed the
case on each of the "principles". He noted that the damage suffered was clearly foreseeable
indeterminacy was not a problem because liability will ordinarily be restricted to the person
who owned the building at the time when the damage is discovered since the defendants were
already under a duty to the first owner, imposing a duty to avoid economic loss does not
impinge on the interests of those who design or construct the building a subsequent purchaser
of a commercial building has the means of protecting against economic loss arising from the
condition of the building. Kirby J also, reluctantly, applied the five criteria. He agreed with
McHugh on all except the question of vulnerability on which he would have applied a less
stringent test. Kirby J would have allowed the case to proceed. Application to the collecting
bank In any case, if the "five principles" test is the correct one to begin with, then there is little
problem with finding that the collecting bank owes a duty of care at least to the other parties on
the cheque.
The present situation is far from clear, and the application of the "principles" is uncertain at
best. However, in an appropriate case, there may be an argument that the collecting bank owes
a duty of care to the drawer or the true owner of a cheque or, again in a suitable case, some
other party clearly associated with the cheque.

COLLECTION

OF

MATERIALLY

ALTERED

CHEQUES

NEGLIGENCE
A reference may be made to the following cases where cheques were materially altered and
collected.
18

AIR[2004] HCA 16

14

In kerala State Cooperative Marketing Federation Vs. State Bank of India 19- The principles
governing the liability of collecting banker:
(1) As a general rule the collecting banker shall be exposed to his usual liability under common
law for conversion or for money had and received, as against the `true owner' of a cheque or a
draft, in the event the customer from whom he collects the cheque or draft has no title or a
defective title.
(2) The banker, however, may claim protection from such normal liability provided he fulfils
strictly the conditions laid down in S. 131 of the Act and one of those conditions is that he must
have received the payment in good faith and without negligence.
(3) It is the banker seeking protection who has on his shoulders the onus of proving that he acted
in good faith and without negligence.
(4) The standard of care to be exercised by the collecting banker to escape the charge of
negligence depends upon the general practice of bankers which may go on changing from time to
time with the enormous spread of banking activities and cases decided a few decades ago may
not probably offer an unfailing guidance in determination the question about negligence today.
(5) Negligence is a question of fact and what is relevant in determining the liability of a
collecting banker is not his negligence in opening the account of the customer but negligence in
the collection of the relevant cheque unless, of course, the opening of the account and depositing
of the cheque in question therein from part and parcel of one scheme as where the account is
opened with the cheque in question or deposited therein so soon after the opening of the account
as to lead to an inference that the depositing the cheque and opening the account are
interconnected moves in a integrated plan.
In State Bank of India Vs. Punjab National Bank20 the following observations were made
(i) A person who makes payment to another under a mistake of fact or under or under a mistake
of law has a right to recover back the same from the person to whom he pays unless that the rule
of estoppel operates against the payer.
(ii) When the person paying and the person collecting are both acting mistake of fact or mistake
of law then rule of estoppel is ordinarily not applicable against the payer.

19
20

AIR (2004) Banking Cases 2 (SC).

AIR1996 Banking Cases 251 (Delhi High Court).

15

(iii) In case there is a document which purports to be cheque but on which the signature of the
drawer is forged, it does not have a mandate of the drawer having account in the Bank and,
therefore, it does not fall strictly within the definition of cheque under Section 6 of the
Negotiable Instruments Act.
(iv) Such a forged cheque, when it is passed on for collection through a collecting Bank by the
person knowing it to be forged (but the collecting bank not knowing it to be forged and passing it
on for collection in good faith in ordinary course of its business of banking) and is paid by the
drawee Bank, that payment does not amount to a representation by the paying Bank that the
signatures on the cheque are genuine signatures of the drawer, unless the surrounding
circumstances show that their effect was such a representation made by the drawee Bank or
paying bank to the collecting Bank.

COLLECTING BANKERS DUTY OF CARE:In a series of recent decisions, our courts have recognised the principle that a collecting bank does
in fact owe a duty of care to the true owner of a cheque, not to act negligently when dealing with
the cheque Indac Electronics (Pvt) Ltd v Volkskas Bank Ltd

, Kwamashu Bakery Ltd v

21

Standard Bank of South Africa Limited 22.This does not mean that a collecting bank will
automatically be liable in each instance, as its liability is based in delict, and accordingly the
requirements for delictual liability must first be met. As bankers are considered to render a
professional service, the standard of care to which they will be held, is that of the bonus
argentarius, or reasonable banker. Negligence in this context is present if (i) a reasonable banker
would have foreseen that his conduct might reasonably cause another to sustain a patrimonial loss,
(ii) would have taken reasonable steps to guard against such an occurrence, and (iii) the defendant
banker failed to take such steps Kruger v Coetzee23 As regards the duty of care imposed on banks
when opening accounts for clients, the courts draw a distinction between new and existing clients
of the bank. When dealing with new clients, a reasonable banker should not only satisfy himself as
to the identity of the new client, but should also gather sufficient information to enable him to

21
22
23

AIR(1992) 1 SA 783
AIR(1995) 1 SA 377
AIR(1966) 2 SA 428

16

establish whether the person is the actual person or entity which he or she purports to be. Whilst
bankers should constantly guard against offending potential new clients, the latter should
reasonably expect a thorough probe into their financial affairs.

The bank is not however required to cross-examine the client to determine whether the customer is
lying, nor need the bank enquire as to the source of the client's funds in the absence of compelling
reasons to do so Columbus Joint Venture v Absa Bank Ltd 24 In terms of section 1 of the
Apportionment of Damages Act, 1956 (the "Act"), a plaintiff's claim must be reduced in
accordance with his own degree of fault. The concept of "fault" within this context has given rise
to uncertainty and it is presently unclear whether section 1 is applicable to intentional or negligent
conduct. The question whether apportionment can take place where one wrongdoer acts
negligently and the other intentionally has been the subject of much debate. Where for example a
collecting banker's negligent conduct and a thief's intentional conduct both cause the true owner of
a cheque to suffer patrimonial loss, it is uncertain whether they may be treated as joint wrongdoers
in terms of section 2 of the Act. Although the court in Lloyd-Gray Lithographers (pvt) Ltd v
Nedcor Bank25
answered this question in the affirmative, the issue is at present far from resolved.

CONCUSION:The general rule is that the collecting Banker would be liable under common law for
conversion of an instrument devoid of title or tainted with a defective title. However this being
the general rule, the exception would be the protection afforded to such a Banker by Sections
131 and 131-A of the Act of 1881. Such protection is conditional upon proof of good faith and
absence of negligence on the part of such Banker as is evident from the language of Section
131. The protection in respect of cheques under section 131 is extended to demand drafts under
Section 131-A of the Act of 1881. Further, it is for the Banker who is seeking such protection to
discharge the burden of proof that he acted in good faith and without negligence. The Supreme
Court recognized that negligence was a question of fact and pointed out that where the account
24

AIR(2000) 2 SA 491

25

AIR1998 (2) SA 667

17

was opened with the cheque in question or the same is deposited therein so soon after opening
of the account as to lead to an inference that the depositing of the tainted cheque and the
opening of the account were interconnected moves in an integrated plan, the same should be
indicative to the collecting banker that there was something remiss. It is also to be noticed that
failure to fulfil the procedure in the opening of the account may also lead to a cogent though not
conclusive proof of negligence, particularly if the cheque in question was deposited in the
account soon after the opening thereof. The Supreme Court also recognized that the
contributory negligence of the paying Banker could provide no defence to the collecting Banker
who has not collected the amount in good faith and without negligence.
The question of good faith and negligence is to be judged from the stand point of the true
owner towards whom the banker owes no contractual duty but the statutory duty which is
created by this section and it is a price which the banker pays for seeking protection, under the
statute, from the otherwise larger liability he would be exposed to under common law. Allegation
of contributory negligence against the paying banker clause provide no defence for a collecting
banker who has not collected the amount in good faith and without negligence.

BIBLIOGRAPHY

BOOK SOURCES: Avtar Singh, Laws of Banking and Negotiable Instruments: An Introduction,
Eastern Book Company, 2007.
M.L. Tannan, Tannan's Banking Law and Practice in India, Volume 1, Ed. 22,
LexisNexis Butterworths Wadhwa Nagpur, 2008.
Dr.S.R. Myneni, Law of Banking,Asia Law House, 2nd Edition 2014.
Dr.B.R.Sharma&Dr.R.P.Nainta, Banking Law & Negotiable Instruments Act, 4th
edition, 2013.

STATUTES:-

18

 The Negotiable Instruments Act, 1881.

The Negotiable Instrument [Amendment] Act, 2002.

ARTICLES: Young Henry the duties and responsibilities of the paying banker and the collecting
banker , Melbourne Bankers Institute of Australia, 1968Australasia Pg.55, Libaries
Australia.
Banker and Customer Realationship by Sayed janan, HR at Wekh Zwanan on Oct,06,
2009.
Collecting Banker by Mitika patel, August 2012.
Collecting Banker by Vinaya.Hs, October13, 2006.

ELECTRONIC SOURCES: www.qfinance.com

www.austilii.edu.in
www.business-finance.blurtit.com
www.bankingknowledgeblogspot.in
www.indiankanoon.com
www.nls.ac.in
www.bclr.com

19